The document provides information on foreign exchange and foreign exchange markets. It defines foreign exchange as the process of converting one national currency into another for international trade and transactions. The foreign exchange market allows for the buying and selling of currencies between countries and operates globally 24/7. Factors like imports, exports, currency demand and supply determine currency exchange rates in this decentralized market.

1. Foreign Exchange
• Also known as FOREX, FE, or FOEX.
• The importing country pays money to the exporting country
in return of goods in the domestic currency. This currency
which facilitates the payment to complete the transaction is
called “foreign Exchange”.
• According to “Dr. Paul Einzig”, “ Foreign Exchange is the
system or process of converting one national currency into
another and of transferring money from one country to
another.
• The term foreign exchange is used to refer to foreign
currencies.

2. • Foreign exchange includes foreign currency, foreign
cheques, and foreign drafts.
Foreign Exchange Market:
• Foreign exchange market is the market for sale and
purchase of different currencies.
• The market for foreign exchange is the largest market in the
world.
• The market operates almost 24 hours a day so that there is a
market open where you can trade foreign exchange.
• It is also a “Credit Market”.
• The goods and services cannot move between countries
without foreign exchange markets.
• Foreign exchange in recent times is traded through online.

3. • The most important confidence or participants in the market
are banks.
• Foreign exchange market is the market for currencies of
various countries anywhere in the globe, as the financial
centre's of the world are united as a single market.
Nature of Foreign Exchange Market:
• Widespread Geographically:
Foreign exchange transactions take place in all the
countries in the world and in all geographical areas in each
country.
• All time operations:
Foreign exchange market carries transactions 24 hours a
day and 365 days a year.

4. • Market Participants:
Foreign exchange market consists of two levels, namely,
interbank or wholesale market.
The participants in the foreign exchange market include: Bank
and Non – Bank foreign exchange dealers, individuals and
firms conducting commercial and investment transactions,
speculators and arbitragers, Central banks and Foreign
exchange brokers.
Banks and Non – Bank foreign exchange dealers operate in
interbank and client markets. They buy foreign exchange at a
“bid” price and sell at a higher price called “Ask” price and
thus make a profit.

5. Speculators and arbitragers participate in foreign exchange
market to earn profit by trading in foreign exchange rates.
Arbitragers try to earn profit from exchange rate differences in
different markets.
Central banks participate in the market to acquire and spend
foreign exchange reserves and to influence the price in the
market.
Foreign exchange brokers trade in foreign exchange on
behalf of their principals, by charging a small commission for
their service.
• Size of the Market:
The volume of foreign exchange traded in the foreign
exchange market is very large.

6. Features:
• The foreign exchange market performs international
clearing function by bringing two parties wishing to trade
currencies at agreeable exchange rates.
• There are importers or exporters of goods, services and
financial assets who are participants.
• The foreign exchange market operates 24 hours a day
permitting intervention in the major international foreign
exchange markets at any point in time.
• Until recently, this market was used mostly by banks., who
fully appreciated the excellent opportunities to increase their
profits. Today, it is accessible to any investor enabling him to
diversify his portfolio.

7. Functions of Foreign Exchange Market:
• Transfer of Purchasing Power:
The primary function of a foreign exchange market is the
transfer of purchasing power from one country to another
and from one currency to another.
• Provision of credit for International business:
The credit function performed by foreign exchange
markets also plays a very important role in the growth of
foreign trade, for international trade depends to a great extent
on credit facilities. Exporters may get pre- shipment and post-
shipment credit.
• Provision of Hedging facilities:
The other important function of the foreign exchange
market is to provide hedging facilities.

8. “Hedging” refers to covering of export risks, and it provides a
mechanism to exporters and importers to guard themselves
against losses arising from fluctuations in exchange rates.
Methods of affecting International payments:
i. Telegraphic Transfer:
• By this method, a sum can be transferred from a bank in
one country to a bank in another part of the world by cable. It
is, thus, the quickest method of transmitting funds from one
center to another.
ii. Mail Transfer:
• Just as it possible to transfer funds from a bank account in
one centre to an account in another centre within the country
by mail.

9. iii. Cheques and Bank Drafts:
• International payments may be made by means of
cheques and bank drafts. A bank draft is a cheque drawn on a
bank instead of a customer’s personal account. It is a
acceptable means of payment.
iv. Foreign Bill of Exchange:
• A bill of exchange is an unconditional order in writing,
addressed by one person to another, requiring the person to
whom it is addressed to pay a certain sum on demand or on a
specified future date.
v. Bill brokers:
• They help buyers and sellers to come together.
vi. Central bank of the country

10. Foreign Exchange rate:
• An exchange rate (also known as the FOREX Rate or FX
Rate) between two currencies is the rate at which one currency
will be exchanged for another. There are two ways to express
an exchange rate between two currencies.
(Egs. The $ and £) one can either write $/£ or £/$.
• It is also regarded as the value of one country’s currency in
terms of another currency.
• Exchange rates are determined in the foreign exchange
market which is open to a wide range of different types of
buyers and sellers where currency trading is continuous.
• Forward transaction is an agreement between two parties
requiring the delivery at some specified future date of a

11. specified amount. The rate of exchange applicable to the
forward contract is called the “Forward Exchange Rate”.
• The “Foreign Exchange Rate” refers to an exchange rate
that is quoted and traded today but for delivery and payment
on a specific future date.
• Foreign exchange markets do not operate during periods of
hyper inflation. The primary function of forward market is to
afford protection against risk of fluctuations in exchange rates.
• The term “Spot Exchange” refers to the class of foreign
exchange transactions which requires the immediate delivery
or exchange of currencies on the spot.
• The “Spot Exchange rate” refers to the current exchange
rate.

12. • In practice, the settlement takes place within two days in
most markets.
• The rate of exchange effective for the spot transaction is
known as “Spot Rate” and the market for such transaction s is
known as the “Spot Market”.
• An exchange rate is usually quoted in terms of number of
units of one currency that can be exchanged for one unit of
another currency.
For egs:
In the form: 50.12 INR/USD. In this example. The US $ is
referred to as the “Quote Currency” (Price currency, Payment
currency) and the INR is the “Base currency” (Unit currency,
Transaction currency).

13. • With reference to its relationship with the spot rate, the
forward rate may be at par, discount or premium.
• At Par:
If the forward exchange rate quoted is exactly equivalent
to the spot rate at the time of making the contract the forward
rate is said to be at par.
• At Premium:
A foreign currency is said to be at a premium when its
forward rate is higher than the spot rate.
Forward Rate > Spot Rate, then forward rate of foreign
currency is at a Premium. The premium is usually expressed as
a percentage deviation from the spot rate on a per annum
basis.

14. • At Discount:
A foreign currency is said to be at a discount when its
Spot rate is higher than the forward rate.
Spot Rate > Forward Rate, then forward rate of foreign
currency is at a Discount.
• The forward exchange rate is determined mostly by the
demand for and supply of forward exchange.
• When the demand for forward exchange exceeds supply, the
forward rate will be quoted at a premium.
• When the supply of forward exchange exceeds the demand,
the rate will be quoted at discount.
• When supply is equivalent to the demand for forward
exchange, the forward rate will tend to be at par.

15. • According to International Convention two rates are
quoted namely,
Direct quote/ rate (Home currency quotation)
Indirect quote/ rate (Foreign currency quotation)
• Quotes using a country’s home currency as the price
currency are known “Direct quotation or Price quotation”
and are used by most countries.
• Direct quote is one where foreign currency is base currency
(fixed), domestic currency varied against foreign currency.
• Quotes using a country’s home currency as the base
Currency are known as “Indirect quotation or Quantity
quotation” and are used in British newspapers and are also
common in Australia, New Zealand, and the Euro Zone.

16. • Indirect quote, home currency is base (fixed) and foreign
currency is varied.
• Under the direct rate, buying low and selling high where as
in indirect quote buying high and selling low.
• Using direct quotation, if the home currency is
strengthening ( i.e., appreciating or becoming more valuable)
then the exchange rate number decreases. Conversely if the
foreign currency is strengthening the exchange rate number
increases and the home currency is depreciating.
• A market based exchange rate will change whenever the
values of either of the two component currencies change.
• A currency will tend to become more valuable whenever
demand for it is greater than the available supply.

17. Exchange Rate:
• The transactions in the foreign exchange market viz; buying
and selling foreign currency take place at a rate, which is
called “Exchange Rate”.
• Exchange rate is the price paid in the home currency for a
unit of foreign currency.
Exchange Rate Determination:
• Exchange rate in a free market is determined by the demand
for and supply of exchange of a particular country’s currency.
• The equilibrium exchange rate is the rate at which demand
for foreign exchange and the supply of foreign exchange are
equal.
• Equilibrium exchange rate can be determined by two ways:

18. • The exchange rate between USD and INR can be
determined by demand for and supply of USD in India. The
price of US $ is fixed in Indian Rupees.
• The exchange rate between INR and USD can also be
determined by demand for and supply of INR in USA. The
price of Indian Rupee is determined in US $.
• The price are the same in both these methods.
Demand for foreign exchange:
• Import of goods and services.
• Investment in foreign countries i.e., flow of capital to other
countries.
• Other types of outflow of foreign capital like giving
donations etc.

19. Supply of foreign exchange:
• Country’s exports of goods and services to foreign
countries.
• Inflow of foreign capital.
• Other types of inflow of foreign capital like remittances by
the Non- Residents Indians, donations received etc.
• Payments made by the foreign governments to Indian
government for settling their transactions.
Exchange Rate of Indian Rupee:
• 1947- 1971: The Indian Rupee had a fixed exchange rate
under the par value system of IMF.
• Rupee was devalued twice in 1947 and 1966.
• In 1966, foreign aid was cut off and India was told it had to

20. liberalize its restrictions on trade before foreign aid would
again materialize.
• In 1971- 1975: The exchange rate of the rupee was pegged
to dollar via sterling in December 1971.
• 1975- 1992: The exchange rate of the rupee was pegged to a
basket of currencies with effect from September 1975.
• In 1991, India still had a fixed exchange rate system.
• India started having balance of payments problem since
1985, and by the end of 1990, it found itself in serious
economic trouble.
• As in 1966, India faced high Inflation and large government
budget deficits. This led to the government to devalue rupee.
• 1992- 1993: In March 1992, a dual exchange rate system
was introduced.

21. • Here 60% of the foreign exchange earnings could be
converted into rupee at the market rate and 40% at official rate
determined by the Reserve Bank (RBI).
• 1993 onwards – Flexible/ Floating/ Market determined
exchange rate system.
• March 1993 a single floating exchange rate in the market of
foreign exchange in India was implemented.
• The exchange rate of Rupee is determined by the market
forces of demand and supply. If the currency is more valuable
then demand is more than the supply, and if the currency is
less valuable then demand is less than supply.
• There are occasional interventions of the RBI on the foreign
exchange market to prevent movements of the exchange rate.

22. A few major events that changed the
currency rates.
• June 4, 1966. First major devaluation. For the first
two decades, India had almost a constant peg
against the dollar at Rs.4.75/$. Then things
changed in 1966. India had just fought 2 major
wars (with China and Pakistan) and have had 3
prime ministers in 3 years (Nehru, Shastri, Indira)
after 17 years of one man rule. Then a major
drought shook the country. Perfect storm. 1966
Budget With nowhere to go and no more dollars,
the Indian government announced a 57%
depreciation of the rupee overnight from
Rs.4.75/$ to Rs.7.5/$.

23. • 1980s inflation. From 1966 to 1980, rupee
stayed constant. However, the 1979 energy
crisis and gold's skyrocketing prices in early
1980s left India with no place to go (oil and
gold were historically our primary imports).
Indian rupee started to slowly decline. From
about 7.85/$ in 1980 we reached about 17/$
by 1991.

24. • 1991 crisis. In July 1991, another major crisis. Biggest
event in modern Indian economic history. Overnight
rupee was devalued by another 50% from about 17/$
to about 25/$.
• 1993 liberalization. In 1993, Indian finance minister
Manmohan Singh let rupee to float a little freely.
Translation: the rupee was allowed to be traded by
traders without a forced peg such as the one kept by
China. Rupee value started to slide as the government
was no longer controlling the prices, fully and started
to reflect the reality. From about 27/$ it slid to Rs.35/$
by 1997.

25. Nov 04, 2015
ndian Rupee 1.00 INR inv. 1.00 INR
US Dollar 0.015250 65.574653
Euro 0.013918 71.851453
British Pound 0.009888 101.128373
Australian Dollar 0.021156 47.267798
Canadian Dollar 0.019904 50.240220
Singapore Dollar 0.021285 46.982419
Swiss Franc 0.015125 66.117693
Malaysian Ringgit 0.065078 15.366076
Japanese Yen 1.846573 0.541544
Chinese Yuan Renminbi 0.096585 10.353602
Bahraini Dinar 0.005748 173.966040

26. Brief History about Rupee and Dollar:
Year Exchange rate (INR per US $)
1952 5.000
1990 17.504
1995 32.427
2000 45.000
2010 46.21
2011 49.47
Codes and Currencies:
• USD ($) – United States Dollar
• EUR (€) - Euro
• AUD ($) – Australian Dollar
• CAD ($) – Canadian Dollar

27. • JPY (¥) – Japanese Yen
• GBP (£) – Great Britain Pound Sterling
• HKD ($) – Hong Kong Dollar
• SEK (Kr) – Swedish Krona
• INR () – Indian Rupee
Foreign Exchange Market in India:
• Foreign Exchange Market in India operates under the
Central Government of India and executes, wide powers to
control transactions in Foreign Exchange.
• The Foreign Exchange Management Act, 1999 or FEMA
regulates the whole Foreign Exchange Market in India.
• To recommend the Public Accounts Committee, the Indian
Government passed the FERA in 1973. and gradually this act
became famous as FEMA.

28. • Before the introduction of this act, the foreign exchange
market in India was regulated by the Reserve Bank of India
through the Exchange Control Department, by the Foreign
Exchange Regulation Act or FERA, 1947.
• After, independence FERA was introduced as a temporary
measure to regulate the inflow of the foreign capital.
• With the economic and industrial development, the Indian
Government passed the Foreign Exchange Regulation act,
1973 and gradually this act became famous as FEMA.
• The Foreign Exchange Market in India is growing very
rapidly, since the annual turnover of the market is more than
$400 billion.
• The main center of Foreign Exchange in India is Mumbai.

29. • There are several other centers for foreign exchange
transactions in India including the major cities of Kolkata,
New Delhi, Chennai, Bangalore, Pondicherry and Cochin.
• Foreign Exchange Trade goes on between Authorized
Dealers and Reserve Bank of India or between the Authorized
Dealers and the Overseas Market.
• The IDBI and EXIM Bank are also permitted at specific
times to hold foreign currency.
Cash Flows:
• Cash flow is the movement of cash into or out of a business,
project, or financial product.
• It is usually measured during a specified period of time.
• Measurement of cash flow can be used to determine a
projects value.

30. Introduction:
 Capital inflow means inflows from any country outside India for capital
transactions in India.
It tracks capital movement of investments and loans into and out of the
country.
It helps in financing the gap between domestic savings and capital investment
need of the Country.
When there is capital account surplus it means a country is receiving more
capital inflows. This results in increase in overall increase in BOP, thereby
resulting increase in country’s foreign exchange reserves.
Capital Inflows have direct impact at macro level. It facilitates stability at
macro level by impacting the exchange rates, interest rates, forex reserves etc.

31. What is FDI
World Bank
• foreign direct investment is
• acquisition of
• “a lasting management interest (10 percent or more
of the voting stock)
• in an enterprise operating in an economy other than
that of the investor.”
• Includes foreign equity inflows. Re-invested
earnings,other forms of capital(NRI investment)

32. Host country perspective

33. Investor perspective-What attracts FDI?
FDI
attractiveness
Market size-per-capita
income like retail
telecom
Resources-
capital/labour/infras
tructure
Mining,gas,power
Efficiency -Productivity-
wage differentials
Mfg, trade,transport
Good governance

34. Share of top 10 investing countries FDI equity inflows
Mauritius
45%
Singapore
12%
UK
11%
Japan
9%
USA
7%
Netherlands
5%
cyprus
4%
Germany
3%
France
2%
UAE
2%
April 2000-Jan 2013

35. • The total net cash flow in the sum of cash flows that are
classified in 3 areas:
Operational Cash Flow
Investment Cash Flow
Financing Cash Flow
Operational Cash Flow:
Cash received as a result of the company’s internal business
activities.
Investment Cash Flow:
Cash received from the sale of long life assets or spent on
capital expenditure. (investments, acquisition and long life
assets).

36. Financing Cash Flow:
Cash received from the issue of debt and equity or paid out
as dividends etc.
Foreign Investment Flows and Barriers:
Types of Foreign Investment:
• Foreign Direct Investment
• Foreign Portfolio Investment
Foreign Portfolio Investment:
• If the investor has only property interest in investing the
capital in buying equities bonds or other securities abroad, it is
referred to as portfolio investment.
• There are mainly two ways of Portfolio Investments in India
a) By Foreign Institutional Investors (FIIs)

37. b) Through Global Depository Receipts (GDRs)
American Depository Receipts (ADRs) and Foreign Exchange
Convertible Bonds (FCCBs).
• The GDRs, ADRs, FCCBs are instruments issued by
Indian Companies in the foreign markets for mobilizing
foreign capital by facilitating portfolio investment by
foreigners in Indian securities.

38.  It helps in financing Current Account deficit.

39. Components of Capital A/c:
Capital A/c
Foreign Investments
Foreign Direct
Investment (FDI)
Foreign Institutional
Investor (FII)
Loans
External Commercial
Borrowing (ECB)
External Assistance
Short Term Loans
Banking Capital
NRI Deposits
Foreign currency
holdings
Movement in balances
of foreign central
banks
Other Capital

40. Capital Account: Inflows Analysis
-20
0
20
40
60
80
100
120
2007 2008 2009 2010 2011 2012 2013*
Capital Account (A+B+C+D+E)
Foreign Investment (A)
Loans (B)
Banking Capital (C)
Rupee Debt Service (D)
Other Capital (E)
* FY13 till December 2012

41. Analysis of Foreign Investments
-20
-10
0
10
20
30
40
50
60
2007 2008 2009 2010 2011 2012 2013*
Foreign Investment (A)
FDI
Portfolio Investment

42. FDI Equity Inflows

43. FII Flow in Equity & Debt

44. Impact on the Economy
 Volatility in the Capital Market
 Growth Rate
 Balance of Payment
 Employment Generation
 Infrastructure Development
 Global Competitiveness

45. Recommendations:
 Measure to attract more capital inflows
 Measures against corruption
 Measures to strengthen Rupee
 FDI in new Sectors
 Procedural ease
 Tax & Commercial Laws

46. Foreign Investment Barriers:
Tariffs:
In international trade, tariff
refers to the duties or taxes
imposed on internationally traded
goods, when they cross the
national borders. Hence, tariff refers
to import duty and export
duty.

47. Types of Tariffs:
They are classified into several categories:
• Export Duties:
An export duty is a tax imposed on a commodity
originating from the duty levying country destinated for some
other country.
• Import Duties:
An import duty is a tax imposed on a commodity
originating abroad and destinated for the duty levying country.
• Transit Duties:
A transit duty is a tax imposed on a commodity crossing
the national boundary originating from and destinated for
other countries.

48. • Ad valorem Duty:
It is a fixed percentage of tariff on the value of goods
imported or exported. So it is a fixed percentage of the cost,
insurance and freight value of the commodity.
• Specific Duties:
It is a fixed amount levied on the physical unit of the
commodity imported. It is charged on the basis of size, length,
quantity of the goods.
• Commodity Duties:
It is the combination of ad valorem and specific duties.
Here tax is imposed on imported commodity based on a
percentage of value and also on the net weight or number of
pieces.

49. • Single Column Tariff:
It is the uniform rate of duty imposed on all similar
commodities irrespective of the country from which they are
imported.
• Double Column Tariff:
Here the Government fixes two rates of tariff on some on
all commodities. Thus it discriminates between countries.
• Revenue Tariff:
They are meant to provide revenue to the Government.
They are levied on luxury consumer goods.
• Protective Tariff:
They are intended to protect domestic countries from
foreign competition.

50. • Multiple Column Tariff:
Here three different rates of tariff are fixed. General,
Intermediate, Preferential. The General Rate is the highest rate
of duty, imposed on goods imported from developed countries.
The intermediate rate is the low rate of duty, imposed on
goods, imported from developing countries. The preferential
rate is the lowest, imposed on goods imported from poor
countries or friendly countries.
Effects of Tariffs:
• Price Effect:
As a result of the tariff imposed by the government, the
prices of imported commodities may increase by its full
amount. In this case the entire incidence of the tariff falls on

51. the importing country. For sometime, even after the imposition
of the tariff the prices of imported goods may not change at
all. In this case the entire burden of the price tariff is borne by
the exporting countries.
• Protective Effect:
This effect refers to the increase in the home production
following the imposition of a tariff. When the government
imposes a protective tariff the prices of the imported goods
rise and hence imports are discouraged. The home industries
are encouraged to expand production.
• Revenue Effect:
The advantage of a tariff is that it is a source of revenue
to the government. . An increase in the revenue of the
government following the imposition of a tariff is know as the

52. revenue effect of a tariff.
• Consumption Effect:
A change in the level of consumption as a result of tariff
is known as consumption effect. Consequent upon the
imposition of a tariff, the prices of imported commodities go
up and hence the demand for them is reduced.
• Redistribution Effect:
The changes which takes place in the distribution of
national income as a result of the imposition of tariffs is
known as redistribution effect. Tariffs redistribute the
national income among the factors of production.
• Income and Employment Effect:
It is argued that the imposition of protective tariff leads to
an increase in the level of income and employment.

53. By reducing imports, tariffs stimulate employment and output
in the import competing industries.
• Balance of Payments Effect:
As tariff will reduce the volume of imports, will help the
country to improve its balance of payments position because a
deficit in the balance of payments is considerably reduced.
• Terms of Trade Effect:
Tariffs have the advantage of helping a country to change
the terms of trade in its favour. The terms of trade become
advantageous to the country because it can import a larger
quantity of goods in exchange for the same or less quantity of
exports.

54. 2. Quotas:
Quotas and Quantitative restrictions are an important
means of restricting foreign trade. A quota is a specific limit
applied to a particular type of goods. It is a very important
traditional means of restricting international trade.
Quotas may be export quotas or import quotas.
• Export quota is a protectionist device to restrict the supply
of goods or services to foreign countries.
• Import quota is a protectionist device to restrict the supply
of goods or services from abroad.
The following are the important types of import quota:
• Tariff Quota:
Here the imports of a commodity up to a specified limit
are allowed duty free or at a special low rate.

55. • Unilateral Quota:
Here the total volume or value of the goods to be imported
is fixed by Law, without any agreement with other countries.
• Bilateral Quota:
Here quotas are fixed by some agreements with one or
more other countries. Thus quotas are set through negotiation
between the importing country and exporting country.
• Mixing Quota:
Here the producers are obliged to use domestic raw
materials up to a certain proportion in the production of a
finished product.

56. Effects of Quotas:
• Price Effect:
The main object of fixing import quota is to put a limit on
imported quantity of the product.
• Consumption Effect:
A quota leads to an increase in prices of commodities,
automatically the domestic consumption of the commodities
will reduce.
• Protective Effect:
Import quotas reduces the total supply of commodities
from foreign countries. It in turn increases the demand for
domestic products. The domestic industry will be protected
from foreign competition.

57. • Revenue effect
• Terms of Trade effect
• Redistribution Effect
• Balance of Payment Effect

58. Features of Foreign Currency:
• No exchange fees
• Different currencies can be exchanged at any time.
• Huge market is accessible anywhere anytime.
• A number of currencies are exchanged at anytime.
Revenues and Pricing Strategies:
Factors to determine an International Pricing Strategy:
• National Market size:
 One of the main factors to determine an international

59. pricing strategy is the size of the national market, which
affects prices in different ways.
 A company will often attempt to use the potential volume of
sales to estimate the price at which they will need to market
their product.
 For larger companies with the potential for more sales, this
price may be set lower; for smaller countries, the price may be
higher.
• Exchange Rate:
 Exchange rate also play a significant role in setting
prices. Due to discrepancies in the value of different currency,
similar products in different countries may be priced different.
 This has to do not just with demand for that particular
product, but for macroeconomic demand for national

60. currencies, which affects inflation. Companies often have to
adjust prices due to fluctuations in the exchange rates.
• Cultural Differences:
 One of the most complicated factors in international
pricing is cultural variations between companies.
 Cultural variations that affect pricing can take many forms,
most of which have to do with how members of different
cultures perceive the value of certain products, which in turn
affects how much they are willing to pay for them.
• Distribution:
 Before setting a price, companies also must consider the
distribution network by which they are selling their product.

61. • Regulations:
 When setting prices in other countries, companies must
research all national regulations relevant to their product.
 Even if the product a company is selling does not have
price restrictions, regulations, placed on the prices of similar
products may affect potential demand and thus price.
Pricing Objectives:
• Current profit maximization:
seeks to maximize current profit, taking into account
revenue and costs.
• Current revenue maximization:
seeks to maximize current revenue with no regard to profit
margins.

62. • Maximize quantity:
seeks to maximize the number of units sold or the number
of customers served in order to decrease long- term costs.
• Quality leadership:
use price to signal high quality in an attempt to position
the product as the quality leader.
• Survival:
In situations such as market decline and overcapacity, the
goal may be to select a price that will cover costs and permit
the firm to remain in the market. In this case, survival may
take a priority over profits, so this objective is considered
temporary.

63. Regional Trading Arrangements:
A regional trading arrangement is an agreement among
governments to liberalize trade and possibly to co- ordinate
other trade related activities.
There are five principal types of regional trading
arrangements. They are:
• Free Trade Area:
It is usually a permanent arrangement between
neighboring countries. A Free Trade Area occurs when a group
of countries agree to eliminate tariffs between themselves but
maintain their own external tariff with non members. In a free
trade area all barriers to the trade of goods and services among
member countries are removed.

64. • Customs Union:
It is an advanced level of integration than free trade area.
Here the members, apart from eliminating tariff among
themselves, agree to have a uniform customs tariff with the
rest of the world. A custom union eliminates trade barriers
between member countries and adopts a common external
policy.
• Common Market:
It is an extension of customs union. A common market
establishes free trade in good and services among member
countries and allows free movement of factors of production
like labour and capital. The European Union was established
as a common market in 1957.

65. • Economic Union:
Here the member countries not only allow free trade and
movement of factor of production but also have harmonized
economic policies. So the member countries will have
common fiscal, monetary and financial policies.
• Economic Integration:
It is full economic integration characterized by the
completion of the removal of all barriers of goods and factors,
unification of social and economic policies. Here all the
members are bound by decisions of a super- national authority
consisting of executive, judicial, and legislative branches.
The economic groupings are shown in the form of a table:

66. Regulatory Environment:
Regulatory Environment consists of laws and regulations
that has been developed by federal, state, and local
governments in order to exert control the behaviour and
actions of business activities.
Types of laws in different parts of the World:
Trade regulations are laws enacted by Congress or by a
State to ensure a free and competitive economy. These
regulations promote free trade and fair competition and
prohibit anti- competitive business practices. Trade regulation
is often referred to as “Anti- trust trade regulation law”.

67. Trade regulation Law – International:
• Andean Community:
It means Community of countries that decide voluntarily
to join together for the purpose of achieving more rapid, better
balanced and development.
• Centre for Trade Policy and Law:
CTPL is a non- governmental, non- profit specializing in
trade capacity building and institutional support services for
public and private sector clients and international
organizations. It was established in 1989 to promote greater
public understanding of trade, research on trade policy and
legal issues and to encourage development of trade policy.

68. • European Commission – Trade:
The European Commission’s Directorate – General for
trade helps through the EU’s trade policy to secure prosperity,
solidarity, and security in Europe and around the globe.
• European Union – External Trade:
The common commercial policy is a pillar for the external
relations of the European Union. It is based on a set of rules
under the Customs Union and the Common Customs Tariff
and governs the commercial relations of the Member States.
• International Trade Law – Definition:
International trade law includes the appropriate rules and
customs for handling trade between countries or between
private companies across borders.

69. • International Trade Law – Overview:
International trade law is the mixture of domestic or
national law and public international law and applies to
transactions of goods or services that cross national
boundaries.
• NAFTA Secretariat:
The NAFTA Secretariat is a unique organization
established pursuant to Article 2002 of the NAFTA agreement.
It was established to resolve trade disputes between national
industries or governments in a timely and impartial manner.
• World Trade Law:
World Trade Law was established in January 2001. the
main goal is to set up and to determine research of the issues.

70. Organizations Related to Trade Regulation Law:
• Agency for International Trade Information and Co-
Operation:
AITIC is an intergovernmental organization, based in
Geneva, whose goal is to help less advanced countries and to
benefit from the globalization process and to take active part
in the work of the World Trade organization and other trade-
related organizations in Geneva.
• Federation of International Trade Associations:
FITA has 450 association members and 4,50,000 linked
company members dedicated to the promotion of international
trade, import- export, international finance and more.

71. • Global Trade Watch:
GTW is a division of Public Citizen, the national
consumer and environmental group founded in 1971. GTW
was created in 1995 to promote government and corporate
accountability in the globalization and trade arena.
• International Centre for Trade and Sustainable
Development:
ICTSD was established in Geneva in September 1996 to
contribute to a better understanding of development and
environment concerns in the context of international trade.
• International Chamber of Commerce:
ICC is the voice of world business championing the
world economy as a force for economic growth, job creation.

72. • International Trade Administration:
ITA’s mission is to create prosperity by strengthening the
competitiveness of promoting trade and investment, and
ensuring fair trade and compliance with trade laws and
agreements.
• World Trade Organization:
The World Trade Organization (WTO) is the only global
international organization dealing with the rules of trade
between nations. The goal is to help producers of goods and
services, exporters, and importers conduct their business.

73. Country Risk Analysis:
A collection of risks associated with investing in a foreign
country. These risks include political risk, exchange rate risk,
and transfer risk. Country Risk varies from country to country.
Some countries have high risk to discourage much foreign
investment.
Types of Country Risk Assessment:
There are two types:
• A Macro Assessment of country risk is an overall risk
assessment of a country with consideration of the MNC’s
business.
• A Micro Assessment of country risk is the risk assessment
of a country and not the MNC’s business.

74. Integration Vs Differentiation:
Integration means combining the activities with the present
activities of the firm. Integration is of two types. They are:
• Vertical Integration
• Horizontal Integration
“Vertical integration” is the process in which several steps in
the production and/or distribution of a product or service are
controlled by a single company or entity, in order to increase
that company’s or entity’s power in the marketplace.
Types of Vertical Integration:
There are basically 3 classifications of vertical integration
namely:
• Backward integration:

75. • Where the company tries to own an input product
company. Like a car company owning a company which
makes tires.
• Forward integration:
Where the business tries to control the post production
areas, namely the distribution network. Like a mobile
company opening its own Mobile retail chain.
• Balanced integration:
A balanced strategy to take advantages of both the worlds.
Horizontal Integration:
“Horizontal integration” (also known as lateral integration)
simply means a strategy to increase your market share by
taking over a similar company. This takes over / merger /

76. buyout can be done in the same geography or probably in
other countries to increase your reach.
Differentiation:
“Differentiation” consists of offering or the services.
Differences between Integration and Differentiation:
The differences are as follows:
Integration Differentiation
• Firm can integrate on the Consists of offering the
present activities for the same product that perceived as
product. unique.
• Low cost of production. High cost of production.
• There is no new technology. Increases the technology to
development.

77. • There is no innovative There is an innovative
marketing facilities. marketing facilities.
• There is no chance for R&D. It creates chance for R&D.
• It increases the market power Marketing power are
because of wide range of increased because of quality
product are offered. and special features of
product.
Formal Organization and Informal Organization:
Within any company there are two types of organization-
Formal structure and informal structure. Both effect the
organization and relationships between staff. The “formal
organization” refers to the formal relationships of authority
and subordination within a company.

78. The primary focus of the formal organization is the position
the employee/ manager holds. Power is delegated from the top
levels of the management down the organization. Each
position has rules governing what can and cannot be done.
• In a formal organization the work is delegated to each
individual of the organization. He/ She works towards the
attainment of definite goals, which are in compliance with the
Goals of an organization.
• To facilitate the co-ordination of various activities: The
authority, responsibility and accountability of individuals in
the organization is very well defined. Hence, facilitating the
co-ordination of various activities of the organization very
effectively.

79. • Permit the application of the concept of specialization and
division of Labour, division of work amongst individuals
according to their capabilities helps in greater specializations
and division of work.
• To aid the establishment of logical authority relationship.
The responsibilities of the individuals in the organization are
well defined.
Informal Organization:
The “informal organization” refers to the network of
personal and social relations that develop between people
associated with each other. The primary focus of the informal
organization is the employee as an individual person. Power is
derived from membership of informal groups within the

80. Organization. The conduct of individuals within these groups
is governed by norms – that is social rules of behaviour. When
individuals break these norms, other members of the group
impose penalties on them.
Reasons for informal organization:
• Informal standards: Personal goals and interests of
workers differ from official organizational goals.
• Informal communication: Changes of communication
routes within an enterprise due to personal relations between
coworkers.
• Informal group: Certain groups of coworkers have the
same interests, or the same origin.

81. Centralized organization and Decentralized Organization:
The degree of centralization is based on how much
authority is delegated. In a centralized organizational structure,
decision-making authority is concentrated at the top, and only
a few people are responsible for making decisions and creating
the organization's policies. Small businesses often use this
structure since the owner is responsible for the company’s
business operations.
Centralized organizations can be extremely efficient
regarding business decisions. Business owners typically
develop the company’s mission and vision, and set objectives
for managers and employees to follow when achieving these
goals.

82. Decentralized Organization:
In a decentralized organization, authority is delegated to all
levels of management and throughout the organization. An
organization's degree of centralization or decentralization
depends on the extent of decision-making power that is
distributed throughout all levels. This can occur in following
situations:
• Where there are many store locations.
• Where there is considerable competition.
• Where innovations change the business model constantly.
Important reasons are:
• Decisions:
Local employees have the best knowledge base from

83. which to make decisions, so this would improve various
decisions throughout the company.
• Training:
Giving some authority to local managers is an excellent
way to observe their decision making authority, which can be
used to determine advancement to higher positions.
• Speed:
Here the company is able to make decisions more quickly.