IGNOU : M.COM : IBO 6 : UNIT 2 : Q - 3. a) How are GDRs priced ? b) What are the characteristics of GDRs ?

Ans. A GDR is an instrument to raise equity capital in multiple markets outside the issuers domestic market through one security - which is traded in a foreign stock market. A GDR may represent one or more shares and the holder can at any time convert it into the number of shares it represents. The underlying shares are already listed in the domestic stock exchange and the depository release them from its original inventory. Till conversion they do not carry direct voting rights (may do so through the depository).

Issuers have found it advantageous as a GDR programme expands the market for its shares through a broadened, liquid and more diversified exposure which increases or stabilizes the share price. It enhances the issuing companies image and propels it into a global stage. GDRs are quoted in US Dollars. After a period of 45-180 days, referred to as a "cooling off period", a GDR becomes a fungible i.e., the investor may sell his GDR. The holder simply instructs its depository to cancel the GDR. The Depository (overseas) asks its custodian (say-in India) to release shares to the counterparty and the custodian releases the share certificates - which are delivered in the (Indian) market. The custodian completes the settlement process, receives the money through the local stock exchange settlement system, adjusts for the capital gains tax and remits the foreign .exchange equivalent at the prevailing market rate to the US dollar account of the investor abroad. Instead of directly dealing with the foreign depository, the investor may go through an intermediary (foreign broker), who would co-ordinate the settlement process, receives the remittance from the Indian Custodian and credits the investors account. In effect the investor has sold his GDR and received the dollar value.

IGNOU : M.COM : IBO 6 : UNIT 2 : Q - 2. What are Euro Bonds? What are its characteristics?

Ans. The International Bond Market consists of the Euro bond market, the Foreign Bond market and those Domestic Bond market (such as the US, Japanese and French markets), in which global bond investors participate actively. The most international of these markets is the Euro bond market.

IGNOU : M.COM : IBO 6 : UNIT 2 : Q - 1. What is Euro market? Explain the reasons of its existence.

Ans. The prefix 'Euro' tends to create confusion for many as it denoted a currency -used for financial transactions outside the country of origin of that currency, e.g. US dollar were termed as Eurodollars when they formed financial assets and liabilities (denominated in dollars) but traded outside the United States, Japanese yen traded out of Japan were termed as Euro-yen, German marks traded out of Germany were termed as Euro markets, Swiss francs traded out of Switzerland were termed as Euro franc. But after launching of the 'Euro' as the official currency of European Monetary Union (or what is also known as Euro land), Eurocurrency (or Euros) denotes the official currency of the European Union or Euro land. The currency used for financial transactions outside the country of the origin of that currency is now no more called Eurocurrency. It is rather known as Eurodollar, Euro-yen, Euro-marks, Euro-francs etc. depending on which particular currency is used for financial transaction outside the country of the origin of that currency. The transactions in Eurodollar, Euro-yen, Euro-marks etc. are known as 'Euro Markets'.

The Euro markets thrived and grew because national money markets were hobbled with regulations such as interest rate controls, reserve requirements and deposit insurance costs. The major currencies in the recent years have however gained enough non-resident convertibility that a Euro market segment was able to rise.

Euro markets facilitate hedging possibilities for corporate borrowers e.g.: American companies operating in the UK or Germany can borrow Eurodollars in' the UK or Germany without being required to go in for Sterling or German mark borrowings (that imply currency risk exposure).

An important feature of the Euro market that needs to be noted is that it is basically "deepest" in the short-term market, where 3-6 months deposits are most popular (this does not mean that funds cannot be made available for long-term deployment). Deposit instruments focus on time deposits and negotiable Certificates of Deposits (CDs). As a matter of fact Euro banks have always shown a willingness to accept deposits for various maturities-short, medium or long term. The banks take into consideration borrowers requirements and have devised various instruments for preferred maturity.

IGNOU : M.COM : IBO 6 : UNIT 1 : Q - 3. What were the basic weaknesses of the Bretton Woods System?

Ans.  We may briefly mention the three major weaknesses of the bretton wood system. The First weakness was that the system did not provide a systematic means by which world reserves could grow with world trade and the world economy. The world reserves increased partially because of the increased production of gold, but mainly as a result of deficit the US Balance of Payments. To the extents the other currencies held dollars rather than purchase gold from the United States, Total gross world reserves increased as a result of the US Deficits. Thus the United States took on one major role of a world central bank, fulfilling a function left unspecified in the Bretton Woods agreement i.e. the creation of international money. The U.S. balance of payments were necessary to increase international liquidity. But as U.S. liabilities to foreign central banks grew the confidence in the convertibility of dollars into gold wavered. This problem is called Triffin dilemma, after Robert Triffin (1960) pointed out the difficulty of the existing monetary arrangements.

The second weakness of the Bretton Woods System concerned the balance of payments adjustment process. As individual countries faced balance-of-payments deficits, the international community provided credits and advice through the Fund. Exchange rate adjustment was a rare event in industrial countries and when they I occurred, they were large and adhoc in response to speculative attacks.

The third weakness was the failure of the system to cope with large disequilibrating capital flows. Interest rates differentials could induce sizeable movements of capital. These could not be controlled without controlling all international transactions thus creating disequilibrating forces.

IGNOU : M.COM : IBO 6 : UNIT 1 : Q - 2. What are Special Drawing Rights (SDR) ?

Ans. In view of the limitations of the dollar (or ally other currency), or gold as the international reserve asset, from the later half 1960s, the negotiations over new reserve asset continued. In 1969, the Special Drawing Rights (SDRs) were created. The SDRs were allocated to individual member countries by the IMF in proportion to their quotas-rather like a bonus issue of shares in a company. A country holding SDRs may use them to acquire foreign currency by transferring them to another country in exchange for foreign currency.

The value of the SDR is calculated by using a currency basket, which includes currencies of members having the largest exports d goods and services during 1980-84. These include the US dollar, the Deutsch mark, the Japanese yen, the French franc and the pound sterling. The dollar value of the SDR is computed daily by using the average of the buying and selling at mid day on the London foreign exchange markets. In addition to financing outright purchases foreign currencies, members can now use SDRs in forward and swap transactions and they can donate SDRS or make SDR denominated loans to other members.

IGNOU : M.COM : IBO 6 : UNIT 1 : Q - 1. Is a floating-rate system move inflationary than a fixed rate system ? Explain.

Ans. The impact of floating rates in practice has bee; to increase uncertainty and misalignment ("overshooting") in foreign exchange markets. Overshooting implies that exchange rates move significantly beyond the equilibrium level. Markets for financial assets, including foreign exchange, react more quickly than markets for goods to financial disturbance or policy changes. Foreign exchange markets tend to be more volatile than other markets. Thus real exchange rate volatility has increased, not decreased since floating began.

Three variables determine the exchange rates; difference in price performance and in interest rates, movement of current account balances, and the expectations about future exchange rates engendered by these variables: There is a growing recognition of the importance of current account balances in influencing exchange rates.

Given this recognition a number of economists have called for a return to fixed exchange rates. They suggest to restrict more tightly the types of monetary and other policies governments can pursue and put a premium on avoidance of current account imbalances. It is argued that this should make expectations less volatile and reduce fluctuations in the real exchange rate.

The present state regarding the exchange rate practices of IMF members includes various alternatives from-pegging to floating.

Pegged exchange rates are managed on a day-to-day basis through official intervention in foreign exchange markets. Some countries are pegging their currencies to a group of currencies.

Floating exchange rates are managed less closely. Generally, nations with developed financial markets prefer to float their currencies. However, they do manage their currencies informally or rely on a co-operative exchange rate agreement such as the European Monetary System. Some countries 'lean against the wind' by official interventions to smooth short-term fluctuations in exchange rates. Some countries use target rates or objective indicators to provide signals for a devaluation or a revaluation of their currencies.