FOREX ANDINTERNATIONAL TRADEBy : Nokesh Hirendra Lele                            Roll No: 04                            Ex...
Why International Trade ? The unevenly distributed natural resources on the globe resulted in interdependency amongst nat...
Import / Export… Purchase of Goods and Services from International Market for sale or consumption in Domestic Market is c...
A economy which encourages international trade is      called as open economy. A useful measure of openness      is the ra...
Economics…Basic Economic Theories of International Trade: Answer to the question why?                Theory of Absolute A...
Economics…Theory of Absolute Advantage                                            By : Adam Smith 1776International trade ...
Economics…Theory of Comparative Advantage                                              By : David Ricardo 1817According to...
Economics…Theory of Comparative Advantage cont…             Labor Hour Required to produce *assuming 600 labor hours are a...
Economics…Heckscher-Ohline Model                 By : Eli Heckscher and Bertil Ohlin 1920According to this theory, there a...
Economics…Balance Of PaymentA country’s Balance of Payment is a systematic statement of all economic transactionbetween th...
Economics…GOVERNMENT TOOLS Despite all the obvious benefits of international trade , Government have an inclination to put...
Economics…Risk Involved in International Trade Risk and reward always go hand-in hand True to this maxim, the advantage of...
Finance…International Monetary System System of Exchange in Currencies at specific exchange rate facilitating internationa...
Finance…Factors Affecting Exchange Rate Foreign exchange rate is the price of one currency in terms of another currency. E...
Finance…Exchange Rate Cont….                 Fixed Exchange Rate                 Floating Exchange Rate                ...
Finance…The Anatomy of a FOREX Quote The currencies are always traded in two-way quotes pairs,          INRUSD =48.62/48.7...
Finance…BID / ASK RATE  The rate at which a bank is ready to buy a base currency is call Bid Rate  The rate at which a ban...
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Forex and international trade

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Forex and international trade

  1. 1. FOREX ANDINTERNATIONAL TRADEBy : Nokesh Hirendra Lele Roll No: 04 Ex-MBA Sem 2
  2. 2. Why International Trade ? The unevenly distributed natural resources on the globe resulted in interdependency amongst nations, giving rise to exchange of goods and services to meet mutual requirements  Resulting in International Trade Trading globally gives consumers and countries the opportunityto be exposed to goods and services not available in their owncountries. Almost every kind of product can be found on theinternational market: food, clothes, spare parts, oil, jewelry, wine,stocks, currencies and water. Services are also traded: tourism,banking, consulting and transportation
  3. 3. Import / Export… Purchase of Goods and Services from International Market for sale or consumption in Domestic Market is called Import  E.g. India Import Crude Oil , Iron ore from international market Goods and Services produced in Domestic Market and sold in International Market is called Export  E.g. India Export Engineering Good , Iron & Steel
  4. 4. A economy which encourages international trade is called as open economy. A useful measure of openness is the ratio of a country‘s export or import to its GDP India’s Import Export % to GDP35 130 025 -120 -215 -310 -4 5 -50 -6 1976 1986 2002 1970 2004 2006 2010 1982 2000 1964 1966 1974 1978 1980 1984 1988 1992 2008 1960 1968 1962 1972 1994 1990 1996 1998 Export % GDP Import % GDP Deficit
  5. 5. Economics…Basic Economic Theories of International Trade: Answer to the question why?  Theory of Absolute Advantage  Theory of Comparative Advantage  Heckscher – Ohlin Model
  6. 6. Economics…Theory of Absolute Advantage By : Adam Smith 1776International trade takes place because one country may be more efficient inproducing a particular good than another country, and that other country may becapable of producing some other good more efficiently than the first one. Thisprovides an incentive to trade as both the countries can benefit from specializationand the resultant increase in productivity Example: Country Aircraft Supercomputer Country A 20 Labor Units 10 Labor Units Country B 10 Labor Units 20 Labor Units *Assuming all other factor of production are used in equal amount Here, Country A enjoy absolute advantage in producing Supercomputer Country B enjoy absolute advantage in producing Aircraft Let’s assume country A exchange 1 supercomputer for 1 Aircraft Then Country A will be able to use 10 Labor to produce a Supercomputer and get a Aircraft and use other 10 Labor to product supercomputer for domestic use Country B will also benefit in same fashion
  7. 7. Economics…Theory of Comparative Advantage By : David Ricardo 1817According to the absolute advantage theory, two countries enter into trade when bothof them hold an absolute advantage in the production of at least one product. Thequestion arises here is whether two countries can benefit by trading with each othereven if one of them has an absolute advantage in all the commodities. According tothe theory of Comparative Advantage propounded by the English Economist DavidRicardo in 1817,trade is possible as long as both the countries enjoy comparativeadvantage in at least one of the product Example: Labor Hour Required to produce Country 1 Unit of Steel 1 Unit of Cement Country A 5 10 Country B 15 20 *Assuming all other factor of production are used in equal amount Here, Country A enjoys absolute advantage in producing both the commodities Let’s assume that both the countries have 600 unit of labor-hour at their disposal which can be either use for producing Steel or Cement
  8. 8. Economics…Theory of Comparative Advantage cont… Labor Hour Required to produce *assuming 600 labor hours are available Country 1 Unit of Steel (Max) 1 Unit of Cement (Max) Country A 600/ 5 = 120 600/10 = 60 Country B 600/15 = 40 600/20 = 30 For producing each unit of steel, the production of a particular number of units of cement has to be forgone and vice versa. The quantity of cement thus forgone in order to product one unit of steel is called the Opportunity cost of steel Opportunity cost involve in production of Steel and Cement Country 1 Unit of Steel 1 Unit of Cement Country A 60/120 = 0.5 120/60 = 2 Country B 30/40 = 0.75 40/30 = 1.33 India has a comparative advantage in providing world class services in low cost. So we earn a net export of 43,747 cr (April June 2011) from service sector
  9. 9. Economics…Heckscher-Ohline Model By : Eli Heckscher and Bertil Ohlin 1920According to this theory, there are two types of products Labor Intensive and CapitalThis model explores the possibility of two nations operating at the same level ofefficiency, benefiting by trading with each other reason can be traced to thedifference in their Factor Endowment The labor rich country is more likely to produce labor intensive goods andthe capital rich country most probably produce capital intensive goods. This countrieswill then trade these goods and reap the benefits of international trade India has a high skilled labor force available comparatively at cheap rate which is very attractive to foreign capital giving a room for development in both Service sector and Manufacturing Sectors So Engineering goods as well as Software Services
  10. 10. Economics…Balance Of PaymentA country’s Balance of Payment is a systematic statement of all economic transactionbetween that country and the rest of the world. Its major components are the currentaccount and the financial account. I. Current Account Merchandise (or Trade Balance) Services Investment Income Unilateral Transfer II. Capital Account Private Government Official Reserve Changes Other The Balance of payment has two fundamental parts. The current account represents the spending and receipt on goods and services along with transfers. The financial account includes purchases and sales of financial assets and liabilities. An important principle is that two must always sum to zero Current Account + Financial Account –I + II = 0
  11. 11. Economics…GOVERNMENT TOOLS Despite all the obvious benefits of international trade , Government have an inclination to put up trade barriers in order to discourage import 1. Tariff Barriers 2. International Price Fixing 3. Exchange Controls 4. Non-Tariff Barriers 1. Quota 2. Embargo 3. Subsidies to Local Goods 4. Local Content Requirement
  12. 12. Economics…Risk Involved in International Trade Risk and reward always go hand-in hand True to this maxim, the advantage of international trade are also accompanied with additional risk broadly categorized as Country Risk : It is a risk of an exporter not receiving his payments from the importer due to some country specific reasons It is basically related to the countries macroeconomic condition, Political condition, Credibility and Social condition, even when the capacity of the importer to pay is not impaired by any of these reasons, the payment may not come through due to some currency exchange restrictions suddenly impose by the importing country Exchange Risk: Changes in Exchange Rates may have an unfavorable effect on sales, prices costs and profits of exporter and importers
  13. 13. Finance…International Monetary System System of Exchange in Currencies at specific exchange rate facilitating international trade is called International Monetary System Foreign exchange rate is the price of one currency in terms of another currency The settlement of international transaction takes place by conversion of currencies into one another and the transfer of funds across nations Example : An importer in India importing goods from America has to pay the amount in USD , suppose 1 USD can be Brought at 50 Rupee this payment is made through International Monetary system
  14. 14. Finance…Factors Affecting Exchange Rate Foreign exchange rate is the price of one currency in terms of another currency. Economic forces of Demand and Supply of the currencies determine the price of foreign currency Example: Suppose India and USA is in trade The supply of Indian Rupee comes from Indian Market for the payment of goods and services from America where American Dollar is demanded likewise Supply of American Dollar comes from American Market who demands Indian Rupee for payment of goods and services from India this bilateral Demand- Supply determines the exchange rate of the currencies in trade Factors affecting the demand and supply 1. Interest Rates 2. Rate of Inflation 3. Political or Military Unrest 4. Domestic Financial Market 5. Business Environment 6. Economic Data 7. Balance of trade 8. Government Budget 9. Rumors
  15. 15. Finance…Exchange Rate Cont….  Fixed Exchange Rate  Floating Exchange Rate  Floating with limited flexibility India follows a system between a freely floating and fully managed system. This type of system is known as Managed float system .Exchange rates are allowed to float freely, but RBI intervenes when it feels necessary in the way it considers suitable.
  16. 16. Finance…The Anatomy of a FOREX Quote The currencies are always traded in two-way quotes pairs, INRUSD =48.62/48.75 here USD is being bought or sold, with its value being expressed in terms of INR, USD is referred as the base currency Direct Vs. Indirect Quote: Indirect Quote : $/100 Rs : 2.0525/67 here the bank would be buying dollars @ $2.0567/Rs 100 and selling dollars @ $ 2.0525/Rs 100 The corresponding Direct Quote would be : RS/$ 48.62/48.72 here the bank would be buying dollars @ Rs 48.62/$ and selling dollars @Rs48.72/$ In India Direct Quote is used from August 2 1993
  17. 17. Finance…BID / ASK RATE The rate at which a bank is ready to buy a base currency is call Bid Rate The rate at which a bank is ready to sell the base currency is called as Ask rate All the information is express in a quote as given INRUSD = 48.62/48.72 which means the currency in trade is USD express in Indian Rupee where bank is ready to buy USD @ 48.62 Rs and is ready to sell USD @ 48.72 Rs
  18. 18. Thank You

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