Samacheer Kalvi Class 11 Commerce Solutions Chapter 20 International Finance

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 options
Answer: (b) a depositary receipt.
In simple words: A depositary receipt is like a special paper that shows you own a part of a company from another country. It is traded easily, like other shares.

🎯 Exam Tip: Remember that a depositary receipt is a financial instrument, not just a simple ownership certificate, because it facilitates trading in a foreign market.

 

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 options
Answer: (a) International market
In simple words: When many people in other countries want to buy shares of a local company, that company might issue Depositary Receipts (DRs). These are sold in the international market to meet this global demand.

🎯 Exam Tip: Depositary Receipts are specifically created to help companies raise money from investors outside their home country, emphasizing their international focus.

 

Question 3. ADRs are issued in ........................
(a) Canada
(b) China
(c) India
(d) The USA
Answer: (d) The USA
In simple words: American Depositary Receipts (ADRs) are special certificates that let people in the USA buy shares of companies from other countries. They are traded on American stock exchanges.

🎯 Exam Tip: The "A" in ADR specifically stands for "American," indicating its origin and primary market for issuance.

 

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
In simple words: When depositary receipts are sold in many different countries around the world, but not in the United States, they are known as Global Depositary Receipts (GDRs). They help companies get money from a wide range of international investors.

🎯 Exam Tip: Differentiate between ADRs (US-specific) and GDRs (broader international market) by remembering their geographic scope.

 

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
In simple words: A Foreign Currency Convertible Bond (FCCB) is a debt paper that a company sells in a different country's money. Later, these bonds can be changed into shares of that company.

🎯 Exam Tip: The key features of an FCCB are that it's issued in a foreign currency and has the option to be converted into equity shares later.

II. Very Short Answer Questions:

 

Question 1. Who are Foreign Institutional Investors?
Answer: Foreign Institutional Investors (FII) are non-residents who invest in a domestic company's shares. Their aim is not to gain control over the company's management. These investments often bring valuable foreign capital into the economy.
In simple words: FIIs are people or groups from other countries who put money into a local company's shares, but they don't want to run the company.

🎯 Exam Tip: Highlight "non-resident" and "without the intention of acquiring management control" as key definitions for FIIs.

 

Question 2. What is a Depository Receipt?
Answer: A depositary receipt is a special financial paper issued by a bank. It stands for a foreign company's shares or other securities. This allows foreign companies to be traded on local stock exchanges, making it easier for investors to buy their shares.
In simple words: A depositary receipt is a bank-issued paper that represents shares of a foreign company, letting people invest in it easily.

🎯 Exam Tip: Mentioning that it's "negotiable" and "issued by a bank" are important details for defining a depositary receipt.

 

Question 3. What is a GDR (Global Depository Receipt)?
Answer: A Global Depositary Receipt (GDR) is a financial tool issued by a company in a foreign country to collect money in various foreign currencies. These GDRs are then listed and traded on a foreign stock exchange. They are a popular way for companies to access international capital markets.
In simple words: A GDR is a certificate a company sells in other countries to get funds in foreign money, and it can be traded on foreign stock markets.

🎯 Exam Tip: Emphasize "issued abroad" and "traded on a foreign stock exchange" for a complete definition of a GDR.

 

Question 4. What is an American Depositary Receipt (ADR)?
Answer: An American Depositary Receipt (ADR) is a certificate given in US dollars. It represents shares of a non-US company. ADRs are traded in the US market, which lets American citizens invest in shares of overseas companies more easily. This helps bridge the gap between US investors and foreign companies.
In simple words: An ADR is a dollar-based certificate for shares of a foreign company, traded in the US for American investors.

🎯 Exam Tip: Clearly state that ADRs are "dollar-denominated" and specifically for "US citizens to invest in overseas securities" in the US market.

 

Question 5. What is a Foreign Currency Convertible Bond?
Answer: A Foreign Currency Convertible Bond (FCCB) is a unique bond issued in a currency that is not the company's home currency. Essentially, companies use FCCBs to raise money in foreign currency from international investors. These bonds also have the option to be converted into equity shares later on.
In simple words: An FCCB is a special bond sold by companies in foreign money, which can later be turned into shares.

🎯 Exam Tip: Focus on the two main characteristics: "issued in a currency other than the home currency" and "convertible" into shares.

III. Short Answer Questions:

 

Question 1. Explain the importance of international finance.
Answer: International finance is very important for several reasons.

• It helps calculate the exchange rates for different national currencies. This shows how much each country's money is worth compared to others.
• It allows for comparing inflation rates between countries. This helps in making decisions about investing in international debt securities.
• It helps understand the financial health of various countries. This is useful for judging foreign markets and making international business decisions.
• The International Financial Reporting System (IFRS) helps to compare financial statements from different countries. This allows for clear evaluation of global companies.
• It also helps in understanding how international organizations work and how to maintain balance among them.

In simple words: International finance helps us know how much money is worth in different countries, compare prices, check the economic health of nations, and understand global financial rules. It's key for worldwide trade and investment.

🎯 Exam Tip: When explaining importance, categorize points like exchange rates, investment decisions, economic assessment, and regulatory understanding for a comprehensive answer.

 

Question 2. What are Foreign Currency Convertible Bonds?
Answer: A Foreign Currency Convertible Bond (FCCB) is a special kind of bond issued in a currency different from the home country's currency. Companies use these bonds to raise money in foreign currency from international markets. Investors can later convert these bonds into equity shares of the issuing company. FCCBs offer flexibility for both companies seeking funds and investors looking for convertible options.
In simple words: FCCBs are bonds that companies sell in foreign money, which can be changed into shares of the company later. They help companies raise money from other countries.

🎯 Exam Tip: Clearly define the two main aspects: foreign currency issuance and convertibility into equity, as these are the distinguishing features of FCCBs.

 

Question 3. Explain any three disadvantages of FDI:
Answer: Foreign Direct Investment (FDI) has several disadvantages for the host country:

1. Exploiting Natural Resources: FDI companies might use a lot of local natural resources like water, forests, and minerals. This can make these resources scarce for the local people in the host country.
2. Heavy Outflow of Capital: Foreign companies often send large amounts of money out of the host country as dividends, royalty fees, and other payments. This results in a significant drain of capital from the local economy.
3. Not Transferring Technology: Sometimes, foreign companies do not share their advanced technology with developing countries. Instead, they might transfer older or second-hand technology. This prevents the host country from benefiting from real technological advancement and achieving faster economic growth.

In simple words: FDI can use up local resources, take a lot of money out of the country, and sometimes doesn't bring new technology. These can be bad for the local economy and environment.

🎯 Exam Tip: When listing disadvantages, use clear headings for each point and briefly explain the negative impact on the host country.

 

Question 4. State any three features of ADR:
Answer: Here are three important features of American Depositary Receipts (ADR):

1. ADRs are always priced in US dollars.
2. They are only issued to investors who live in America.
3. The bank that issues these ADRs, known as the depositary bank, must be located in the United States. This ensures regulatory oversight by US authorities.

In simple words: ADRs are always in US dollars, sold only to US residents, and managed by a bank in the US.

🎯 Exam Tip: Focus on the US-centric nature of ADRs—currency, investor base, and issuing bank location—as these are crucial distinguishing factors.

 

Question 5. State any three features of GDR:
Answer: Here are three important features of Global Depositary Receipts (GDR):

1. GDRs are financial instruments that can be traded freely, like other securities. This makes them highly liquid for investors.
2. GDRs are issued to investors in many countries around the world. They are priced in any freely convertible currency, making them flexible.
3. Although a GDR might be valued in a foreign currency, the actual shares it represents (the underlying shares) are always in the local currency of the company that issued them.

In simple words: GDRs can be freely traded, sold to investors worldwide in different currencies, but represent shares valued in the issuing company's local money.

🎯 Exam Tip: When describing GDR features, highlight their global reach, flexible currency denomination, and the relationship between the GDR currency and the underlying share currency.

IV. Long Answer Questions:

 

Question 1. Describe the importance of international finance?
Answer: International finance plays a crucial role in the global economy. Here's why it's important:

1. International finance helps to determine the exchange rates of different national currencies. It also helps to calculate the relative economic value of each nation's currency. This understanding is essential for global trade and investment.
2. It allows us to compare inflation rates between countries. This information is vital for making smart investment decisions in international debt securities.
3. It helps in assessing the economic condition of various countries. This understanding is key for businesses and investors who want to enter or operate in foreign markets.
4. The International Financial Reporting System (IFRS) is part of international finance. It makes it easier to compare financial statements from companies in different countries, promoting transparency.
5. Finally, international finance helps us understand the fundamental principles of global organizations and how to maintain financial stability among them. This ensures a balanced and cooperative international economic environment.

In simple words: International finance helps us understand how money flows between countries, how currencies are valued, and how global investments work. It's essential for trade, investment, and keeping the world economy stable.

🎯 Exam Tip: For comprehensive answers, categorize the importance points into areas like currency valuation, investment analysis, economic assessment, and regulatory frameworks.

 

Question 2. Distinguish between GDR and ADR.
Answer: Here is a comparison distinguishing between Global Depositary Receipts (GDR) and American Depositary Receipts (ADR):

In simple words: GDRs are traded globally in various currencies, while ADRs are specific to the US market and are always in US dollars. Both let foreign companies raise money, but their reach and rules are different.

🎯 Exam Tip: When distinguishing, focus on key differences like geographic scope (global vs. US-specific), currency denomination, and regulatory requirements.

 

Question 3. State any five features of FCCB.
Answer: Here are five key features of Foreign Currency Convertible Bonds (FCCBs):

1. An FCCB is issued by an Indian company but in a foreign currency. This helps companies access international funds directly.
2. These bonds are listed and traded on foreign stock exchanges. They are similar to debentures in their debt-like nature.
3. An FCCB is a type of convertible debt instrument. It includes an interest coupon, meaning it pays interest to the bondholder, but it is typically unsecured.
4. FCCBs give their holders the option to convert the bond into a set number of the company's shares at a price determined beforehand.
5. After a specific period, the bond can be converted into either equity shares or a depositary receipt. This offers investors flexibility and potential for capital appreciation.

In simple words: FCCBs are bonds from Indian companies, sold in foreign money on foreign markets. They pay interest and can be changed into company shares or depositary receipts after some time.

🎯 Exam Tip: Remember to include both the "foreign currency" and "convertible" aspects, along with details like listing, interest, and the conversion mechanism.

 

Question 4. Explain any five advantages of FDI.
Answer: Foreign Direct Investment (FDI) offers many advantages, especially for developing countries:

1. Achieving Higher Growth in National Income: Developing countries receive much-needed capital through FDI. This helps them achieve a faster rate of growth in their national income and overall economic development.
2. Help in Addressing Balance of Payment (BOP) Crisis: FDI brings a flow of foreign exchange resources into a country. This inflow can help the country solve issues with its balance of payment position, making its economy more stable.
3. Faster Economic Development: FDI often introduces new technology, management skills, and marketing expertise. These elements are crucial for speeding up economic development in developing countries.
4. Generating Employment Opportunities: FDI creates many job opportunities in host countries, particularly in skilled areas. This helps reduce unemployment and improve living standards.
5. Encouraging Competition in Host Countries: When foreign companies enter developing countries through FDI, it encourages healthy competition. This makes local businesses operate more efficiently and effectively. Consumers benefit from a wider variety of good quality products at competitive prices.

In simple words: FDI helps countries grow faster, solve money problems, get new technology, create jobs, and make local businesses more competitive. It brings foreign money and expertise, benefiting the economy.

🎯 Exam Tip: When listing advantages, group similar points (e.g., economic growth, job creation, technology transfer) and provide a brief explanation for each.

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
In simple words: International finance is the study of how money moves and is exchanged between different countries around the world.

🎯 Exam Tip: Understand that "international finance" is the broad term covering all monetary dealings across borders.

 

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
In simple words: An indirect quotation means you state how much foreign currency you get for one unit of your local currency. This is when the foreign currency amount changes (variable) for a fixed local amount.

🎯 Exam Tip: Remember that an indirect quotation means expressing the value of one unit of foreign currency in terms of the local currency.

 

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
In simple words: A GDR is a special certificate that foreign companies sell outside their home country to get money in different currencies, which can be traded on international stock markets.

🎯 Exam Tip: The key phrases here are "issued abroad," "raise funds in some foreign currencies," and "listed and traded on a foreign stock exchange," all pointing to 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 person from one country into a business in another country. This involves either setting up new business operations or buying assets in the other country, often taking ownership or control. For instance, building a new factory in a foreign land is an example of FDI.
In simple words: FDI is when a company or person from one country invests directly into a business in another country, often by owning a part of it or starting new operations there.

🎯 Exam Tip: Highlight "investment made by a company or an individual in one country" and "acquiring business assets" or "controlling interest" as core components of FDI.

 

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

In simple words: These are short forms for important financial terms. GDR is for global certificates, ODB and DCB are types of banks involved in these transactions, and ECB is for taking loans from foreign sources.

🎯 Exam Tip: Make sure to memorize the full forms of common financial abbreviations, as they are frequently tested.

III. Short Answer Questions:

 

Question 1. What are International capital markets?
Answer: International capital markets are places where countries can borrow and lend money to each other. Modern organizations, including large multinational companies, often need significant funds for their operations. They raise these funds through borrowings in local currencies (like rupees) or foreign currencies. Key financial tools used for this purpose include Depositary Receipts. These markets allow for the global flow of money, supporting investment and growth worldwide.
In simple words: International capital markets are global places where companies and countries can get loans or raise money from investors around the world, often using special financial tools like Depositary Receipts.

🎯 Exam Tip: Emphasize that international capital markets facilitate both borrowing and lending across national borders and involve various financial instruments.

 

Question 2. What are all the forms of Foreign Direct Investment?
Answer: Foreign direct investments (FDI) can take several forms:

1. Establishment of a new enterprise: A foreign company can build a completely new business in another country.
2. Expansion of existing branch or subsidiary: A foreign company might expand its current operations or its local subsidiary in the host country.
3. Acquisition of enterprise: A foreign company can buy an existing company located in another country.

Each form represents a different way for foreign entities to establish a significant presence and exert control in a host country's economy.
In simple words: FDI can happen when a foreign company starts a new business, makes an existing local branch bigger, or buys a company in another country.

🎯 Exam Tip: Categorize the forms of FDI clearly as starting new, expanding existing, or acquiring, to ensure a complete answer.

IV. Long Answer Questions:

 

Question 1. What are all the disadvantages of FDI?
Answer: While Foreign Direct Investment (FDI) offers many benefits, there are also several potential disadvantages for the host country:

1. Exploiting Natural Resources: FDI companies might use up natural resources like water, forests, and mines at a fast rate. This can lead to these resources becoming unavailable for the common people in the host country.
2. Heavy Outflow of Capital: Foreign companies often take large amounts of money out of the host country. This includes payments for dividends, royalty fees, and other profits. This causes a significant outflow of capital, which can negatively impact the host country's economy.
3. Not Transferring Technology: Some foreign businesses do not share their advanced technology with developing countries. Instead, they might bring in older or second-hand technology. This means the host country may not gain the advantage of new technology and may not achieve significant economic development.
4. Exploiting Cheap Labour: Foreign companies might employ workers in developing countries at lower wages than they would pay in their home countries. They also might not hire local people for higher management positions or provide the same benefits. This can lead to the exploitation of labour in developing countries.
5. Creating Monopolistic Environment: Multinational Companies (MNCs) entering a host country through FDI can sometimes create situations where they have too much market power. This can reduce competition, preventing other businesses from growing and potentially leading to monopolies.

In simple words: FDI can sometimes use up local resources, cause money to leave the country, not bring new technology, exploit workers, and create large monopolies. These issues can be harmful to the local economy and its people.

🎯 Exam Tip: When detailing disadvantages, consider impacts on resources, capital, technology, labor, and market competition for a comprehensive response.

 

Question 2. Write a note on FII:
Answer: Foreign Institutional Investors (FIIs) are non-residents who invest in the equity of a domestic company without intending to gain management control. FIIs are essentially investments made by individual investors or investment funds from other nations into a country's financial markets. These can include various organizations such as hedge funds, insurance companies, pension funds, and mutual funds. FIIs play a very important role in economies like India. Since 1992, FIIs have been allowed to invest in all kinds of securities traded in both primary and secondary markets, including shares, debentures, and warrants. Over 1450 FIIs have registered with the Securities and Exchange Board of India (SEBI), which regulates the securities market. Their investments bring foreign capital and liquidity to the market.
In simple words: FIIs are foreign groups or individuals who invest money in a country's stock market, but they don't try to manage the companies. They help bring in foreign money and make the market more active.

🎯 Exam Tip: Define FIIs by their "non-resident" status and lack of "management control" intent, and also mention their significant role in boosting market liquidity and capital inflow.

 

Question 3. Explain the international sources from where funds can be generated?
Answer: Funds can be generated from various international sources to support business and development:

1. Commercial Banks: Most commercial banks offer foreign currency loans to promote business activities. The types of loans and services provided by these banks can vary greatly from one country to another.
2. International Agencies and Development Banks: These organizations play a vital role in encouraging international trade and business. They provide long-term loans and grants specifically to help develop economically backward regions globally. Examples include the International Finance Corporation (IFC), EXIM Bank, and the Asian Development Bank, which operate internationally to meet finance needs.
3. International Capital Markets: Modern organizations, including multinational companies, often require large sums of money. They obtain these funds through borrowings, either in their local currency or in foreign currencies. Depositary Receipts are prominent financial instruments used for this purpose. These markets facilitate global investment flows.

In simple words: Companies can get money from international commercial banks, global development groups that give loans and grants, or by selling financial papers like Depositary Receipts in international capital markets.

🎯 Exam Tip: Categorize the sources (Commercial Banks, Development Banks/Agencies, Capital Markets) and provide a brief function of each to show a complete understanding.

 

Question 4. Explain the procedure for issuing ADR:
Answer: The procedure for issuing an American Depositary Receipt (ADR) involves several steps:

• First, a company that wants to issue ADRs gives its shares to a Domestic Custodian Bank (DCB) in its home country.
• Next, the DCB requests an American Depository Bank (ADB) to issue the shares in the form of ADRs. The ADB is located in the United States.
• The ADB then converts the value of these shares, which were in the home country's currency (like rupees), into US dollars.
• Finally, the ADB issues these ADRs to the investors who wish to buy them in the United States. This process makes it easy for US investors to buy shares of foreign companies.

In simple words: First, a company gives its shares to a local bank. This bank asks a US bank to turn the shares into US dollar-based ADRs. Then, the US bank issues these ADRs to American investors.

🎯 Exam Tip: Clearly outline the roles of the Domestic Custodian Bank (DCB) and the American Depository Bank (ADB) and the currency conversion step.

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