Samacheer Kalvi 11th Commerce Guide Chapter 20 International Finance

Tamilnadu State Board New Syllabus Samacheer Kalvi 11th Commerce Guide Pdf Chapter 20 International Finance Text Book Back Questions and Answers, Notes.

Tamilnadu Samacheer Kalvi 11th Commerce Solutions Chapter 20 International Finance

11th Commerce Guide International Finance Text Book Back Questions and Answers

I. Choose the Correct Answer

Question 1.
An instrument representing ownership interest in securities of a foreign issuer is called ………………..
a. an ownership certificate
b. a depositary receipt.
c. an ownership receipt
d. None of the above.
Answer:
b. a depositary receipt.

Question 2.
Issuance of DRs is based on the increase of demand in the ……………….
a. International market
b. Local market
c. Existing shareholders
d. All of the above
Answer:
a. International market

Question 3.
ADRs are issued in ……………
a. Canada
b. China
c. India
d. The USA
Answer:
d. The USA

Question 4.
Depositary receipts that are traded in an international market other than the United States are called ……………..
a. Global Depositary Receipts
b. International Depositary Receipts.
c. Open Market Depositary Receipts
d. Special Drawing Rights.
Answer:
a. Global Depositary Receipts

Question 5.
………………….. bond is a special type of bond issued in a currency other than the home currency.
a. Government Bonds
b. Foreign Currency Convertible Bond
c. Corporate Bonds
d. Investment Bonds
Answer:
b. Foreign Currency Convertible Bond

II. Very Short Answer Questions:

Question 1.
Who are Foreign Institutional Investors?
Answer:
The Foreign Institutional Investors (FII) can be defined as an investment made by a Non-resident in the equity of a domestic company without the intention of acquiring management control.

Question 2.
What is a Depository Receipt?
Answer:
A depository receipt is a negotiable financial instrument issued by a bank to represent a foreign company’s equity shares or securities.

Question 3.
What is a GDR (Global Depository Receipt)?
Answer:
GDR is an instrument issued abroad by a company to raise funds in some foreign currencies and is listed and traded on a foreign stock exchange.

Question 4.
What is an American Depositary Receipt (ADR)?
Answer:
ADR is a dollar-denominated negotiable certificate representing a non-US company in the US market which allows US citizens to invest in overseas securities.

Question 5.
What is a Foreign Currency Convertible Bond?
Answer:
A foreign currency convertible bond is a special type of bond issued in a currency other than the home currency. In other words, companies issue foreign currency convertible bonds to raise money in foreign currency.

III. Short Answer Questions:

Question 1.
Explain the importance of international finance.
Answer:

• International finance helps in calculating the exchange rates of various currencies of nations and the relative worth of each and every nation in terms thereof.
• It helps in comparing the inflation rates and getting an idea about investing in international debt securities.
• It helps in ascertaining the economic status of the various countries and in judging the foreign market.

Question 2.
What are Foreign Currency Convertible Bonds?
Answer:
A foreign currency convertible bond is a special type of bond issued in a currency other than the home currency. Companies issue foreign currency convertible bonds to raise money in foreign currency.

Question 3.
Explain any three disadvantages of FDI:
Answer:

1. Exploiting Natural Resources: The FDI Companies deplete natural resources like water, forest, mines, etc. As a result, such resources are not available for the usage of the common man in the host country.
2. Heavy Outflow of capital: Foreign companies are said to take away huge tunes in the form of dividends, royalty fees, etc. This causes a huge outflow of capital from the host country.
3. Not Transferring Technology: Some foreign enterprises do not transfer the technology to developing countries. They mostly transfer second-hand technology to the host country.

Question 4.
State any three features of ADR:
Answer:
ADRs are denominated only in US dollars. They are issued only to investors who are American residents. The depository bank should be located in the US.

Question 5.
State any three features of GDR:
Answer:

1. It is a negotiable instrument and can be traded freely like any other security.
2. GDRs are issued to investors across the country. It is denominated in any acceptable freely convertible currency.
3. GDR is denominated in any foreign currency but the underlying shares would be denominated in the local currency of the issuer.

IV. Long Answer Questions

Question 1.
Describe the importance of international finance?
Answer:

1. International finance helps in calculating the exchange rates of various currencies of nations and the relative worth of each and every nation in terms thereof.
2. It helps in comparing the inflation rates and getting an idea about investing in international debt securities.
3. It helps in ascertaining the economic status of the various countries and in judging the foreign market.
4. International Financial Reporting System (IFRS) facilitates comparison of financial statements made by various countries.
5. It helps in understanding the basics of international organisations and maintaining the balance among them.

Question 2.
Distinguish between GDR and ADR.
Answer:

Sl.No	Basis of Difference	GDR	ADR
1.	Denomination	It is denomi­nated in terms of any freely convertible currency	It is denominat­ed only in US dollars
2.	To whom it is issued	It is issued to investors in one or across more markets simul­taneously	It is issued only to investors, who are res­idents of the United States of America
3.	Listed in	Non-US Stock Exchange such as London Stock Exchange or Luxemburg Stock Exchange	American stock exchange
4.	Approval	Issue of GDR does not require foreign regula­tory clearances	Issue of ADR requires approval from the Securities Exchange Com­mission (SEC) of the United States of America.
5.	Mode of ex­pression	GDRs are normally correlated to equity shares of the issuing compa­ny expressed in whole numbers.	In many cases, ADRs co-re­lated to equity shares of the company are expressed as a fraction
6.	Negotiation	It is negotiable all over the World	It is negotiable only in Amer­ica.

Question 3.
State any five features of FCCB.
Answer:

1. FCCB is issued by an Indian company in foreign currency.
2. These are listed and traded in the foreign stock exchange and similar to the debenture.
3. It is a convertible debt instrument. It carries an interest coupon. It is unsecured.
4. It gives its holders the right to convert for a fixed number of shares at a predetermined price.
5. It can be converted into equity or depository receipt after a certain period.

Question 4.
Explain any five advantages of FDI.
Answer:
International Finance:
1. Achieving Higher Growth in National Income Developing countries get much-needed capital through FDI to achieve a higher rate of growth in national income.

2. Help in Addressing BOP Crisis FDI provides an inflow of foreign exchange resources into a country. This helps the country to solve the adverse balance of payment position.

3. Faster Economic Development FDI brings technology, management, and marketing skills along with it. These are crucial for achieving faster economic development in developing countries.

4. Generating Employment Opportunities: FDI generates a lot of employment opportunities in developing countries, especially in high-skill areas.

5. Encouraging Competition in Host Countries Entry of FDI into developing countries promotes healthy competition therein. This leads to enterprises in developing countries operating efficiently and effectively in the market. Consumers get a variety of products of good quality at a market-determined price which usually benefits the customers.

11th Commerce Guide International Finance Additional Important Questions and Answers

Choose the Correct Answer:

Question 1.
…………….. is a section of financial economics that deals with the monetary interactions that occur between two or more countries.
(a) International finance
(b) Business finance
(c) DR
(d) GDR
Answer:
(a) International finance

Question 2.
If the local currency is in variable form and foreign currency is in fixed form quotation will be …………….
a. Indirect
b. direct
c. Local Form
d. Foreign form
Answer:
a. Indirect

Question 3.
………………. is an instrument issued abroad by a company to raise funds in some foreign currencies and is listed and traded on a foreign stock exchange.
(a) GDR
(b) DR
(c) FDI
(d) FII
Answer:
(a) GDR

II. Very Short Answer Questions:
Question 1.
Define Foreign Direct Investment (FDI).
Answer:
Foreign direct investment (FDI) is an investment made by a company or an individual in one country with business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company.

Question 2.
Expand the following:
Answer:

1. GDR: Global Depositary Receipt
2. ODB: Overseas Depository Bank
3. DCB: Domestic Custodian Bank
4. ECB: External Commercial Borrowing

III. Short Answer Questions:

Question 1.
What are International capital markets?
Answer:
Modem organisations including multinational companies depend upon sizeable borrowings in rupees as well as in foreign currencies. Prominent financial instruments used for this purpose are Depository Receipts.

Question 2.
What are all the forms of Foreign Direct Investment?
Answer:
Foreign direct investments take the following forms:
Establishment of a new enterprise in a foreign country. Expansion of existing branch or subsidiary in a foreign country. Acquisition of enterprise located in a foreign country.

IV. Long Answer Questions:

Question 1.
What are all the disadvantages of FDI?
Answer:
The following are the disadvantages of FDI:
Exploiting Natural Resources:
The FDI Companies deplete natural resources like water. forest, mines, etc. As a result, such resources are not available for the usage of the common man in the host country.
Heavy Outflow of capital:
Foreign companies are said -to take away huge funds in the form of dividends, royalty fees etc. This causes a huge outflow of capital from the host country.

Not Transferring Technology:
Some foreign enterprises do not transfer the technology to developing countries. They mostly transfer second-hand technology to the host country. They keep the fundamental aspects of technology with the parent company. In such a case, the host country may not get the advantage of technology transfer and consequently economic development.

Exploiting Cheap Labour:
Foreign enterprises employ a cheap labour force at lower pay in developing countries. They do not employ local people for higher posts in the management. Further, they do not extend the privileges they usually give to the employees in their home country to the employees of the host country. Thus they are stated to exploit the labour in developing countries.

Creating Monopolistic Environment:
Multi-National Companies (MNCs) which enter the host country through the FDI route create monopolistic conditions in the host countries through their market power. They may not create a competitive environment in the host country. Contrarily they may affect the competition altogether and establish supremacy.

Question 2.
Write a note on FII:
Answer:
The FII can be defined as an investment made by a Non-resident inequity of a domestic company without the intention of acquiring management control. Fils are the investments made by an individual investor or an investment fund, into the financial markets of another nation. Organizations like hedge funds, insurance companies, pension funds, and mutual funds can be called institutional investors.

Foreign Institutional Investors play a very important role in the Indian economy. From 1992, Foreign Institutional Investors (FIIs) have been allowed to invest in all securities traded on the primary and secondary markets, including shares, debentures, and warrants issued by companies. Over 1450 foreign institutional investors have registered their names with the Securities and Exchange Board of India (SEBI), the regulator for the securities market in India.

Question 3.
Explain the international sources from where funds can be generated?
Answer:
Commercial Banks:
Most of the commercial banks extend foreign currency loans for promoting business opportunities. The loans and services of various types, provided by banks differ from country to country.

International Agencies and Development Banks:
International agencies and Development banks play an important role to promote international trade and business. They provide term loans and grants to promote the development of economically backward areas in the world. International Finance Corporation (IFC), EXIM Bank, and Asian Development Bank are the agencies operating at the International level to meet the needs of international finance.

International Capital Markets:
Modem organisations including multinational companies depend upon sizeable borrowings in rupees as well as in foreign currencies. Prominent financial instruments used for this purpose are Depository Receipts.

Question 4.
Explain the procedure for issuing ADR:
Answer:

• First of all, a company hands over the shares to a Domestic Custodian Bank (DCB)
• Then DCB requests the American Depository Bank (ADB) to issue the shares in the form of ADRs
• ADB converts the issue which are in rupees into US dollars
• Finally, ADB issues them to the intending investors.

Question 5.
Explain the process of issuing GDR:
Answer:

• The company issuing GDRs hands over its shares to one Domestic Custodian Bank (DCB).
• The DCB requests the Overseas Depository Bank (ODB) situated in the foreign country for issuing the shares as GDR.
• The ODB converts the shares shown in rupees into GDR which are denominated in US dollars.
• Finally, ODB issues them to the intending investors.