Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – I - exam paper

Return after six months = 2608093 – 2500000

= Can$ 108093

The company should invest in Euro, since the return on investment is more when compared to the others.

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6. The customer has to sell AUS$ to the bank. Hence the relevant rate is Rs. / AUS$ bid rate. To compute the gain or loss in the transaction, we have to compare the notional rupee inflow on July 20, 2005 with the true rupee inflow on August 10, 2005.

Notional rupee inflow on July 20, 2005.

Rs. / AUS$ bid rate = (Rs. / Euro) bid ´ (Euro / SKr) bid ´ (SKr / AUS$) bid

= (Rs. / Euro) bid ´ ´ (SKr / AUS$)bid

=

= 33.4073

Effective rate offered by the bank = 33.4073 x (1 – 0.0015)

= 33.3572 Say Rs.33.36

true rupee / AUS$ bid rate on August 10, 2005

Rs. / AUS$ bid rate = = 33.6541

Rate offered by the bank = 33.6541 ´ (1 – 0.0015)

= 33.6036 Say Rs.33.60

true rupee inflow to the exporter

= 2,50,000 ´ 33.60

= Rs.8.4 million

Gain to the customer = 2,50,000 (33.60– 33.36)

= Rs.60,000

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part C: Applied Theory



7. The portfolio balance approach states that the value of a currency is determined by 2 factors – the relative demand and supply of money and the relative demand and supply of bonds. According to this approach, people can hold assets across various countries, denominated in various currencies (mainly in the form of currencies and bonds). Hence, any change in exchange rates modifications the wealth of the holders of these assets, which becomes an instrument for maintaining equilibrium in money and bond markets.

According to this theory, interest rates and exchange rates are linked in the manner as shown by the subsequent figure.

Figure: Portfolio Balance Model



A – Home currency; B – Foreign Currency

In the above figure, interest rates are shown on the y-axis, and the exchange rate on the x-axis, with a movement towards the right reflecting depreciation of the home currency. Curve bb represents the combinations of interest rates and exchange rates for which the bond market is in equilibrium, with curve mm representing those combinations for which the money markets are in equilibrium. As interest rates rise, the demand for bonds increases. With the supply of bonds not changing, this outcomes in an excess demand. This demand can be decreased by reducing the wealth of the portfolio holders. A reduction in the wealth would induce portfolio holders to demand less of everything, including bonds. This is achieved through an appreciation of the domestic currency. The appreciation decreases the real wealth of the portfolio holders in domestic currency terms. Hence, appreciation of the domestic currency accompanies an increase in interest rates, in order to maintain the equilibrium in the bond market. This makes curve bb downward sloping. At the identical time, an increase in interest rates means a lower demand for money. With money supply being constant, this outcomes in an excess supply of money. To bring the money markets back to equilibrium, the demand for money needs to be increased. This can happen if the real wealth of portfolio holders increases through a depreciation of the domestic currency. The increase in the wealth induces higher demand for everything, including money. Hence, depreciation of the domestic currency accompanies an increase in the interest rates, to maintain the equilibrium in the money markets. This makes curve mm upward sloping.

The equilibrium level of interest rates and exchange rate are determined by the interplay of money market and bonds market, represented by the 2 curves in the figure. The theory goes on to presume that any change in money supply is effected via open-market operations by the government (or the central bank), thus changing the supply of bonds. Suppose there is a reduction in the money supply. This would be done by the government selling bonds in the market. The decreased money supply would shift the mm curve upwards to since the interest rate would increase for every level of exchange rate. The increase in the bonds’ supply would shift curve bb to the right to as at every level of exchange rate, portfolio holders would require increased interest rate. While this reduction in the money supply will definitely outcome in an increase in interest rates, the effect on exchange rates would depend upon the degree to which the 2 curves would shift, and hence could be in any direction. If curve bb shifts more than curve mm, then there would be a depreciation of the currency. If, however, the opposite is true, the currency will appreciate. In any case, the appreciation in the currency will be less than that predicted by the monetary approach, i.e. the 1 arrived at without considering the bond markets.

If the money supply increases through a purchase of bonds by the government, the mm curve will shift downwards and the bb curve will shift to its left. This will be because the increased money supply and the decreased supply of bonds will decrease the interest rates at every level of exchange rates. If mm curve shifts more than bb curve, the currency will depreciate. In the other case, the currency will appreciate. In any case, the depreciation will be less than that predicted by the monetary approach.

Next, the theory provides an explanation for a change in the value of a currency arising from a change in the real GNP. A higher real GNP outcomes in a higher demand for both money and bonds. The higher demand for money increases interest rates and hence, shifts mm curve upwards. The higher demand for bonds decreases the interest rates and hence, shifts curve bb to the left. Both the shifts outcome in an appreciation of the currency, which is higher than that predicted by the monetary theory. But here, the effect on interest rates is ambiguous and depends on the quantum by which the 2 curves shift.

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8. The TRIPs Agreement covers 7 categories of intellectual property. They are

1. Copyright and Related Rights: The rights of writers of literary and artistic works (such as books and other writings, musical compositions, paintings, sculpture, computer programs and films) are protected by copyright, for a minimum period of 50 years after the death of the writer. Also protected through 'copyright and related (sometimes referred to as "neighboring") rights are the rights of performers (example: Actors, singers and musicians), producers of phonograrns (sound recordings) and broadcasting organizations. The main social purpose of protection of copyright and related rights is to encourage and reward creative work.

2. Trademarks: Any sign, or combination of signs, capable of distinguishing the goods or services of 1 undertaking from those of other undertakings constitutes a trademark. The owner of a registered trademark has the executive right to prevent 3rd parties from using identical or similar signs for goods or services. The protection of trademarks stimulates and ensures fair competition. The protection may last indefinitely, given the sign in ques. continues to be distinctive.

3. Geographical Indications: This refers to the identity of a good originating in the territory of a member/region/locality where a provided quality or reputation is essentially attributed to its geographical origin. Members are needed to give the legal means for interested parties to prevent the use of any indication, which misleads the consumer as to the origin of goods.

4. Industrial Designs: Industrial designs are protected for a period of 10 years. The social purpose is to give protection for the outcomes of investment in the development of new technology, thus giving the incentive and means to finance research and development activities.

5. Patents: Patents are provided for inventions (whether products or processes), in all fields of technology. The invention should be new and capable of industrial application. The patent owners can transfer the patent rights to conclude licensing contracts. The protection for patents is provided for a period of 20 years.

6. Integrated Circuits: The Agreement provides protection to layout designs/topographics of integrated circuits for a period of ten years. The protection shall lapse 15 years after creation of the layout design.

7. Trade Secrets: Trade secrets having commercial value shall be protected against breach of confidence. The test data submitted to governments (in order to find marketing approval for pharmaceuticals and agricultural chemicals) shall be protected against unfair commercial use.

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Earning:   Approval pending.