International Trade and Foreign Exchange Market

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The response address the queries posted in 2413 words with references.
//In the present times, investment is not limited for a national boundary. Investment can be made in various forms, in different locations, as per the requirement of the investors. As per the instruction, we will discuss about difference between 'Portfolio Management' and 'Foreign Direct Investment'.//

International Trade and Foreign Exchange Market

Ans.1

Foreign investment can be divided in two parts- one is the Foreign Direct Investment (FDI) and the second is portfolio investment. But there are some differences in the nature of both the investments. The differences between foreign direct investment and portfolio investment can be classified as follows-

A) Foreign direct investment refers to investment in a foreign country where the control on the investment is retained in the hand of the investors. Whereas portfolio investment is also a type of investment in a foreign country but investors doesn't have control over the investment.

B) FDI is a form of starting a new business, acquiring a firm in the foreign country or starting a joint venture with other firm in the foreign country. Whereas main objective of the portfolio investment is getting a return on the investment and it is invested in the ADRs, GDRs, FCCBs etc.

C) Foreign direct investment is denoted for the long term consideration and the portfolio investment is considered for the short term period. An investor sells its share in the company as he gets a desired return on the investment.

D) FDI can not be liquidated easily because it is a form of buying a business in the foreign market or a foreign country. Portfolio investment can be liquidated easily and at any time, as soon as the investors get a desired return on their money.

E) FDI is not influenced by the short term gains whereas the portfolio investment is influenced by the short term gains.

// Foreign Direct Investment has become a great source of investment. FDIs invest huge amount of money, which affects the economy of a Country. Here, we will see the current trend of FDI.//

Current Trends in FDI

In many countries, FDI is the main source of the foreign capital. The recent trend shows that the level of FDI is increasing in the developing countries because foreign investors are looking for a great opportunity in those nations. Growth rate of FDI is about 30% in the recent period. Many countries are changing their policies towards FDI. OIC countries are the biggest beneficiaries of the FDI. Economists of the US assume that the flow of the FDI may harm the economy of their country in the future, so there should be a policy to ward the FDI (Foreign Direct Investment in a Globalized World, 2008).

Global Operation

Foreign investment plays an important role in the development of an economy. FDI influences the change in the global operation of a business because it shifts the risk burden of an investment to the foreign investor from the domestic investor. Business can trade without any risk of repayment of the investment because repayment in the FDI is related to the profitability of the business. FDI also helps a firm to go global. Less amount of FDI imposes some financial problems for the business operations. Thus it is concluded that the global operations of the businesses are affected by FDI (Moosa, 2002).

//Today's market is a global market. The goods are sold from out of national realm. So, here foreign exchange market plays a vital role. As per the directions, we will move further and discuss somewhat about foreign exchange market and as a 'Tool of Hedging'.//

Ans.2

Mostly countries have different currencies but the transaction of the businesses is settled in the local currency of a country where transactions are done. Foreign exchange market provides a place where the currency of a country is traded for the currency of another country. Foreign exchange market ...