OBJECTIVES OF FOREIGN DIRECT INVESTMENT'S AND

PI - September 10th, 2010

1. Sustaining a high level of investment - Since the

underdeveloped countries want to industrialized
themselves within a short period of time, it becomes
necessary to raise the level of investment substantially.
This requires, in turn, a high level of savings.

However, because of general poverty of masses, the

savings are often very low. Hence emerges a resource
gap between investment and savings. This gap has to be
filled through foreign capital.

2. Technological gap - The under developed countries

have very low level of technology as compared to the
advanced countries. However they possess strong urge
for industrialization to develop their economies and to
wriggle out of the low level equilibrium trap in which
they are caught.

This raises the necessity for importing technology from

advanced countries. Such technology usually comes with
foreign capital when it assumes the form of private
foreign investment or foreign collaboration. In the
Indian case technical assistance received from abroad
has helped in filling the technological gap through the
following three ways:

(a) Provision for expert services

(b) Training of Indian personnel

(c) Education research and training institution in the

country

3. Exploitation of natural resources - A number of

underdeveloped countries possess huge mineral
resources, which await exploitation. These countries
themselves do not possess the required technical skill
and expertise to accomplish this task. As a consequence,
they have to depend upon foreign capital to undertake
the exploitation of their mineral wealth.

4. Undertaking the initial risk - Many under developed

countries suffer from acute private entrepreneurs. This
creates obstacles in the programs of industrialization. An
argument advanced in favour of the foreign capital is
that it undertakes the risk of investment in host
countries and thus provides the much-needed impetus to
the process of industrialization.

Once the programme of industrialization gets started

with the initiative of foreign capital, domestic industrial
activity starts picking up as more and more of the host
country enter the industrial field.

5. Development of basic economic infrastructure - It has

been observed that the domestic capital of the under
developed countries is often too inadequate to build up
the economic infra structure of its own. Thus these
countries require the assistance of foreign capital to
undertake this task.

In the latter half of the 20th century, especially during

the last 3-4 decades, international financial institutions
and many governments of advanced countries have
made substantial capital available to the under
developed countries to develop their system of transport
and communications, generation and distribution of
electricity, development of irrigation facilities, etc.
6. Improvement in balance of payments position - In the
initial phase of the economic development, the under
developed countries need much larger imports (in the
form of machinery, capital goods, industrial raw
materials, spares and components), then they can
possibly export. As a result, the balance of payments
generally turns adverse. This creates a gap between the
earnings and foreign exchange. Foreign capital presents
short run solution to the problem.

This shows that the economic development of an

underdeveloped country should obviously receive a
boost as a result of foreign capital.
Accordingly, if foreign capital is obtained on easy terms
and without any ‘strings’, it should be welcomed.
However, as noted by John P. Lewis, “despite denials,
the fact is that all foreign aid carries strings and every
foreign aid relationship involves bargaining, however
genteel, between aiding and receiving parties.”

Key Terms and Concepts

Spot Rate is the rate paid for delivery of a currency within two business days
after the day of the trade.

Direct Quote is a home currency price per unit of a foreign currency.

Indirect Quote is a foreign currency price per unit of a home currency.

Cross Rate is an exchange rate between two currencies when it is obtained

from the rates of these two currencies in terms of a third currency.
Bid Price is the price at which a bank is ready to buy a foreign currency.

Ask Price is the price at which a bank is ready to sell a foreign currency.

Bid-Ask Spread is the spread between bid and ask rates for a currency; this
spread is the bank's fee for executing the foreign exchange transaction.

Forward rate is the rate to be paid for delivery of a currency at some future
date.

Efficient Exchange Markets exist when exchange rates reflect all available
information and adjust quickly to new information.

Theory of Purchasing Power Parity (PPP) holds that the exchange rate must
change in terms of a single currency so as to equate the prices of goods in both
countries.

Fisher Effect named after the economist Irving Fisher, assumes that the
nominal interest rate in each country is equal to a real interest rate plus an
expected rate of inflation.

International Fisher Effect states that the future spot rate should move in an
amount equal to, but in a different direction from, the difference in interest
rates between two countries.
Interest-Rate Parity Theory holds that the difference between a forward rate
and a spot rate equals the difference between a domestic interest rate and a
foreign interest rate

Arbitrage is the purchase of something in one market and its sale in another
market to take advantage of a price differential.

Two-Point Arbitrage is the arbitrage transaction between two currencies.

Three-Point Arbitrage, also known as triangle arbitrage, is the arbitrage

transaction among three currencies and can occur if any of the three cross
rates is out of line.

Covered Interest Arbitrage is the movement of short-term funds between

countries to take advantage of interest differentials with exchange risk covered
by forward contracts.
1.
o Forward Exchange :
 It is the agreement between two parties
requiring the delivery of some specified future date; of a
specified amount of foreign currency by one of the
parties; against the payment in the domestic currency
by the other party at a price agreed upon in the
contract.
 Rate of exchange that is applicable is
called forward exchange rate
 Such transactions occur in
the forward market.
2.
 Forward exchange at Par
when, forward exchange rate quoted is equal to
the spot rate at the timeof making the contract.
 Forward exchange at Premium
when forward rate quoted is more than the spot rate
then the foreign currency is selling at
the forward premium. (i.e. dollar buys more rupees)
 Forward exchange at Discount
when forward rate quoted is less than the spot rate then
the foreign currency is selling at the forward discount.
(i.e. dollar buys less rupees).
3.
o Swap Operation :
 Banks do it to correct their fund position.
 The spot is swapped against Forward.
 It is also the double deal where the
sale/purchase of spot currency accompanied by a
purchase/sale respectively of the same currency
for forward delivery.

 A swap transaction in the interbank market is the simultaneous

purchase and sale of a given amount of foreign exchange for two
different value dates.

 Both purchase and sale are conducted with the same counterparty.
 Some different types of swaps are:

– spot against forward,

– forward-forward,

– nondeliverable forwards (NDF).

– Outright Forward Transactions:

– A forward transaction requires delivery at a future value date of a

specified amount of

– one currency for a specified amount of another currency.

– The exchange rate to prevail at the value date is established at the

time of the agreement,

– but payment and delivery are not required until maturity.

– Forward exchange rates are normally quoted for value dates of

one, two, three, six, and

– twelve months. Actual contracts can be arranged for other

lengths.

– Outright forward transactions only account for about 9 % of all

foreign exchange

– transactions.

 The Forward Market

 3.1 Definition

 A forward exchange contract (FEC) is an agreement to exchange two

 currencies at a specified date in the future at a fixed rate.

3.3 Mechanism

The forward contract or “cover” provided by the Bank will guarantee to

the

customer the future rate of exchange at which the currencies will be

bought or

sold.

In providing this guarantee of a future fixed price, the Bank is not taking
a view

on the future. It simply does today what the customer needs to do in the

future:

The Bank will take the following steps:

1.) Spot transaction

The Bank will buy, on day 1, the USD that the importer only requires 180
days

later.

2.) Placement of currency on deposit

Assuming that USD deposits offer an interest of 1 % per annum, the Bank
will

only need to buy USD 995,025, as this amount, placed for 180 days at 1%
will
 generate interest of USD 4,975, so that capital plus interest = USD
1,000,000.

3.) Borrowing

In order to purchase the USD 995,025, the bank had to borrow EUR

1,105,583 at the then prevailing spot rate of EUR/USD 0.90.

Assuming that the interest on this loan is 5 % per annum, the amount
the

bank must repay after 180 days is EUR 1,133,223.

4.) Delivery by the bank and repayment by the customer

On day 180, the bank will claim this amount from the importer in
exchange for

the USD 1,000,000, which will be used to pay the exporter.

The forward rate is EUR/USD 0.8824, as EUR 1,133,223 are required to

purchase USD 1,000,000 (USD 1,000,000: EUR 1,133,223 x 100 = 0.8824)

The difference between the spot rate on day 1 and the forward rate on
day

180 is simply the difference between the interest rate paid by the Bank
on the

Euro loan and the interest it received on its USD deposit (5% - 1% = 4%
for

180 days or 2%) translated into the exchange rate.

EXPOSURE OF FOREIGN EXCHANGE RISK

• Three important Facts:

1- Changes in the nominal exchange rate are not offset

by corresponding changes in prices at home and

abroad: there is real exchange rate risk

-2 Neither the forward rate is successful in forecasting

the exchange rate nor are other fundamental variables

-3 Given the various market imperfections in the real

world, hedging exchange rate risk can lead to an

increase in the value of the firm

The Importance The importance of hedging is best expressed in the categorical

statement that

of Hedging futures trading depends upon hedging. Evidence of this

dependence abounds

in the statistics of commodity markets, and the habitue of the markets comes

against such a constant stream of first-hand evidence that he takes the

relationship for granted. Study the open interest in any commodity futures

contract and you obtain insight into the economics of the commodity, so

strong and general is the relationship. Find two commodities for which the

open-interest pattern differs markedly and consistently and you will find that

their production or distribution differs in such a way as to account for the

contrasting open-interest patterns.

Consider, for instance, a contrast between two very important commodity

futures markets, those for wheat and corn at Chicago. The open interest in

wheat had a much wider seasonal range than that in corn during the 1920's

and 1930's when both markets were thriving. The cause of this lay in the

contrasting commercial movement, wheat being marketed rapidly, corn being

marketed over a more prolonged period owing to slower harvesting

223

© Board of Trade of the City of Chicago 1978.techniques plus the fact that it
need not be harvested rapidly and the

consideration that crib storage was a good drying method. The greater

seasonal concentration in movement of wheat made for greater seasonal

concentration in its hedging and hence in the open interest. Similarly, the

average level of open interest in wheat was much larger than that in corn, for

the reason that wheat had a greater commercial movement although corn was

produced in much larger quantity. These are familiar facts, but the evidence

they provide of the importance of hedging in futures trading bears continued

emphasis. In these and many similar cases it is quite clear that the pattern of

the open interest is dictated by the hedging use of the market. Nothing on the

speculative side, that did not arise out of hedging business, could explain these

use patterns.

For a large number of commodities the open interest in futures, in its seasonal

and year-to-year fluctations, follows closely the commercial stocks or

visiblesupplies data. This generalization of the above cases is the strongest
single

class of evidence of the dependence of futures trading upon hedging. Even in

markets where large proportions of the commercial stocks are not hedged, the

minor fraction that is hedged characteristically dictates the pattern of open

interest.

If it is not stock carrying it may be the hedging needs of certain processors that

dictate the level of open interest. Thus, for example, the open interest pattern

in soybean oil or in millfeeds has not typically conformed to the stocks

pattern. Investigation of the hedging policy and practice of users of these

contracts soon reveals that they are used for purposes other than stock

carrying, however, and that the open interest still conforms to hedging use. Or

it may be the financing of a growing crop rather than stock carrying which

gives rise to hedging, as in the case of onions and potatoes; or the financing of

imports, as in the case of coffee and cocoa; and in these cases as well it is

hedging which dictates the open interest pattern.

In addition to seasonal and year-to-year patterns, there are long-term trends

as well as singular episodes reflected in the open interest which can be shown

to rest upon hedging use. The long-term decline in wheat-future business at

Minneapolis relative to Kansas City since about World War I reflects the

changing relative importance of the two as milling centers. The episode which

was described by Working

, in which soft wheats became the effective delivery

at Kansas City in 1953 and the millers fled the market, illustrates vividly the
importance of hedging. Only by a change in the contract to require a
hardwheat delivery were the hedgers persuaded to return and preserve this
market

from complete disuse. In sharp contrast to this singular episode which was of

the market's own doing, some weighty evidence of the importance of hedging

is found on many markets today and is neither of their doing nor to their

liking. I refer, of course, to the general decline in levels of business on most

futures markets—a decline which stems primarily and directly from the

reduced need for hedging occasioned by the extensive stock-carrying engaged

in by an agency of the federal government. Recent increases in business owing

to the subsidy-in-kind program provide additional evidence that it is the

demand for hedging which determines the level of use of futures markets.

Holbrook Working, "Whose Markets?—Evidence on Some Aspects of Futures

Trading," The

Journal of Marketing, Vol. XIX, July 1954.

224

© Board of Trade of the City of Chicago 1978.Evidence on this score, as

suggested earlier, proliferates. I have sought merely

to indicate the kinds and sources of available evidence on a question on which

the evidence indicates overwhelmingly that futures trading depends upon

hedging.

There are two versions of interest rate parity known as covered interest
rate parity and uncovered interest rate parity.
Covered Interest Rate Parity is also known as Interest Parity
Condition. It assumes that the ‘interest rate return from different
currencies will be the same if one covers against currency changes.’ That
is, the returns will be the same when you invest USD in US deposits and
the same dollar amount in a foreign currency, and protect that
investment using a forward on the foreign currency.

Uncovered Interest Rate Parity is a condition that assumes that ‘the

difference between the interest rate of two currencies will be equal to the
expected depreciation of a currency.’ That is, a 10% depreciation of the
USD against any foreign currency is to be compensated by a 10% rise in
the interest rate of the dollar.

Interest rate parity is a no-arbitrage condition representing an

equilibrium state under which investors will be indifferent to interest
rates available on bank deposits in two countries.[

Financial Controller
Samples taken from various job descriptions related to
financial controller positions:
The role will encompass all areas of accounting from financial
accounting to forecasting and include specific project work.
Working alongside the CFO and COO, the successful candidate
will be required to advise on potential acquisitions and business
decisions made by the company.

This role is a hands role with the emphasis on providing

genuine commercial direction to the MD of a fast growing niche
retailer. As well as ultimate responsibility for the financial
accounts preparation, you will provide regular relevant analysis
and make course changing business decisions.
Financial Controller, reporting to the Finance Director, to be
responsible for the Finance Function on a day to day basis. This
is a unique opportunity to learn from a highly experienced
team of professional entrepreneurs. This recent management
buy out team seeks a commercially focussed accountant for
production of management accounts and all commercial
business issues. You will use your staff management and
accountancy skills in managing a team of five and collating the
numbers for the business, managing the cash-flow, and
drafting the board pack commentary. The candidate will also
head up the weekly finance team meeting. Further
responsibilities will include payroll, VAT, cashbook.

Read
more: http://wiki.answers.com/Q/What_does_a_financial_cont
roller_do#ixzz1cXNedgfJ

What Does Transfer Price Mean?

The price at which divisions of a company transact with each other.
Transactions may include the trade of supplies or labor between
departments. Transfer prices are used when individual entities of a larger
multi-entity firm are treated and measured as separately run entities.

Also known as "transfer cost".

Read
more: http://www.investopedia.com/terms/t/transferprice.asp#ixzz1cXOq
J52g

FOREX STRUCTURE

In a universe with a single currency, there would be no foreign exchange

market, no foreign exchange rates, no foreign exchange. But our world of
mainly national currencies, the foreign exchange market plays the
indispensable role of providing the essential machinery for making
payments across borders, transferring funds and purchasing power from
one currency to another, and determining that singularly important price,
the exchange rate. Over the past twenty-five years the way the market has
performed those tasks has changed enormously.
Since the early 1970s, with increasing internationalization of financial
transactions, the foreign exchange market has been profoundly
transformed, not only in size but in coverage and mode of operations. A
basic change in the international monetary system from the fixed exchange
rate "par value" requirements of Bretton Woods that existed until 1971 to
the flexible legal structure of today, in which nations can choose to float
their exchange rates or to follow other exchange rate regimes and practices
of their choice.
An important wave of financial deregulation throughout the world with
massive elimination of government controls and restrictions in neatly all
countries, resulting in greater freedom for national and international
financial transactions, and in greatly increased competition among
financial institutions, both within and across national borders.
The foreign exchange market, commonly known as the FOREX market, is
by far the largest and most liquid market in the world.
The foreign exchange market , is the backbone of all international capital
transactions. It is the medium for how the world may view a nation's
economic situation.
The FOREX is the largest financial market in the world. The New York
Institute of Finance estimates the daily average to be more than $1.5
trillion. By the year 2008, more than $8.0 trillion will be traded daily.
Because of its size and reach, it is virtually impossible, even by government
central banks to manipulate the FOREX market for any length of time.
Unlike the equity markets, no effective insider interference is possible.

The Interbank market is unique:

Transactions occur directly with other Interbank participants
Orders are processed immediately
Transaction participants are non-discretionary
Two-sided markets are offered to purchase and sell any currency at any
time
Both short and long positions can easily be established
The FOREX market is open 24 hours a day, nearly 6 days a week.
The FOREX market usually offers high leverage, up to 200:1.
Forex Market Structure
For the sake of comparison, let us first examine a market that
you are probably very familiar with: the stock market. This is
how the structure of the stock market looks like:

"I have no choice but to go through a centralized exchange!"

By its very nature, the stock market tends to be very

monopolistic. There is only one entity, one specialist that
controls prices. All trades must go through this specialist.
Because of this, prices can easily be altered to benefit the
specialist, and not traders.
How does this happen?
In the stock market, the specialist is forced to fulfill the order
of its clients. Now, let's say the number of sellers suddenly
exceed the number of buyers. The specialist, which is forced to
fulfill the order of its clients, the sellers in this case, is left with
a bunch of stock that he cannot sell-off to the buyer side.
In order to prevent this from happening, the specialist will
simply widen the spread or increase the transaction cost to
prevent sellers from entering the market. In other words, the
specialists can manipulate the quotes it is offering to
accommodate its needs.
Trading Spot FX is Decentralized

Unlike in trading stocks or futures, you don't need to go

through a centralized exchange like the New York Stock
Exchange with just one price. In the forex market, there is no
single price that for a given currency at any time, which means
quotes from different currency dealers vary.

"So many choices! Awesome!"

This might be overwhelming at first, but this is what makes the

forex market so freakin' awesome! The market is so huge and
the competition between dealers is so fierce that you get the
best deal almost every single time. And tell me, who does not
want that?
Also, one cool thing about forex trading is that you can do it
anywhere. It's just like trading baseball cards. You want that
mint condition Mickey Mantle rookie card, so it is up to you to
find the best deal out there. Your colleague might give up his
Mickey Mantle card for just a Babe Ruth card, but your best
friend will only part with his Mickey Mantle rookie card for your
soul.

The FX Ladder

Even though the forex market is decentralized, it isn't pure and

utter chaos! The participants in the FX market can be organized
into a ladder. To better understand what we mean, here is a
neat illustration:

At the very top of the forex market ladder is the interbank

market. Composed of the largest banks of the world and some
smaller banks, the participants of this market trade directly
with each other or electronically through the Electronic
Brokering Services (EBS) or the Reuters Dealing 3000-Spot
Matching .
The competition between the two companies - the EBS and the
Reuters Dealing 3000-Spot Matching - is similar to Coke and
Pepsi. They are in constant battle for clients and continually try
to one-up each other for market share. While both companies
offer most currency pairs, some currency pairs are more liquid
on one than the other.
For the EBS plaform, EUR/USD, USD/JPY, EUR/JPY, EUR/CHF,
and USD/CHF are more liquid. Meanwhile, for the Reuters
platform, GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and
NZD/USD are more liquid.
All the banks that are part of the interbank market can see the
rates that each other is offering, but this doesn't necessarily
mean that anyone can make deals at those prices.
Like in real life, the rates will largely dependent on the
established CREDIT relationship between the trading parties.
Just to name a few, there's the "B.F.F. rate," the "customer
rate," and the "ex-wife-you-took-everything rate." It's like
asking for a loan at your local bank. The better your credit
standing and reputation with them, the better the interest rates
and the larger loan you can avail.
Next on the ladder are the hedge funds, corporations, retail
market makers, and retail ECNs. Since these institutions do not
have tight credit relationships with the participants of the
interbank market, they have to do their transactions via
commercial banks. This means that their rates are slightly
higher and more expensive than those who are part of the
interbank market.
At the very bottom of the ladder are the retail traders. It used
to be very hard for us little people to engage in the forex
market but, thanks to the advent of the internet, electronic
trading, and retail brokers, the difficult barriers to entry in
forex trading have all been taken down. This gave us the
chance to play with those high up the ladder and poke them
with a very long and cheap stick.
Now that you know the forex market structure, let's get to
know them forex market playaz!

Read more: http://www.babypips.com/school/forex-market-

structure.html#ixzz1cXV9s9jF
Foreign Exchange Risk Exposure

• Exposure refers to the degree to which a company is affected by exchange

rate changes.• Exchange rate risk is defined as the variability of a firm’s value
due to uncertain changes in the rate of exchange.

Types of Exposures

• Translation Exposure

• Economic Exposure

Transaction ExposureOperating Exposure

Transaction Exposure

• Stems from the possibility of incurring exchange gains or losses on

transactions already entered into and denominated in a foreign currency.•
They are changes in the value of outstanding contracts

Real exchange gains or lossesMixes retrospective and prospectiveShort-

term in nature

Translation Exposure

• Arises from the need, for purposes of reporting and consolidation, to convert
the results of foreign operations from the local currency to the home currency.
• Represents change in value of owner equityPaper exchange gains or
lossesRetrospective in natureShort-term in nature
Operating Exposure

• Arises because currency fluctuations combined with price level changes can
alter the amounts and riskiness of a firm’s future revenues and costs.•
Represents change in the PV of the firm (real exchange rates)

Real exchange gains or lossesProspective in natureLong-term in nature

Economic Exposure and Tax Exposure

• Economic exposureIs defined as the extent to which the value of the firm, as
measured by the present value of all expected future cash flows, will change
when exchange rates change.• Tax ExposureThe tax consequence of foreign
exposure varies by countries.As a general rule: Only realized foreign
exchange losses are tax deductible. Only realized foreign exchange gains
create taxable income

Transaction Exposure Sources

• It arises from the various types of transactions that require settlement in a

foreign currency.Purchasing or selling on credit goods or services
denominated in foreign currency.Borrowing and lending funds with
repayment made in foreign currency.Acquiring assets denominated in foreign
currency.• When does it occur?From the time of agreement to time of
payment.

Transaction exposure timing

t0 - order price quotedt1 - order placed - few days latert2 - order shipped
- 2 - 3 weekst3 - order settled - 90 days
1. Net Transaction Exposure
o Is measured currency by currency.
o Is the difference between contractually fixed future
cash inflows and cash outflows in each currency.
o It represents real gains and losses.
o To measure transaction exposure:
 project the net amount of inflows or outflows
in each foreign currency, and
 determine the overall risk of exposure to
those currencies.
2. Managing Exposure
o Managing exposure centers around the concept of
hedging, which means:
 Entering into an offsetting currency position
so whatever is lost/gained on the original
currencyexposure is exactly offset by a corresponding
currency gain/loss on the currency hedge.
 The coordinated buying or selling of a
currency to minimize exchange rate risk.

Objectives of Hedging
 Minimize translation exposure.
 Minimize quarter-to-quarter earnings fluctuations arising
from exchange rate changes.
 Minimize transaction exposure.
 Minimize economic exposure.
 Minimize foreign exchange risk management costs.
 Avoid surprises.
 Managing Transaction Exposure
o A transaction exposure arises whenever a company
is committed to a foreign currency denominated
transaction.
o Protective measures to guard against
transaction exposure involve entering
into foreign currency transactions whose cash flows
exactly offset in whole or in part the cash flows of
the transactionexposure.
 Managing Transaction Exposure
o Contractual Hedges
  Forward Market Hedge
 Money Market Hedge
 Options Market Hedge
 Futures Market Hedge
o Financial Hedges
 Swaps
 leads & lags
o Operating Strategies
 Risk Shifting
 Price adjustment clauses
 Exposure Netting
 Risk Sharing

CROSS-HEDGING
 Often forward contracts not available in a certain
currency.
 Solution: a cross-hedge
o a forward contract in a related currency.
 Correlation between 2 currencies is critical to success of
this hedge.


 Meanings:


 Managing foreign exchange (or forex) risk is essential to

successful investment in the forex market.
 Foreign exchange exposure or risk can be classified into three
types: transaction, economic and translation exposure.
 Transaction exposure refers to the extent to which the future cash
transactions of the firm may be affected by any changes in the
currency exchange rate.
  Economic exposure measures the impact of changes in exchange
rate on the firm&'s cash flows and earnings.
 Translation exposure refers to accounting exposure. It measures
the impact of changes in exchange rate on the financial statements
of the group of company.
 Most companies attempt to minimize the risk of fluctuating
exchange rates by using hedging instruments such as Forward
Exchange Contracts, Money Market Hedge, Futures, Options and
Swaps.
 Political Risk

ROLE OF IMF

Focusing on its core macroeconomic and financial areas of

responsibility. Working in a complementary fashion with other institutions
established.

Collection and allocation of reserves.

Rendering advice to member countries on their international monetary

affairs.

Promoting research in various areas of international economics and

monetary economics.

Providing a forum for discussion and consultation among member

countries. Being in the center of competence.•The risk that a sove

reCurrent challenges in the global financial markets

The Financial Stability Forum (FSF) met in Rome on 28-29 March.

Members discussed the current challenges in financial markets, the
steps that are being taken to address them and policy options going
forward.

Financial system risks and responses

The financial system faces a number of significant near-term

challenges. With many securitisation markets effectively closed,
assets are accumulating on bank balance sheets. Together with
valuation losses on mortgages and other assets, this is straining
capital positions and contributing to tightening credit conditions.
Hoarding of liquidity and counterparty concerns are leading to a
shortening of the maturity of banks’ funding profiles and causing
severe strains in interbank and other lending markets.

While the necessary deleveraging has been ongoing since last

summer, the process is being complicated by the lack of transparency
and valuation difficulties for some credit instruments. Financial
institutions should continue enhancing their disclosures of risk
exposures and refining valuation judgements concerning structured
credit activities and poorly performing assets on and off the balance
sheet. Banks, securities firms and financial guarantors have made
progress in replenishing capital levels and should continue to do so
where necessary. The raising of capital and the repairing of credit
markets will facilitate balance-sheet management by financial
institutions and help to counteract the potential cycle of financial
market and economic weakness.

National authorities have taken a variety of exceptional steps to

facilitate adjustment and to dampen the impact on the real economy.
Authorities in the main financial centres are in continuous contact and
closely monitoring developments. Supervisors are working with firms
so that risks in current market circumstances are effectively identified
and appropriately managed. Central banks have provided liquidity to
address market pressures, both individually and in concert, and will
continue to do so as long as needed. Authorities will also act
cooperatively and swiftly to investigate and penalise market abuse or
manipulation.

Strengthening market and institutional resilience

The FSF discussed the report to be delivered to G7 Finance Ministers

and Central Bank Governors in April that identifies the key
weaknesses underlying the turmoil and recommends actions to
enhance market and institutional resilience going forward. The report
has been prepared by a working group comprising senior officials from
major financial centres and from the international financial institutions
and the chairs of international supervisory and regulatory bodies. It
sets out specific policy recommendations in the following areas:
prudential oversight of capital, liquidity and risk management;
transparency, disclosure and valuation practices; the role and uses of
credit ratings; the authorities’ responsiveness to risks and their
 arrangements to deal with stress in the financial system. These
recommendations are concrete and operational and, if approved, the
FSF will report on their prompt implementation.

Hedge fund industry

In its 2007 report on highly leveraged institutions the FSF called on

the hedge fund industry to review and enhance sound practice
benchmarks. In response, best practice standards have been
developed by the UK-based Hedge Fund Working Group, and are to
be released shortly by a similar US-based group. Both groups have
established boards which will keep the standards up to date and
monitor the take-up of the standards by hedge funds. The FSF would
welcome regular reports on the adoption of the standards by the
hedge fund industry and how well these standards are meeting the
objectives of increasing transparency and improving risk management
practices.

Sovereign wealth funds

The FSF discussed work underway at the IMF and OECD with regard
to sovereign wealth funds (SWFs). The IMF in close partnership with
the SWFs is coordinating work to identify a set of voluntary best
practice guidelines, focusing on the governance, institutional
arrangements and transparency of SWFs. The OECD is developing
guidance for recipient countries’ policies toward investments from
SWFs. Members welcomed these efforts and the participation of the
SWFs in the development of these guidelines.

ig#

Foreign Exchange Market India

The foreign exchange market India is growing very rapidly. The annual
turnover of the market is more than $400 billion.

This transaction does not include the inter-bank transactions. According

to the record of transactions released by RBI, the average monthly
turnover in the merchant segment was $40.5 billion in 2003-04 and the
inter-bank transaction was $134.2 for the same period. The average total
monthly turnover was about $174.7 billion for the same period. The
transactions are made on spot and also on forward basis, which include
currency swaps and interest rate swaps.
The Indian foreign exchange marketconsists of the buyers,
sellers,market intermediaries and the monetary authority of India. The
main center of foreign exchange transactions in India is Mumbai, the
commercial capital of the country. There are several other centers for
foreign exchange transactions in the country including Kolkata, New
Delhi, Chennai, Bangalore, Pondicherry and Cochin. In past, due to lack
of communication facilities all these markets were not linked. But with
the development of technologies, all the foreign exchange markets of
India are working collectively.

The foreign exchange market India is regulated by the reserve bank of

India through the Exchange Control Department. At the same time,
Foreign Exchange Dealers Association (voluntary association) also
provides some help in regulating the market. The Authorized Dealers
(Authorized by the RBI) and the accredited brokers are eligible to
participate in the foreign Exchange market in India. When the foreign
exchange trade is going on between Authorized Dealers and RBI or
between the Authorized Dealers and the Overseas banks, the brokers
have no role to play.

Apart from the Authorized Dealers and brokers, there are some others
who are provided with the restricted rights to accept the foreign currency
or travelers cheque. Among these, there are the authorized money
changers, travel agents, certain hotels and government shops. The IDBI
and Exim bank are also permitted conditionally to hold foreign currency.

The whole foreign exchange market in India is regulated by the Foreign

Exchange Management Act, 1999 or FEMA. Before this act was
introduced, the market was regulated by the FERA or Foreign Exchange
Regulation Act ,1947. After independence, FERA was introduced as a
temporary measure to regulate the inflow of the foreign capital. But with
the economic and industrial development, the need for conservation of
foreign currency was felt and on the recommendation of the Public
Accounts Committee, the Indian government passed the Foreign
Exchange Regulation Act,1973 and gradually, this act became famous
as fema.
 Classification of Foreign Exchange Risk
 Position Risk
 Gap or Maturity or Mismatch Risk
 Translation Risk
 Operational Risk
 Credit Risk
1. Position Risk
The exchange risk on the net open Forex position is called the position
risk. The position can be a long/overbought position or it could be a
short/oversold position. The excess of foreign currency assets over
liabilities is called a net long position whereas the excess of foreign
currency liabilities over assets is called a net short position. Since all
purchases and sales are at a rate, the net position too is at a
net/average rate. Any adverse movement in market rates would result in
a loss on the net currency position.
For example, where a net long position is in a currency whose value is
depreciating, the conversion of the currency will result in a lower amount
of the corresponding currency resulting in a loss, whereas a net long
position in an appreciating currency would result in a profit. Given the
volatility in Forexmarkets and external factors that affect FX rates, it is
prudent to have controls and limits that can minimize losses and ensure
a reasonable profit.
The most popular controls/limits on open position risks are:
 Daylight Limit : Refers to the maximum net open position that can
be built up a trader during the course of the working day. This limit is
set currency-wise and the overall position of all currencies as well.
 Overnight Limit : Refers to the net open position that a trader can
leave overnight – to be carried forward for the next working day. This
limit too is set currency-wise and the overall overnight limit for all
currencies. Generally, overnight limits are about 15% of the daylight
limits.
2. Mismatch Risk/Gap Risk
Where a foreign currency is bought and sold for different value dates, it
creates no net position i.e. there is no FX risk. But due to the different
value dates involved there is a “mismatch” i.e. the purchase/sale dates
do not match. These mismatches, or gaps as they are often called, result
in an uneven cash flow. If the forward rates move adversely, such
mismatches would result in losses. Mismatches expose one to risks of
exchange losses that arise out of adverse movement in the forward
points and therefore, controls need to be initiated.

The limits on Gap risks are:

 Individual Gap Limit : This determines the maximum mismatch
for any calendar month; currency-wise.
 Aggregate Gap Limit : Is the limit fixed for all gaps, for a currency,
irrespective of their being long or short. This is worked out by adding
the absolute values of all overbought and all oversold positions for
the various months, i.e. the total of the individual gaps, ignoring the
signs. This limit, too, is fixed currency-wise.
 Total Aggregate Gap Limit : Is the limit fixed for all aggregate gap
limits in all currencies.
3. Translation Risk
Translation risk refers to the risk of adverse rate movement on foreign
currency assets and liabilities funded out of domestic currency.

There cannot be a limit on translation risk but it can be managed

by:
1. Funding of Foreign Currency Assets/Liabilities through money
markets i.e. borrowing or lending of foreign currencies
2. Funding through FX swaps
3. Hedging the risk by means of Currency Options
4. Funding through Multi Currency Interest Race Swaps
4. Operational Risk
The operational risks refer to risks associated with systems, procedures,
frauds and human errors. It is necessary to recognize these risks and
put adequate controls in place, in advance. It is important to remember
that in most of these cases corrective action needs to be taken post-
event too. The following areas need to be addressed and controls need
to be initiated.

 Segregation of trading and accounting functions : The

execution of deals is a function quite distinct from the dealing
function. The two have to be kept separate to ensure a proper check
on trading activities, to ensure all deals are accounted for, that no
positions are hidden and no delay occurs.
 Follow-up and Confirmation: Quite often deals are transacted
over the phone directly or through brokers. Every oral deal has to be
followed up immediately by written confirmations; both by the dealing
 departments and by back-office or support staff. This would ensure
that errors are detected and rectified immediately.
 Settlement of funds: Timely settlement of funds is necessary not
only to avoid delayed payment interest penalty but also to avoid
embarrassment and loss of credibility.
 Overdue contracts: Care should be taken to monitor outstanding
contracts and to ensure proper settlements. This will avoid
unnecessary swap costs, excessive credit balances and overdrawn
Nostro accounts.
 Float transactions: Often retail departments and other areas are
authorised to create exposures. Proper measures should be taken to
make sure that such departments and areas inform the authorised
persons/departments of these exposures, in time. A proper system of
maximum amount trading authorities should be installed. Any amount
in excess of such maximum should be transacted only after proper
approvals and rate.
5. Credit Risk
Credit risk refers to risks dealing with counter parties. The credit is
contingent upon the performance of its part of the contract by the
counter party. The risk is not only due to non performance but also at
times, the inability to perform by the counter party.

The credit risk can be

 Contract risk: Where the counter party fails prior to the value
date. In such a case, the Forex deal would have to be replaced in the
market, to liquidate the Forex exposure. If there has been an adverse
rate movement, this would result in an exchange loss. A contract limit
is set counter party-wise to manage this risk.
 Clean risk: Where the counter party fails on the value date i.e. it
fails to deliver the currency, while you have already paid up. Here the
risk is of the capital amount and the loss can be substantial. Fixing a
daily settlement limit as well as a total outstanding limit, counter
party-wise, can control such a risk.
 Sovereign Risk: refers to risks associated with dealing into
another country. These risks would be an account of exchange
control regulations, political instability etc. Country limits are set to
counter this risk.
International Capital Asset Pricing Model (CAPM)

What Does International Capital Asset Pricing Model

(CAPM) Mean?

A financial model that extends the concept of the capital asset pricing
model (CAPM) to international investments. The standard CAPM pricing
model is used to help determine the return investors require for a given
level of risk. When looking at investments in an international setting, the
international version of the CAPM model is used to incorporate foreign
exchange risks (typically with the addition of a foreign
currency risk premium) when dealing with several
currencies.

International Capital Asset Pricing Model (ICAPM)

(No Ratings Yet)
International Capital Asset Pricing Model (ICAPM)

International CAPM
1) Since investors are risk-averse, they will
hedge all portfolio against exchange rate risk
2) For the same reason, they will only
borrow/lend domestic risk free asset (without
exchange rate risk)
3) Assumptions of extended CAPM are not
necessarily those of ICAPM

The separation theorem of ICAPM is the same as extended CAPM with

the world risky assets hedged against exchange rate risk.
ICAPM risk-pricing relationship

E(R) = R_rf + Beta x MRP + sum(gamma x FCRPi)

ICAPM already assumed the investors hedged the asset against
exchange rate risk, so only FCRP matters because those predictable by
interest rate differential have already been hedged.
*** For gammas, all are LC exposures, except the one related to the
domestic currency which we have to add 1 to become domestic currency
exposure because this includes how the effect on the profit by currency
rate change and also the conversion gain to domestic currency.
Currency Exposures

Local Currency Exposure (firm’s exchange rate exposure): change of

return of foreign company for every 1% change of exchange rate.
(positive, zero, negative correlation)
Domestic Currency Exposure: change of return in domestic value for
every 1% change of the exchange rate (this is due to currency itself and
the growth of foreign company)
So, Domestic Currency Exposure = LC exposure + 1
This is the gamma
International Capital Asset Pricing Model (CAPM)

Definition
A financial model that was developed by William Sharpe.
It expands the Capital Asset Pricing Model (CAPM), which
estimates risks and returns, on an international scale. It
calculates the risks of foreign exchange in
different currencies to determine the
correct return for investors.

Bid–offer spread
From Wikipedia, the free encyclopedia
The bid–offer spread (also known as bid–ask or buy–sell spread, and
their equivalents using slashes in place of the dashes)
for securities (such as stocks, futures contracts, options, or currency
pairs) is the difference between the prices quoted (either by a
single market maker or in a limit order book) for an immediate sale (ask)
and an immediate purchase (bid). The size of the bid-offer spread in a
security is one measure of the liquidity of the market and of the size of
the transaction cost.[1] If the spread is 0 then it is a frictionless asset.

Collapse of bretton woods system:

Events: On 15 August 1971, US PresidentRichard Nixon
launched a New EconomicPolicy, sometimes called the ‘Nixon
shock’.Among other things this suspended theconvertibility of
the dollar to gold at the established
rate. This last measure effectivelysounded the death knell of
the Bretton Woods
system, paving the way for major currencies tofloat instead of
staying fixed. Nixon’s decision
was made in the context of emerging difficultiesin the US
economy. Increased government
spending due to the Vietnam War andPresident Johnson’s Great
Society programme
of public education and urban redevelopmenthad led to
rampant inflation, which, in turn,
worsened the USA’s balance-of-trade position.In addition, the
USA was facing stiffer competition
from export-orientated economies such as Japan andGermany
as well as newly industrializing states such as
Korea and Taiwan. The relative decline of the US economywas
reflected in the fact that, having been responsible foralmost 50
per cent of world industrial output in 1945, thishad fallen to
about 20 per cent by the early 1970s.Ultimately, the decision to
end the Bretton Woods systemwas determined by the USA’s
declining gold stocks andtherefore its inability to maintain the
value of the dollar.By 1970, US gold stocks were worth $10
billion comparedwith $25 billion in 1945.
Significance: Debate about the significance of thecollapse of
Bretton Woods focuses on two main issues:
why it happened and what it led to. For many
commentators,the end of Bretton Woods reflected a decline in
US
hegemony (Gilpin 1987). For hegemonic stability theorists,a
hegemonic power is one that is willing and able to
act in ways that allow other states to make relative gains,so
long as these help to sustain the liberal economic
order. However, confronted by the rise of Japan andWestern
Europe and facing a growing balance-ofpayments
deficit, the USA opted to place its nationalinterests before those
of the liberal world economy.
Others, nevertheless, argue that the end of Bretton Woodswas
not so much an example of declining hegemony butan exercise
of audacious hegemonic power in its ownright. In this view, the
USA had become a ‘predatory
hegemon’, willing to dismantle a system of global
governancethat no longer served its interest. This process was
completed in the 1980s by the establishment of
the‘Washington consensus’. For economic liberals, however,
these changes had less to do with hegemonic power andmore
to do with the futility of trying to regulate a market
capitalist system. From this perspective, Bretton Woodswas
doomed to collapse, sooner or later, under the weightof its
economic contradictions: markets and regulation aresimply not
compatible.
Whatever its cause, the collapse of Bretton Woods hasbeen
widely viewed as a decisive moment in the developmentof the
world economy. Bretton Woods had beenbased on a model of
economic ‘internationalization’,
which assumed the existence of a collection of separateand
distinct national economies. Its purpose, then, was to
provide a more stable and predictable framework withinwhich
these national economies could interact. The end f
a system of fixed exchange rates contributed, over thefollowing
decade or two, to ‘globalizing’ tendencies in the
world economy, particularly through the emergence
ofinterlocking currency and financial markets. Once
currencieswere allowed to float, other controls on finance
andcapital movements became unsustainable. The triumph
ofneoliberalism in the 1980s can therefore be traced back tothe
1971 ‘Nixon shock’. In that sense, the end of BrettonWoods was
a decisive moment in the emergence of
acceleratedglobalization. Nevertheless, the end of
BrettonWoods may have been more a consequence of
thatprocess than its cause. This can be seen, for instance, inthe
emergence in the 1960s of Eurocurrency, mainlyconsisting of
Eurodollars, free-floating dollars that weretraded in an entirely
uncontrolled global market, makingthe task of maintaining
stable exchange rates difficult andultimately impossible.
Emerging global markets maytherefore have killed off Bretton
Woods.

reLink Between Exchange Rates and Inflation

The link between exchange rates and
inflation can be quite complicated as its effect can be both positive
and negative. They are also similar in that both Inflation and exchange
rates determine if a nation is likely to be economically stable or not.

Inflation and its effects on exchange

rates can also be ascertained from the following facts. In the early
years of the foreign exchange market, it was proposed by a large
portion
of leading economists to peg a particular currency or to “dollarise”
the currency of a particular nation. Emerging nations were typically
used to having a fixed type of exchange rate. They went to great lengths
to ensure that the exchange rate remained fixed or pegged because a
floating exchange rate was generally believed to cause problems when
trading. With the development of the strategy of “inflation targeting”
and exchange rates, which are more flexible, this belief has changed
somewhat. More and more countries are moving away from the fixed
exchange
rates. This transition is in progress, when the majority of countries
are using inflation targeting as a way of conducting various monetary
policies. In several nations, the nominal exchange rate was frequently
used as a way of bringing down the level of inflation.

The exchange rates are essential

macroeconomic variables which is to say they variables of the biggest
economic movements. The exchange rate affects inflation, trade (both
in the form of imports and exports) and a range of additional economic
activities of a particular country. If the rate of inflation stays at
a low level for an extended period of time, the value of the country's
currency rises as a direct result of the increase in the purchasing
power of that currency, as discussed in the quotations section. The
perfect example of this would be the three countries Switzerland, Japan
and Germany whose inflation rates were particularly low during the
twenties.
The countries, having higher rates of inflation observed depreciation
in their currency. Whereas in contrast, the countries with lower rates
of inflation did not endure this trend. In the event when a nation is
aware of a possible rise in inflation, it can take measures accordingly.
Exchange rates may also be affected by the type of inflation prevailing
in the economy. Inflation can come in the form of:

 Cost push inflation -

Cost-push inflation is a type of inflation that is brought on by
significant
increases in the cost of essential goods or services without any
realistic
alternative being available to them. Oil is a particularly good example
and in the seventies, it was the oil crisis that brought about a
significant
increase in inflation in the Western world. Due to the impotance of
petroleum to industrialised economies in particular, a hike in price
is passed on through the sale of their goods and services and in turn
a rise in the inflation rate.

- Demand pull inflation - The demand-pull

inflation becomes an issue when the agrregate demand in a particular
country's economy, increases or decreases faster than the aggregate
supply. This means inflaton rises as the real GDP (Gross Domestic
Product)
increases and unemployment levels decrease. This frequently referred
to as “too much money chasing too few goods”. Realistically however,
it is more a case of “too much money SPENT chasing too few goods”
as it only the money that is spent tho on these goods and services that
contributes to the rise in inflation.
tton Woods
BOP:

Current Account – General information

Current accounts mainly consists of two groups…
–Merchandise or trade account.
–Invisible account.
In trade or merchandise account, all PHYSICAL goods exported and
imported are
recorded.
Invisible account consists of services account and the gifts & charities
account.
–Services account entries could be banking and insurance charges,
interest on loans, tourist
expenditure, transport charges etc.
–Gifts & Charities accounts consist of all those items which are received
or given away free
by residents of the nation. It may be physical goods or cash.

Current account – Invisible account

IMF includes following items in the invisible account:
International transportation of goods including warehousing, in transit
and other transit expenses.
Travel for reasons of business, education, health, international
conventions or pleasure.

Insurance premiums and payments of claims.

Investment income, including interest, rents, dividends and profits.

Miscellaneous service items such as advertising, commissions, film

rental, pensions, patent fees, royalties, subscriptions to periodicals
and membership fees.
Donations, migrant remittances and legacies.

Repayment of commercial credits.

Contractual amortization and depreciation of direct investment.

Capital Account
Capital account deals with payments of debts and claims.
It consists of those components of Imports & exports such as Private
balances, Assistance by international institution agencies, Specie flow
& Balances held on government account.
Summary of BOP is…
Current account and capital account should necessarily balance each
other.
–If India’s imports of goods are more than its exports, then it will have a
deficit in its current balance of payments.
–India will have to pay either in gold and other assets or by borrowing
from
other countries

Balance Of Payments - BOP

What Does Balance Of Payments - BOP Mean?

A record of all transactions made between one particular country and all other countries during
a specified period of time. BOP compares the dollar difference of the amount of exports and imports,
including all financial exports and imports. A negative balance of payments means that more money is
flowing out of the country than coming in, and vice versa.

Read more: http://www.investopedia.com/terms/b/bop.asp#ixzz1cZ80Zt7U

Definition
An accounting record of all transactions made by a country over a certain
time period, comparing the amount of foreign currency taken in to the amount
of domestic currency paid out.

Read more: http://www.investorwords.com/394/balance_of_payments.html#ixzz1cZ8M21cT



Some of the basic differences between the futures and forward contracts are
as follows:

While futures contracts are traded on the exchange, forwards contracts are traded over- the-counter
market.

Incase of futures contracts the exchange specifies the standardized features of the contract, while no
pre determined standards are there in the forward contracts.

Exchange provides the mechanism that gives the two parties a guarantee that the contract will be
honored whereas there is no surety/guarantee of the trade settlement in case of forward contract.

A forward contract is an agreement between two parties to buy or sell an asset (which can be of any
kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. It
is used to control and hedge risk, for example currency exposure risk (e.g. forward contracts on USD
or EUR) or commodity prices (e.g. forward contracts on oil). Allaz and Vila (1993) suggest that there is
also a strategic reason (in a imperfect competitive environment) for the existence of forward trading,
that is, forward trading can be used even in a world without uncertainty. This is due to firms have
Stackelberg incentives to anticipate its production through forward contracts.

One party agrees to buy, the other to sell, for a forward price agreed in advance. In a forward
transaction, no actual cash changes hands. If the transaction is collaterised, exchange of margin will
take place according to a pre-agreed rule or schedule. Otherwise no asset of any kind actually
changes hands, until the maturity of the contract.

The forward price of such a contract is commonly contrasted with the spot price, which is the price at
which the asset changes hands (on the spot date, usually next business day). The difference between
the spot and the forward price is the forward premium or forward discount.

A standardized forward contract that is traded on an exchange is called a futures contract.

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a
certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called
the delivery date or final settlement date. The pre-set price is called the futures price. The price of the
underlying asset on the delivery date is called the settlement price. The futures price, naturally,
converges towards the settlement price on the delivery date.

A futures contract gives the holder the right and the obligation to buy or sell, which differs from an
options contract, which gives the buyer the right, but not the obligation, and the option writer (seller)
the obligation, but not the right. In other words, the owner of an options contract can exercise (to buy
or sell) on or prior to the pre-determined settlement/expiration date. Both parties of a "futures contract"
must exercise the contract (buy or sell) on the settlement date. To exit the commitment, the holder of a
futures position has to sell his long position or buy back his short position, effectively closing out the
futures position and its contract obligations.

Futures contracts, or simply futures, are exchange traded derivatives. The exchange acts as
counterparty on all contracts, sets margin requirements, etc.

While futures and forward contracts are both a contract to trade on a future date, key differences
include:

Futures are always traded on an exchange, whereas forwards always trade over-the-counter

Futures are highly standardized, whereas each forward is unique

The price at which the contract is finally settled is different:
Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the
end)

Forwards are settled at the forward price agreed on the trade date (i.e. at the start)
The credit risk of futures is much lower than that of forwards:
Traders are not subject to credit risk due to the role played by the clearing house. The profit or loss on
a futures position is exchanged in cash every day. After this the credit exposure is again zero.

The profit or loss on a forward contract is only realised at the time of settlement, so the credit
exposure can keep increasing

In case of physical delivery, the forward contract specifies to whom to make the delivery. The
counterparty on a futures contract is chosen randomly by the exchange.
In a forward there are no cash flows until delivery, whereas in futures there are margin requirements
and periodic margin calls.

W %
0   8 9  0  47  / .0397,  47  ,3  ,9  43 147
 39073,9  43,  24309,7 .44507,943
W %
 0     8 5 7  2 , 7  5 : 7 5 4 8 0  8 9 4
0 3 8 : 7 0 9  0 8 9 , -    9  4 1
9  0 39073,943, 24309,7 88902 $
W
$ 8 9 0 8  8902 41 0  .  ,3  0 7,908 ,3/
 39073,9  43,  5,  20398 9  ,903,- 08 .4:397 08 ,3/
9  0  7 .  9  038  94 -:   44/8 ,3/ 807; .08 17420,. 
49  07 
W %
0  574;  /08 90.  3  .,  ,88  89,3.0 ,3/ 97, 3 3  94
 0  5 .4:397  08  03 9  0  300/ 147 0.4342  . 89,-
 9  ,3/  74  9 

574;/08 ,/;.0
94  98  202-07 .4:397  08

3
.4:7,0
902 94 ,/459 54.08 9,9 148907 0.4342
.89,-9 70/:.0 907 ;:307,-
   9  9 4 0 . 4 3 4 2  . , 3 / 1  3,3.  ,  .7  808 
7,  80  ;  3  89,3/,7/8  ,3/

,08
1

3
,
3
.
3

902547,7 ,;,,-0 94 202-
07.4:39708 94 05 902 ,//7088 -,,3.0
4 1 5 ,  2 0 3 9 8 ,3/  47 1470  3 97,/0 -,  ,3.0 574-  028
 n host government will
unexpectedly change the rules of the game under
which businesses operate
 •Examples of political risks
 –Expropriation risk
–Disruptions in operations
–Protectionism
–Blocked funds
–Loss of intellectual property rights