International Business Finance
IBO 06 Solved Free Assignment 2023
IBO 06 Solved Free Assignment January 2023
Q 1. (a)What are forward contracts? In what circumstances these contracts are used? How are they different from future contracts?
Ans. Forward contracts are a form of financial agreement between two parties that specify the terms of a transaction that will occur at a future date.
The terms of the contract include the price, the quantity, and the delivery date of a particular asset, such as a commodity or currency.
The price is determined at the time of the agreement, but the actual exchange of assets and money takes place at a later date.
Forward contracts are commonly used as a means of hedging against price fluctuations, allowing parties to lock in a price for a particular asset in advance.
Forward contracts are used in a variety of circumstances, but they are most commonly used in the commodities and currency markets.
For example, a company that is buying or selling a commodity, such as oil or grain, may use a forward contract to lock in a price for that commodity in advance.
Similarly, companies that engage in international trade may use forward contracts to hedge against currency fluctuations.
For instance, a US company that will receive payment in Euros in six months can enter into a forward contract to sell Euros at a fixed exchange rate in order to lock in the US dollar value of the payment.IBO 06 Solved Free Assignment 2023
Forward contracts differ from futures contracts in several ways.
First, forward contracts are not traded on an exchange, whereas futures contracts are traded on an exchange.
Second, forward contracts are generally customized to meet the specific needs of the parties involved, whereas futures contracts are standardized.
Third, forward contracts involve more credit risk than futures contracts, as the parties involved must rely on each other to fulfill the terms of the contract, whereas futures contracts are guaranteed by a clearinghouse.
Forward contracts have several advantages. First, they provide a means of hedging against price fluctuations, allowing parties to lock in a price for a particular asset in advance. IBO 06 Solved Free Assignment 2023
Second, they can be customized to meet the specific needs of the parties involved. Third, they can be used to reduce credit risk, as the parties involved can agree to collateralize the contract.
However, forward contracts also have some disadvantages. First, they are not as liquid as futures contracts, as they are not traded on an exchange.
This can make it difficult to find a counterparty willing to enter into a forward contract.
Second, they involve credit risk, as the parties involved must rely on each other to fulfill the terms of the contract. This can be a particular concern if one of the parties is a smaller or less creditworthy entity.
In conclusion, forward contracts are a useful tool for hedging against price fluctuations in commodities and currencies.
They are customizable and can be used to reduce credit risk, but they are not as liquid as futures contracts and involve credit risk.
It is important to carefully consider the advantages and disadvantages of forward contracts before using them in any particular situation.
(b) What are floating rate notes? Explain its features.
Ans (B) Floating Rate Notes (FRNs) are fixed-income securities that have a variable interest rate, which is based on a benchmark rate such as LIBOR or the Federal Funds Rate. IBO 06 Solved Free Assignment 2023
The interest rate on these notes changes periodically based on the current market conditions, which makes them less susceptible to interest rate risks.
FRNs are issued by corporations, financial institutions, and governments to raise funds from investors.
Features of Floating Rate Notes:
Variable Interest Rate: The interest rate on FRNs is not fixed, but it is linked to a benchmark rate that changes over time.
The benchmark rate is typically a short-term interest rate, such as LIBOR or the Federal Funds Rate, and it is adjusted periodically to reflect the current market conditions.
Coupon Reset: FRNs have a coupon reset period, which is the frequency at which the interest rate is adjusted. The reset period can be as short as one day or as long as several months, depending on the terms of the note.
At the end of each reset period, the interest rate is adjusted based on the current market conditions.IBO 06 Solved Free Assignment 2023
Maturity: FRNs have a fixed maturity date, which is the date on which the issuer is required to repay the principal amount of the note to the investor.
The maturity date can be several years in the future, depending on the terms of the note.
Credit Risk: The credit risk of FRNs is determined by the creditworthiness of the issuer. If the issuer defaults on its payment obligations, the investor may not receive the full principal amount of the note.
Liquidity: The liquidity of FRNs depends on the demand and supply in the market. If there is a high demand for the notes, they may be more liquid and easier to sell.
Conversely, if there is a low demand for the notes, they may be less liquid and more difficult to sell.IBO 06 Solved Free Assignment 2023
Yield Spread: The yield spread on FRNs is the difference between the interest rate on the note and the benchmark rate. The yield spread reflects the credit risk of the issuer, as well as other factors such as supply and demand in the market.
Advantages of Floating Rate Notes:
Lower Interest Rate Risk: FRNs are less susceptible to interest rate risks because the interest rate on the note is adjusted periodically based on the current market conditions.
This means that the investor is less likely to suffer losses due to changes in interest rates.
Higher Yield: FRNs typically offer a higher yield than fixed-rate securities, which makes them attractive to investors who are looking for higher returns.
Diversification: FRNs can provide diversification benefits to investors because they have a low correlation with other fixed-income securities.
This means that adding FRNs to a portfolio can help to reduce the overall risk of the portfolio.IBO 06 Solved Free Assignment 2023
Flexibility: FRNs offer greater flexibility to investors because they can be bought and sold in the secondary market.
This means that investors can easily adjust their portfolios to reflect changing market conditions.
Disadvantages of Floating Rate Notes:
Credit Risk: The credit risk of FRNs is determined by the creditworthiness of the issuer. If the issuer defaults on its payment obligations, the investor may not receive the full principal amount of the note.
Liquidity Risk: FRNs may be less liquid than other fixed-income securities, especially if there is a low demand for the notes in the market.
Market Risk: Although FRNs are less susceptible to interest rate risks, they are still subject to market risks such as changes in the supply and demand for the notes.
Q 2. (a)Discuss the working of Bretton woods system.
Ans. The Bretton Woods system was a monetary system developed at the Bretton Woods conference held in 1944. The system established the rules for commercial and financial relations between the world’s major industrial states.
The main objective of the system was to stabilize currencies and to facilitate international trade after the devastation of the Second World War.
The Bretton Woods system was based on the gold standard, where the US dollar was pegged to gold at a rate of $35 per ounce, and other currencies were pegged to the US dollar. IBO 06 Solved Free Assignment 2023
The system was designed to provide stability in exchange rates and avoid currency fluctuations that could affect international trade.
The Bretton Woods system worked in the following manner. Countries that were members of the system fixed their currency exchange rates to the US dollar.
The US government, in turn, agreed to convert US dollars into gold at a fixed rate of $35 per ounce upon request by other governments.
This meant that countries could hold US dollars as international reserves, and the US government would ensure the convertibility of these reserves into gold.
This system worked well for many years, as the US dollar was considered a stable currency and the US was a major exporter of goods and services.
However, as the US faced challenges such as inflation, deficits, and devaluation of the dollar, other countries began to question the validity of the system.
By the late 1960s, the US was facing a significant trade deficit, and the value of the dollar was declining rapidly.IBO 06 Solved Free Assignment 2023
In 1971, US President Richard Nixon suspended the convertibility of the US dollar into gold, effectively ending the Bretton Woods system.
This decision was made due to the mounting pressure on the US gold reserves and the need to address the country’s trade deficit.
The decision had a significant impact on the global financial system, as it allowed currencies to float freely and exchange rates to be determined by market forces.
The Bretton Woods system had several advantages. One of the main advantages was that it provided a stable exchange rate system, which allowed for easier international trade and investment. IBO 06 Solved Free Assignment 2023
The system also provided a mechanism for countries to manage their currency exchange rates and to keep them within a certain range.
It also provided a sense of predictability and stability to the global financial system, which was critical in the aftermath of the Second World War.
However, the system also had its limitations. One of the main limitations was that it was based on the US dollar, which meant that any instability in the US economy would have a ripple effect on the rest of the world.
It also created a sense of dependency on the US as a stable economic power. Additionally, the system did not take into account the changing economic landscape of the world, including the rise of other economic powers such as Japan and Germany.IBO 06 Solved Free Assignment 2023
b)What do you understand by Balance of payment? What are its components?
Ans (b) Balance of Payments (BoP) is a systematic record of all the economic transactions that are carried out between the residents of a country and the rest of the world during a particular period.
It is a comprehensive record of all the monetary transactions that occur between the residents of a country and other nations.
In other words, it represents the monetary value of all economic transactions between a country and the rest of the world over a given period, usually a year.
Components of Balance of Payment:
The BoP comprises two main components: Current Account and Capital Account.
Current Account:IBO 06 Solved Free Assignment 2023
The current account records all transactions of goods, services, income, and current transfers between residents of a country and non-residents.
The current account is further divided into four sub-components:
(a) Balance of Trade (BoT):
BoT records the value of all imports and exports of goods and services between the residents of a country and non-residents during a particular period.
If the value of exports is greater than the value of imports, the balance of trade is said to be in surplus, and if the value of imports is greater than the value of exports, the balance of trade is said to be in deficit.
The income account records all the income earned by the residents of a country from non-residents and vice versa, including compensation of employees, interest, and dividends.
The services account records all transactions related to services such as tourism, transportation, and communication between the residents of a country and non-residents.
(d) Current Transfers:
The current transfers account records all non-returnable transfers of money between the residents of a country and non-residents, such as remittances, donations, and grants. IBO 06 Solved Free Assignment 2023
The capital account records all transactions related to capital movements, such as investments and loans, between the residents of a country and non-residents. The capital account is further divided into two sub-components:
(a) Foreign Direct Investment (FDI):
FDI is the investment made by a resident in a foreign country for the purpose of establishing a long-term business relationship.
(b) Portfolio Investment:
Portfolio investment includes investments in equity and debt securities by non-residents in the resident country and vice versa.
Working of Balance of Payment System:
The BoP system works on the principle of double-entry bookkeeping. It means that for every transaction, there is a corresponding entry in the BoP.
For example, if a resident of a country imports goods worth $100 from a non-resident, then $100 will be recorded as a debit entry in the BoP under the BoT account, and a credit entry of $100 will be recorded under the capital account to reflect the payment made by the resident to the non-resident.
If the balance of payments is in deficit, it indicates that a country is spending more money on imports than it is earning from exports.
On the other hand, if the balance of payments is in surplus, it indicates that a country is earning more from exports than it is spending on imports.
Q 3. (a)What is international fisher effect? In what situation it operates?
Ans. The International Fisher Effect (IFE) is an economic theory that describes the relationship between exchange rates and interest rates.
It suggests that the difference in nominal interest rates between two countries will be equal to the expected change in their exchange rate over a specified period.
The IFE is based on the Fisher Effect, which states that nominal interest rates equal the sum of the real interest rate and the expected rate of inflation.
The Fisher Effect assumes that investors will require compensation for inflation in addition to the real return on their investments.
If the expected inflation rate in a country is higher than another country, its nominal interest rate will also be higher, all else being equal.
The IFE extends the Fisher Effect to the international level by incorporating exchange rates. IBO 06 Solved Free Assignment 2023
It suggests that investors will shift funds to countries that offer higher real returns, resulting in a change in exchange rates that will offset any differences in nominal interest rates.
If a country has a higher nominal interest rate than another, it will experience an equal decline in its exchange rate over the same period, according to the IFE.
For example, suppose the United States has a nominal interest rate of 3% and an expected inflation rate of 2%, resulting in a real interest rate of 1%.
Meanwhile, Japan has a nominal interest rate of 1% and an expected inflation rate of 0%, resulting in a real interest rate of 1%.
According to the IFE, the difference in nominal interest rates (2%) will be equal to the expected change in the exchange rate over the same period.
The IFE operates in situations where there are no restrictions on the movement of capital between countries.
It assumes that investors have access to the same financial markets and can shift their funds to take advantage of differences in real interest rates.
In reality, there are often barriers to capital flows, such as capital controls, taxes, and regulations, which can prevent the IFE from operating.
The IFE is often used to explain the long-term behavior of exchange rates. If the IFE holds true, then changes in interest rates will have a direct impact on exchange rates.
Central banks often use interest rates as a tool to influence the value of their currency. IBO 06 Solved Free Assignment 2023
If a central bank raises interest rates, it can lead to an appreciation in the value of its currency, as investors shift funds to take advantage of the higher real returns.
In summary, the IFE suggests that nominal interest rate differences between two countries will be offset by changes in exchange rates over time.
It operates in situations where there are no restrictions on the movement of capital between countries, and it is often used to explain the long-term behavior of exchange rates.
(b) Explain how currency futures may be a good hedging technique with the help of an illustration.
Ans. Currency futures are a financial instrument used by traders to hedge against the risk of foreign currency fluctuations.
A futures contract is an agreement between two parties, where one party agrees to buy and the other party agrees to sell a specific currency at a predetermined price and date in the future.
By using currency futures, traders can lock in an exchange rate for a future date and protect themselves against currency risk.
One of the advantages of currency futures is their ability to provide a high degree of flexibility in terms of the size and timing of trades.
Unlike spot transactions, futures contracts can be traded in a variety of sizes, ranging from mini-contracts to large institutional contracts.
Additionally, futures contracts are available for a range of currencies, allowing traders to hedge against the currency risks associated with a wide range of international transactions. IBO 06 Solved Free Assignment 2023
Another advantage of currency futures is their transparency and liquidity. Currency futures are traded on regulated exchanges, such as the Chicago Mercantile Exchange (CME) or Intercontinental Exchange (ICE), which provide a high level of transparency regarding the prices and volumes of trades.
This transparency allows traders to accurately assess the market conditions and make informed decisions regarding their trades.
One of the most significant advantages of currency futures as a hedging technique is their ability to provide a high degree of flexibility in terms of the timing of trades.
By using currency futures, traders can lock in an exchange rate for a future date, allowing them to plan for future transactions and minimize the risks associated with currency fluctuations.
For example, suppose a U.S. company plans to import goods from Japan in six months’ time and expects to pay 100 million yen for the goods.
At the current exchange rate of 1 USD to 100 JPY, the cost of the goods would be $1 million. IBO 06 Solved Free Assignment 2023
However, the U.S. company is concerned about the possibility of the yen appreciating against the U.S. dollar, which would increase the cost of the goods in USD terms.
To hedge against this risk, the U.S. company could enter into a currency futures contract to purchase 100 million yen in six months’ time at the current exchange rate of 1 USD to 100 JPY.
By doing so, the U.S. company can lock in the exchange rate and ensure that the cost of the goods remains at $1 million, regardless of any fluctuations in the exchange rate.
If, in six months’ time, the exchange rate remains at 1 USD to 100 JPY, the U.S. company can execute the currency futures contract and purchase the 100 million yen at the agreed-upon exchange rate of 1 USD to 100 JPY.
If the exchange rate has shifted in favor of the U.S. dollar, the U.S. company can simply let the futures contract expire and purchase the yen at the new, more favorable exchange rate.
However, it is important to note that currency futures do not eliminate currency risk entirely.
While they can provide a degree of protection against adverse currency fluctuations, they can also limit potential gains if the exchange rate moves in favor of the hedger.
Additionally, futures contracts have associated costs, such as brokerage fees and margin requirements, which can affect the overall profitability of a transaction.
Q 4. What is Adjusted Present Value (APV) technique? How does it differ from other techniques of financial appraisal of the project? Why it is suitable for international project appraisal?
Ans. Adjusted Present Value (APV) is a technique used to calculate the value of a project by considering its effects on both equity and debt. This approach can be used to assess the financial viability of a project and its impact on the company’s cash flows. IBO 06 Solved Free Assignment 2023
The APV technique was introduced as an alternative to the traditional Discounted Cash Flow (DCF) method of project appraisal.
Unlike the DCF method, the APV technique explicitly takes into account the effects of debt financing and taxation on the value of the project.
The APV technique involves two basic steps. The first step is to calculate the present value of the project without any debt financing.
This is known as the Unlevered Net Present Value (UNPV). The second step is to add the value of any debt financing to the UNPV.
This gives the Adjusted Present Value (APV) of the project. The debt financing is valued by calculating the present value of the tax savings that result from the tax-deductibility of interest payments on debt.
The APV technique differs from other techniques of financial appraisal of the project, such as the DCF method or the Internal Rate of Return (IRR) method, in that it explicitly accounts for the impact of financing and taxation on the project’s value.
The DCF method assumes that the project is financed entirely with equity and ignores the impact of taxation on the value of the project.
The IRR method assumes that the project is financed with a fixed mix of equity and debt, and that the tax effects of debt financing are reflected in the project’s discount rate.
The APV technique is particularly suitable for international project appraisal due to several reasons.
Firstly, it allows for the incorporation of country-specific tax rates and regulations, which can vary widely across different countries.
This is important when assessing the viability of a project in a foreign country, as the tax treatment of debt financing may differ from that in the home country.
Secondly, the APV technique allows for the assessment of the impact of exchange rate fluctuations on the value of the project.
This is particularly relevant for international projects that involve cash flows in multiple currencies. IBO 06 Solved Free Assignment 2023
Thirdly, the APV technique can be used to assess the impact of political and economic risks on the project’s value.
This is important when assessing the viability of a project in a country with a volatile political or economic environment.
To illustrate the use of the APV technique, consider the following example. A company is considering investing in a project that requires an initial investment of $100 million and is expected to generate cash flows of $20 million per year for the next 10 years.
The company plans to finance the project with 50% equity and 50% debt, with the debt carrying an interest rate of 10%. The tax rate is 30%.
Using the APV technique, the UNPV of the project is calculated as follows:
UNPV = PV of cash flows – Initial investment
= $20 million x (1 – 1/(1 + r)^10)/r – $100 million
= $81.1 million (where r is the discount rate)
Next, the tax savings from the debt financing are calculated:
Tax savings = (Interest rate x Debt financing x Tax rate)
= (10% x $50 million x 30%)
= $1.5 million
The value of the debt financing is then calculated as the present value of the tax savings: IBO 06 Solved Free Assignment 2023
Debt financing = Present value of tax savings / Interest rate
= $1.5 million / (1 + r)^1 + $1.5 million / (1 + r)^2 + … + $1.5 million / (1 + r)^10
= $10.4 million
To calculate the APV, we need to discount the cash flows of the project by the cost of equity and then add the net present value of any financing side-effects.
Discounted Cash Flows:
Year 1: $1,500,000 / (1+0.12) = $1,339,286
Year 2: $2,000,000 / (1+0.12)^2 = $1,492,537
Year 3: $2,500,000 / (1+0.12)^3 = $1,559,553
Year 4: $3,000,000 / (1+0.12)^4 = $1,580,784
Year 5: $3,500,000 / (1+0.12)^5 = $1,575,446
Total PV of Cash Flows = $8,547,606
Net Present Value of Financing Side-Effects:
The cost of debt = 7%
Tax rate = 30%
Interest tax shield = $1,050,000 x 7% x 30% = $22,050
NPV of Financing Side-Effects = $22,050 / (1-0.3) = $31,500
Adjusted Present Value = PV of Cash Flows + NPV of Financing Side-Effects
= $8,547,606 + $31,500
Therefore, the APV of the project is $8,579,106, which is higher than the NPV of $7,503,440. This is because the APV technique takes into account the financing side-effects, which increases the value of the project.
The APV technique is suitable for international project appraisal because it considers the impact of financing side-effects, such as tax shields and subsidies, which can vary significantly across countries.
However, like any other financial appraisal technique, the APV approach has its limitations. IBO 06 Solved Free Assignment 2023
It requires accurate projections of future cash flows and discount rates, which can be difficult to predict, particularly in an uncertain international business environment.
Additionally, the method assumes a static capital structure over the project’s life, which may not hold true in practice.
Despite these limitations, the APV technique remains a valuable tool for international project appraisal and should be considered as part of a comprehensive evaluation process.
Q 5. (a)What is international cash management? What are its objectives? Which of the gains from centralization of cash management are related to foreign exchange transaction costs?
Ans. International cash management is the process of effectively managing cash flows across different countries, currencies, and financial systems.
It involves optimizing the use of available funds, minimizing foreign exchange transaction costs, and reducing exposure to currency risks.
The main objective of international cash management is to ensure that an organization has adequate cash resources to meet its obligations, make profitable investments, and maximize shareholder value.
The primary objectives of international cash management are as follows:
Optimize cash balances: The first objective of international cash management is to optimize cash balances. IBO 06 Solved Free Assignment 2023
This involves ensuring that the company has sufficient cash to meet its obligations, but not so much that excess cash is lying idle and not earning any returns.
Minimize foreign exchange transaction costs: The second objective of international cash management is to minimize foreign exchange transaction costs.
This involves consolidating cash balances and making foreign exchange transactions in bulk to reduce the costs associated with currency conversion.
Manage currency risks: The third objective of international cash management is to manage currency risks.
This involves hedging currency exposures using instruments such as forwards, options, and swaps to reduce the impact of adverse currency movements on cash flows.
Maximize returns: The fourth objective of international cash management is to maximize returns.
This involves investing surplus cash in short-term instruments such as money market funds or overnight deposits to earn higher returns than those offered by regular savings accounts.
The gains from centralization of cash management that are related to foreign exchange transaction costs are as follows:
Consolidation of cash balances: When cash balances are consolidated in a central location, foreign exchange transactions can be made in bulk, which reduces the number of transactions and associated costs.
Negotiation of better rates: With centralized cash management, an organization can negotiate better exchange rates and transaction fees with banks and other financial institutions due to the increased volume of business.
Reduction of currency risk: By centralizing cash management, an organization can better manage currency risk by using instruments such as forwards, options, and swaps to hedge currency exposures.
Improved cash forecasting: Centralized cash management provides better visibility of cash balances and cash flows, which improves cash forecasting accuracy and reduces the need for emergency borrowing.
The Adjusted Present Value (APV) technique is a financial appraisal technique that is used to evaluate investment opportunities, especially those that involve a high degree of uncertainty or risk. IBO 06 Solved Free Assignment 2023
It is based on the concept of adjusting the cost of capital for the specific risks associated with the investment.
The APV technique involves the following steps:
Calculate the unlevered cash flows of the investment: This involves projecting the cash flows that the investment is expected to generate over its lifetime, without considering the impact of debt financing.
Calculate the tax shield of debt: This involves calculating the tax benefits that result from the interest expense associated with the debt financing of the investment.
Calculate the present value of the tax shield: This involves discounting the tax benefits associated with the debt financing of the investment to their present value.
Add the present value of the tax shield to the unlevered cash flows: This results in the adjusted present value of the investment.
The main advantage of the APV technique is that it allows for the incorporation of project-specific risks into the analysis.
It recognizes that the risks associated with an investment may not be reflected in the company’s cost of capital, and therefore adjusts the cost of capital accordingly.
The APV technique differs from other techniques of financial appraisal of the project in the following ways: IBO 06 Solved Free Assignment 2023
The APV technique explicitly considers the impact of debt financing on the investment’s value, whereas other techniques such as the net present value (NPV) and internal rate of return (IRR) do not.
Another objective of international cash management is to reduce risk. There are several types of risks that a company faces when dealing with international cash management, including transaction risk, interest rate risk, and credit risk.
By centralizing the management of cash, a company can minimize these risks by having a better understanding of their cash flows and being able to identify and respond to potential issues more quickly.
One of the gains from centralization of cash management that is related to foreign exchange transaction costs is the ability to achieve economies of scale.
When a company centralizes its cash management operations, it can negotiate better rates for foreign exchange transactions by dealing with larger volumes of currency.
This can lead to significant cost savings for the company, as the cost of foreign exchange transactions can be a significant expense for multinational corporations.
Another gain from centralization of cash management related to foreign exchange transaction costs is the ability to manage currency risk more effectively.
When a company has cash balances in multiple currencies, it is exposed to currency fluctuations and exchange rate risk.
By centralizing its cash management operations, a company can take a more coordinated approach to managing its foreign exchange exposure, including using hedging strategies to mitigate currency risk.
Finally, centralization of cash management can help to reduce foreign exchange transaction costs by improving the efficiency of the transaction process.
By consolidating foreign exchange transactions through a single bank or platform, a company can simplify its foreign exchange processes, reducing the time and resources required to manage these transactions.
This can also help to minimize errors and reduce the risk of fraud or other security issues. IBO 06 Solved Free Assignment 2023
(b) Explain the different types of financing instruments and arrangements to deal with diverse risk in project export.
Ans. Project exports refer to the export of goods and services by companies for large-scale projects that are being developed in foreign countries.
These projects can include infrastructure, engineering, construction, and many other sectors.
However, project exports also come with certain risks that need to be addressed, including political, commercial, and financial risks.
In order to mitigate these risks, there are several types of financing instruments and arrangements available to project exporters.
Export Credit Agencies (ECAs)
Export Credit Agencies are government-backed institutions that provide credit insurance and financing to exporters.
They provide coverage against various risks, including political and commercial risks, which can make it easier for project exporters to secure financing.
ECAs also provide guarantees to lenders, which can lower the cost of borrowing for project exporters. IBO 06 Solved Free Assignment 2023
Some of the major ECAs include the Export-Import Bank of the United States, the Export Development Canada, and the UK Export Finance.
Multilateral Development Banks (MDBs)
MDBs are international financial institutions that provide loans and other financial assistance to developing countries for various projects.
These institutions include the World Bank, the Asian Development Bank, and the African Development Bank.
MDBs can provide financing for projects that are too risky for commercial lenders, and they can also offer technical assistance and guidance to project exporters.
Political Risk Insurance
Political risk insurance is a type of insurance that protects project exporters against losses due to political risks, such as expropriation, currency inconvertibility, and political violence.
This insurance can be provided by private insurance companies or by government-backed agencies such as the Overseas Private Investment Corporation (OPIC) in the United States.
Political risk insurance can provide project exporters with greater certainty and protection against losses due to political events.
Structured finance refers to a range of financial arrangements that are designed to meet the specific needs of project exporters.
These arrangements can include project finance, asset-backed securities, and other structured products. IBO 06 Solved Free Assignment 2023
Project finance involves the creation of a special purpose vehicle (SPV) to finance a specific project, and it is often used for large-scale infrastructure projects.
Asset-backed securities involve the securitization of assets, such as accounts receivable or future cash flows, to create a new security that can be sold to investors.
Guarantees are financial instruments that provide a guarantee or assurance to lenders that they will be repaid in the event of a default.
Guarantees can be provided by governments, financial institutions, or other entities, and they can be used to reduce the risk of lending to project exporters.
For example, a government may provide a guarantee to a commercial lender that they will be repaid in the event of a default on a project loan.
Foreign Exchange Hedging
Foreign exchange hedging refers to the use of financial instruments to manage foreign exchange risk. This can include the use of forwards, options, and other derivatives to hedge against changes in exchange rates.
Project exporters can use foreign exchange hedging to protect themselves against losses due to changes in exchange rates, which can be especially important for projects that span multiple years. IBO 06 Solved Free Assignment 2023