Recent financial market developments have also blurred the distinction between different segments of the financial markets. Creditors and investors now compete with each other for good financial transactions. In addition, borrowers can now structure the best deals available in the entire market rather than focusing on specific market segments. By borrowing in the most accessible financial market segment and then swapping aspects of the debt to other markets, successful borrowers tailor the currency, cost, maturity, and form of their financial transactions to their financial needs. These developments in international financial markets do entail some adverse consequences for developing country borrowers. Lenders and investors can be more selective in choosing their financial transactions, using swaps and other hedging techniques to pass Continue reading
International Business Finance
The Pros and Cons of Securitization
Securitization forces banks to compete with institutional investors and other financial institutions for the business of prime borrowers. In response, banks are beginning to provide borrowers with a range of fee-earning services that facilitate the sale of debt instruments to investors. For example, banks offer borrowers note-issuing or underwriting facilities instead of loans and agree to help borrowers sell their debt instruments to investors as and when needed. Banks may also agree to purchase only the unsold portion of the debt issue. Thus, securitization is moving banks away from performing traditional banking functions, such as extending credit in exchange for periodic interest payments. In addition, securitization provides the creditor with two significant benefits. Because the lender can choose whether to Continue reading
Global Depositary Receipts (GDR’s)
A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, which is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of DRs is the American depositary receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s. Since then, DRs have spread to other parts of the globe in the form of global depositary receipts (GDRs) (the other most common type of DR), European DRs and international DRs. ADRs are typically traded on Continue reading
Types of Letters of Credit
A Letter of Credit (L/C) or documentary credit is an undertaking issued by a bank, on behalf of the buyer (the importer), to the seller (exporter), to pay for the goods and services, provided that the seller presents documents, which comply with the terms and conditions of the letter of credit. Letters of credit are classified in to various categories on the basis of their nature which are used depending on the needs of the importer/opener. Revocable Letter of Credit: A revocable L/C is one that can be amended or cancelled at anytime by the issuing bank without the notice or reference to the beneficiary, consequently, revocable credit does not constitute a legally binding undertaking between the banks and the Continue reading
Bills for Collection
Under Bills for Collection method of international trade payments, since a bank acts as an intermediary, the seller does not have to depend on the buyer only. But here the bank’s role is only in the process of routing the documents of transport/title along with other documents. The seller draws documents in terms of the contract that it has entered into with the buyer, hands over those documents to the bank with clear instructions as to the mode of collection- whether goods are to be delivered against payment or against acceptance of documents and a bill of exchange on the basis of which he can get payment after due date of exchange and if for instance that bill is not Continue reading
Dollar Market: Some Basics
The US financial market or dollar market is the largest and the most versatile financial system in the world. It has the broadest range of funding options to offer and some of the most sophisticated and innovative financial institutions. The importance of this market is further enhanced by the dominant role played by the US dollar as the vehicle currency in international transactions, though over the years this has declined somewhat. At the same time, it is not a market that is readily accessible to borrowers from developing countries like India except perhaps those with the highest ratings and sovereign guarantees. In some ways the US financial system is perhaps the freest system. Institutions enjoy complete operational freedom in terms Continue reading