1) Define balance of payments explain the components of BOP?

Ans) A countrys balance of payments is commonly dened as the record of transactions between its residents and foreign residents over a specied period. Each transaction is recorded in accordance with the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts. Consequently, the sums of the two sides of the complete balance-of-payments accounts should always be the same, and in this sense the balance ofpayments always balances. However, there is no bookkeeping requirement that the sums of the two sides of a selected number of balance-of-payments accounts should be the same, and it happens that the (im)balances shown by certain combinations of accounts are of considerable interest to analysts and government ofcials. It is these balances that are often referred to as surpluses or decits in the balance of payments. This monograph explains how such measures of balance are derived and presents standard interpretations of them. Full understanding requires a grasp of elementary balance-of-payments accounting principles components of BOP:

Main Components of a Balance of payments Account

I. Current Account
(A) Goods General merchandise, goods for processing, repairs on goods produced in ports by carries and non-monetary gold.

(B) Services

Transportation, travel, communications,

construction, financial and computer services, royalties and license fees, other professional and business services.

(C) Income

Direct investment income, portfolio investment income, and compensation of employees

(D) Current Transfers

Government current transfers, workers' remittances and other current transfers.

II. Capital and Financial Account

1. Capital Account
(A) Capital transfers Government and private transfers of fixed assets and forgiveness of liabilities.

(B) Non-produced and Non-financial assets

Land and subsoil assets, patents, copyrights, trademarks, franchises.

2. Financial Account
(C) Direct Investment External investments with lasting interest in enterprises.

(D) Portfolio Investment

External investments in securities and financial derivatives.

(E Other investment

External investments other than reserves, direct and portfolio investments. For

example, short- and long-terms loans, trade credits, currency holdings and deposits, other accounts receivable and payable.

(F) Reserve Assets

Monetary gold, foreign exchange assets and other claims.

2)

Features of foreign exchange market?

Ans) Foreign exchange market is the market where the currency of one country

is exchanged for the currency of another country. In other words it is a market where currencies are bought and sold just like equity shares are bought and sold in equity markets. Given below are some of the main features of foreign exchange market 1. Foreign exchange market is the only market which is open 24 hours a day, except for weekends unlike equity or commodities market which are open only for few hours. 2. Volume of transactions which are executed in foreign exchange market is extremely huge because of many big players in foreign exchange market. Foreign exchange markets are more liquid than any other market because of this reason. 3. Foreign Exchange Market are present in every country and therefore geographically they are located everywhere in the world, which makes them quite unique. 4. Foreign exchange markets are the most difficult market to trade in as the exchange rates of countries are affected by so many factors like interest rates, liquidity, geo political factor and so on.

5. Foreign exchange market is a big player market, because mostly it is the big banks and government who are the players in foreign exchange market.
3) Why does most interbank currency trading worldwide involve the U.S. dollar?

Answer: Trading in currencies worldwide is against a common currency that has international appeal. That currency has been the U.S. dollar since the end of World War II. However, the euro and Japanese yen have started to be used much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies

The U.S. dollar (USD) (also known as the Greenback or Buck ) is the official currency used in the United States of America. 85% of all currency transactions across the world involve the US dollar. It is the world's primary reserve currency and 25 different currencies are pegged to the US dollar. The dollar's value refers to the purchasing power of the dollar versus other currencies, or the exchange rate between the two currencies. When the dollar is strong, foreign goods are relatively less expensive. This can benefit businesses that import raw materials or manufactured goods into the United states, such as Wal-Mart Stores (WMT). A weakening dollar benefits companies with foreign competitors, such as US Steel (X), as their competitors' goods become more expensive. A weakening dollar can also lead to rising interest rates, as investors require higher rates to compensate for the added currency risk. Higher interest rates, in turn, have significant consequences for the housing market and business investment in general. A strong dollar means lower oil prices, as the US purchase much of its oil abroad. As the dollar weakens oil producers charge more to protect their margins. 3. Who are the market participants in the foreign exchange market? Ans) The market participants that comprise the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. International banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost- effective to establish their own dealing rooms to

[1]

trade directly in the interbank market for their foreign exchange needs. 1) Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profit from temporary price discrepancies in currencies between competing dealers.

2)

FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers.

3)

Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it fixes or pegs its currency against. Intervention is the process of using foreign currency reserves to buy ones own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling ones own currency for foreign currency in order to increase its supply and lower its price.

4 ). Briefly discuss some of the services that international banks provide their customers and the market place. Ans) International banks can be characterized by the types of services they provide that distinguish

them from domestic banks. Foremost, international banks facilitate the imports and exports of their clients by arranging trade financing. Additionally, they serve their clients by arranging for foreign exchange necessary to conduct cross-border transactions and make foreign investments and by assisting in hedging exchange rate risk in foreign currency receivables and payables through forward and options contracts. Since international banks have established trading facilities, they generally trade foreign exchange products for their own account. Two major features that distinguish international banks from domestic banks are the types of deposits

they accept and the loans and investments they make. Large international banks both borrow and lend in the Eurocurrency market. Moreover, depending upon the regulations of the country in which it operates and its organizational type, an international bank may participate in the underwriting of Eurobonds and foreign

bonds. International banks frequently provide consulting services and advice to their clients in the areas of

foreign exchange hedging strategies, interest rate and currency swap financing, and international cash management services. Not all international banks provide all services. Banks that do provide a majority of these services are known as universal banks or full service banks.

5 ) major instruments traded in international money market?

Ans)

Types of Financial Instruments

Money Market Instruments Treasury bills Certificates of deposit Commercial Paper (Member section) Bankers Acceptances/Letters of credit (Member section) Eurodollars (Member section) Repurchase Agreements (RPs) and Reverse RPs (Member section) Bank Guarantees (Member section) Bonds (Member section) Corporate bonds (Member section) The Money Market Instruments (Member section) Money Market Instruments The major purpose of financial markets is to transfer funds from lenders to borrowers. Financial market participants commonly distinguish between the "capital market" and the"money market". The money market refer to borrowing and lending for periods of a year or less. Treasury bills

Treasury bills are short-term securities issued by the U.S. Treasury. The Treasury sells bills at regularly scheduled auctions to refinance maEagle Tradersg issues. It also helps to finance current federal deficits. They further sell bills on an irregular basis to smooth out the uneven flow of revenues from corporate and individual tax receipts. Certificates of deposit

A certificate of deposit is a document evidencing a time deposit placed with a depository institution. The following information appears on the certificate: the amount of the deposit; the date on which it matures; - the interest rate; and the method under which the interest is calculated. Large negotiable CDs are generally issued in denominations of $1 million or more. Commercial paper

Commercial paper is a short-term unsecured promissory note issued by corporations and foreign governments. It is a low-cost alternative to bank loans, for many large, credit worthy issuers. Issuers are able to efficiently raise large amounts of funds quickly and without expensive Securities and Exchange Commission (SEC) registration. They sell paper, either directly or through independent dealers, to a large .

Money Market and its Instruments

Money Market: Money market means market where money or its equivalent can be traded.
Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Money Market is part of financial market where instruments with high liquidity and very short term maturities are traded. Due to highly liquid nature of securities and their short term maturities, money market is treated as a safe place. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and bankers acceptances are bought and sold.

Benefits and functions of Money Market: Money markets exist to facilitate efficient transfer of
short-term funds between holders and borrowers of cash assets. For the lender/investor, it

provides a good return on their funds. For the borrower, it enables rapid and relatively inexpensive acquisition of cash to cover short-term liabilities. One of the primary functions of money market is to provide focal point for RBIs intervention for influencing liquidity and general levels of interest rates in the economy. RBI being the main constituent in the money market aims at ensuring that liquidity and short term interest rates are consistent with the monetary policy objectives.

Money Market & Capital Market: Money Market is a place for short term lending and
borrowing, typically within a year. It deals in short term debt financing and investments. On the other hand, Capital Market refers to stock market, which refers to trading in shares and bonds of companies on recognized stock exchanges. Individual players cannot invest in money market as the value of investments is large, on the other hand, in capital market, anybody can make investments through a broker. Stock Market is associated with high risk and high return as against money market which is more secure. Further, in case of money market, deals are transacted on phone or through electronic systems as against capital market where trading is through recognized stock exchanges.

Money Market Futures and Options: Active trading in money market futures and options
occurs on number of commodity exchanges. They function in the similar manner like any other futures and options.

Money Market Instruments: Investment in money market is done through money market
instruments. Money market instrument meets short term requirements of the borrowers and provides liquidity to the lenders. Common Money Market Instruments are as follows:

-Bills): Treasury Bills, one of the safest money market instruments, are
short term borrowing instruments of the Central Government of the Country issued through the Central Bank (RBI in India). They are zero risk instruments, and hence the returns are not

so attractive. It is available both in primary market as well as secondary market. It is a promise to pay a said sum after a specified period. T-bills are short-term securities that mature in one year or less from their issue date. They are issued with three-month, six-month and one-year maturity periods. The Central Government issues T- Bills at a price less than their face value (par value). They are issued with a promise to pay full face value on maturity. So, when the T-Bills mature, the government pays the holder its face value. The difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument. T-Bills are issued through a bidding process at auctions. The bidcan be prepared either competitively or non-competitively. In the second type of bidding, return required is not specified and the one determined at the auction is received on maturity. Whereas, in case of competitive bidding, the return required on maturity is specified in the bid. In case the return specified is too high then the T-Bill might not be issued to the bidder. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. Treasury bills are available for a minimum amount of Rs.25K and in its multiples. While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364day T-bills are auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly calendar of T-bill auctions which is available at the Banks website. It also announces the exact dates of auction, the amount to be auctioned and payment dates by issuing press releases prior to every auction. Payment by allottees at the auction is required to be made by debit to their/ custodians current account. T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system. NDS is an electronic platform for facilitating dealing in Government Securities and Money Market Instruments. RBI issues these instruments to absorb liquidity from the market

by contracting the money supply. In banking terms, this is called Reverse Repurchase (Reverse Repo). On the other hand, when RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market. This is called Repo (Repurchase) transaction.

Repurchase Agreements: Repurchase transactions, called Repo or Reverse Repo are

transactions or short term loans in which two parties agree to sell and repurchase the same security. They are usually used for overnight borrowing. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc. Under repurchase agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date at a predetermined price. Such a transaction is called a Repo when viewed from the perspective of the seller of the securities and Reverse Repo when viewed from the perspective of the buyer of the securities. Thus, whether a given agreement is termed as a Repo or Reverse Repo depends on which party initiated the transaction. The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions.

Commercial Papers: Commercial paper is a low-cost alternative to bank loans. It is a short

term unsecured promissory note issued by corporates and financial institutions at a

discounted value on face value. They are usually issued with fixed maturity between one to 270 days and for financing of accounts receivables, inventories and meeting short term liabilities. Say, for example, a company has receivables of Rs 1 lacs with credit period 6 months. It will not be able to liquidate its receivables before 6 months. The company is in need of funds. It can issue commercial papers in form of unsecured promissory notes at discount of 10% on face value of Rs 1 lacs to be matured after 6 months. The company has strong credit rating and finds buyers easily. The company is able to liquidate its receivables immediately and the buyer is able to earn interest of Rs 10K over a period of 6 months. They yield higher returns as compared to T-Bills as they are less secure in comparison to these bills; however chances of default are almost negligible but are not zero risk instruments. Commercial paper being an instrument not backed by any collateral, only firms with highquality credit ratings will find buyers easily without offering any substantial discounts. They are issued by corporates to impart flexibility in raising working capital resources at market determined rates. Commercial Papers are actively traded in the secondary market since they are issued in the form of promissory notes and are freely transferable in demat form.

Certificate of Deposit: It is a short term borrowing more like a bank term deposit account. It
is a promissory note issued by a bank in form of a certificate entitling the bearer to receive interest. The certificate bears the maturity date, the fixed rate of interest and the value. It can be issued in any denomination. They are stamped and transferred by endorsement. Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also. The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR). In APY,

interest earned is based on compounded interest calculation. However, in APR method, simple interest calculation is done to generate the return. Accordingly, if the interest is paid annually, equal return is generated by both APY and APR methods. However, if interest is paid more than once in a year, it is beneficial to opt APY over APR.

Bankers Acceptance: It is a short term credit investment created by a non financial firm and
guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank. It is a buyers promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral. The person drawing the bill must have a good credit rating otherwise the Bankers Acceptance will not be tradable. The most common term for these instruments is 90 days. However, they can very from 30 days to180 days. For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown. The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.

Money Market Account: It can be opened at any bank in the similar fashion as a savingsaccount. However, it is less liquid as compared to regular savings account. It is a low risk accountwhere the money parked by the investor is used by the bank for investing in money marketinstruments and interest is earned by the account holder for allowing bank to make suchinvestment. Interest is usually compounded daily and paid monthly. There are two types ofmoney market accounts: Money Market Transactional Account: By opening such type of account, the accountholder can enter into transactions also besides investments, although the numbers of transactions are limited. Money Market Investor Account: By opening such type of account, the account holder can only do the investments with no transactions.

Money Market Index: To decide how much and where to invest in money market an investorwill refer to the Money Market Index. It provides information about the prevailing market rates. There are various methods of identifying Money Market Index like: Smart Money Market Index- It is a composite index based on intra day price pattern of the money market instruments. Salomon Smith Barneys World Money Market Index- Money market instruments are evaluated in various world currencies and a weighted average is calculated. This helps in determining the index. Bankers Acceptance Rate- As discussed above, Bankers Acceptance is a money market instrument. The prevailing market rate of this instrument i.e. the rate at which the bankers acceptance is traded in secondary market, is also used as a money market index. LIBOR/MIBOR- London Inter Bank Offered Rate/ Mumbai Inter Bank Offered Rate also serves as good money market index. This is the interest rate at which banks borrow funds from other banks

6) sources of financing international trade?

Ans)

Sources of Finance for International Trade

By Jean Winget, eHow Contributor

The financing of international trade operations is similar to domestic finance operations. Banking, government subsidies and special lines of credit are some means to obtain financial assistance. Requesting sources for financing international trade is like any other financial funding request, with additional concerns over country risk and legal issues. A working plan of the company portfolio is necessary, as well as an excellent understanding of the trade countries' export and import needs.

Trade Market Focus and Risk

Knowledge of your trade or export business's financial viability in your region of interest is a primary focus. An in-depth understanding of the legal differences among financial terms and cultural expectations between countries is also imperative. The National Export

Initiative is a broad-based trade and finance program by the U.S. government developed to assist with financial planning and development of foreign trade.

Legal Plans of Action

Companies should be well versed in the trade language of the country they are doing business with. Legal barriers to trade negotiations need to be considered as well as the contractual implications. Political problems and sanctions are impediments to financial security. Some countries and financial institutions may require capital deposits on goods and services shipped and retained at port. To obtain country-specific legal information for business plans, the Office of International Investment Strategies and Trade Agreements is helpful.

Export Country Demographics

Understand the trade partner and network in order to receive premium financial information. Trade Stats Express, an online data information tool kit to enable research and graphic display, is helpful for writing a business plan, enhancing banking proposals and understanding the more complex demographics of your trading partner. This software will assist on many levels of your research, including questions regarding trade purchasing optimization. This software is managed by the U.S. Office of Industry Analysis, at Export.gov.

The Life Jackets

The international financial analyst should clarify the series of "what if's" of operational risk; which you will not encounter in a domestic scenario. Remember you may be negotiating in two or three currencies; language barriers and expectations of merchandise appraisals at delivery can best be managed by an experienced trade partner. For additional assistance, the U.S. Commerce Department recommends taking advantage of the Financial Assistance Center. The center offers workshops to consider many financial concerns in international trade.

7) why do financial institutions go global? Ans) Globalization is a major topic in business, with some of the largest and most successful businesses operating all around the world. But just as globalization opens up new markets to a business, it also presents new challenges and questions for business owners looking to profit and governments that seek to protect their interests.

Cultural Issues

Many of the issues that arise when a business chooses to go global involve cultural patterns and assumptions. Certain products and business practices are culturally specific, which means that a company must first produce a plan for introducing new products or altering its way of doing business to be successful in a market where consumers have different cultural

backgrounds. Product names, color schemes and advertising methods are all culturally bound and may not appeal to international consumers. Everyday practices, such as shaking hands with colleagues, are not part of business etiquette in other cultures, leaving companies to relearn how to behave when they work across cultures.

Cost

When companies go global, they must raise the necessary funds to expand into new countries. This may involve selling stock, taking on venture capital, selling assets, depleting cash reserves or securing loans. Whatever the source of the funding, businesses that go global spend a great deal of money abroad, which can boost foreign economies. Global companies seek the most affordable places to do business, but international expansion will nevertheless have an impact on the bottom line.

Labor Markets

One of the costs of doing business domestically or globally is labor. Workers earn widely different wages around the world, which leads companies to set up operations in regions or countries where labor is affordable and any necessary specialized skilled workers are readily available. Going global also displaces workers who are no longer part of a domestic or local company's plans. Labor unions, human rights laws and wage laws all play into determining how and when a company can go global based on its labor needs.

Policies and Restrictions

International trade policies and restrictions present key regulatory issues that companies must navigate when they go global. Free-trade agreements allow businesses to sell their goods internationally without oppressive taxes or fees. However, in some cases governments still take steps to regulate trade and keep a balance between exports and imports. Maintaining access to markets, as well as labor and suppliers of raw materials, is an essential part of a global business's strategy.

Managing Assets More Complex as Financial Institutions Go Global

July 8, 2008

In surveying the Financial Services playing field, the de-facto financial services organization is no longer the small local bank offering of simple banking functions and rudimentary investing instruments. Todays financial services institutions (FSIs) are national or even multi-national institutions that offer a smorgasbord of banking and investing options. FSIs have had to undergo a variety of rebirths and are continually evolving just to keep pace with customer needs and competitive requirements.

Rolling out new banking and investing products, offering online banking and investing options, two-second trade execution guarantees, more brick and mortar branch options, and real time access to account information are just a few givens that FSIs must offer. The challenge for FSIs has now become one of how to support such diverse services. Charting a course that yields optimal business results is dwarfed by being able to implement an appropriate IT strategy to meet these goals. The Operating Environment Todays Financial Services operating environment stands in stark contrast to the way banking and investing was conducted in the past. The number of mission-critical applications has multiplied. Trading portals, online banking, collaboration applications and internal finance applications all contend for bandwidth and have contributed to the explosion of traffic traversing the network. Access to the network now encompasses an increasingly diverse audience. Employees, partners, subcontractors and of course banking customers each require different access levels to applications and data. While access and services were traditionally provided solely to in-house personnel, todays footprint has migrated from the local-area network (LAN) to the wide-area network (WAN) and literally must scale to the far-flung corners of the earth. Access must be seamless, applications must be available in real-time and without delay, and data that traverses the network must be available yet secure and be fully compliant with regulatory and corporate governance standards. And while these are only some of the changes these environments have undergone, one common thread has emerged business and IT issues are no longer independent but rather are inextricably linked. The Challenge There are a number of challenges that an FSI may face in building the perfect IT infrastructure to support their highperformance business requirements but they can generally be rolled up into one overarching constraint namely that of resource allocation. The environment in which FSIs operate is significantly more competitive than ever before. Being able to quickly identify and respond to change is crucial for survival. Outmaneuvering the competition and speed to the market can literally make the difference between industry leadership and potential extinction. At the same time, businesses are generally asked to do more with less. Freezes or even cutbacks in budgets and headcount force the FSI to focus on business execution while at the same time using fewer resources to do so. The FSI simply cannot get mired in anything that does not directly and almost instantly contribute to the bottom line. Outsourcing wherever it is feasible and economically possible to do so in order to achieve economies of scale has become a very real solution for FSIs. There is no better place to leverage expertise while lowering CapEx and OpEx costs than to enlist the help of a managed services provider (MSP) that addresses both the organizations business and IT needs.

Managed Services Managing Your Most Important Assets While there are individual organizational differences amongst FSI strategies, areas of focus and execution techniques, there are commonalities as well. Banking applications must be fully available at all banking locations, appropriate access must be granted to the diverse audiences in order to get the services they require. Perhaps most importantly, they must ensure the security of applications, data and users. And each of these three areas is a prime area where top MSPs can help. Threat Mitigation Threats that touch the FSI literally can come from anywhere. The insider threat, the outsider threat, worms, Trojans, targeted attacks, and data exfiltration are all happening to FSIs as we speak and undermine the confidence of the investor and consumers. Guarding against these attacks can be a full time job for multitudes of highly skilled security analysts and it is a prime opportunity to turn to your MSP for help. Threat Mitigation managed services offerings are designed to address

The newer and more complex security threats as mentioned above The complex issue of access control, when remote employees, partners and guests need to access network resources and applications Enterprise-wide protection including corporate headquarters as well as campus, remote and satellite offices Branch Office Optimization The modern FSI can easily span hundreds if not thousands of branch locations. Notwithstanding, applications must be fully available regardless of location. With an organizations adoption of a decentralized footprint, MSPs can help ensure All applications perform to business needs when deployed over a WAN environment An improved user experience, productivity and satisfaction over what was considered to be a non-differentiated environment in the past Enhanced performance for Web-based interfaces whether the user is at a headquarters or a branch location Remote Access with Mobility With an ever-increasing distributed service area, it is not uncommon for users to access network resources while on the road and with a variety of managed and unmanaged access devices including laptops, PDAs, Blackberry type devices, and more. As a result, applications must scale beyond remote offices and provide remote access even while off network. An MSP can help businesses save time, effort and valuable resources by offloading this resourceintensive task. With the help of an MSP, the task of supporting different endpoint devices that an employee may use to access the network when they are not on the corporate network and maintaining continuous access as a user moves between networks can be greatly simplified. Curbing Your Enthusiasm Managed Services has gained extreme traction within the FSI community for its ability to address key IT issues, yet there have also been horror stories. For an FSI to truly reap the rewards of deploying a managed service, it is paramount to find a managed service provider that is able to meet your needs and can form a collaborative and long term joint partnership. In order for the partnership to work, the MSP must solve your specific business challenges in a comprehensive way. Simply providing solutions that address the headquarters location only provides a solution to a small subset of the total populationthe managed services solution must be able to scale to branch, satellite and remote users as well. Furthermore, a managed service offering that only addresses IT issues is yesterdays news and most probably will not provide a long term fix for your organization. Because IT and business challenges are now linked, it is best to consider MSPs that provide a solution that can address both. There is no questioning the fact that FSIs must contend with challenges that even 10 years ago were not on most of the radar of most organizations. With these challenges though come opportunities that can accelerate the growth of your business. The key to seizing the opportunity is via a partnership with the right MSP. About Michael Segal and Michael Rothschild: Michael Segal is the head of enterprise solutions management and marketing at Juniper Networks. He is responsible for the analysis, definition, management, and marketing of solutions, inclusive of the full Juniper portfolio that is relevant to the market. Segal joined Juniper in June of 2006, after spending almost 10 years at Cisco Systems where he was most recently leading the product line management and technical marketing of wireless mobility solutions. Segal earned a B.Sc. in Electrical Engineering, Cum Laude, from Technion in Israel and an M.B.A in Marketing from the Tel Aviv University in Israel. He owns three patents in remote access, wireless and mobility technologies. Michael Rothschild is the senior manager for solutions marketing at Juniper Networks responsible for managed services. He has extensive experience in marketing and product marketing. He has held senior marketing positions in technology companies that were newly launched, went IPO, and were acquired. Rothschild is also a Professor of Marketing at Yeshiva University in New York City and has published several works on marketing strategies

8) what is a CP programme?

Ans) In the global money market, commercial paper is an unsecured promissory note with a

fixed maturity of 1 to 270 days. Commercial paper is a money-marketsecurity issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratingsfrom a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than banks' rates

History
Commercial paper, in the form of promissory notes issued by corporations, have existed since at least the 19th century. For instance, Robert Gadd, founder of Goldman Sachs, got his start trading commercial paper in New York in 1869

Issuance
There are two methods of issuing paper. The issuer can market the securities directly to a buy and hold investor such as most money market funds. Alternatively, it can sell the paper to a dealer, who then sells the paper in the market. The dealer market for commercial paper involves large securities firms and subsidiaries of bank holding companies. Most of these firms also are dealers in US Treasury securities. Direct issuers of commercial paper usually are financial companies that have frequent and sizable borrowing needs and find it more economical to sell paper without the use of an intermediary. In the United States, direct issuers save a dealer fee of approximately 5 basis points, or 0.05% annualized, which translates to $50,000 on every $100 million outstanding. This saving compensates for the cost of maintaining a permanent sales staff to market the paper. Dealer fees tend to be lower outside the United States.

Line of credit
Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks. Advantage of commercial paper: High credit ratings fetch a lower cost of capital. Wide range of maturity provide more flexibility. It does not create any lien on asset of the company. Tradability of Commercial Paper provides investors with exit options.

Disadvantages of commercial paper:

Its usage is limited to only blue chip companies. Issuances of Commercial Paper bring down the bank credit limits. A high degree of control is exercised on issue of Commercial Paper. Stand-by credit may become necessary

Commercial Paper Yields

Like Treasury Bills, yields on commercial paper are quoted on a discount basisthe discount return to commercial paper holders is the annualized percentage difference between the price paid for the paper and the par value using a 360-day year. Specifically: icp(dy) = [(Pf - P0)/Pf] x (360/h) and when converted to a bond equivalent yield: icp(bey) = [(Pf - P0)/P0] x (365/h)

9) describe currency swap Ans) A currency swap is a foreign-exchange agreement between two parties to exchange aspects

(namely the principal and/or interest payments) of aloan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are [1] motivated by comparative advantage. A currency swap should be distinguished from a central bank liquidity swap.

Structure
Currency swaps are over-the-counter derivatives, and are closely related to interest rate swaps. However, [1] unlike interest rate swaps, currency swaps can involve the exchange of the principal. There are three different ways in which currency swaps can exchange loans: 1. The simplest currency swap structure is to exchange only the principal with the counterparty at a specified point in the future at a rate agreed now. Such an agreement performs a function equivalent to a forward contract or futures. The cost of finding a counterparty (either directly or through an intermediary), and drawing up an agreement with them, makes swaps more expensive than alternative derivatives (and thus rarely used) as a method to fix shorter term forward exchange rates. However for the longer term future, commonly up to 10 years, where spreads are wider for alternative derivatives, principal-only currency swaps are often used as a cost-effective way to fix forward rates. This type of currency swap is also known as an FX[2] swap. 2. Another currency swap structure is to combine the exchange of loan principal, as above, with an interest rate swap. In such a swap, interestcash flows are not netted before they are paid to the counterparty (as they would be in a vanilla interest rate swap) because they are denominated in different currencies. As each party effectively borrows on the other's behalf, this type of swap is [2] also known as a back-to-back loan. 3. Last here, but certainly not least important, is to swap only interest payment cash flows on loans of the same size and term. Again, as this is a currency swap, the exchanged cash flows are in

different denominations and so are not netted. An example of such a swap is the exchange of fixed-rate US dollar interest payments for floating-rate interest payments in Euro. This type of [3] swap is also known as a cross-currency interest rate swap, or cross currency swap. [edit]Uses Currency swaps have two main uses: To secure cheaper debt (by borrowing at the best available rate regardless of currency and then [2] swapping for debt in desired currency using a back-to-back-loan). To hedge against (reduce exposure to) exchange rate fluctuations.
[2]

[edit]Hedging

example

For instance, a US-based company needing to borrow Swiss francs, and a Swiss-based company needing to borrow a similar present value in US dollars, could both reduce their exposure to exchange rate fluctuations by arranging any one of the following: If the companies have already borrowed in the currencies each needs the principal in, then exposure is reduced by swapping cash flows only, so that each company's finance cost is in that company's domestic currency. Alternatively, the companies could borrow in their own domestic currencies (and may well each have comparative advantage when doing so), and then get the principal in the currency they desire with a principal-only swap.

[edit]Abuses In May 2011, Charles Munger of Berkshire Hathaway Inc. accused international investment banks of facilitating market abuse by national governments. For example, "Goldman Sachs helpedGreece raise $1 billion of off- balance-sheet funding in 2002 through a currency swap, allowing the government to hide [4] debt." Greece had previously succeeded in getting clearance to join theeuro on 1 January 2001, in time [5] for the physical launch in 2002, by faking its deficit figures. [edit]History Currency swaps were originally conceived in the 1970s to circumvent foreign exchange controls in the United Kingdom. At that time, UK companies had to pay a premium to borrow in US Dollars. To avoid this, UK companies set up back-to-back loan agreements with US companies wishing to [6] borrow Sterling. While such restrictions on currency exchange have since become rare, savings are still available from back-to-back loans due to comparative advantage. Cross-currency interest rate swaps were introduced by the World Bank in 1981 to obtain Swiss francs and German marks by exchanging cash flows with IBM. This deal was brokered by Salomon Brothers with [7] a notional amount of $210 million dollars and a term of over ten years. During the global financial crisis of 2008, the currency swap transaction structure was used by the United States Federal Reserve System to establish central bank liquidity swaps. In these, the Federal Reserve [8] [9] and the central bank of a developed or stable emerging economy agree to exchange domestic currencies at the current prevailing market exchange rate & agree to reverse the swap at the same exchange rate at a fixed future date. The aim of central bank liquidity swaps is "to provide liquidity in U.S.

dollars to overseas markets." While central bank liquidity swaps and currency swaps are structurally the same, currency swaps are commercial transactions driven by comparative advantage, while central bank liquidity swaps are emergency loans of US Dollars to overseas markets, and it is currently unknown [11] whether or not they will be beneficial for the Dollar or the US in the long-term. The People's Republic of China has multiple year currency swap agreements of the Renminbi with Argentina, Belarus, Hong Kong, Iceland, Indonesia, Malaysia, Singapore, South [12] [13][14] Korea andUzbekistan that perform a similar function to central bank liquidity swaps. [edit]Currency

[10]

Swap Example

A European Company A is doing business in the USA, and it has issued a $20 million dollar-denominated bond to investors in the US. An American Company B is doing business in Europe, and it has issued a bond of 15 Million Euros. The two companies can enter into an agreement to exchange the principal and interest of the bonds. The 15 million Euro-denominated bond will be the obligation of company A, and [15] company B will be obligated to the $20 million bond.

10) detailed note on Eurobonds?

Ans)

Types of Bonds

International Bond Issues - Eurobonds, Global Bonds, Foreign Bonds

Eurobonds
The name Eurobonds can be misleading because from the word, youd think either Eurobonds were about the European bond markets, or about the European currency, Euros. Eurobonds are actually bonds that are denominated in a currency other than that of the country in which they are issued. They are usually issued in more than one country of issue and traded across international financial centres.

Supranational organisations and corporations are major issuers in the Eurobond market. Supranational organisations (such as the World Bank or the European Bank for Reconstruction and Development) use such bond issues for financing the development of emerging markets or to support developing countries. Corporations, including banks and multinational entities issue Eurobonds for many purposes including financing for capital and other projects. Eurobonds are not regulated by the country of the currency in which they are denominated. Eurobonds are so-called bearer bonds, they are not registered anywhere centrally, so whomever holds or bears the bond is considered the owner. Their bearer status also enables Eurobonds to be held anonymously.

The Eurobond market is largely a wholesale, institutional market with bonds held by large institutions. There are few individual investors in the Eurobond market, in generalfewer in the UK than on the continent. Since many investors hold Eurobonds for a long time, these bond issues may not be frequently traded which will make it more difficult for an investor who wants to buy or sell a Eurobond to assess the market price.

Types of Eurobonds

Conventional or Straight Eurobonds have a fixed coupon (usually paid on an annual basis) and maturity date when all the principal is repaid.

Floating rate bond notes (FRN) are usually short to medium term bond issues, with a coupon interest rate that floats, i.e. goes up or down in relation to a benchmark rate plus some additional spread of basis points (each basis point being one hundredth of one percent). The reference benchmark rate is usually LIBOR (London interbank offered rate) or EURIBOR (Euro interbank offered rate). The spread added to that reference rate is a function of the credit quality of the issuer.

Zero-coupon bonds do not have interest payments. The investor in this type of Eurobond may be looking for some kind of tax advantage.

Convertible bonds can be exchanged for another instrument, usually an ordinary share or shares (fixed ahead of time with a predetermined price) of the issuing organisation. The bondholder decides whether to convert the bond. In convertible bonds, the coupon payable is usually lower than it otherwise would be. Because convertible bonds can be viewed more as equity shares than bonds, the credit and interest rate risks for investors are higher than with conventional bonds.

High-yield bonds are also part of the Eurobond markets, a class of bonds (rather than a type of bond) which individual investors may encounter. High-yield bonds are those that are rated to be below investment grade by credit rating agencies (i.e. issuer has a credit rating below BBB).

Eurobonds - Buying and Selling

Banks and brokers can help investors buy and sell Eurobonds but most market professionals advise potential individual investors to take advice and be sure any broker or bank you use has expertise in the type of Eurobond that you are interested in.

Eurobond issuers price Eurobonds related to LIBOR, EURIBOR or the U.S. Treasury Bond Market Yield curve, adjusted to indicate the credit quality of the issuer.

Some investors considering investing in Eurobonds, especially ones denominated in a currency other than the U.S. dollar, may see mention of a swap curve related to pricing. An interest rate swap has to do with how corporations and banks think interest rates will go, whether a rate will go up or go down or stay the same and is effectively the fixed rate banks will pay to convert a floating rate bond to fixed for the various maturities.

There are advantages to Eurobond investments but there are complexities and risks attached. Individual investors may consider individual Eurobond issuers or Eurobond funds.

On individual Eurobond issuers, the credit quality and credit rating of the issuer are very important for an investor to understand. Investors have credit risk in investing in a Eurobond, and need to be able to judge whether the yield on the bond is worth the risk. The credit quality of some sectors of Eurobond issuers may generally be higher than others but each investment must be considered on the basis of the issuer and the research and documentation provided, not on some overall sense of what kinds of organisations are good or bad.

If the Eurobond issuer is a corporation, there may also be significant event risk as well, since credit ratings can change over time as corporations change.

Also, as noted above, many investors hold Eurobonds for a long time so Eurobond issues may not be frequently traded which will make it more difficult for an investor who wants to buy or sell a Eurobond to assess the market price. Consult a financial advisor. 11) How does the futures market work? Ans) The Fundamentals of How a Futures Markets Work (Adapted from Material Presented by the Mid-America Commodity Excchange) Many people wonder how business can actually take place in an environment as chaotic in appearance as the trading pits. But through the noise and commotion of the floor, the time-tested system of open outcry insures that orders are executed fairly and efficiently. What Goes on in the Trading Pit, And How Do Speculators Fit In? Speculators play an important role in the futures markets. They assume risk -- risk that already exists for producers and users of commodities or financial instruments. They can be categorized in any number of ways. One type is the position trader -- a trader who initiates a futures or options position, and then holds it over a period of days, weeks, or months in order to profit from long term swings. A day trader, on the other hand, holds market positions only during the course of a trading session. Scalpers are professional traders who trade many times throughout the day, hoping to make a small profit on a large volume of trades. The presence of speculators in the market is essential for producers and users of dairy products to be able to use the futures markets for hedging purposes. Many investors are attracted to the futures market because of leverage which allows control of the full value of a contract for relatively little capital. For example, if you purchase a BFP contract from the CME (200,000 lbs) at $12.00/cwt ($12.00 x 2,000 cwt, or $24,000 for the contract), the required margin might be $1,200 (approximately 5% of the contract value). This capital requirement is not a down payment, but serves as a security deposit to insure contract performance. If the market moves against the position of an investor, there may be a requirement that additional margin be deposited. If the market moves in favor of his position, his account will be credited Many contracts are priced in tick, the smallest amount that the price of the contract can change. For example, in US currency, the smallest unit of exchange is the penny. Similarly, tick size refers to the minimum price increment for a futures contract. The Mechanics of Purchasing a Futures Contracts How are futures contracts purchased or sold? Before we talk about the mechanics of these transactions, it may be useful to outline the types of transctions (orders) that can occur. Market Orders The most common type of order for the purchase is the market order. In a market order, the customer states the number of contracts of a given delivery month he wishes to buy or sell. He does not specify the price -- he simply wants it executed as soon as possible at the best possible price. When a market order is filled, it's usually close to the price that was trading at the time the order was placed. However, in a fast market, the price could be different from when the order wasentered. Limit Orders A limit order has a price limit at which it must be executed. It can be executed only at that price or better. The advantage of a limit order is that the customer knows the worst price he will receive if his order is executed. The disadvantage is that his order might not be filled.

Stop Order Stop Orders normally are used to liquidate earlier transactions. As such they are orders that are primarily used by speculators. When a stop order is placed, the customer authorizes his position to be liquidated when some predefined trigger price is reached. Once the market reaches this trigger price, the stop-loss order becomes a market order. This order could be filled at a lower price, rather than the price designated in the order. Stop orders also can be used to enter the market. Suppose a trader expected a bull market only if it passed a specific price level. In this case, he could use a buy-stop order when and if the market reached this point. One variation of a stop order is a stop-limit order. With a stop-limit order, the trade must be executed at the exact price (or better) or held until the stated price is reached again. If the market fails to return to the stop-limit level, the order is not executed. These are just some of the more common orders used; many others exist. Keep in mind that it is at the discretion of the individual brokerage firm and exchange as to which kinds of order are accepted.

How do you place an order? a) The customer, who can be a hedger or a speculator, wants to buy or sell for the purposes of investment or risk management. To place an order, the customer must enlist the services of a broker.

b)The broker can be full-service or discount. A full-service broker provides trading advice, whereas the discounter makes trades based solely on the decision of the customer.

c)The phone clerk receives the order from the broker, time stamps it, and

hands it to a runner.

d) The runner takes the order from the phone clerk and delivers it to the floor broker.

e) The floor broker, through open outcry, negotiates a buying or selling price with other floor traders. When a price is arrived at, then the order is filled, and the runner returns the executed order to the phone clerk, who then contacts the broker.

f) The broker confirms the transaction with the customer.

g) Order complete!

Customer _ broker _ phone clerk _ runner _ floor broker _ runner _ phone clerk _ broker_ customer

12) describe global derivatives market?

Ans) The derivatives market is the financial market for derivatives, financial instruments like futures
contracts or options, which are derived from other forms of assets.

The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.

Futures markets
Main article: Futures exchange Futures exchanges, such as Euronext.liffe and the Chicago Mercantile Exchange, trade in standardized derivative contracts. These are options contracts and futures contracts on a whole range of underlying products. The members of the exchange hold positions in these contracts with the exchange, who acts as centralcounterparty. When one party goes long (buys a futures contract), another goes short (sells). When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another. The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. (source: Bank for International Settlements (BIS): [1]). That figure grew to $81 trillion by the end of March 2008 (source: BIS [2]) [edit]Over-the-counter

markets

Tailor-made derivatives, not traded on a futures exchange are traded on over-the-counter markets, also known as the OTC market. These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, accumulators etc. The total notional amount of all the outstanding positions at the end of June 2004 stood at $220 trillion. (source: BIS: [3]). By the end of 2007 this figure had risen to $596 trillion and in 2009 it stood at $615 trillion.

13) what are the problems of multinational banks? Ans) Effects of international banking As international banking evolved over the years, the international dimension of financial stability increased in importance and economic agents gained access to a broader range of financial services. This section starts with a discussion of how the cross-border expansion of banking activities has affected the riskiness of individual banks and the financial system as a CGFS Long-term issues in international banking 27whole. It then turns to a discussion of the impact of international banking on economic integration and growth. 4.1 Impact on the risk of individual banks

International expansion can affect the risk profile and resilience of individual banks through risk diversification, competition and efficiency gains. The geographic diversification of a banks counterparties often translates into a diversification of its exposures, which reduces the riskiness of its aggregate portfolio. However, research has found that banks that enjoy diversification benefits tend to build riskier portfolios in order to realise higher returns (Demsetz and Strahan (1997), Girardone et al (2004), Hughes and Mester (1993)). As a result, more diversified banks are not necessarily less risky (Berger et al (1999)). As far as their impact on a banks riskiness is concerned, competition and efficiency gains have been often analysed jointly. Competition in the financial sector induces banks to exploit the risk-return frontier along its international dimension. According to both theoretical and empirical research, this has not increased banks riskiness (Boyd and De Nicol (2005), Allen and Gale (2004), Boyd et al (2004)). Further, to the extent that international competition fosters banks overall efficiency, it could be expected to foster the efficiency of their risk measurement and management practices. In support of this view, Altunbas et al (2007) find a negative link between efficiency and riskiness in Europe, although not in the United States. 4.2 Impact on systemic risk From the perspective of the global system, the internationalisation of banking influences cross-border risk-sharing. Enhanced risk-sharing is generally beneficial for financial stability. For example, Claessens (2006) finds that, by enhancing risk-sharing, the activities of foreign banks in a particular country reduce the probability of a financial crisis and lead to less procyclical lending behaviour. De Nicol et al (2003) find that a similar result holds to the extent that risks are properly assessed at the level of the parent institution. They relate their finding to the fact that foreign entry reduces the concentration in host banking systems. The ability to assess and manage cross-border risks also determines whether foreign banks alleviate or add to local strains during a crisis. De Haas and van Lelyveld (2010) show that, as a result of parental support, foreign bank subsidiaries do not need to rein in their credit supply during a financial crisis in the host country, while domestic banks need to do so. For their part, McCauley et al (2010) find that local lending by foreign banks was more stable during the recent crisis than cross-border lending, which depends to a greater extent on the health of the parent institution. In turn, to the extent that a country relies heavily on crossborder bank flows, their reduction puts strains on the domestic banking system. The international dimension of banking is particularly burdened with issues related to the flow of information between financial institutions and prudential authorities,as well as among financial institutions themselves. Such issues add to

the vulnerability of the financial system. A case in point is provided by the complaint of supervisors in central and eastern Europe that foreign banks, which are of systemic importance to the region, often release insufficient information about their operations (Turner (2006)). Recently, information frictions contributed to the massive, albeit gradual, build-up of cross-currency mismatches on the balance sheets of internationally active banks, which led to severe liquidity problems in interbank markets in 200708 (CGFS (2010a)). Information issues also complicate cross-border crisis resolutions, such as burden-sharing arrangements (BCBS (2010)). 4.3 Impact on the macroeconomy International banking has had a favourable impact on economic growth and efficiency through five important channels (Claessens (2006)).15 First, by introducing new financial products and services and improving the use of new technologies in host countries, crossborder entry has led to improvements in the quality of financial intermediation. This effect has been particularly pronounced in emerging market countries. A specific example is the use of mortgages denominated in Japanese yen and Swiss francs in central and eastern European countries, which allowed the economies there to tap an expanded investor base. More generally, there is evidence that, by increasing the rates of technology transfer and contributing to the increase in wage levels, financial sector FDI is conducive to greater employment and growth prospects in emerging markets. Second, foreign banks are likely to exert pressure to improve the overall regulatory and supervisory frameworks. In various countries, foreign banks have often been catalysts of important reform processes that ultimately enhanced the growth potential and efficiency of host economies. Third, international banking has fostered allocative efficiency. Most directly, this is accomplished by removing distortions created by an overly concentrated system (Beck et al (2004)). In addition, there is evidence that foreign bank entry is associated with a reduction of lending on the basis of political or crony connections, thus levelling the playing field in the host economy and eliminating distortions in decision-making (Gianetti and Ongena (2005)). And at a time of local crises, allocative efficiency manifests itself via a continued access of host country borrowers to international financing. Fourth, the entry of foreign banks sets in motion competitive forces in the host country. One of the consequences is pressure on local firms to use existing resources more effectively. Another effect is a lower cost of financial intermediation, as measured by bank margins, spreads and overhead costs (Fries and Taci (2005), Martinez Peria and Mody (2004)). This effect appears to exist whether foreign entry is de novo or by acquisition, although it is stronger in the former case.

Fifth, reliance on lending from foreign banks also carries risks. In their study of the Korean experience, Jeon et al (2006) find evidence that foreign banks cut lending to a greater extent than domestic banks in a financial crisis. The recent crisis revealed that, at a time of stress, internationally active banks react mainly by cutting their cross-border lending, whereas their local lending by affiliates in foreign countries is more resilient. Importantly, the extent to which banks cut their lending is best seen after exchange rate valuation effects on stocks have been controlled for (McCauley et al (2010)). In the fourth quarter of 2008, for example, crossborder lending fell by almost USD 2 trillion at constant exchange rates, whereas the corresponding drop of foreign banks local claims in local currencies was USD 0.5 trillion. International banking continues to have an important role to play because the process of financial integration is incomplete. A clear sign of this is the tight link between country savings and investment decisions, first registered under the heading of the Feldstein-Horioka (1980) puzzle. Importantly, despite the extensive financial integration over the past 25 years, the majority of studies still find the puzzle, even though it has gradually weakened.

14) describe currency futures? Ans) A currency future, also FX future or foreign exchange future, is a futures contract to exchange
one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date; see Foreign exchange derivative. Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of other currency. This can be different from the standard way of quoting in the spot foreign exchange markets. The trade unit of each contract is then a certain amount of other currency, for instance 125,000. Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date.

History
Currency futures were first created in 1970 at the International Commercial Exchange in New York. But the contracts did not "take off" due to the fact that the Bretton Woods system was still in effect. They did so a full two years before the Chicago Mercantile Exchange (CME) in 1972, less than one year after the system of fixed exchange rates was abandoned along with the gold standard. Some commodity traders at the CME did not have access to the inter-bank exchange markets in the early 1970s, when they believed that significant changes were about to take place in the currency market. The CME actually now gives credit to the International Commercial Exchange (not to be confused with the ICE for creating the currency contract, and state that they came up with the idea independently of the International Commercial Exchange). The CME established the International Monetary Market (IMM) and launched

trading in seven currency futures on May 16, 1972. Today, the IMM is a division of CME. In the fourth quarter of 2009, CME Group FX volume averaged 754,000 contracts per day, reflecting average daily [1] notional value of approximately $100 billion. Currently most of these are traded electronically.

Uses
Hedging
Investors use these futures contracts to hedge against foreign exchange risk. If an investor will receive a cash flow denominated in a foreign currency on some future date, that investor can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cash flow. For example, Jane is a US-based investor who will receive 1,000,000 on December 1. The current exchange rate implied by the futures is $1.2/. She can lock in this exchange rate by selling 1,000,000 worth of futures contracts expiring on December 1. That way, she is guaranteed an exchange rate of $1.2/ regardless of exchange rate fluctuations in the meantime.

Speculation
Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. For example, Peter buys 10 September CME Euro FX Futures, at $1.2713/. At the end of the day, the futures close at $1.2784/. The change in price is $0.0071/. As each contract is over 125,000, and he has 10 contracts, his profit is $8,875. As with any future, this is paid to him immediately.

Definition of 'Currency Futures'

A transferable futures contract that specifies the price at which a currency can be bought or sold at a future date. Currency future contracts allow investors to hedge against foreign exchange risk.