A letter of credit is a written undertaking issued by buyer’s bank to pay a certain sum of money within a stipulated period against a specified set of documents. It is a conditional undertaking. It undertakes to pay a certain amount of money on presentation of stipulated documents and the fulfillment by the exporter of all the terms and conditions incorporated in the L/C. The Letter of credit is a separate and distinct contract from the underlying sale contract, and the bank is not responsible for the fulfillment of the terms of the sale contract. The essential and basic provisions of the sale contract must be incorporated in the letter of credit. In addition, the amount of credit, its expiry date, the tenor of the draft to be drawn, party on whom the draft is to be drawn, the documents to be presented, brief description of the goods, must beContinue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Translation Exposure in Terms of Foreign Exchange Risk
Consolidation of financial statements, which involve foreign currency denominated assets and liabilities automatically, gives rise to translation exposure, sometimes termed as accounting exposure. Consolidation of foreign subsidiaries account into group financial statements denominated in home currency requires the application of a rate or rates of exchange to foreign subsidiaries accounts, in order that they may be translated into the parent currency. Both balance sheets and income statements must be consolidated and they both give rise to translation exposure. Translating foreign currency profit and loss accounts at either the average exchange rate during the accounting year or at the exchange rate at the end of the accounting year (both methods are currently permissible as per British accounting procedures) will mean that expected consolidated profit will vary as the average or that the expected closing rate changes. So the whole amount of profit earned in the foreign currency is exposed to translationContinue reading
Indian Depository Receipts (IDRs)
Indian Depository Receipts (IDRs) are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India. As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, Indian Depository Receipt is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited — NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to issue the IDRs. The Indian Depository Receipts would have following features: Overseas Custodian: Foreign bankContinue reading
Depositary Receipts – Definition, History and Types
A Depositary Receipt (DR) is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly-listed company. The Depositary Receipt, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of Depository Receipts is the American depository receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s. Since then, Depository Receipts have spread to other parts of the globe in the form of global depository receipts (GDRs). The other most common type of Depository Receipts are European DRs and International DRs. ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as theContinue reading
European Economic and Monetary Union (EMU)
The basis of the European Economic and Monetary Union (EMU) was the American desire to see a united Western Europe after the World War II. This desire started taking shape when the Europeans created the European Coal and Steel Community, with a view to freeing trade in these two sectors. The pricing policies and commercial practices of the member nations of this community were regulated by a supranational agency. In 1957, the Treaty of Rome was signed by Belgium, France, Germany, Italy, Luxembourg and the Netherlands to form the European Economic Community (EEC), whereby they agreed to make Europe a common market. While they agreed to lift restrictions on movements of all factors of production and to harmonize domestic policies (economic, social and other policies which were likely to have an effect on the said integration), the ultimate aim was economic integration. The European countries desired to make their firmsContinue reading
Foreign Credit Extension
One of the ever-present problems in international business is the extension of credit. Whenever international business people assemble and the subject turns to trade conditions in particular countries, the question inevitably raised is: “What terms do you grant?” The differences in the terms are often due to the products for which the terms are cited. There is also difference in the way marketers appraise a particular market. Therefore, it would appear that the appraisal of the credit situation of a buyer in a particular market is determined by a number of factors. Before looking at these factors, however, it would be well to examine closely the meaning of foreign credit. The Meaning of Foreign Credit Credit usually refers to the procedure of surrendering title to merchandise without immediate payment. In other words, credit means trusting the buyer to pay for goods after title to them has been obtained by theContinue reading