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World Fin. Env.

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23 views18 pages

World Fin. Env.

Uploaded by

aanishkashyap61
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Unit- IV

World Financial Environmrnt

Instructor
Kuldeep Goswami
SOURCES
OF
FINANCING
COMMERCIAL BANKS
Some small commercial banks
limit their reach to the local
business community; but as
business has gone global, so
have commercial banks.

Large banks such as Citigroup,


Bank of America and Chase are
retail (consumer) banks that also
maintain full commercial banking
activities in the United States
with branches in many countries.
FACTORING

• International factoring provides a simple solution


regardless of whether the exporter is a small
organisation or a major corporation.

• The role of the factor is to collect money owed from


abroad by approaching importers in their own country, in
their own language and in the locally accepted manner.
As a result, distances and cultural differences cease to
be a problem.

• A factor can also provide exporters with 100%


protection against the importer's inability to pay.
Contd…
• The advantages of export factoring have proved to be
very attractive to international traders. It is now seen as
an excellent alternative to other forms of trade finance
and the role of the letter of credit is gradually diminishing
as a consequence.

• This means that the prospects for international factoring


can be seen as favourable in all countries. Not only
those that are highly industrialised, but also those that
are still developing. In the future though, the real
challenge for factoring companies will be to maintain
their flexibility so that they can react quickly to changing
market circumstances.
TRADE FINANCE
• Trade finance refers to financing international
trading transactions.

• In this financing arrangement, the bank or other


institution of the importer provides letter of credit
for paying for goods imported on behalf of the
importer.
EXPORT CREDIT INSURANCE

• Export Credit Insurance provides protection against


the risks of non-payment involved when offering
credit terms to your overseas buyers.

• Being insured by export credit insurance, your


company is protected against bad debts risks,
enabling you to secure by extending more favorable
terms to overseas buyers. Your capability in
acquiring trade finance is also enhanced
EX-IM BANKS

Ex-Im Bank provides financial assistance


to exporters and importers, and functions
as the principal financial institution for
coordinating the working of institutions
engaged in financing export and import
of goods and services with a view to
promoting the country’s international
trade.
Types of Financial Risks

• Commercial risk
• Political risk
• Foreign exchange risk
Types of Commercial Risk

• Internal changes in the firm


• Loss of key customers
• Cash flow problems
• Natural disasters
• Slow payment by government buyers
Types of Political Risk

• Ownership risk
• Operating risk
• Transfer risk
Types of Exchange Risk
• Fluctuations in currency exchange rates
• Devaluation and revaluation
• Impact on trade
Devaluation
There are two implications for a currency
devaluation. First, devaluation makes a
country's exports relatively less expensive
for foreigners and second, it makes foreign
products relatively more expensive for
domestic consumers, discouraging
imports. As a result, this may help to
reduce a country's trade deficit.
Revaluation
• For example, suppose a government has set 10
units of its currency equal to one U.S. dollar. To
revalue, the government might change the rate
to five units per dollar. This would result in that
currency being twice as expensive to people
buying that currency with U.S. dollars than
previously and the U.S. dollar costing half as
much to those buying it with foreign currency.

• Before the Chinese government revalued the


yuan, it was pegged to the U.S. dollar. It is now
pegged to a basket of world currencies.
Financial Risk Management
• Dun & Bradstreet
• Local credit agency report
• Bank report
Problems in assessing a foreign buyer’s credit worthiness
• Credit reports may not be reliable
• Audited reports may not be available
• Financial reports may be in a different format
• Many governments require that assets be revaluated upward
• Statements are in local currency
• Exchange controls may stop conversion into dollars
Factors influencing foreign exchange rates
A. Macroeconomic factors
 Inflation
 Foreign exchange reserves
 Balance of payments
 Economic growth
 Money supply growth
 Interest rate policy
B. Political factors
 Exchange rate control
 Election year or leadership change
C. Random factors
 Unexpected/unpredicted events in a country
 Change variations
Balance of Payment : Summary of Transactions (Exports&Imports)

• Current account

 Current account balance in trading of goods and services


• Capital account

 Short term capital account (less than 1 year)


 Long term capital account (direct and portfolio investments
official reserves)
 Balance of payment and competitiveness of a nation

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