Multinational Business

Finance Project

Submitted by

Priyank Karoor
Roll no 19
FS2
 INDEX
Sr. No. TOPIC Page No.
1 Executive Summary 3

2 India Introduction 4

3 EURO Zone Introduction 5

4 Currency Tracing 9

5 Currency Movement 10

6 Forex Triggers And Impacts 10

7 Purchasing Power Parity 12

8 International Fisher Effect 13

9 Conclusion 14
 Executive Summary
Currency Project gains relevance due to the importance of global economy and
its ramifications on the international financial sector. The approach has been to
Integrate the theoretical aspects such as PPP Model, International Fisher
Effect,Technical & Fundamental Analysis, and Quantitative applications along
with the practical developments in Forex/ Multinational Business Finance. The
project attempts to analyses the information and develop an interpretation of the
facts which is characterized by its brevity in representation.

The first part is the snapshot of INR / Euro. This is followed by a fundamental
outlook on India & Europen nations which includes information and analysis on
economic indicators such as GDP, Interest rates, inflation, Balance of
Payment/Trade, Equity markets. The period for which the currencies USD &
Euro have been tracked ranges from 16th May 2010 to 20th July 2010. Analysis
has been done on the possible triggers and impact to/on INR/ Euro over a period
of 6 weeks. The currency rates have been analyzed by involving technical views
such as Avg. True Range, Support & Resistance Levels. The projections have
been made by taking INR / EURO spot on 16th May 2010 as the base and by
using PPP Model & IFE Model.

Economy of India
The economy of India is the eleventh largest economy in the world by nominal GDP and
the fourth largest by purchasing power parity (PPP). Following strong economic reforms from
the socialist inspired economy of a post-independence Indian nation, the country began to
develop a fast-paced economic growth, as free market activities initiated in 1990 for international
competition and foreign investment. India is an emerging economic power with a very large pool
of human and natural resources, and a growing large pool of skilled professionals. Economists
predict that by 2020, India will be among the leading economies of the world.

India was under social democratic-based policies from 1947 to 1991. The economy was
characterized by extensive regulation, protectionism, public ownership, pervasive
corruption and slow growth. Since 1991, continuing economic liberalization has moved the
country towards a market-based economy. A revival of economic reforms and better economic
policy in 2000s accelerated India's economic growth rate. In recent years, Indian cities have
continued to liberalize business regulations. By 2008, India had established itself as the
world's second-fastest growing major economy. However, the year 2009 saw a significant
slowdown in India's GDP growth rate to 6.8% as well as the return of a large projected fiscal
deficit of 6.8% of GDP which would be among the highest in the world.
India's large service industry accounts for 55% of the country's Gross Domestic Product (GDP)
while the industrial and agricultural sector contribute 28% and 17% respectively. Agriculture is
the predominant occupation in India, accounting for about 52% of employment.
The service sector makes up a further 34% and industrial sector around 14%. The labor force
totals half a billion workers. Major

Economy Of Euro Zone

The economy of Europe comprises more than 731 million people in 48 different states. It
contributes 11% of the world's population. Like other continents, the wealth of Europe's states
varies, although the poorest are well above the poorest states of other continents in terms of GDP
and living standards. The difference in wealth across Europe can be seen in a rough East-West
divide. Whilst Western European states all have high GDPs and living standards, many of
Eastern Europe's economies are still rising from the collapse of the communist Soviet Union and
former Yugoslavia. Throughout this article "Europe" and derivatives of the word are taken to
include selected states whose territory is only partly in Europe – such as Turkey, Azerbaijan, and
the Russian federation – and states that are geographically in Asia, bordering Europe – such as
Armenia and Cyprus.
Europe was the first continent to industrialize – led by the United Kingdom in the 18th century –
and as a result, it has become one of the richest continents in the world today. Europe's largest
national economy is that of Germany, which ranks fourth globally in nominal GDP, and fifth in
purchasing power parity (PPP) GDP; followed by France, which ranks fifth globally in nominal
GDP and sixth in PPP GDP; the United Kingdom, ranking sixth globally in nominal GDP,
followed by Italy. The end of World War II has since brought European countries closer
together, culminating in the formation of the European Union (EU) and in 1999, the introduction
of a unified currency – the euro. If the European Union was taken as a single country, today it
would be the world's largest economy – see List of countries by GDP. In 2009 Europe remained
the wealthiest region. Its $37.1 trillion in assets under management represented one-third of the
world’s wealth. It was one of several regions where wealth surpassed its pre crisis year-end peak

The most common currency within Europe is the euro, the currency of the European Union. To
join, each new EU member must meet certain criteria, when these are met their own currencies
will be replaced by the euro. Becoming a member of the EU involves a pledge to work towards
Eurozone membership, (except in the cases of the United Kingdom and Denmark who have opt-
outs). Currently, 15 of the 27 EU member states use the euro. Each EU member's central bank is
part of the European System of Central Banks, and in addition, those that use the euro are part of
the European Union's central bank, the European Central Bank.
There are some non-EU members who have elected to use the euro as their national currency,
either with or without specific agreements with the EU to do so, (those with agreements with the
EU may mint their own euro coins). The French overseas territories and departments of Mayotte
and Réunion in the Indian Ocean, Guadeloupe and Martinique in the Caribbean and French
Guiana in South America all use the euro, among many other islands in the Pacific, Caribbean
and indeed around the globe that are ruled directly by European countries.
Some countries while maintaining their own national currency have pegged its value to the euro.
In some of these countries, there is a fixed exchange rate between the national currency and the
euro and in this case the currency is actually a submultiple of the euro. In other countries, the
national currency's value fluctuates within a band (generally 15%) around a set rate. Currencies
pegged to the euro include the currencies of Bulgaria, Estonia, Lithuania, Bosnia and
Herzegovina and Cape Verde. Denmark & Latvia have a foreign exchange band tied to the euro.
The CIS is also planning to introduce a single currency among its members.

The bulk of the EU's external trade is done with the United States, Brazil, China, India, Russia
and non-member European states.
EU members are represented by a single official at the WTO.
The EU is involved in a few minor trade disputes. It had a long running dispute with the USA of
allegedly unfair subsidies the US government gives to several companies, such as Boeing. There
is also a dispute with China over textile exports, and the EU has a long running ban prohibiting
arms trade with the Chinese.

In early 2010 fears of a sovereign debt crisis or the 2010 Euro Crisis also known as Aegean
Contagion developed concerning some countries in Europe including: Greece, Spain, and
Portugal. This led to a crisis of confidence as well as the widening of bond yield spreads and risk
insurance on credit default swaps between these countries and other EU members, most
importantly Germany.
Concern about rising government deficits and debt levels across the globe together with a wave
of downgrading of European Government debt has created alarm in financial markets. The debt
crisis has been mostly centered on recent events in Greece, where there is concern about the
rising cost of financing government debt. On 2 May 2010, the Euro zone countries and the
International Monetary Fund agreed to a €110 billion loan for Greece, conditional on the
implementation of harsh Greek austerity measures. On 9 May 2010, Europe's Finance Ministers
approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring
financial stability across Europe by creating the European Financial Stability Facility.
The Greek economy was one of the fastest growing in the euro zone during the 2000s; from 2000
to 2007 it grew at an annual rate of 4.2% as foreign capital flooded the country. A strong
economy and falling bond yields allowed the government of Greece to run large structural
deficits. According to an editorial published by the Greek newspaper Kathimerini, large public
deficits are one of the features that have marked the Greek social model since the restoration of
democracy in 1974. After the removal of the right leaning military junta, the government wanted
to bring disenfranchised left leaning portions of the population into the economic mainstream. In
order to do so, successive Greek governments have, among other things, run large deficits to
finance public sector jobs, pensions, and other social benefits. Since 1993 debt to GDP has
remained above 100%.
Initially currency devaluation helped finance the borrowing. After the introduction of the euro
Greece was initially able to borrow due the lower interest rates government bonds could
command. The global financial crisis that began in 2008 had a particularly large effect on
Greece. Two of the country's largest industries are tourism and shipping, and both were badly
affected by the downturn with revenues falling 15% in 2009.
To keep within the monetary union guidelines, the government of Greece has been found to have
consistently and deliberately misreported the country's official economic statistics. In the
beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks
hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual
level of borrowing. The purpose of these deals made by several subsequent Greek governments
was to enable them to spend beyond their means, while hiding the actual deficit from the EU
overseers.
In 2009, the government of George Papandreou revised its deficit from an estimated 6% (8% if a
special tax for building irregularities were not to be applied) to 12.7%. In May 2010, the Greek
government deficit was estimated to be 13.6% which is one of the highest in the world relative to
GDP. Greek government debt was estimated at €216 billion in January 2010.[24] Accumulated
government debt is forecast, according to some estimates, to hit 120% of GDP in 2010. The
Greek government bond market is reliant on foreign investors, with some estimates suggesting
that up to 70%[citation needed] of Greek government bonds are held externally.
Estimated tax evasion costs the Greek government over $20 billion per year. Despite the crisis,
Greek government bond auctions have all been over-subscribed in 2010 (as of 26 January).
According to the Financial Times on 25 January 2010, "Investors placed about €20bn ($28bn,
£17bn) in orders for the five-year, fixed-rate bond, four times more than the (Greek) government
had reckoned on." In March, again according to the Financial Times, "Athens sold €5bn (£4.5bn)
in 10-year bonds and received orders for three times that amount."

EU emergency measures
On 9 May 2010 the 27 member states of the European Union agree to create the European
Financial Stability Facility (EFSF), a legal instrument aiming at preserving financial stability in
Europe by providing financial assistance to eurozone states in difficulty.In order to reach these
goals the Facility is devised in the form of a special purpose vehicle (SPV) that will sell bonds
and use the money it raises to make loans up to a maximum of € 440 billion to eurozone nations
in need. The bonds will be backed by guarantees given by the European Commission
representing the whole EU, the eurozone member states, and the IMF. The new entity will sell
debt only after an aid request is made by a country. The EFSF will be combined to a € 60 billion
loan coming from the European financial stabilisation mechanism (reliant on guarantees given by
the European Commission using the EU budget as collateral) and to a € 250 billion loan backed
by the IMF in order to obtain a financial safety net up to € 750 billions.[148][149] The
agreement allows the European Central Bank to start buying government debt which is expected
to reduce bond yields. (Greek bond yields fell from over 10% to just over 5%;Asian bonds also
fell with the EU bailout.) The ECB has announced a series measures aimed at reducing volatility
in the financial markets and at improving liquidity.

Stocks worldwide surged after this announcement as fears that the Greek debt crisis would
spread subsided, some rose the most in a year or more. The Euro made its biggest gain in 18
months, before falling to a new four-year low a week later. Commodity prices also rose
following the announcement. The dollar Libor held at a nine-month high. Default swaps also fell.
The VIX closed down a record almost 30%, after a record weekly rise the preceding week that
prompted the bailout.
Despite the moves by the EU, the European Commissioner for Economic and Financial Affairs,
Olli Rehn, called for "absolutely necessary" deficit cuts by the heavily indebted countries of
Spain and Portugal.[ Private sector bankers and economists also warned that the threat from a
double dip recession has not faded. Stephen Roach, chairman of Morgan Stanley Asia, warned
about this threat saying "When you have a vulnerable post-crisis economic recovery and crises
reverberating in the aftermath of that, you have some very serious risks to the global business
cycle." Nouriel Roubini said the new credit available to the heavily indebted countries did not
equate to an immediate revival of economic fortunes: "While money is available now on the
table, all this money is conditional on all these countries doing fiscal adjustment and structural
reform."
After initially falling to a four-year low early in the week following the announcement of the EU
guarantee packages, the euro rose as hedge funds and other short-term traders unwound short
positions and carry trades in the currency.

Currency Tracking

Exchange
Date Rate
11.06.201 56.6577
0
12.06.201 56.6551
0
13.06.201 57.3197
0
14.06.201 57.3365
 0
15.06.201 56.8858
0
16.06.201 57.1104
0
17.06.201 57.1678
0
18.06.201 57.233
0
19.06.201 57.1024
0
20.06.201 56.9044
0
21.06.201 58.085
0
22.06.201 56.5937
0
23.06.201 56.663
0
24.06.201 56.7391
0
25.06.201 57.1788
0
26.06.201 57.1867
0
27.06.201 58.1597
0
28.06.201 58.163
0
29.06.201 56.9574
0
30.06.201 56.7444
0
01.07.201 56.9744
0
02.07.201 57.5678
0
03.07.201 58.486
0
04.07.201 59.4608
0
05.07.201 59.4934
0
06.07.201 58.613
0
07.07.201 58.9123
0
08.07.201 59.2811
0
09.07.201 59.2968
0
 10.07.201 59.1008
0
11.07.201 60.1848
0
12.07.201 60.1786
0
13.07.201 58.7869
0
14.07.201 59.0838
0
15.07.201 59.4052
0
16.07.201 59.8265
0

10/06/2010-The European Central Bank left interest rates at a record low after Europe’s
sovereign debt crisis forced it to start buying government bonds.

15/06/2010The first estimate for the euro area (EA16) trade balance with the rest of the world in
April 2010 gave a 1.8 billion euro surplus, compared with +2.6 bn in April 2009
The March 2010 balance was +4.5 bn, compared with +1.5 bn in March 2009.

In April 2010 compared with March 2010, seasonally adjusted exports fell by 2.4% and imports
by 3.5%.

The first estimate for the April 2010 extra-EU27 trade balance was a 10.2 bn euro deficit,
compared with -7.8 bn in April 2009. In March 20102 the balance was -7.2 bn, compared with
-9.2 bn in March 2009. In April 2010 compared with March 2010, seasonally adjusted exports
fell by 2.4% and imports by 2.8%.

The EU27 deficit rose for energy (-66.6 bn euro in January-March 2010 compared with -58.5 bn
in January-March 2009), while the surplus for manufactured goods increased (+35.9 bn
compared with +21.9 bn).

16/06/2010-Euro Area inflation accelerated to the fastest pace in more than a year in May as
surging energy costs and a weaker euro made imported goods more expensive across the 16-
nation region. Euro-area consumer prices rose 1.6 percent in May from a year earlier after
increasing 1.5 percent in April, the European Union statistics office said. That’s the fastest
inflation since December 2008.
Labor-cost growth accelerated to 2.1 percent in the first quarter from a year earlier from 1.7
percent in the fourth quarter, a separate report showed today.
The euro’s 14.5 percent drop against the dollar this year is pushing up inflation just as rising
energy prices hurt consumers’ purchasing power. European Central Bank President Jean-Claude
Trichet said on June 10 that inflation might further accelerate even with the euro region’s
economy seen expanding at only a “moderate pace” this year.

30/06/2010-Euro-area consumer prices rose 1.4 percent from a year earlier after increasing 1.6
percent in May, the European Union statistics office in Luxembourg.

08/07/2010-The European Central Bank left interest rates at a record low as rising market
borrowing costs and the sovereign debt crisis threaten to derail the region’s economic recovery.

Eurozone inflation eased in June and remained within the official target range, giving no reason
to change monetary policy.
The consumer price index rose 1.4% year-on-year in June, slower than May's 1.6% increase,
final data from Eurostat showed. That confirmed a preliminary figure released on June 30. A
year earlier, inflation was negative 0.1%. The European Central Bank targets inflation rates of
'below, but close to, 2%' over the medium term.

On a monthly basis, the consumer price index, or CPI, was flat in June. The core CPI that
excludes energy, food, alcohol and tobacco rose 0.9% year-on-year following a 0.8% rise in
May.

Eurozone inflation could increase somewhat further in subsequent months, as energy and food
price inflation temporarily move higher, ING Bank NV economist Martin van Vliet said. But
with core inflation set to slow further and to remain low thereafter, the outlook is still for below-
target inflation in the medium term. Consequently, ECB rate hikes remain a distant prospect, the
economist added.
Following the announcement of the interest rate decision earlier last week, ECB President Jean-
Claude Trichet had said inflationary pressures over the medium term remain contained. Hence,
the current ECB interest rates are appropriate, he noted.

"We expect price stability to be maintained over the medium term, thereby supporting the
purchasing power of euro area households," Trichet had said adding that the firm anchoring of
inflation expectations remains of the essence.
The retreat in Eurozone consumer price inflation in June reinforces belief that any interest rate
hike by the ECB is a long way off, IHS Global Insight's economist Howard Archer noted. As
such, the economist expects the central bank to keep interest rates down at the current level of
1% not only through 2010, but deep into 2011.

PURCHASING POWER PARITY

THEORY
Et = [(1+ih) ^t/ (1+if) ^t]*e0
Et = Exchange rate of foreign country
Eo = Exchange rate of home country
ih = Inflation rate of INR
if = Inflation rate of Euro Zone
t = Time period

Inflation Rates

As on 16/07/2009, 1 EUR= 68.79 INR, where

EUR is base currency
Et= 68.79 (1 - 0.098)^t/(1 + (- 0.001)^t
Et= 68.79 (0.902)^1/ (0.99)^1
1 EUR= 62.67 INR

But the rate on 16/07/2010 is 59.83 hence the difference is 2.84 INR per EUR

International Fisher Effect

Et = Eo (1+rh) t / (1+rf) t
Et = Spot Exchange rate in period t
Eo = value of one unit of home currency at the beginning of the period
rh = interest rate of home country
rf = interest rate of foreign country
t = time period

Interest Rates

INR EURO

3.25% 1%

As on 16/07/2009, 1 EUR= 68.79 INR, where EUR is base currency

Et= 68.79 (1 + 0.0325)^t/(1 + 0.01)^t
Et= 68.79 (1.0325)^1/ (1.01)^1
1 EUR= 70.32 INR
But the rate on 16/07/2010 is 59.83 hence the difference is 10.49 INR per EUR

Conclusion
As per the PPP currency forecast for 16/7/2010 is 62.71 INR – 1 EUR while the spot rate on this
date is 59.83 so there is a difference between the spot and forecasted is 2.84 INR that means the
Indian rupee is undervalued.

Following are the reasons for the same.

1. Decline in the European economy.

2. Bailout package given to Greece.

3. Constantly depreciating INR because of higher interest rates in India.

4. High Inflation rates in India.

5. There is a improvement in European Inflation.

Biblography

www.x-rate.com

www.tradingeconomics.com

www.oanda.com
www.economictimes.com