Question

Discuss the financial instruments used in international financing.

Answer 1

Various financial instruments used in international facing include (i) Commercial Banks Commercial banks extend foreign currency loans for business purposes. They are an important source of financing non-trade international operations. The types of loans and services provided by banks vary from country to country. Banks do not interfere in the management of companies and such loans can be repaid in parts and interest can be saved. (ii) International Agencies and Development Banks A number of international agencies and development banks provide long and medium term loans and grants to promote the development of economically backward areas in the world. These bodies were set up by the Governments of developed countries of the world at national, regional and international levels for funding various projects. The more notable among them include International Finance Corporation (IFC), EXIM Bank and Asian Development Bank. (iii) International Capital Markets Prominent financial instruments used for international financing through capital markets are (a) Global Depository Receipts (GDRs) These are the depository receipts denominated in US dollars issued by depository bank to which the local currency shares of a company are delivered. GDR is a negotiable instrument and can be traded freely like any other securely. In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange. (b) American Depository Receipts (ADRs) The depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks. ADR is similar to a GDR except that it can be issued only to American citizens and can be listed and traded on a stock exchange of USA. (c) Foreign Currency Convertible Bonds (FCCB's) foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts after a specific period at a pre-determined exchange rate. The FCCB's are issued in a foreign currency and carry a fixed interest rate which is lower than the rate of any other similar non convertible debt instrument. FCCB's are listed and traded in foreign stock exchanges.