Understanding the goal of management and organizational structure of MNCs

Q1: What is the goal of Management? Explain the organizational structure
of MNCs?
Answer:
Goal of Management:
The main Goal of management is the maximization of shareholder’s wealth. When
business managers try to maximize the wealth of their firm, they are actually trying to increase
their stock price. As the stock price increases, the individual who holds the stock wealth
increases. As the stock price goes up, the value of the firm increases and the net worth of the
individual who owns the stock increases.
Share price increasing factors:
1. Event base:
In such cases the share price increase evenly such as selection of dullen trump is
the main event when the share price goes down.
2. Performance base:
But mostly the share price increase according to performance of organization. If
the organization makes more profit the share price goes up and if not, then share price
goes down.
Organizational structure of MNCs
There are two types of organizational structure of MNCs, which are following;
• Centralization
• Decentralization
1. Centralization:
Centralized organization can be defined as a hierarchy decision-making structure
where all decisions and processes are handled strictly at the top or the executive level.
Managers and employees lower in the chain of command are limited in the decision-
making processes and can rarely implement new processes that veer “off course” without
approval.
In a centralized organization, even those decisions regarding everyday operations
and processes are generally decided upon by upper level executives or the business
owner. Policies are put in place to ensure the rest of the company follows the direction of
the executives.
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The benefits to a centralized organizational structure are clear cut and to the point
because that’s exactly how the model is meant to be. There is little room for error which
means the basic processes and more detailed operations are in place. Employees that
appreciate this kind of structure don’t favor change and like knowing where they stand in
the company.
2. Decentralization:
Decentralization is a type of organizational structure in which daily operations
and decision-making responsibilities are delegated by top management to middle and
lower-level mangers within the organization, allowing top management to focus more on
major decisions.
While management is given the power of freedom to “run their department as
they see fit” they are still held accountable for production. The owner or company
executives will rely heavily on management to instill and manage the processes and
guideline they have set in place but will allow the manager to bring their own style to the
mix
The benefits to a decentralized organizational structure are more flexible and open
to change. There is room for innovation and individual thought processes that could
benefit the company as a whole or even one simple task. Employees of this type of
environment favor change and like the fast paced environment that allows them to have
input and feedback.

Q2: Describe the key theories that justify International Business? How firms
engage in International business?
Answer:
Key theories
There are basically three types of theories, which are following:
1. Theory of comparative advantage
Comparative advantage is an economic law referring to the ability of any given
economic actor, company, country to produce goods and services at a lower opportunity
cost than its competitor.
Example, if countries A and B allocate resources evenly to both goods combined
output is: Cars = 15 + 15 = 30; Trucks = 12 + 3 = 15, therefore world output is 45 m
units. It is being able to produce goods by using fewer resources, at a lower opportunity
cost, that gives countries a comparative advantage.
2. Imperfect market theory:
In economic theory, imperfect competition is a type of market structure showing
some but not all features of competitive markets. Forms of imperfect competition
Examples of imperfect competition include oligopoly, monopolistic competition,
monopsony and oligopsony. In an oligopoly, there are many buyers for a product or
service but only a few sellers
3. Product Cycle Theory:
Theory suggesting that a firm initially establish itself locally and expand into
foreign markets in response to foreign demand for its product; over time, the MNC will
grow in foreign markets; after some point, its foreign business may decline unless it can
differentiate its product from competitors. Product life cycle theory divides the marketing
of a product into four stages:
• Introduction,
• Growth,
• Maturity and
• Decline.
When product life cycle is based on sales volume, introduction and growth often
become one stage.
Firms engagement in International Business:

The firms use several methods to conduct the international business. The most common
methods are following:
1. International Trade
International trade is a relatively conservative approach that can be used by firms
to penetrate markets (by exporting) or to obtain supplies at a low cost (by importing).
This approach entails minimal risk because the firm does not place any of its capital at
risk. If the firm experiences a decline in its exporting or importing, it can normally reduce
or discontinue this part of its business at a low cost. Many large U.S.-based MNCs,
including Boeing, DuPont, General Electric, and IBM, generate more than $4 billion in
annual sales from exporting. Nonetheless, small businesses account for more than 20
percent of the value of all U.S. exports.
2. Licensing
Licensing obligates a firm to provide its technology (copyrights, patents,
trademarks, or trade names) in exchange for fees or some other specified benefits.
Starbucks has licensing agreements with SSP (an operator of food and beverages in
Europe) to sell Starbucks products in train stations and airports throughout Europe.
3. Franchising
Franchising obligates a firm to provide a specialized sales or service strategy,
support assistance, and possibly an initial investment in the franchise in exchange for
periodic fees. For example, McDonald’s, Pizza Hut, Subway Sandwiches, Blockbuster,
and Dairy Queen have franchises that are owned and managed by local residents in many
foreign countries. Like licensing, franchising allows firms to penetrate foreign markets
without a major investment in foreign countries. The recent relaxation of barriers in
countries throughout Eastern Europe and South America has resulted in numerous
franchising arrangements.
4. Joint Venture
A joint venture is a venture that is jointly owned and operated by two or more
firms. Many firms penetrate foreign markets by engaging in a joint venture with firms
that reside in those markets. Most joint ventures allow two firms to apply their respective
comparative advantages in a given project. For example, General Mills, Inc., joined in a
venture with Nestlé SA so that the cereals produced by General Mills could be sold
through the overseas sales distribution network established by Nestlé.
5. Acquisition of existing operations
Firms frequently acquire other firms in foreign countries as a means of penetrating
foreign markets. Acquisitions allow firms to have full control over their foreign
businesses and to quickly obtain a large portion of foreign market share.
For example, Google, Inc., has made major international acquisitions to expand its
business and to improve its technology. It has acquired businesses in Australia (search

engines), Brazil (search engines), Canada (mobile browser), China (search engines),
Finland (micro-blogging), Germany (mobile software), Russia (online advertising), South
Korea (weblog software), Spain (photo sharing), and Sweden (videoconferencing).
6. Establishing new foreign subsidiaries
Firms can also penetrate foreign markets by establishing new operations in
foreign countries to produce and sell their products. Like a foreign acquisition, this
method requires a large investment. Establishing new subsidiaries may be preferred to
foreign acquisitions because the operations can be tailored exactly to the firm’s needs. In
addition, a smaller investment may be required than would be needed to purchase
existing operations. However, the firm will not reap any rewards from the investment
until the subsidiary is built and a customer base established.

Q3: What is the Balance of payment? Explain the components of Balance of
payment?
Answer:
Balance of payment:
The balance of payments is a summary of transactions between domestic and foreign
residents for a specific country over a specified period of time. It represents an accounting of a
country’s international transactions for a period, usually a quarter or a year. It accounts for
transactions by businesses, individuals, and the government.
Components of Balance of payment:
A balance-of-payments statement can be broken down into various components. Those
that receive the most attention are the current account and the capital account.
1. Current Account:
The main components of the current account are payments for (1) merchandise (goods)
and services, (2) factor income, and (3) transfers.
• Payments for Merchandise and Services:
Merchandise exports and imports represent tangible products, such as
computers and clothing, that are transported between countries. Service exports
and imports represent tourism and other services, such as legal, insurance, and
consulting services, provided for customers based in other countries. Service
exports by the United States result in an inflow of funds to the United States,
while service imports by the United States result in an outflow of funds. The
difference between total exports and imports is referred to as the balance of trade.
• Factor Income Payments:
A second component of the current account is factor income, which
represents income (interest and dividend payments) received by investors on
foreign investments in financial assets (securities). Thus, factor income received
by U.S. investors reflects an inflow of funds into the United States. Factor income
paid by the United States reflects an outflow of funds from the United States.
• Transfer Payments:
A third component of the current account is transfer payments, which
represent aid, grants, and gifts from one country to another.

2. Capital and Financial Accounts:
The capital account includes the value of financial assets transferred across
country borders by people who move to a different country. It also includes the value of
non-produced non-financial assets that are transferred across country borders, such as
patents and trademarks. The key components of the financial account are payments for
(1) direct foreign investment, (2) portfolio investment, and (3) other capital investment.
• Direct foreign investment:
Direct foreign investment represents the investment in fixed assets in
foreign countries that can be used to conduct business operations. Examples of
direct foreign investment include a firm’s acquisition of a foreign company, its
construction of a new manufacturing plant, or its expansion of an existing plant in
a foreign country.
• Portfolio investment:
Portfolio investment represents transactions involving long term financial
assets (such as stocks and bonds) between countries that do not affect the transfer
of control. Thus, a purchase of Heineken (Netherlands) stock by a U.S. investor is
classified as portfolio investment because it represents a purchase of foreign
financial assets without changing control of the company. If a U.S. firm
purchased all of Heineken’s stock in an acquisition, this transaction would result
in a transfer of control and therefore would be classified as direct foreign
investment instead of portfolio investment.
• Other Capital investment:
A third component of the financial account consists of other capital
investment, which represents transactions involving short-term financial assets
(such as money market securities) between countries. In general, direct foreign
investment measures the expansion of firms’ foreign operations, whereas portfolio
investment and other capital investment measure the net flow of funds due to
financial asset transactions between individual or institutional investors.

Q4: What are the factors that affecting International Trade flow?
Answer:
There are such factors that affecting the international trade flow are following;
1- Cost of Labor
The cost of labor varies substantially among countries. Many of China’s workers
earn wages of less than $300 per month, and so it is not surprising that China’s firms
commonly produce products that require manual labor at a lower cost compared to many
countries in Europe or North America. Within Europe, wages of Eastern European
countries tend to be much lower than wages of Western European countries. Firms in
countries where labor costs are low commonly have an advantage when competing
globally, especially in labor intensive industries.
2- Impact of Inflation:
If a country’s inflation rate increases relative to the countries with which it trades,
its current account will be expected to decrease, other things being equal. Consumers and
corporations in that country will most likely purchase more goods overseas (due to high
local inflation), while the country’s exports to other countries will decline. However, the
impact of inflation may have a limited effect on the balance of trade between some
countries when the typical wage rate in one country is more than ten times the typical
wage rate in the other country.
3- Impact of National Income
If a country’s income level (national income) increases by a higher percentage
than those of other countries, its current account is expected to decrease, other things
being equal. As the real income level (adjusted for inflation) rises, so does consumption
of goods. A percentage of that increase in consumption will most likely reflect an
increased demand for foreign goods.
a. Impact of the Credit Crisis on Trade:
The credit crisis weakened the economies (and national incomes) of many
different countries. Consequently, the amount of spending, including spending for
imported products, declined. MNCs cut back on their plans to boost exports as they
lowered their estimates for economic growth in their foreign markets. As they

reduced their expansion plans, they also reduced their demand for imported supplies.
Thus, international trade flows were reduced in response to the credit crisis. A related
reason for the decline in international trade is that some MNCs could not obtain
financing. International trade is commonly facilitated by letters of credit, which are
issued by commercial banks on behalf of importers promising to make payment upon
delivery. Exporters tend to trust that commercial banks would follow through on their
obligation even if they did not trust the importers. However, because many banks
experienced financial problems during the credit crisis, exporters were less willing to
accept letters of credit.
4- Impact of Government Policies:
Government policies can have a major influence on which firms get most of the
market share within an industry. These policies affect each country’s unemployment
level, income level, and economic growth. Each country’s government wants to increase
its exports, because more exports result in a higher level of production and income, and
may create jobs. In addition, a country’s government may prefer that its consumers and
firms purchase products and services locally rather import them, because this would also
create local jobs. However, a job created in one country may be lost in another, which
causes countries to battle for a greater share of the world’s exports.
1. Restrictions on Imports:
Some governments prevent or discourage imports from other countries by
imposing such trade restrictions. Among the most commonly used trade restrictions
are tariffs and quotas. If a country’s government imposes a tax on imported goods
(often referred to as a tariff), the prices of foreign goods to consumers are effectively
increased. Tariffs imposed by the U.S. government are on average lower than those
imposed by other governments. Some industries, however, are more highly protected
by tariffs than others. American apparel products and farm products have historically
received more protection against foreign competition through high tariffs on related
imports. In addition to tariffs, a government can reduce its country’s imports by
enforcing a quota, or a maximum limit that can be imported. Quotas have been
commonly applied to a variety of goods imported by the United States and other
countries. As mentioned earlier, international trade treaties have resulted in a
reduction of explicit trade restrictions. However, there are still many other country
characteristics that can give one country’s firms an advantage in international trade.
2. Subsidies for Exporters
Some governments offer subsidies to their domestic firms so that those firms
can produce products at a lower cost than their global competitors. Thus, the demand
for the exports produced by those firms is higher as a result of subsidies.
3. Restrictions on Piracy

Government restrictions on piracy vary among countries. A government can
affect international trade flows by its lack of restrictions on piracy.
4. Environmental Restrictions
When a government imposes environmental restrictions, local firms
experience higher costs of production. Thus, they may be at a global disadvantage
compared to firms in other countries that are not subject to the same restrictions.
5. Labor Laws:
Labor laws vary among countries, which might allow for pronounced
differences in the labor expenses incurred by firms among countries. Some countries
have more restrictive laws that protect the rights of workers. In addition, some
countries have more restrictive child labor laws. Firms based in countries with more
restrictive laws will incur higher expenses for labor, other factors being equal. Thus,
their firms may be at a disadvantage when competing against firms based in other
countries.
6. Business Laws:
Some countries have more restrictive laws on bribery than others. Thus, firms
based in these countries may not be able to compete globally in some situations, such
as when there is a government agency soliciting specific services or production, and if
the officials involved in the decision-making are expecting bribes from firms that
attempt to get the business.
7. Tax Breaks:
The government in some countries may allow tax breaks to firms that are in
specific industries. This practice is not necessarily a subsidy, but it still is a form of
government financial support that might benefit many firms that export products.
8. Country Security Laws:
Some U.S. politicians have argued that international trade and foreign
ownership should be restricted when U.S. security is threatened. While the general
opinion has much support, there is disagreement regarding the specific business
transactions in which U.S. businesses deserve protection from foreign competition.
5- Impact of Exchange Rates:
Each country’s currency is valued in terms of other currencies through the use of
exchange rates. Currencies can then be exchanged to facilitate international transactions.
The values of most currencies fluctuate over time because of market and government
forces. If a country’s currency begins to rise in value against other currencies, its current
account balance should decrease, other things being equal. As the currency strengthens,
goods exported by that country will become more expensive to the importing countries.
As a consequence, the demand for such goods will decrease.

Q5: Discuss the agencies that facilitate International flow?
Answer:
A variety of agencies have been established to facilitate international trade and financial
transactions. These agencies often represent a group of nations. A description of some of the
more important agencies follows.
1- International Monetary Fund:
The United Nations Monetary and Financial Conference held in Bretton Woods, New
Hampshire, in July 1944 was called to develop a structured international monetary system.
As a result of this conference, the International Monetary Fund (IMF) was formed. The major
objectives of the IMF, as set by its charter, are to
(1) promote cooperation among countries on international monetary issues,
(2) promote stability in exchange rates,
(3) provide temporary funds to member countries attempting to correct imbalances of
international payments,
(4) promote free mobility of capital funds across countries, and
(5) promote free trade. It is clear from these objectives that the IMF’s goals encourage
increased internationalization of business.
2- World Bank
The International Bank for Reconstruction and Development (IBRD), also referred to
as the World Bank, was established in 1944. Its primary objective is to make loans to
countries to enhance economic development. For example, the World Bank recently
extended a loan to Mexico for about $4 billion over a 10-year period for environmental
projects to facilitate industrial development near the U.S. border. Its main source of funds is
the sale of bonds and other debt instruments to private investors and governments. The
World Bank has a profit-oriented philosophy. Therefore, its loans are not subsidized but are
extended at market rates to governments (and their agencies) that are likely to repay them.
Because the World Bank provides only a small portion of the financing needed by
developing countries, it attempts to spread its funds by entering into co-financing
agreements. Co-financing is performed in the following ways:

 Official aid agencies. Development agencies may join the World Bank in
financing development projects in low-income countries.
 Export credit agencies. The World Bank co-finances some capital-intensive
projects that are also financed through export credit agencies.
 Commercial banks. The World Bank has joined with commercial banks to provide
financing for private-sector development. In recent years, more than 350 banks
from all over the world have participated in co-financing, including Bank of
America, J.P.
 Morgan Chase, and Citigroup.
3- World Trade Organization
The World Trade Organization (WTO) was created as a result of the Uruguay Round
of trade negotiations that led to the GATT accord in 1993. This organization was established
to provide a forum for multilateral trade negotiations and to settle trade disputes related to the
GATT accord. It began its operations in 1995 with 81 member countries, and more countries
have joined since then. Member countries are given voting rights that are used to make
judgments about trade disputes and other issues.
4- International Financial Corporation
In 1956 the International Financial Corporation (IFC) was established to promote
private enterprise within countries. Composed of a number of member nations, the IFC
works to promote economic development through the private rather than the government
sector. It not only provides loans to corporations but also purchases stock, thereby becoming
part owner in some cases rather than just a creditor. The IFC typically provides 10 to 15
percent of the necessary funds in the private enterprise projects in which it invests, and the
remainder of the project must be financed through other sources. Thus, the IFC acts as a
catalyst, as opposed to a sole supporter, for private enterprise development projects. It
traditionally has obtained financing from the World Bank but can borrow in the international
financial markets.
5- International Development Association
The International Development Association (IDA) was created in 1960 with country
development objectives somewhat similar to those of the World Bank. Its loan policy is more
appropriate for less prosperous nations, however. The IDA extends loans at low interest rates
to poor nations that cannot qualify for loans from the World Bank.
6- Bank for International Settlements
The Bank for International Settlements (BIS) attempts to facilitate cooperation among
countries with regard to international transactions. It also provides assistance to countries
experiencing a financial crisis. The BIS is sometimes referred to as the “central banks’
central bank” or the “lender of last resort.” It played an important role in supporting some of

the less developed countries during the international debt crisis in the early and mid-1980s. It
commonly provides financing for central banks in Latin American and Eastern European
countries.
7- OECD
The Organization for Economic Cooperation and Development (OECD) facilitates
governance in governments and corporations of countries with market economics. It has 30
member countries and has relationships with numerous countries. The OECD promotes
international country relationships that lead to globalization.
8- Regional Development Agencies
Several other agencies have more regional (as opposed to global) objectives relating
to economic development. These include, for example, the Inter-American Development
Bank (focusing on the needs of Latin America), the Asian Development Bank (established to
enhance social and economic development in Asia), and the African Development Bank
(focusing on development in African countries).

Q6: What is foreign exchange market? Explain the foreign exchange
transactions?
Answer:
Foreign Exchange market:
The foreign exchange market allows for the exchange of one currency for another. Large
commercial banks serve this market by holding inventories of each currency so that they can
accommodate requests by individuals or MNCs. Individuals rely on the foreign exchange market
when they travel to foreign countries.
Foreign Exchange transactions:
The foreign exchange market should not be thought of as a specific building or location
where traders exchange currencies. Companies normally exchange one currency for another
through a commercial bank over a telecommunications network. It is an over the- counter market
where many transactions occur through a telecommunications network. While the largest foreign
exchange trading centers are in London, New York, and Tokyo, foreign exchange transactions
occur on a daily basis in all cities around the world. London accounts for about 33 percent of the
trading volume, while New York accounts for about 20 percent. Thus, these two markets control
more than half the currency trading in the world.
the foreign exchange transaction is an agreement of exchange of currencies of one
country for another at an agreed exchange rate on a definite date.
1. Spot Transaction:
The spot transaction is when the buyer and seller of different currencies settle
their payments within the two days of the deal. It is the fastest way to exchange the
currencies. Here, the currencies are exchanged over a two-day period, which means no
contract is signed between the countries. The exchange rate at which the currencies are
exchanged is called the Spot Exchange Rate. This rate is often the prevailing exchange
rate. The market in which the spot sale and purchase of currencies is facilitated is called
as a Spot Market.
2. Forward Transaction:
A forward transaction is a future transaction where the buyer and seller enter into
an agreement of sale and purchase of currency after 90 days of the deal at a fixed
exchange rate on a definite date in the future. The rate at which the currency is exchanged
is called a Forward Exchange Rate. The market in which the deals for the sale and
purchase of currency at some future date is made is called a Forward Market.
3. Future Transaction:

The future transactions are also the forward transactions and deals with the
contracts in the same manner as that of normal forward transactions. But however, the
transactions made in a future contract differs from the transaction made in the forward
contract on the following grounds:
 The forward contracts can be customized on the client’s request, while the future
contracts are standardized such as the features, date, and the size of the contracts is
standardized.
 The future contracts can only be traded on the organized exchanges, while the
forward contracts can be traded anywhere depending on the client’s convenience.
 No margin is required in case of the forward contracts, while the margins are
required of all the participants and an initial margin is kept as collateral so as to
establish the future position.
4. Swap Transactions:
The Swap Transactions involve a simultaneous borrowing and lending of two
different currencies between two investors. Here one investor borrows the currency and
lends another currency to the second investor. The obligation to repay the currencies is
used as collateral, and the amount is repaid at a forward rate. The swap contracts allow
the investors to utilize the funds in the currency held by him/her to pay off the obligations
denominated in a different currency without suffering a foreign exchange risk.
5. Option Transactions:
The foreign exchange option gives an investor the right, but not the obligation to
exchange the currency in one denomination to another at an agreed exchange rate on a
pre-defined date. An option to buy the currency is called as a Call Option, while the
option to sell the currency is called as a Put Option.
Thus, the Foreign exchange transaction involves the conversion of a currency of
one country into the currency of another country for the settlement of payments.

Q7: Explain the following.
a) Bid Offer price and bid offer spread
Answer:
Bid Offer Price:
The bid price displayed in most quote services is the highest bid price in the market. The
ask or offer price on the other hand is the lowest price a seller of a particular stock is willing to
sell a share of that given stock. The ask or offer price displayed is the lowest ask/offer price in
the market (Stock market).
Bid Offer spread:
The bid-offer spread is simply the difference between the price at which you can buy a
share and the price at which you can sell it. There is a difference between the two prices because
this is how the people who ensure there is a market for the shares (known as ‘market makers’)
make money.
The bid price is what the market maker will pay you to sell your shares to them (it’s what
they’ll bid for it). The offer price is what you have to pay to buy shares from them. The offer
price is usually higher than the bid price so that the market maker can make a profit.
The bid-offer spreads on large companies in the FTSE 100 which trade in huge volumes
every day tend to be tiny. Smaller companies can have very big spreads, as they are harder to
trade, so an investment in a very small company can easily be worth 10%-15% less than the price
you paid for it as soon as you have bought it.
Bid-offer spreads are also a feature of investment trusts and exchange-traded funds (ETFs)
and represent an extra initial cost of investing in them. In the case of certain funds having large
bid-offer spreads it might be worth the effort of finding an alternative in order to minimize your
investment costs.
b) Explain Cross, Forward, Future and option Market transaction:
These are following transactions defined:
Cross Transaction:
Cross trade is a practice where buy and sell orders for the same stock are offset without
recording the trade on the exchange, an activity that is not permitted on most major stock
exchanges.
Forward Transaction:

A forward transaction is a customized transaction between two parties to buy or sell an
asset at a specified price on a future date. A forward contract can be used for hedging or
speculation, although its non-standardized nature makes it particularly apt for hedging.
A forward transaction is a future transaction where the buyer and seller enter into an
agreement of sale and purchase of currency after 90 days of the deal at a fixed exchange rate on a
definite date in the future. The rate at which the currency is exchanged is called a Forward
Exchange Rate. The market in which the deals for the sale and purchase of currency at some
future date is made is called a Forward Market.
Future Transaction:
The future transactions are also the forward transactions and deals with the contracts in
the same manner as that of normal forward transactions. But however, the transactions made in a
future contract differs from the transaction made in the forward contract on the following
grounds:
 The forward contracts can be customized on the client’s request, while the future
contracts are standardized such as the features, date, and the size of the contracts is
standardized.
 The future contracts can only be traded on the organized exchanges, while the
forward contracts can be traded anywhere depending on the client’s convenience.
No margin is required in case of the forward contracts, while the margins are required of all the
participants and an initial margin is kept as collateral so as to establish the future position.
Option transaction:
The foreign exchange option gives an investor the right, but not the obligation to
exchange the currency in one denomination to another at an agreed exchange rate on a pre-
defined date. An option to buy the currency is called as a Call Option, while the option to sell the
currency is called as a Put Option.
Thus, the Foreign exchange transaction involves the conversion of a currency of one
country into the currency of another country for the settlement of payments.

Q8: What are International Money and Credit Market? Explain how
exchange rate movements are measured?
Answer:
International Money Market:
The international money market is a market where international currency transactions
between numerous central banks of countries are carried on. The transactions are mainly carried
out using gold or in US dollar as a base.
The International Monetary Market (IMM) was introduced in December 1971 and
formally implemented in May 1972, although its roots can be traced to the end of Bretton Woods
through the 1971 Smithsonian Agreement and Nixon's suspension of U.S. dollar's convertibility
to gold.
The IMM Exchange was formed as a separate division of the Chicago Mercantile
Exchange, and as of 2009, was the second largest futures exchange in the world. The primary
purpose of the IMM is to trade currency futures, a relatively new product previously studied by
academics as a way to open a freely traded exchange market to facilitate trade among nations.
Credit Market:
A marketplace for the exchange of debt securities and short-term commercial paper.
Companies and the government are able to raise funds by allowing investors to purchase these
debt securities. Activity in credit markets is often used to gauge investor sentiment. If more
bonds from the government are being purchased, this is typically a good indicator that investors
are worried about the stock market.
Measuring Exchange Rate movements:
Exchange rate movements affect an MNC’s value because they can affect the amount of
cash inflows received from exporting or from a subsidiary and the amount of cash outflows
needed to pay for imports. An exchange rate measures the value of one currency in units of
another currency. As economic conditions change, exchange rates can change substantially. A
decline in a currency’s value is often referred to as depreciation. When the British pound
depreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the
pound. The increase in a currency value is often referred to as appreciation. When a foreign
currency’s spot rates at two specific points in time are compared, the spot rate at the more recent
date is denoted as S and the spot rate at the earlier date is denoted as St–l. The percentage change
in the value of the foreign currency is computed as follows:
Percent Δ in foreign currency value ¼ =

A positive percentage change indicates that the foreign currency has appreciated, while a
negative percentage change indicates that it has depreciated. The values of some currencies have
changed as much as 5 percent over a 24-hour period.
Foreign exchange rate movements tend to be larger for longer time horizons. Thus, if
yearly exchange rate data were assessed, the movements would be more volatile for each
currency than what is shown here, but the euro’s movements would still be more volatile. If daily
exchange rate movements were assessed, the movements would be less volatile for each currency
than what is shown here, but the euro’s movements would still be more volatile. A review of
daily exchange rate movements is important to an MNC that will need to obtain a foreign
currency in a few days and wants to assess the possible degree of movement over that period. A
review of annual exchange movements would be more appropriate for an MNC that conducts
foreign trade every year and wants to assess the possible degree of movements on a yearly basis.
Many MNCs review exchange rates based on short-term and long-term horizons because they
expect to engage in international transactions in the near future and in the distant future.

Q9: What is the difference between Bond market and Stock Market?
Discuss the method used to invest internationally?
Answer:
Bond Market:
The bond market (also debt market or credit market) is a financial market where
participants can issue new debt, known as the primary market, or buy and sell debt securities,
known as the secondary market.
Stock Market:
Stock market is a place where shares are bought and sold, i.e. a stock exchange Example:
stock market price or price on the stock market. Stock is a unit of ownership in a company.
Every company is divided into a number of shares and the owner of a share owns a small
percentage of the company.
Difference between bond market and stock market:
1. While the stock market is primarily known as a barometer by which an economy can be
addressed, the bond market is highly regarded as an indicator of how the economy is
progressing now.
2. The stock market as a market for variable income is mainly focused on the prediction of
future profits of the companies and the bond market as a debt market is more concerned with
current interest rates, which are the concerns of many market participants beyond the
corporations.
3. The size of the bond market is several times the size of the stock market, which can be
attributed to the different structures and the perceived risks of the two markets.
4. Although companies can only issue shares, governments, organizations and agencies, along
with corporations, all can issue bonds.
5. The bond market is a massive and decentralized network of market participants, while the
stock market is a highly centralized one that consists of only a few exchanges and a limited
number of markets on highly controlled counter.
6. The differences in market structure offer different incentives for issuers of bonds and equity
issuers. To issue bonds, issuers need not fulfill any requirements in the market, while to issue
shares, companies face stringent listing requirements of actions enforced by the exchange. As
a result, the greater amount of bonds can reach the market more easily than shares, thereby
contributing to the larger size of the bond market.

7. The different levels of investment risk perceived by bonds and stocks contribute to the
impact on size of the bond market compared to the stock market.
8. The bonds are often referred to as fixed-income securities that pay an agreed interest rate and
return the principal investment at maturity, presenting a relatively low risk for investors. On
the contrary, shares provide potentially more benefits, but also with increased risk.
9. Since investors in generally are averse to risk, most investors would be willing to invest in
the bonds that are safe than stocks that are risky, especially in the alarming market
conditions, which requires a larger bond market to accommodate the increased demand for
investors.
Methods use to invest internationally:
There are numerous ways in which the ordinary investor can invest in foreign markets
without having too much trouble. Here are a few of the major types offered by most brokerages.
1. American Depositary Receipts (ADRs)
American depositary receipts are used by foreign countries unable to list on the
NYSE or Nasdaq, which have domestic country regulations. ADRs mimic their domestic
stocks very closely, and offer you a way of investing internationally without actually
buying stock from a foreign exchange. One ADR found on the NYSE is Nokia (NYSE:
NOK). This company tracks its parent stock on the Helsinki Exchange almost identically,
allowing investors the convenience of international diversification without actually
leaving American exchanges. (To learn more, see What Are Depositary Receipts?)
2. Exchange-Traded Funds (ETFs)
These investments offer a wide variety of international flavors. You can buy ETFs
that track most of the major foreign indexes, and they allow investors to obtain a return
based on a specific foreign market without having too great of an exposure. Also, because
they trade and work like any other ETF, they aren't expensive to trade and are relatively
liquid. (To learn more, see Introduction to Exchange-Traded Funds.)
3. International Funds
International stock funds are comparable to international ETFs as they also
provide for diversification but have same drawbacks and benefits that are associated with
regular funds and ETFs. One thing to remember is that in these international funds, a
hired professional portfolio manager is in charge and decides what to place in the
portfolio. Be sure you do your research before buying such a fund to make sure that these
investments and the trading strategy of the fund are in line with your preferences.
4. Foreign Securities
Many brokerage firms will offer investors the ability to buy investments from
different countries directly from the brokerage's international trading desk. So, if you

wanted to buy a stock in a company that doesn't trade on American markets, you can
inquire with your brokerage to see if it will facilitate the trade for you through one of the
brokerage's affiliated international companies that has a membership on the foreign
exchange or market. Because these trades are typically more expensive and less liquid
than regular domestic trades, you should carefully check out all of the other alternatives
before you decide to do it this way.
5. Eurobonds
Not recommended for the beginner investor, these are bonds issued in foreign
markets by domestic companies. An example of this would be if Sony were to issue a
bond that matures in yen for American investors. Eurobonds don't always offer higher
yields than domestic bonds, and they are only as secure as the company issuing them, but
they are a way you can participate in a foreign fixed-income market. One of the main
reasons that beginner investors should be wary of these bonds is that they pay a foreign
currency that the investor will probably have to exchange.

Q10: How equilibrium Exchange rate is determined? Explain the factors that
affect equilibrium exchange rate?
Answer:
Equilibrium Exchange Rate:
The exchange rate at which the supply for a currency meets the demand of the same
currency. As foreign exchange rates are affected by a number of factors, the equilibrium
exchange rate in turn, are also influenced by its supply and demand. Hence equilibrium is
achieved when a currency's demand is equal to its supply.
The demand–supply framework enables you to predict the next period’s exchange rate. When
you understand this framework, you’ll be able to predict the direction of the change in the
exchange rate — in other words, whether a currency will depreciate or appreciate against another
currency. Keep the following in mind when applying the demand–supply model to exchange
rates:
• An exchange rate implies the relative price of a currency. For example, the euro–dollar
exchange rate tells you how many euros to give up to buy one dollar. Therefore, this
exchange rate implies the price of a dollar in euros. If the exchange rate is expressed as
the dollar–euro rate, it tells you how many dollars to give up to buy one euro. Therefore,
this exchange rate implies the price of a euro in dollars.
• Certain forces affect the demand for and supply of dollars, or of any other currency, in
foreign exchange markets.
• The demand–supply model of exchange rate determination implies that the equilibrium
exchange rate changes when the factors that affect the demand and supply conditions
change.
This example uses the market for
dollars as an example, but you can use any
market you want. Whichever market you
use, be careful when labeling the x– and y-
axes of your model. For example, if you
have the quantity of oranges on the x-axis,
you have to put the price of oranges on
the y-axis. Then the supply and demand
curves inside the model refer to oranges.
Also, think about the meaning of the
demand for and supply of dollars. Who are
these people that want to buy or sell dollars
or any other currency? They are

international banks, multinational companies, speculators, and so on. Whenever they want to buy
dollars, they’ll be along the demand curve. Whenever they want to sell dollars, they’ll be along
the supply curve.
PRICE AND QUANTITY OF THE DOLLAR MARKET:
If you want to graph the dollar market, the quantity on the x-axis must be the quantity of
dollars in the market. Therefore, the price indicated by the y-axis must be the price of dollars in
another currency (in this example, the euro). In other words, the exchange rate has to be defined
as the euro–dollar exchange rate.
Consequently, the demand and supply curves indicate the demand for and supply of
dollars. The figure shows the initial equilibrium exchange rate as €0.89 per dollar.
FACTORS THAT AFFECT DEMAND AND SUPPLY:
Ceteris paribus conditions are associated with the demand and supply of dollars. These
conditions are related to the macroeconomic fundamentals of two countries represented in the
exchange rate. Because the example exchange rate is the euro–dollar rate, the following variables
may change in the U.S. or the Euro-zone, which then have an effect on the euro–dollar exchange
rate:
• Inflation rate
• Growth rate
• Interest rate
• Government restrictions
In the demand–supply model, these factors are divided into two areas based on how they
affect exchange rates. Inflation rate and growth rate are considered trade-related factors. When
you apply the changes in one of these factors to exchange rates, you think about the trade
between the U.S. and the Euro-zone.
The interest rate, on the other hand, is a portfolio flow–related factor. It means that when
one of the country’s interest rate changes, you think about how this change affects the
attractiveness of dollar- and euro-denominated securities to American and European investors.
Government restrictions can be related to both trade flows and portfolio flows, depending on the
nature of these restrictions.

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