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I.B.O – 06
International
Business Finance IGNOU IBO 06 Solved Assignment 2023-24
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NOTE: All
questions are compulsory.
Q1. What
are Euro Bonds? What are its characteristics? Also explain how are GDRs priced?
Euro bonds are
a type of international bond that is issued and traded outside the issuer's
home country but denominated in a currency other than the currency of the
country in which it is issued. These bonds are typically issued by
multinational corporations, international organizations, and governments to
raise funds in foreign markets.
Currency: Euro
bonds are denominated in a currency different from the issuer's home currency.
For example, a European company may issue bonds denominated in US dollars or
Japanese yen.
Global Market:
Euro bonds are issued and traded in the international market, providing access
to a broader investor base and allowing issuers to tap into foreign capital
markets.
Fixed or
Floating Interest Rate: Euro bonds can have fixed or floating interest rates,
depending on the terms of the bond issuance. The interest payments are usually
made semi-annually or annually.
Maturity: Euro
bonds have varying maturity periods, ranging from short-term (less than a year)
to long-term (up to several decades).
Regulatory
Environment: The issuance and trading of Euro bonds are subject to
international regulations and the laws of the countries where they are issued
or traded.
Global Depositary
Receipts (GDRs) are financial instruments that represent shares in a foreign
company. They are used to facilitate the trading of shares of companies listed
on foreign stock exchanges by allowing investors to trade in a foreign
company's shares without having to directly purchase or hold the underlying
shares.
Underlying
Share Price: The price of GDRs is typically derived from the price of the
underlying shares in the foreign company. The GDR price is usually quoted at a
certain ratio to the underlying share price, with each GDR representing a
certain number of underlying shares.
Currency
Exchange Rates: GDRs are denominated in a currency different from the
underlying shares. Therefore, the exchange rate between the GDR currency and
the currency of the underlying shares can impact the pricing of GDRs.
Market Demand
and Supply: The demand and supply dynamics in the market for GDRs can influence
their pricing. Factors such as investor sentiment, market conditions, and
liquidity can affect the pricing of GDRs.
Trading Premium
or Discount: GDRs can trade at a premium or discount to the underlying shares,
depending on market conditions, investor perception, and liquidity. The premium
or discount reflects the market's assessment of the GDRs' value compared to the
underlying shares.
It is important
to note that GDR pricing can be influenced by factors specific to the issuing
company, such as its financial performance, industry prospects, and market
reputation.
Overall, GDRs
provide investors with an opportunity to invest in foreign companies' shares
indirectly. The pricing of GDRs is influenced by various factors, including the
underlying share price, currency exchange rates, market demand and supply, and
trading premiums or discounts.
Q2. (a)
Define a loan syndicate. Explain the syndication process.
A loan
syndicate refers to a group of lenders who come together to jointly provide a
loan facility to a borrower. In this arrangement, multiple financial
institutions, such as banks, work together to provide a large loan to a
borrower that may be beyond the lending capacity of a single institution. The
lenders collaborate in structuring, underwriting, and distributing the loan
among themselves.
Identification
of Borrower: The first step is identifying a borrower who requires a large
loan. This borrower is typically a corporate entity or a government entity
seeking funding for a specific purpose, such as financing a project,
acquisitions, or working capital requirements.
Lead Arranger
Selection: A lead arranger is chosen among the participating lenders who will
take the lead in coordinating and managing the syndication process. The lead
arranger is usually a bank with expertise in arranging syndicated loans.
Structuring the
Loan: The lead arranger, in consultation with the borrower, structures the loan
facility. This includes determining the loan amount, repayment terms, interest
rates, collateral requirements, and any specific conditions or covenants.
Inviting
Participants: The lead arranger invites other financial institutions, known as
participants or syndicate members, to join the syndicate. These participants
express their interest in participating in the loan facility based on their
lending capacity, risk appetite, and interest in the borrower's industry or
project.
Negotiating
Terms: The lead arranger negotiates the terms of the loan with the borrower on
behalf of the syndicate. This involves finalizing the loan documentation, legal
agreements, and any additional conditions or requirements.
Allocation and
Underwriting: Once the terms are agreed upon, the lead arranger allocates
portions of the loan to the participating lenders based on their commitments.
Each lender commits to a specific amount they are willing to lend, known as
their participation level. The lead arranger often underwrites a significant
portion of the loan to provide assurance to other lenders.
Documentation
and Due Diligence: The syndicate members conduct their due diligence on the
borrower, reviewing financial statements, business plans, legal agreements, and
other relevant documents. The loan documentation is finalized, including the
loan agreement, security documents, and any ancillary agreements.
Loan
Distribution: After completing the due diligence process, the syndicate members
fund their respective portions of the loan to the borrower. The lead arranger
manages the distribution of funds and ensures compliance with the agreed terms
and conditions.
Ongoing
Monitoring and Administration: Once the loan is disbursed, the syndicate
members, including the lead arranger, monitor the borrower's financial
performance, compliance with loan covenants, and any potential risks. They also
handle ongoing loan administration, including interest and principal
repayments, amendments, and any necessary restructurings.
The syndication
process allows lenders to pool their resources and share risks, enabling them
to participate in large-scale financing opportunities while diversifying their
lending portfolios. It provides borrowers with access to substantial funding
and the expertise of multiple lenders.
(b)
Discuss the meaning and purpose of different money market instruments.
Money market
instruments are short-term financial instruments that are highly liquid and
provide a means for borrowing, lending, and investing in the money market.
These instruments are typically issued by governments, financial institutions,
and corporations to meet their short-term funding or investment needs. They
serve various purposes and play a crucial role in the efficient functioning of
the money market. Here are some common money market instruments and their meanings
and purposes:
Treasury Bills
(T-bills): Treasury bills are short-term debt instruments issued by governments
to raise funds. They have a maturity of less than one year and are considered
low-risk investments. The purpose of T-bills is to provide a means for
governments to finance their short-term cash requirements while providing
investors with a secure investment option.
Commercial
Papers (CP): Commercial papers are unsecured, short-term promissory notes
issued by corporations to raise funds for their working capital needs. They
typically have a maturity of up to 270 days. The purpose of commercial papers
is to provide corporations with a cost-effective source of short-term funding
while offering investors an opportunity to earn higher yields compared to other
money market instruments.
Certificates of
Deposit (CD): Certificates of deposit are time deposits offered by banks and
financial institutions. They have fixed maturity dates and offer a
predetermined interest rate. CDs are used by banks to raise funds and by
investors as a secure investment option with a fixed return. The purpose of CDs
is to provide a stable funding source for banks and a safe investment
alternative for individuals and institutions.
Repurchase
Agreements (Repo): Repurchase agreements are short-term borrowing and lending
agreements where one party sells securities to another party with an agreement
to repurchase them at a specified future date and price. Repos are used by
banks and financial institutions to manage their short-term liquidity needs.
They provide a means for borrowing funds against collateral and for investing
excess funds in a secure manner.
Treasury Notes
and Bonds: Treasury notes and bonds are medium to long-term debt instruments
issued by governments to finance their budget deficits and other long-term
expenditures. They have longer maturities compared to T-bills and provide
investors with fixed or variable interest payments. The purpose of treasury
notes and bonds is to fund government operations and provide long-term
investment options for individuals and institutions.
The main
purpose of money market instruments is to facilitate short-term borrowing,
lending, and investing activities in the money market. These instruments
provide issuers with access to short-term funds to meet their funding
requirements, while investors can earn returns on their surplus funds in a
relatively low-risk environment. Money market instruments also contribute to
maintaining liquidity in the financial system and serve as benchmarks for short-term
interest rates. Overall, they play a vital role in the efficient functioning of
the money market and provide participants with various options to manage their
short-term cash flows and investments.
Q3. What
is ‘Political Risk’? How do the companies assess and manage them? Discuss.
Political risk
refers to the potential negative impact on business operations and investments
due to political factors, including changes in government policies,
regulations, social unrest, geopolitical events, and economic instability. It
represents the uncertainty and volatility arising from political actions that
can affect the profitability, stability, and continuity of business operations.
Companies
assess and manage political risks through various strategies and measures. Here
are some common approaches:
Risk
Assessment: Companies conduct thorough risk assessments to identify and
evaluate potential political risks. This involves analyzing political
environments, government stability, regulatory frameworks, social and cultural
factors, and economic conditions in the countries where they operate or plan to
expand. The assessment helps in understanding the specific risks and their
potential impact on the company's operations and investments.
Country and
Market Selection: Companies carefully consider political factors when selecting
countries and markets for their operations and investments. They assess the
political stability, legal frameworks, transparency, and regulatory
environments of potential markets. Countries with a stable political system,
favorable policies, and a conducive business environment are generally
preferred.
Government
Relations: Building and maintaining positive relationships with government
authorities and relevant stakeholders is essential for managing political
risks. Companies engage in dialogue with government officials, participate in
industry associations, and collaborate with local partners to understand and
navigate the political landscape. Developing strong connections and goodwill
can help companies mitigate potential risks and influence policy decisions that
impact their operations.
Diversification:
Companies often diversify their operations and investments across multiple
countries and regions to minimize the impact of political risks. By spreading
their risk exposure, companies can reduce their dependence on a single market
and mitigate the potential negative consequences of political instability in
one location.
Legal and
Regulatory Compliance: Adhering to local laws, regulations, and compliance
requirements is crucial for managing political risks. Companies ensure they
have a comprehensive understanding of the legal and regulatory frameworks in
the countries where they operate and take necessary steps to comply with them.
This includes engaging legal advisors, monitoring changes in regulations, and
implementing robust compliance programs.
Risk Mitigation
Strategies: Companies employ various risk mitigation strategies to manage
political risks. These strategies may include obtaining political risk
insurance, hedging currency exposure, structuring contracts to include dispute
resolution mechanisms, and diversifying supply chains to reduce dependency on
politically sensitive regions.
Monitoring and
Early Warning Systems: Continuous monitoring of political developments and
early identification of potential risks is vital. Companies establish
monitoring systems to track political events, policy changes, and geopolitical
situations that could impact their operations. This allows them to proactively
adjust their strategies and take appropriate measures to mitigate risks.
Scenario
Planning and Contingency Plans: Companies engage in scenario planning exercises
to assess the potential impact of different political scenarios and develop
contingency plans. This involves considering various political outcomes and
their implications for business operations, supply chains, investments, and
stakeholder relationships. Contingency plans help companies respond swiftly and
effectively to unexpected political events.
By adopting
these assessment and management practices, companies can better understand and
navigate political risks, protect their investments, and safeguard their
business operations. It allows them to proactively address challenges and
capitalize on opportunities in a complex and evolving political landscape.
Q4. (a)
Discuss Indian regulation of foreign direct investment.
(b) What
were the major weaknesses of Bretton Woods System which led to its breakdown in
1971?
Q5.
Define cost of Equity. If risk perceptions change what happens to cost of
equity? How equity cost of capital for foreign project is arrived at?
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