mb0053 – international business management - ketan

8/3/2019 MB0053 International Business Management - Ketan

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Roll No: 511010554 MB0053

Center Code: 1976

Ketan Ramesh Borse Learning

Center: Thane.

Master of Business Administration MBA

Semester 4

MB0053 International Business Management 4

Credits

(Book ID: B1315)

Assignment Set 1 (60 Marks)

Note: - Each question carries 10 marks. Answer all the

questions.

Q.1 What is globalization? What are its benefits? How does globalization

help in international business? Give some instances?

Ans:- Globalization describes the process by which regional economies, societies,

and cultures have become integrated through a global network of political ideas

through communication, transportation, and trade. The term is most closely

associated with the term economic: the integration of national economies into the

international economy through trade, investment, capital, migration, the spread

oftechnology, and military presence. However, globalization is usually recognized

as being driven by a combination of economic, technological, socio cultural,political, and biological factors. The term can also refer to the transnational

circulation of ideas, languages, or culture through acculturation. An aspect of the

world which has gone through the process can be said to be globalized.

Against this view, an alternative approach stresses how globalization has actually

decreased inter-cultural contacts while increasing the possibility of international and

intra-national conflict. Globalization has various aspects which affect the world in

several different ways.

Industrial - emergence of worldwide production markets and broader access to a

range of foreign products for consumers and companies. Particularly movement of

material and goods between and within national boundaries. Trade-in manufactured

goods increased more than 100 times (from $95 billion to$12 trillion) in the 50

years since 1955.China's trade with Africa rose sevenfold during 2000-07 alone.

Financial - emergence of worldwide financial markets and better access to

external financing for borrowers. By the early part of the 21st century more than
http://en.wikipedia.org/wiki/Technologyhttp://en.wikipedia.org/wiki/Technology


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$1.5 trillion in national currencies were traded daily to support the expanded levels

of trade and investment

Economic - realization of a global common market, based on the freedom of

exchange of goods and capital

Job Market- competition in a global job market. In the past, the economic fate of

workers was tied to the fate of national economies. With the advent of the

information age and improvements in communication, this is no longer the case.

Because workers compete in a global market, wages are less dependent on the

success or failure of individual economies. This has had a major effect on wages and

income distribution

Political - some use "globalization" to mean the creation of a world government

which regulates the relationships among governments and guarantees the rights

arising from social and economic globalization. Politically, the United States has

enjoyed a position of power among the world powers, in part because of its strong

and wealthy economy. With the influence of globalization and with the help of the

United States own economy, the People's Republic of China has experienced some

tremendous growth within the past decade. If China continues to grow at the rate

projected by the trends, then it is very likely that in the next twenty years, there will

be a major reallocation of power among the world leaders. China will have enough

wealth, industry, and technology to rival the United States for the position of

leading world power.

Most of us assume that international and global business are the same and that any

company that deals with another country for its business is an international or

global company. In fact, there is a considerable difference between the two terms.

International companies Companies that deal with foreign companies for their

business are considered as international companies. They can be exporters or

importers who may not have any investments in any other country, apart from their

home country.

Global companies Companies, which invest in other countries for business and

also operate from other countries, are considered as global companies. They have

multiple manufacturing plants across the globe, catering to multiple markets. The

transformation of a company from domestic to international is by entering just one

market or a few selected foreign markets as an exporter or importer. Competing ona truly global scale comes later, after the company has established operations in

several countries across continents and is racing against rivals for global market

leadership.

Thus, there is a meaningful distinction between a company that operates in few

selected foreign countries and accompany that operates and markets its products

across several countries and continents with manufacturing capabilities in several of


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these countries. Companies can also be differentiated by the kind of competitive

strategy they adopt while dealing internationally. Multinational strategy and global

competitive strategy are the two types of competitive strategy.

Multinational strategy Companies adopt this strategy when each countrys

market needs to be treated as self contained. It can be for the following reasons:Customers from different countries have different preferences and expectations

about a product or a service. Competition in each national market is essentially

independent of competition in other national markets, and the set of competitors

also differ from country to country. A companys reputation, customer base, and

competitive position in one nation have little or no bearing on its ability to

successfully compete in another nation. Some of the industry examples for

multinational competition include beer, life insurance, and food products.

Global competitive strategy Companies adopt this strategy when prices and

competitive conditions across the different country markets are strongly linked

together and have common synergies. In a globally competitive industry, acompanys business gets affected by the changing environments in different

countries. The same set of competitors may compete against each other in several

countries. In a global scenario, a companys overall competitive advantage is

gauged by the cumulative efforts of its domestic operations and the international

operations worldwide.

A good example to illustrate is Sony Ericsson, which has its headquarters in

Sweden, Research and Development setup in USA and India, manufacturing and

assembly plants in low wage countries like China, and sales and marketing

worldwide. This is made possible because of the ease in transferring technology and

expertise from country to country.

Industries that have a global competition are automobiles, consumer electronics

(like televisions, mobile phone), watches, and commercial aircraft and so on.

Table 1 portrays the differences in strategies adopted by companies in international

and global operations.

Table 1: Differences between International and Global Strategies.

Strategy International Global

LocationSelected target countries& trading areas

Most global businessesoperate in North America,Europe, Asia Pacific, andLatin America

Business

Custom strategies to fitthe circumstances ofeach host countrysituation

Same basic strategyworldwide with minorcountry customizationwhere necessary


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Product-Line

Adopted to local cultureand particular needs andexpectations of localbuyers

Mostly standardizedproducts sold worldwide,moderate customizationdepending on theregulatory framework

Production

Plants scattered acrossmany host countries,each producing versionssuitable for thesurrounding environment.

Plants located on the basis

of maximum competitiveadvantage (in low costcountries close to majormarkets, geographicallyscattered to minimizeshipping costs, or use of afew world scale plants tomaximize economies ofscale)

Source of supply ofraw materials

Suppliers in host countrypreferred.

Attractive suppliers fromacross the world

Marketing &distribution

Adapted to practices andculture of each hostcountry

Much more worldwidecoordination; minoradaptation to host countrysituations if required

Cross countryconnections

Efforts made to transferideas, technologies,competencies andcapabilities that worksuccessfully in onecountry to anothercountry whenever such a

transfer appearsadvantageous

Efforts made to use almostthe same technologies,competencies, andcapabilities in all countrymarkets (to promote useof a mostly standardstrategy), new successfulcompetitive capabilities

are transferred to differentcountry markets

Company organization

Form subsidiarycompanies to handleoperations in each hostcountry; each subsidiaryoperates more or lessautonomously to fit hostcountry conditions

All major strategicdecisions closelycoordinated at globalheadquarters; a globalorganizational structure isused to unify theoperations in each country

Benefits of globalization

We have moved from a world where the big eat the small to a world where the fast

eat the slow", as observed by Klaus Schwab of the Davos World Economic Forum.

All economic analysts must agree that the living standards of people have

considerably improved through the market growth. With the development in

technology and their introduction in the global markets, there is not only a steady

increase in the demand for commodities but has also led to greater utilization.

Investment sector is witnessing high infusions by more and more people connected


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to the worlds trade happenings with the help of computers. As per statistics,

everyday more than $1.5 trillion is now swapped in the world's currency markets

and around one-fifth of products and services are generated per year are bought

and sold. Buyers of products and services in all nations comprise one huge group

who gain from world trade for reasons encompassing opportunity charge,

comparative benefit, economical to purchase than to produce, trades guidelines,stable business and alterations in consumption and production. Compared to others,

consumers are likely to profit less from globalization. Another factor which is often

considered as a positive outcome of globalization is the lower inflation. This is

because the market rivalry stops the businesses from increasing prices unless

guaranteed by steady productivity. Technological advancement and productivity

expansion are the other benefits of globalization because since 1970s growing

international rivalry has triggered the industries to improvise increasingly.

Globalization can be described as a process by which the people of the world are

unified into a single society and functioning together. This process is a combination

of economic, technological, socio cultural and political forces. Globalization, as a

term, is very often used to refer to economic globalization that is integration of

national economies into the international economy through trade, foreign direct

investment, capital flows, migration, and spread of technology. The word

globalization is also used, in a doctrinal sense to describe the neoliberal form

of economic globalization. Globalization is also defined as internationalism; however

such usage is typically incorrect as "global" implies "one world" as a single unit,

while "international" (between nations) recognizes that different peoples, cultures,

languages, nations, borders, economies, and ecosystems exist

(http://en.wikipedia.org/ Globalization has two components: the globalization of

market and globalization of production....

Some other benefits of globalization as per statistics

Commerce as a percentage of gross world product has increased in 1986 from

15% to nearly 27% in recent years.

The stock of foreign direct investment resources has increased rapidly as a

percentage of gross world products in the past twenty years.

For the purpose of commerce and pleasure, more and more people are crossing

national borders. Globally, on average nations in 1950 witnessed just one overseas

visitor for every 100 citizens? By the mid-1980s it increased to six and ever sincethe number has doubled to 12.

Worldwide telephone traffic has tripled since 1991. The number of mobile

subscribers has elevated from almost zero to 1.8 billion indicating around 30% of

the world population. Internet users will quickly touch1 billion.

Promotes foreign trade and liberalization of economies.
http://en.wikipedia.org/http://en.wikipedia.org/


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.Increases the living standards of people in several developing countries through

capital investments in developing countries by developed countries.

. Benefits customers as companies outsource to low wage countries. Outsourcing

helps the companies to be competitive by keeping the cost low, with increased

productivity.

Promotes better education and jobs.

. Leads to free flow of information and wide acceptance of foreign products, ideas,

ethics, best practices, and culture.

.Provides better quality of products, customer services, and standardized delivery

models across countries.

Gives better access to finance for corporate and sovereign borrowers. Increases

business travel, which in turn leads to a flourishing travel and hospitality industry

across the world.

Increases sales as the availability of cutting edge technologies and production

techniques decrease the cost of production

Provides several platforms for international dispute resolutions in business, which

facilitates international trade. Some of the ill-effects of globalization are as follows:

Leads to exploitation of labor in several cases.

. Causes unemployment in the developed countries due to outsourcing.

Leads to the misuse of IPR, copyrights and so on due to the easy availability oftechnology, digital communication, travel and so on.

Influences political decisions in foreign countries. The MNCs increasingly use their

economical powers to influence political decisions.

Causes ecological damage as the companies set up polluting production plants in

countries with limited or no regulations on pollution.

Harms the local businesses of a country due to dumping of cheaper foreign goods.

Leads to adverse health issues due to rapid expansion of fast food chains and

increased consumption of junk food.

Causes destruction of ethnicity and culture of several regions worldwide in favor of

more accepted western culture.

In spite of its disadvantages, globalization has improved our lives in various fields

like communication, transportation, healthcare, and education.


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Q2. What is culture and in the context of international business

environment how does it impact international business decisions?

Ans: Culture is defined as the art and other signs or demonstrations of human

customs, civilization, and the way of life of a specific society or group. Culture

determines every aspect that is from birth to death and everything in between it. Itis the duty of people to respect other cultures, other than their culture. Research

shows that national cultures generally characterize the dominant groups values

and practices in society, and not of the marginal aged groups, even though the

marginalized groups represent a majority or a minority in the society.

Culture is very important to understand international business. Culture is the part of

environment, which human has created, it is the total sum of knowledge, arts,

beliefs, laws, morals, customs, and other abilities and habits gained by people as

part of society

. Culture is an important factor for practicing international business. Culture affects

all the business functions ranging from accounting to finance and from production

to service. This shows a close relation between culture and international business

. The following are the four factors that question assumptions regarding the impact

of global business in culture

. National cultures are not homogeneous and the impact of globalization on

heterogeneous cultures is not easily predicted.

Culture is not similar to cultural practice

Globalization does not characterize a rupture with the past but is a continuation ofprior trends.

Globalization is only one of many processes involved in cultural change

. Cultural differences affect the success or failure of multinational firms in many

ways. The company must modify the product to meet the demand of the customers

in a specific location and use different marketing strategy to advertise their product

to the customers. Adaptations must be made to the product where there is demand

or the message must be advertised by the company. The following are the factors

which a company must consider while dealing with international business.

The consumers across the world do not use same products. This is due to varied

preferences and tastes. Before manufacturing any product, the organization has to

be aware of the customer choice or preferences

The organization must manage and motivate people with broad different cultural

values and attitudes. Hence the management style, practices, and systems must be

modified


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The organization must identify candidates and train them to work in other

countries as the cultural and corporate environment differs. The training may

include language training, corporate training, training them on the technology and

so on, which help the candidate to work in a foreign environment.

The organization must consider the concept of international business andconstruct guidelines that help them to take business decisions, and perform

activities as they are different in different nations. The following are the two main

tasks that a company must perform.

.Product differentiation and marketing As there are differences in consumer

tastes and preferences across nations; product differentiation has become business

strategy all over the world. The kinds of products and services that consumers can

afford are determined by the level of per capita income. For example, in

underdeveloped countries, the demand for luxury products is limited.

Manage employees It is said that employees in Japan were normally not

satisfied with their work as compared with employees of North America and

European countries; however the production levels stayed high. To motivate

employees in North America, they have come up with models. These models show

that there is a relation between job satisfaction and production. This study showed

the fact that it is tough for Japanese workers to change jobs. While this trend is

changing, the fact that job turnover among Japanese workers is still lower than the

American workers is true. Also, even if a worker can go to another Japanese entity,

they know that the management style and practices will be quite alike to those

found in their present firm. Thus, even if Japanese workers were not satisfied with

the specific aspects of their work, they know that the conditions may not change

considerably at another place. As such; discontent might not impact their level ofproduction.

The following are the three mega trends in world cultures:

The reverse culture influence on modern Western cultures from growing

economies, particularly those with an ancient cultural heritage.

The trend is Asia centric and not European or American centric, because of the

growing economic and political power of China, India, South Korea, and Japan and

also the ASEAN.

The increased diversity within cultures and geographies

. The following are the necessary implications in international business:

Avoid self reference criterion such as, ones own upbringing, values and

viewpoints.


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Follow a philosophical viewpoint that considers that many perspectives of a single

observation or phenomenon can be true.

Discover and identify global segments and global niche markets, as national

markets are diverse with growing mobility of products, people, capital, and culture.

Grow the total share market by innovating affordable products and services, and

making them accessible so that, they are affordable for even subsistence level

consumers rather than fighting for market share

Organize global enterprises around global centers of excellence.

Hofstadters cultural dimensions

According to Dr. Geert Hofstede, Culture is more often a source of conflict than of

synergy. Cultural differences are a trouble and always a disaster.

Professor Hosted carried out a detailed study of how values in the workplace areinfluenced by culture. He worked as a psychologist in IBM from 1967 to 1973. At

that time he gathered and analyzed data from many people from several countries.

Professor Hofstede established a model using the results of the study which

identifies four dimensions to differentiate cultures. Later, a fifth dimension called

long-term outlook was added.

The following are the five cultural dimensions:

Power Distance Index (PDI) This focuses on the level of equality or inequality,

between individuals in the nations society. A country with high power distance

ranking depicts that inequality of power and wealth has been allowed to grow withinthe society. These societies follow caste system that does not allow large upward

mobility of its people. A country with low power distance ranking depicts the society

and de-emphasizes the differences between its peoples power and wealth. In these

societies equality and opportunity is stressed for everyone.

Individualism This dimension focuses on the extent to which the society

reinforces individual or collective achievement and interpersonal relationships. A

high individualism ranking depicts that individuality and individual rights are

dominant within the society. Individuals in these societies form a larger number of

looser relationships. Allow individualism ranking characterizes societies of a more

collective nature with close links between individuals. These cultures supportextended families and collectives where everyone takes responsibility for fellow

members of their group.

Masculinity This focuses on the extent to which the society supports or

discourages the traditional masculine work role model of male achievement, power,

and control. A country with high masculinity ranking shows the country experiences

high level of gender differentiation. In these cultures, men dominate a major part of


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the society and power structure, with women being controlled and dominated by

men. A country with low masculinity ranking shows the country, having a low level

of differentiation and discrimination between genders. In low masculinity cultures,

women are treated equal to men in all aspects of the society.

Uncertainty Avoidance Index (UAI) This focuses on the degree of tolerance foruncertainty and ambiguity within the society that is unstructured situations. A

country with high uncertainty avoidance ranking shows that the country has low

tolerance for uncertainty and ambiguity. A rule-oriented society that incorporates

rules, regulations, laws, and controls is created to minimize the amount of

uncertainty. A country with low uncertainty avoidance ranking shows that the

country has less concern about ambiguity and uncertainty and has high tolerance

for a variety of opinions. A society which is less rule-oriented, readily agrees to

changes, and takes greater risks reflects a low uncertainty avoidance ranking.

Long-Term Orientation (LTO) Describes the range at which a society illustrates

a pragmatic future oriented perspective instead of a conventional historic or shortterm point of view. The Asian countries are scoring high on this dimension. These

countries have a long term orientation, believe in many truths, accept change

easily, and have thrift for investment. Cultures recording little on this dimension,

trust in absolute truth is conventional and traditional. They have a small term

orientation and a concern for stability. Many western cultures score considerably

low on this dimension.

In India, PDI is the highest Hosted dimension for culture with a rank of 77, LTO

dimension rank is 61, and masculinity dimension rank is 62.

Every society has its own unique culture. Culture must not be imposed onindividuals of different culture. For example, the Cadbury Kraft Acquisition, 2009

was a landmark international deal, in which a U.S. based company Kraft acquired

the British chocolate giant, Cadbury which were in complete extremes in terms of

culture. Let us discuss the major cultural elements that are related to business.

Cultural elements that relate business

The most important cultural components of a country which relate business

transactions are:

Language.

Religion.

Conflicting attitudes.

Cross cultural management is defined as the development and application of

knowledge about cultures in the practice of international management, when

people involved have diverse cultural identities.


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International managers in senior positions do not have direct interaction that is

face-to-face with other culture workforce, but several home based managers handle

immigrant groups adjusted into a workforce that offers domestic markets.

The factors to be considered in cross cultural management are:

Cross cultural management skills

The ability to demonstrate a series of behavior is called skill. It is functionally linked

to achieving a performance goal.

The most important aspect to qualify as a manager for positions of international

responsibility is communication skills. The managers must adapt to other culture

and have the ability to lead its members.

The managers cannot expect to force members of other culture to fit into their

cultural customs, which is the main assumption of cross cultural skills learning. Any

organization that tries to enforce its behavioral customs on unwilling workers fromanother culture faces conflict. The manager has to possess the skills linked with the

following:

Providing inspiration and appraisal systems.

Establishing and applying formal structures.

Identifying the importance of informal structures.

Formulating and applying plans for modification.

Identifying and solving disagreements.

Handling cultural diversity

Cultural diversity in a work group offers opportunities and difficulties. Economy is

benefited when the work groups are managed successfully. The organizations

capability to draw, save, and inspire people from diverse cultures can give the

organization spirited advantages in structures of cost, creativity, problem solving,

and adjusting to change.

Cultural diversity offers key chances for joint work and co-operative action. Group

work is a joint venture where, the production of two or more individuals or groupsworking in cooperation is larger than the combined production of their individual

work.

Factors controlling group creativity

On complicated problem solving jobs diverse groups do better than identical

groups. Diverse groups require time to solve issues of working together. In diverse

groups, over time, the work experience helps to overcome gender, racial, and


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organizational and functional discriminations. But the impact cannot be evaluated

and there is always risk in creating a diverse group. A successful group is profitable

with respect to quick results and the creation of concern for the future. Negative

stereotypes are emphasized if it fails.

Factors related with the industry and company culture are also important. Diversegroups do well when the members

Assist to make group decisions.

Value the exchange of different points of view.

Respect each others skills and share their own. Value the chance for cross-

cultural learning.

Tolerate uncertainty and try to triumph over the inefficiencies that occur when

members of diverse cultures work together.

A diverse group is known to be more creative, where the members are tolerant of

differences. The top management level provides its moral and administrative

support, and gives time for the group to overcome the usual process difficulties.

They also provide diversity training, and the group members are rewarded for their

commitment.

Ignore diversity

It may be difficult to manage diversity. It is better to ignore, which is an alternative.

The management must: Ignore cultural diversity within the employees. Down-play

the importance of cultural diversity. This rejection to identify diversity happenswhen management: Fails to have sufficient awareness and skills to identify

diversity. Identifies diversity but does not have the skill to manage the diversity.

Recognizes the negative consequences of identifying diversity probably cause

greater issues than ignoring it.

Thinks the likely benefits of identifying and managing diversity do not validate the

expected expenses.

Identifies that the job provides no chances for drawing advantages from diversity.

Strategies to ignore diversity may be possible when culture groups are given

various jobs, and sharing required resources are independent in the workplace.

Groups and group members are equally incorporated and work together. In such

cases, confusion occurs when the diverse value systems are not identified that are

held by different staff groups.

Q3. Cosmos Limited wants to enter international markets. Will country risk

analysis help Cosmos Limited to take correct decisions? Substantiate your

answer


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Answer: Country risk analysis is the evaluation of possible risks and rewards from

business experiences in a country. It is used to survey countries where the firm is

engaged in international business, and avoids countries with excessive risk. With

globalization, country risk analysis has become essential for the international

creditors and investors

Overview of Country Risk Analysis

Country Risk Analysis (CRA) identifies imbalances that increase the risks in a cross-

border investment. CRA represents the potentially adverse impact of a countrys

environment on the multinational corporations cash flows and is the probability of

loss due to exposure to the political, economic, and social upheavals in a foreign

country. All business dealings involve risks. An increasing number of companies

involving in external trade indicate huge business opportunities and promising

markets. Since the 1980s, the financial markets are being refined with the

introduction of new products. When business transactions occur across international

borders, they bring additional risks compared to those in domestic transactions.These additional risks are called country risks which include risks arising from

national differences in socio-political institutions, economic structures, policies,

currencies, and geography. The CRAmonitors the potential for these risks to

decrease the expected return of a cross-border investment. For example, a

multinational enterprise (MNE) that sets up a plant in a foreign country faces

different risks compared to bank lending to a foreign government. The MNE must

consider the risks from a broader spectrum of country characteristics. Some

categories relevant to a plant investment contain a much higher degree of risk

because the MNE remains exposed to risk for a longer period of time. Analysts have

categorized country risk into following groups:

Economic risk This type of risk is the important change in the economic structure

that produces a change in the expected return of an investment. Risk arises from

the negative changes in fundamental economic policy goals (fiscal, monetary,

international, or wealth distribution or creation).

Transfer risk Transfer risk arises from a decision by a foreign government to

restrict capital movements. It misanalyses as a function of a countrys ability to

earn foreign currency. Therefore, it implies that effort in earning foreign currency

increases the possibility of capital controls.

Exchange risk This risk occurs due to an unfavorable movement in the exchangerate. Exchange risk can be defined as a form of risk that arises from the change in

price of one currency against another. Whenever investors or companies have

assets or business operations across national borders, they face currency risk if

their positions are not hedged.

Location risk This type of risk is also referred to as neighborhood risk. It includes

effects caused by problems in a region or in countries with similar characteristics.


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Location risk includes effects caused by troubles in a region, in trading partner of a

country, or in countries with similar perceived characteristics.

Sovereign risk This risk is based on a governments inability to meet its loan

obligations. Sovereign risk is closely linked to transfer risk in which a government

may run out of foreign exchange due to adverse developments in its balance ofpayments. It also relates to political risk in which a government may decide not to

honor its commitments for political reasons

Political risk This is the risk of loss that is caused due to change in the political

structure or in the politics of country where the investment is made. For example,

tax laws, expropriation of assets, tariffs, or restriction in repatriation of profits, war,

corruption and bureaucracy also contribute to the element of political risk.

Risk assessment requires analysis of many factors, including the decision-making

process in the government, relationships of various groups in a country and the

history of the country. Country risk is due to unpredicted events in a foreign country

affecting the value of international assets, investment projects and their cash flows.

The analysis of country risks distinguishes between the ability to pay and the

willingness to pay. It is essential to analyze the sustainable amount of funds a

country can borrow. Country risk is determined by the costs and benefits of a

countrys repayment and default strategies. The ways of evaluating country risks by

different firms and financial institutions differ from each other. The international

trade growth and the financial programs development demand periodical

improvement of risk methodology and analysis of country risks.

Purpose of Country Risk Analysis

Risk arises because of uncertainty and uncertainty occurs due to the lack of reliable

information. Country risk is composed of all the uncertainty that defines the risk of

country exposure. The assessment of country risk is used to incorporate country

risk in capital budgeting and modify the discount rate.

CRA regulates the estimated cash flows and explores the main techniques used to

measure a countrys overall riskiness. It is mainly used by MNCs, in order to avoid

countries with excessive risk. It can be used to monitor countries where the MNC is

engaged in international business. Analyzing the country risk helps in evaluating the

risk for a planned project considered for a foreign country and assesses gain and

loss possibility outcomes of cross- border investment or export strategy.

Country detailed risk refers to the unpredictability of returns on international

business transactions in view of information associated with a particular country.

The techniques used by the banks and other agencies for country risk analysis can

be classified as qualitative or quantitative. Many agencies merge both qualitative

and quantitative information into a single rating. A survey conducted by the US


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EXIM bank classified the various methods of country risk assessment used by the

banks into four types. They are:

Fully qualitative method The fully qualitative method involves a detailed

analysis of a country. It includes general discussion of a countrys economic,

political, and social conditions and prediction. Fully qualitative method can beadapted to the unique strengths and problems of the country undergoing

evaluation.

Structured qualitative method The structured method uses a uniform format

with predetermined scope. In structured qualitative method, it is easier to make

comparisons between countries as it follows specific formatacross countries. This

technique was the most popular among the banks during the late seventies.

Checklist method The checklist method involves scoring the country based on

specific variables that can be either quantitative, in which the scoring does not need

personal judgment of the country being scored or qualitative, in which the scoring

needs subjective determinations. All items are scaled from the lowest to the highest

score. The sum of scores is then used to determine the country risk.

Delphi technique The technique involves a set of independent opinions without

group discussion. As applied to country risk analysis, the MNC can assess definite

employees who have the capability to evaluate the risk characteristics of a

particular country. The MNC gets responses from its evaluation and then may

determine some opinions about the risk of the country.

Inspection visits Involves travelling to a country and conducting meeting with

government officials, business executives, and consumers. These meetings clarify

any vague opinions the firm has about the country

Other quantitative methods The quantitative models used in statistical studies

of country risk analysis can be classified as discriminate analysis, principal

component analysis, log it analysis and classification and regression tree method

Data sourcing - The basic data is important to analyze a country. The economic,

financial and currency risk components are based on the variables (quantitative and

qualitative variables). The variables must consider the particularities of each

country and the needs of the model used. The standard variables are used to

maintain the regular analysis comparable with similar works of other countries.

Therefore, the first step is to make sure that the historical series of official data are

reliable, consistent and comparable. The standard economic variables that are

found mainly in the varied approach adopted by financial institutions and rating

agencies, are associated with the countrys real ability to repay its commitments.

The balance of payments (summary account of economic transactions among a

country and the others nations of the world, during a period) and its evolution

through the years means a strong source of data.


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The exchange rate (currency risk) is another important variable considered, as it

balances the transactions (balances the prices of goods, services, and capital)

between residents and non-residents. The analysis must consider the historical

behavior of the exchange rate and the policy which made clear whether the country

follows a rational economics approach or it uses the exchange rate as a tool to

maintain a forced macroeconomic equilibrium.

Apart from the macroeconomic variables which deal with the external sector of the

economy, there are some other relevant variables such as the interest rate, level of

investments, public debt and its service, internal savings, consumption, GDP or

GNP, money supply, inflation rate and so on.

The analysis must be accomplished with qualitative variables, which consider social

aspects as population, life expectancy, rate of birthday, rate of unemployment, level

of literacy and so on. The social-political aspects are necessary for all kind of

analysis as they describe the whole setting of the running economy.

Tools - The risk management demands a regular follow up regarding governmental

policies, external and internal environment, outlook provided by rating agencies,

and so on. Following are the tools recommended.

Chain of value Includes the main countries that sustain trade relationships with

the nation, broken by sectors and products.

Strength and weakness chart Focus the key aspects that warn the country.

Table of financial markets performance Follow up the behavior of bonds and

stocks already issued and to be issued.

Table of macroeconomic variables Provides alert signals when the behavior of

any ratio presents a relevant change. The content of country risk analysis mainly

involves country history, corporate risk, dependency level, external environment,

domestic financial system, ratios for economic risk evaluation and strength and

weakness chart.

Country history - The historical brief helps to identify aspects that interfere in the

future behavior of the country, reducing the ability to payback any external

commitment. The main historical data provides a good understanding of the key

factors which draw the behavior of the society, the government, the private sector,

the legal environment, the economical, political, and the relationships to neighbornations and the world as a whole.

Corporate risk- Both country risk studies and business risk analysis enhances

wealth from the available resources, in terms of capital, natural resources,

technology and labor forces. This clarifies that those kind of analysis procures

extensive knowledge from the business approach for companies, including financial

theory.


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Dependency level - The next step after the history in brief, is a clear definition

about how the country is positioned in the world in terms of its wide relationships,

economic block in which it belongs to, importance of international trade and so on.

All these aspects are significant to identify the dependency level of the country. The

financial dependency to meet the needs of a country is also a strong concern for the

analyst. In this case, the maturity of debts (internal and external) and the availablesources of financing also help to measure the freedom grades of the country.

External environment - The external trade is an important factor to the

development of societies. Globalization has brought international business to the

center of the discussions and the external environment has become vital for all

countries. Thus, a complete vision on economic trends, the behavior of financial

markets, the forecasts for conflicts among nations, the improvement of the

economic blocks, the level of openness of the world economy, financial crisis and

international liquidity is a framework over which the analysis must start.

Domestic financial system -The banking sector has implemented many actionsto avoid losses, after the international crisis. Basel Committee has defined some

strong measures to be followed by the financial houses and Central Banks are trying

to monitor their jurisdictions. Apart from those procedures, recently Asia and Turkey

crisis have shown that the inspection is not enough to keep the reliability of some

domestic system. The international banks had developed many tools to deal with

international crisis. When domestic banks do not have a consistent risk

management policies and adequate provisions to theirs credits, the country risk

happens to be the worst. Therefore, the analysis must consider the health of the

domestic financial system, by evaluating information provided by the Central Banks

and, from the principal banks of the country. Accessing Centrals Bank policies and

supervising procedures also help to evaluate the health of the financial system.

Ratios for economic risk evaluation - Cross-border economic risk analysis

evaluates the probable macroeconomic ratios among some variables. They can be

separated into two groups such as domestic and external. The figures must be

presented in historic series (at least five years) to provide information about its

progress, which can be real values, percentages, or relations. The mainly used

ratios and variables in case of domestic economy are the following:

Gross domestic product (GDP) GDP per capita GDP growth rate

Unemployment rate Internal savings or GDP Investment or GDP Gross

domestic fixed investment or variation of GDP Gini Index Growth domestic fixed

investment or gross domestic savings.Budget deficit or GDPInternal debt or GDP.

The monetary policy is essential as it deals with the price stability. An economy

which presents less instability in its prices of goods and services, provides huge

facilities to decision makers based on their predictions to expected returns of


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investments and a firm social, economical and political environment. All these

aspects request a systematic approach over price indicators such as the following.

Real interest rate Percentage increase in the money supply The mainly used

ratios and variables in case of external economy are the following:

External debt or GDP Short term debts and reserves Exchange currency rate

External debt services and exports

Strength and weakness chart - In order to explain the significant aspects

provided by the analysis, the strength and weakness chart can be used to merge

each strength and weakness with the related scenario. is a model of relationships

among several variables(quantitative and qualitative) to show their

interdependency and the complexity of analysis.

Q4. How can managers in international companies adjust to the ethical

factors influencing countries? Is it possible to establish international

ethical codes? Briefly explain?

Ans: Ethics can be defined as the evaluation of moral values, principles, and

standards of human conduct and its application in daily life to determine acceptable

human behavior. Business ethics pertains to the application of ethics to business,

and is a matter of concern in the corporate world. Business ethics is almost similar

to the generally accepted norms and principles. Behavior that is considered

unethical and immoral in society, for example dishonesty, applies to business as

well. Managers are influenced by three factors affecting ethical values. These

factors have unique value systems that have varying degrees of control over

managers.

Religion Religion is one of the oldest factors affecting ethics. Despite the

differences in religious teachings, religions agree on the fundamental principles and

ethics. All major religions preach the need for high ethical standards, an orderly

social system, and stress on social responsibility as contributing factors to general

well-being.

Culture Culture refers to a set of values and standards that defines acceptable

behavior passed on to generations. These values and standards are important

because the code of conduct of people reflects on the culture they belong to.

Civilization is the collective experience that people have passed on through three

distinct phases: the hunting and gathering phase, agriculture phase, and the

industrial phase. These phases reflect the changing economic and social

arrangements in human history.

Law Law refers to the rules of conduct, approved by the legal system of a country

or state that guides human behavior. Laws change and evolve with emerging and

changing issues. Every organization is expected to abide the law, but in the pursuit


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of profit, laws are frequently violated. The most common breach of law in business

is tax evasion, producing inferior quality goods, and disregard for environmental

protection laws. Ethics is significant in all areas of business and plays an important

role in ensuring a successful business. The role of business ethics is evident from

the conception of an idea to the sale of a product. In an organization, every division

such as sales and marketing, customer service, finance, and accounting andtaxation has to follow certain ethics.

Public image In order to gain public confidence and respect, organizations must

ascertain that they are honest in their transactions. The services or products of a

business affect the lives of thousands of people. It is important for the top

management to impart high ethical standards to their employees, who develop

these services or products. A company that is ethically and socially responsible has

a better public image. People tend to favor the products and services of such

organizations. Investors trust is just as important as public image for any business.

A company that practices good ethical creates a positive impression among its

stakeholders.

Managements credibility with employees Common goals and values are

developed when employees feel that the management is ethical and genuine.

Managements credibility with employees and the public are intertwined. Employees

feel proud to be a part of an organization that is respected by the public. Generous

compensations and effective business strategies do not always guarantee employee

loyalty; organization ethics is equally significant. Thus, companies benefit from

being ethical because they attract and retain good and loyal employees.

Better decision-making Decisions made by an ethical management are in the

best interests of the organization, its employees, and the public. Ethical decisionstake into account various social, economic and ethical factors.

Profit maximization Companies that emphasize on ethical conduct are

successful in the long run, even though they lose money in the short run. Hence, a

business that is inspired by ethics is a profitable business. Costs of audit and

investigation are lower in an ethical company.

Protection of society In the absence of proper enforcement, organizations are

responsible to practice ethics and ensure mechanisms to prevent unlawful events.

Thus, by propagating ethical values, a business organization can save government

resources and protect the society from exploitation. Most countries have similarethical values, but are practiced differently. This section deals with the way

individuals in different countries approach ethical issues, and their ethically

acceptable behavior. With the rise in global firms, issues related to ethical values

and traditions become more common. These ethical issues create complications to

Multi-National Companies (MNCs) while dealing with other countries for business.

Hence, many companies have formulated well-designed codes of conduct to help


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their employees. Two of the most prominent issues that managers in MNCs

operating in foreign countries face are bribery and corruption and worker

compensation.

Bribery and corruption Bribery can be defined as the act of offering, accepting,

or soliciting something of value for the purpose of influencing the action of officialsin the discharge of their duties. Corruption is the abuse of public office for personal

gain. The issue arises when there are differences in perception in different

countries. For example, in the Middle East, it is perfectly acceptable to offer an

official a gift. In Britain it is considered as an attempt to bribe the official, and

hence, considered unlawful.

Worker compensation Businesses invest in production facilities abroad because

of the availability of low-cost labor, which enables them to offer goods and services

at a lower price than their competitors. The issue arises when workers are exploited

and are underpaid compared to the workers in the parent country who are paid

more for the same job. The disparity arises due to the differences in the regulatorystandards in the two countries. Earlier, we believed that ethics is a prerogative of

individuals, but now this perception has immensely changed. Many companies use

management techniques to encourage ethical behavior at an organizational level.

Code of conduct for MNCs -The code of conduct for MNCs refers to a set of rules

that guides corporate behavior. These rules prescribe the duties and limitations of a

manager. The top management must communicate the code of conduct to all

members of the organization along with their commitment in enforcing the code.

Some of the ethical requirements for international companies are as follows:

Respect basic human rights.

Minimize any negative impact on local economic policies.

Maintain high standards of local political involvement.

Transfer technology.

Protect the environment.

Protect the consumer.

Employ labor practices that are not exploitative.

When a manager of an international firm faces an ethical problem, certain models

help in solving these ethical issues.

Culture is a major factor which influences marketing decisions and practices in a

foreign country. For example, in the middle-eastern countries the prior approval of

the governing authorities should be taken if a firm plans to advertise a product


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related to womens apparel, as showcasing some aspects of women clothing is

considered immodest and immoral.

Q.5 Discuss the international marketing strategies. How is it different

from domestic marketing strategies?

Ans:- International marketing refers to marketing of goods and products by

companies overseas or across national borderlines. The techniques used while

dealing overseas is an extension of the techniques used in the home country by the

company. Taking into account the various conditions on which markets vary and

depend, appropriate marketing strategies should be devised and adopted. Like,

some countries prevent foreign firms from entering into its market space through

protective legislation. Protectionism on the long run results in inefficiency of local

firms as it is inept towards competition from foreign firms and other technological

advancements. It also increases the living costs and protects inefficient domestic

firms. To counter this scenario firms must learn how to enter foreign markets and

increase their global competitiveness. Firms that plan to do business in foreign landfind the marketplace different from the domestic one. Market sizes, customer

preferences, and marketing practices all vary; therefore the firms planning to

venture abroad must analyze all segments of the market in which they expect to

compete. The decision of a firm to compete internationally is strategic; it will have

an effect on the firm, including its management and operations locally. The decision

of a firm to compete in foreign markets has many reasons. Some firms go abroad as

the result of potential opportunities to exploit the market and to grow globally. And

for some it is policy driven decision to globalize and to take advantage by

pressurizing competitors. But, the decision to compete abroad is always a strategic

down to business decision rather than simply a reaction. Strategic reasons for

global expansion are:

Diversifying markets that provide opportunistic global market development.

Following customers abroad (customer satisfaction).

Exploiting different economic growth rates.

Pursuing a global logic or imperative to harvest new markets and profits.

Pursuing geographic diversification.

Globalizing for defensive reasons.

Exploiting product life cycle differences (technology).

Pursuing potential abroad.

Likewise, there can be other reasons like competition at home, tax structures,

comparative advantage, economic trends, demographic conditions, and the stage in


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the product life cycle. In order to succeed, a firm should carefully look at their

geographic expansion and global marketing strategy. To a certain extent, a firm

makes a decision about its extent of globalization by taking a stance that may span

from entirely domestic to a global reach where the company devotes its entire

marketing strategy to global competition. In the process of developing an

international marketing strategy, the firm may decide to do business in its home-country (domestic operations) only or host-country (foreign country) only.

Segmentation - Firms that serve global markets can be segregated into several

clusters based on their similarities. Each such cluster is termed as a segment.

Segmentation helps the firms to serve the markets in an improved way. Markets

can be segmented into nine categories, but the most common method of

segmentation is on the basis of individual characteristics, which include the

behavioral, psychographic, and demographic segmentations. The basis

of behavioral segmentation is the general behavioral aspects of the customers.

Demographic segmentation considers the factors like age, culture, income,

education and gender. Psychographic segmentation takes into account: beliefs,

values, attitudes, personalities, opinions, lifestyles and so on.

Market positioning - The next step in the marketing process is, the firms should

position their product in the global market. Product positioning is the process of

creating a favorable image of the product against the competitors products. In

global markets product positioning is categorized as high-tech or hightouch

positioning. One challenge that firms face is to make a trade-off between adjusting

their products to the specific demands of a country and gaining advantage of

standardization such as the maintenance of a consistent global brand image and

cost savings. This is task is not easy.

International product policy - Some thinkers of the industry tend to draw a

distinction between conventional products and services, stressing on service

characteristics such as heterogeneity (variation in standards among providers,

frequently even among different locations of the same firm), inseparability from

consumption, intangibility, and perish ability. Typically, products are composed of

some service component like, documentation, a warranty, and distribution. These

service components are an integral part of the product and its positioning.

Firms have a choice in marketing their products across markets. Many a times,

firms opt for a strategy which involves customization, through which the firm

introduces a unique product in each country, believing that tastes differ so much

between countries that it is necessary to create a new product for each market. On

the other hand, standardisation proposes the marketing of one global product, with

the belief that the same product can be sold indifferent countries without significant

changes. For example, Intel microprocessors are the same irrespective of the

country in which they are sold.


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Finally, in most cases firms will go for some kind of adaptation. Here, when moving

a product between markets minor modifications are made to the product. For

example, in U.S. fuel is relatively cheap, therefore cars have larger engines than the

cars in Asia and Europe; and then again, much of the design is identical or similar.

International pricing decisions - Pricing is the process of ascertaining the valuefor the product or service that will be offered for sale. In international markets,

making pricing decisions is entangled in difficulties as it involves trade barriers,

multiple currencies, additional cost considerations, and longer distribution channels.

Before establishing the prices, the firm must know its target market well because

when the firm is clear about the market it is serving, then it can determine the price

appropriately. The pricing policy must be consistent with the firms overall

objectives. Some common pricing objectives are: profit, return on investment,

survival, market share, status quo, and product quality.

The strategies for international pricing can be classified into the following three

types:

Market penetration Market holding: Market skimming:

The factors that influence pricing decisions are inflation, devaluation and

revaluation, nature of product or industry and competitive behavior, market

demand, and transfer pricing.

The approach taken by company towards pricing when operating in international

markets are ethnocentric, polycentric, and geocentric.

Price can be defined by the following equation

Price = Resonancegiven up

Goods Received

: The pricing decision enables us to change the price in many ways, some of them

are:

Sticker price changes. Change quantity Change quality Change terms

Transfer pricing

Transfer pricing is the process of setting a price that will be charged by a subsidiary(unit) of a multi-unit firm to another unit for goods and services, which are sold

between such related units.

Transfer pricing is determined in three ways: market based pricing, transfer at cost

and cost-plus pricing. The Arms Length pricing rule is used to establish the price to

be charged to the subsidiary.


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Many managers consider transfer pricing as non-market based. The reason for

transfer pricing may be internal or external. Internal transfer pricing include

motivating managers and monitoring performance. External factors include taxes,

tariffs, and other charges.

Transfer Pricing Manipulation (TPM) is used to overcome these reasons.Governments usually discourage TPM since it is against transfer pricing, where

transfer pricing is the act of pricing commodities or services. However, in common

terminology, transfer pricing generally refers TPM.

International advertising : - International advertising is usually associated with

using the same brand name all over the world. However, a firm can use different

brand names for historic reasons. The acquisition of local firms by global players

has resulted in a number of local brands. A firm may find it unfavorable to change

those names as these local brands have their own distinctive market

.The purpose of international advertising is to reach and communicate to target

audiences in more than one country. The target audience differs from country to

country in terms of the response towards humor or emotional appeals, perception

or interpretation of symbols and stimuli and level of literacy. Sometimes, globalised

firms use the same advertising agencies and centralise the advertising decisions

and budgets. In other cases, local subsidiaries handle their budget, resulting in

greater use of local advertising agencies.

International advertising can be thought of as a communication process that

transpires in multiple cultures that vary in terms of communication styles, values,

and consumption patterns. International advertising is a business activity and not

just a communication process. It involves advertisers and advertising agencies thatcreate ads and buy media in different countries. This industry is growing worldwide.

International advertising is also reckoned as a major force that mirrors both social

values, and propagates certain values worldwide.

International promotion and distribution

Distribution of goods from manufacturer to the end user is an important aspect of

business. Companies have their own ways of distribution. Some companies directly

perform the distribution service by contacting others whereas a few companies take

help from other companies who perform the distribution services. The distribution

services include:

The purchase of goods.

The assembly of an attractive assortment of goods.

Holding stocks.

Promoting sale of goods to the customer.


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The physical movement of goods.

In international marketing, companies usually take the advantage of other countries

for the distribution of their products. The selection of distribution channel is helpful

to gain the competitive advantage. The distribution channel is also dependent on

the way to manage and control the channel. Selecting the distribution channel isvery important for agents and distributors.

Domestic vs. International marketing - Domestic marketing refers to the

practice of marketing within a firms home country. Whereas International or foreign

marketing is the practice of marketing in a foreign country; the marketing is for the

domestic operations of the firm in that country. Domestic marketing finds the "how"

and "why" a product succeeds or fails within the firms home country and how the

marketing activity affects the outcome. Whereas, foreign marketing deals with

these questions and tries to find answers according to the foreign market conditions

and it provides a micro view of the market at the firms level. In domestic marketing

a firm has insight of the marketing practices, culture, customer preferences, climateand so onof its home country, while it is not totally aware of the policies and the

market conditions of the foreign country. The stages that have led to achieve global

marketing are:

Domestic marketing Firms manufacture and sell products within the country.

Hence, there is no international phenomenon.

Export marketing Firms start exporting products to other countries. This is a

very basic stage of global marketing. Here, the products are developed based on

the companys domestic market although the goods are exported to foreign

countries.

International marketing Now, Firms start to sell products to various countries

and the approach is polycentric, that is, making different products for different

countries.

Multinational marketing In this stage, the number of countries in which the firm

is doing business gets bigger than that in the earlier stage. And hence, the company

identifies the regions to which the company can deliver same product instead of

producing different goods for different countries. For example, a firm may decide to

sell same products in India, Sri lanka and Pakistan, assuming that the people living

in this region have similar choice and at the same time offering different product forAmerican countries. This approach is termed re geocentric approach.

Global marketing Company operating in various countries opts for a common

single product in order to achieve cost efficiencies. This is achieved by analyzing the

requirements and the choice of the customers in those countries. This approach is

called Geocentric approach.


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The practice of marketing at the international stage does not designate any country

as domestic or foreign. The firm is not considered as the corporate citizen of the

world as it has a home base.

The firm must not have a single marketing plan, because there are differences

between the target markets (that is domestic or international markets). Thereshould never be a rigid marketing campaign. A firm that is successful internationally

first obtains success locally

.Few approaches that you can consider for an international marketing are:

Advertise as a foreign product By doing so, the product will be considered as

genuine and original in some countries.

Joint partnership with a local firm finding a firm that has already established

credibility will benefit a lot. The product will be considered as a local product by

following this marketing approach.

Licensing You can sell the rights of your product to a foreign firm. Here the

problem is that the firm may not maintain the quality standard and therefore may

hurt the image of the brand. Culture is a major factor which influences marketing

decisions and practices in a foreign country. For example, in the middle-eastern

countries the prior approval of the governing authorities should be taken if a firm

plans to advertise a product related to womens apparel, as showcasing some

aspects of women clothing is considered immodest and immoral.

Q.6 Explain briefly the international financial management components

with examples and applicability.

Ans: The term Financial Management refers to the proper maintenance of all the

monetary transactions of the organization. It also means recording of transactions

in a standard manner that will show the financial position and performance of the

organization. The Financial Management can be categorized into domestic and

international financial management.

The domestic financial management refers to managing financial services within the

country. International financial management refers to managing finance and share

between the countries.

The main aim of international finance management is to maximize theorganizations value that in turn will increase the impact on the wealth of the

stockholders. When the doors of liberalization opened, entrepreneurs capitalized the

opportunity to step their foot to conduct business in different parts of the world.

International trade gave way for the growth of international business. For a

corporation to be successful, it is vital to manage the finance and business accounts

appropriately. The rise in significance and complexity of financial administration in a


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global environment creates a great challenge for financial managers. The

contributions of different financial innovations like currency derivative, international

stock listing, and multicurrency bonds have necessitated the accurate management

of the flow of international funds through the study of international financial

management.

The International Financial Management (IFM) came to its existence when the

countries all over the world started opening their doors for each other. This

phenomenon is also called as liberalization. But after the end of the Second World

War, the integration in terms of foreign activities has grown substantially. The firms

of all types are now opting to operate their business and deploy their resources

abroad. Furthermore, the differences between the countries have persisted that has

given rise to the prevalence of market imperfections

Components of International Financial Management

Foreign exchange market

The Foreign exchange or the forex markets facilitates the participants to obtain,

trade, exchange and speculate foreign currency. The foreign exchange market

consists of banks, central banks, commercial companies, hedge funds, investment

management firms and retail foreign exchange brokers and investors. It is

considered to be the leading financial market in the world. It is vital to realize that

the foreign exchange is not a single exchange, but is created from a global network

of computers that connects the participants from all over the world. The foreign

exchange market is immense in size and survives to serve a number of functions

ranging from the funding of cross-border investment, loans, trade in goods, and

trade in services and currency speculation. The participant in a foreign exchangemarket will normally ask for a price. The trading in the foreign exchange market

may take place in the following forms:

Outright cash or ready foreign exchange currency deals that take place on the

date of the deal.

Next day foreign exchange currency deals that take place on the next working

day.

Swap Simultaneous sale and purchase of identical amounts of currency for

different maturities.

Spot and Forward contracts A Spot contract is a binding obligation to buy

or sell a definite amount of foreign currency at the existing or spot market rate. A

forward contract is a binding obligation to buy or sell definite amount of foreign

currency at the pre-agreed rate of exchange, on or before a certain date.

The advantage of spot dealing has resulted in a simplest way to deal with all foreign

currency requirements. It carries the greatest risk of exchange rate fluctuations due


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to lack of certainty of the rate until the deal is carried out. The spot rate that is

intended to receive will be set by current market conditions, the demand and supply

of currency being traded and the amount to be dealt. In general, a better spot rate

can be received if the amount of dealing is high. The spot deal will come to an end

in two working days after the deal is struck.

A forward market needs a more complex calculation. A forward rate is based on the

existing spot rate plus a premium or discounts which are determined by the interest

rate connecting the two currencies that are involved. For example, the interest

rates of UK are higher than that of US and therefore a modification is made to the

spot rate to reflect the financial effect of this differential over the period of the

forward contract. The duration will be up to two years for a forward contract. A

variation in foreign exchange markets can be affected to any company whether or

not they are directly involved in the international trade or not. This is often referred

to as Economic foreign exchange and most difficult to protect a business.

The three ways of managing risks are as follows:

Choosing to manage risk by dealing with the spot market whenever the need of

cash flow rises. This will result in a high risk and speculative strategy since one will

not know the rate at which a transaction is dealt until the day and time it occurs.

Managing the business becomes difficult if it depends on the selling or buying the

currency in the spot market.

The decision must be made to book a foreign exchange contract with the bank

whenever the foreign exchange risk is likely to occur. This will help to fix the

exchange rate immediately and will give a clear idea of knowing the exact cost of

foreign currency and the amount to be received at the time of settlement wheneverthis due occurs.

A currency option will prevent unfavorable exchange rate movements in the similar

way as a forward contract does. It will permit gains if the markets move as per the

expectations. For this base, a currency option is often demonstrated as a forward

contract that can be left if it is not followed. Often banks provide currency options

which will ensure protection and flexibility, but the likely problem to arise is the

involvement of premium of particular kind. The premium involved might be a cash

amount or it could also influence into the charge of the transaction.

Foreign currency derivatives

Currency derivative is defined as a financial contract in order to swap two

currencies at a predestined rate. It can also be termed as the agreement where the

value can be determined from the rate of exchange of two currencies at the spot.

The currency derivative trades in markets correspond to the spot (cash) market.

Hence, the spot market exposures can be enclosed with the currency derivatives.

The main advantage from derivative hedging is the basket of currency available.


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Figure 1 describes the examples of currency derivatives. The derivatives can be

hedged with other derivatives. In the foreign exchange market, currency derivatives

like the currency features, currency options and currency swaps are usually traded.

The standard agreement made in order to buy or sell foreign currencies in future is

termed as currency futures. These are usually traded through organized exchanges.

The authority to buy or sell the foreign currencies in future at a specified rate isprovided by currency option. These will help the businessmen to enhance their

foreign exchange dealings. The agreement undertaken to exchange cash flow

streams in one currency for cash flow streams in another currency in future is

provided by currency swaps. These will help to increase the funds of foreign

currency from the cheapest sources.

Figure 1: Example for Foreign Currency Derivatives

Some of the risks associated with currency derivatives are

: Credit risk takes place, arising from the parties involved in a contract.

Market risk occurs due to adverse moves in the overall market.

Liquidity risks occur due to the requirement of available counterparties to take the

other side of the trade.

Settlement risks similar to the credit risks occur when the parties involved in thecontract fail to provide the currency at the agreed time.

Operational risks are one of the biggest risks that occur in trading derivatives due

to human error.

. Legal risks pertain to the counterparties of currency swaps that go into

receivership while the swap is taking place.


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International monetary systems - The international monetary systems

represent the set of rules that are agreed internationally along with its conventions.

It also consists of set of rules that govern international scenario, supporting

institutions which will facilitate the worldwide trade, the investment across cross-

borders and the reallocation of capital between the states.

International monetary systems provide the mode of payment acceptable between

buyers and sellers of different nationality, with addition to deferred payment. The

global balance can be corrected by providing sufficient liquidity for the variations

occurring in trade. Thereby it can be operated successfully.

The gold and gold bullion standards

The gold standard was the first modern international system. It was operating

during the late 19th and early 20thcenturies, the standard provided for the free

circulation between nations of gold coins of standard specification. The gold

happened to be the only standard of value under the system. The advantages of

this system depend in its stabilizing influence. Any nation which exports more than

its import would receive gold in payment of the balance. This in turn has resulted in

the lowered value of domestic currency. The higher prices lead to the decreased

demands for exports. The sudden increase in the supply of gold may be due to the

discovery of rich deposit, which in turn will result in the increase of price abruptly.

This standard was substituted by the gold bullion standard during the 1920s;

thereby the nations no longer minted gold coins. Instead, reversed their currencies

with gold bullion and determined to buy and sell the bullion at a fixed cost. This

system was also discarded in the 1930s.

The gold-exchange system

Trading was conducted internationally with respect to the gold-exchange standard

following World War II. In this system, the value of the currency is fixed by the

nations with respect to some foreign currency but not with respect to gold. Most of

the nations fixed their currency to the US dollar funds in the United States. With a

view to maintain stable exchange rate at the global level, the International

Monetary Fund (IMF) was created at the Bretton Woods international Conference

held in 1944. The drain on the US gold reserves continued up to the 1970s. Later in

1971,the gold convertibility was abandoned by the United States leaving the world

without a single international monetary system.

Floating exchange rates and recent development - After the abundance of the

gold convertibility by the US, the IMF in 1976 decided to be in agreement on the

float exchange rates. The gold standard was suspended and the values of different

currencies were determined in the market. The Japanese yen and the German

Deutschmark strengthened and turned out to be increasingly important in

international financial market, at the same time the US dollar diminished its


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significance. The Euro was set up in financial market in 1999 as a replacement for

the currencies. Hence, it became the second most commonly used currency after

the dollar in the international market. Many large companies opt to use euro rather

than the dollar in bond trading with a goal to receive better exchange rates. Very

recently the some of the members of Organization of Petroleum Exporting Countries

(OPEC) such as Saudi Arabia, Iraq have opted to trade petroleum in Euro than inDollar.

International financial markets - International foreign markets provide links

connecting the financial markets of each country and independent markets external

to the authority of any one country. The heart of the international financial market

is being governed by the market of currency where the foreign currency is

denominated by the international trade and investment. Hence the purchase of

goods and services is preceded by the purchase of currency.

The purpose of the foreign currency markets, international money markets,

international capital markets and international securities markets are as follows:

The foreign currency markets The foreign currency market is an international

market that is familiar in structure. This means that there exists no central place

where the trading can take place. The market is actually the telecommunications

like among financial institutions around the globe and opens for business at any

time. The greater part of the worlds that deal in foreign currencies is still taking

position in the cities where international financial activity is centered.

International money markets A money market can be conventionally defined

as a market for accounts, deposits or deposits that include maturities of one year or

less. This is also termed as the Euro currency markets which constitute anenormous financial market that is beyond the influence and supervision of world

financial and government authorities. The Euro currency market is a money market

for depositing and borrowing money located outside the country where that money

is officially permitted tender. Also, Euro currencies are bank deposits and loans

existing outside any particular country.

International capital markets The international capital provides links among

the capital markets of individual countries. It also comprises a separate market of

their own, the capital market that flows in to the Euro markets. The firms enjoy thefreedom to raise capital, debit, fixed or floating interest rates and maturities varying

from one month to thirty years in an international capital markets.

International security markets The banks have experienced the greatest

growth in the past decade because of the continuity in providing large portion of the

international financial needs of the government and business. The private

placements, bonds and equities are included in the international security market.


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The following are the reasons given for the enormous growth in the trading of

foreign currency.

Deregulation of international capital flows Without t

mb0053 – international business management - ketan

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