International finance

For the academic journal or financial magazine, see International Finance (journal) and Global Finance (magazine).

International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries.^[1][2] International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.^[1][2][3]
Sometimes referred to as multinational finance, international finance is additionally concerned with matters of international financial management. Investors and multinational corporations must assess and manage international risks such as political risk and foreign exchange risk, including transaction exposure, economic exposure, and translation exposure.^[4][5]
Some examples of key concepts within international finance are the Mundell–Fleming model, the optimum currency area theory, purchasing power parity, interest rate parity, and the international Fisher effect. Whereas the study of international trade makes use of mostly microeconomic concepts, international finance research investigates predominantly macroeconomic concepts.

Profit and Loss Statement - P&L

Definition of 'Profit and Loss Statement - P&L'

A financial statement that summarizes the revenues, costs and expenses incurred during a specific period of time - usually a fiscal quarter or year. These records provide information that shows the ability of a company to generate profit by increasing revenue and reducing costs. The P&L statement is also known as a "statement of profit and loss", an "income statement" or an "income and expense statement".

The statement of profit and loss follows a general form as seen in this example. It begins with an entry for revenue and subtracts from revenue the costs of running the business, including cost of goods sold, operating expenses, tax expense and interest expense. The bottom line (literally and figuratively) is net income (profit). Many templates can be found online for free, that can be used in creating your profit and loss, or income statement.

The balance sheet, income statement and statement of cash flows are the most important financial statements produced by a company. While each is important in its own right, they are meant to be analyzed together.
 

Portfolio (finance)

The term portfolio refers to any collection of financial assets such as cash. Portfolios may be held by individual investors and/or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio and is referred to as the asset allocation of the portfolio.^[2] When determining a proper asset allocation one aims at maximizing the expected return and minimizing the risk. This is an example of a multi-objective optimization problem: more "efficient solutions" are available and the preferred solution must be selected by considering a tradeoff between risk and return. In particular, a portfolio A is dominated by another portfolio A' if A' has a greater expected gain and a lesser risk than A. If no portfolio dominates A, A is a Pareto-optimal portfolio. The set of Pareto-optimal returns and risks is called the Pareto Efficient Frontier for the Markowitz Portfolio selection problem.^[3]...

There are many types of portfolios including the market portfolio and the zero-investment portfolio.^[4] A portfolio's asset allocation may be managed utilizing any of the following investment approaches and principles: equal weighting, capitalization-weighting, price-weighting, risk parity, the capital asset pricing model, arbitrage pricing theory, the Jensen Index, the Treynor the Sharpe diagonal (or index) model, the value at risk model, modern portfolio theory and others.
There are several methods for calculating portfolio returns and performance. One traditional method is using quarterly or monthly money-weighted returns, however the true time-weighted method is a method preferred by many investors in financial markets.^[5] There are also several models for measuring the performance attribution of a portfolio's returns when compared to an index or benchmark, partly viewed as investment strategy.

7 Reasons why India is staring at a currency crisis

1. Rupee weakness
Further weakening of the rupee due to a lower supply of dollars and higher interest rates abroad.
2. GDP growth
Economists predicting a lower GDP for the current fiscal year, a disastrous sign since we just witnessed a GDP drop from 6.2% to 5% from the last fiscal year to the current fiscal year.
3. Current account deficit
A further rise in India's current account deficit.
4. Foreign reserves
The government signaling that within months it might run out of foreign reserves.
5. Short-term debt
$170 billion in short-term debt to pay, while in 2008 it was just $80 billion.
6. FII investment
From May to August 2013, FII investments in India having gone down by $2 billion.
7. Elections
Both the private and public sectors staying clear on investment strategies until next year's elections.
When taking all of this into account, it will require a heroic effort by the newly appointed RBI governor, Raghuram Rajan, to prevent a currency crisis from unfolding.
Raghu Kumar is the co-founder of RKSV, a broking company. The opinions expressed here are the personal opinions of the author. NDTV is not responsible for the accuracy, completeness, suitability or validity of any information given here. All information is provided on an as-is basis. The information, facts or opinions appearing on the blog do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.

 

LEVARAGE

Leverage (finance) In finance, leverage (sometimes referred to as gearing in the United Kingdom and Australia) is a general term for any technique to multiply gains and losses.^[1] Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives.^[2] Important examples are:

• A public corporation may leverage its equity by borrowing money. The more it borrows, the less equity capital it needs, so any profits or losses are shared among a smaller base and are proportionately larger as a result.^[3]
• A business entity can leverage its revenue by buying fixed assets. This will increase the proportion of fixed, as opposed to variable, costs, meaning that a change in revenue will result in a larger change in operating income.^[4][5]
• Hedge funds often leverage their assets by using derivatives. A fund might get any gains or losses on $20 million worth of crude oil by posting $1 million of cash as margin.^[6]

Measuring leverage

A good deal of confusion arises in discussions among people who use different definitions of leverage. The term is used differently in investments and corporate finance, and has multiple definitions in each field.^[7]

Investments

Accounting leverage is total assets divided by the total assets minus total liabilities.^[8] Notional leverage is total notional amount of assets plus total notional amount of liabilities divided by equity.^[1] Economic leverage is volatility of equity divided by volatility of an unlevered investment in the same assets. To understand the differences, consider the following positions, all funded with $100 of cash equity:^[9]

• Buy $100 of crude oil with money out of pocket. Assets are $100 ($100 of oil), there are no liabilities, and assets minus liabilities equals owners' equity. Accounting leverage is 1 to 1. The notional amount is $100 ($100 of oil), there are no liabilities, and there is $100 of equity, so notional leverage is 1 to 1. The volatility of the equity is equal to the volatility of oil, since oil is the only asset and you own the same amount as your equity, so economic leverage is 1 to 1.
• Borrow $100 and buy $200 of crude oil. Assets are $200, liabilities are $100 so accounting leverage is 2 to 1. The notional amount is $200 and equity is $100, so notional leverage is 2 to 1. The volatility of the position is twice the volatility of an unlevered position in the same assets, so economic leverage is 2 to 1.
• Buy $100 of crude oil, borrow $100 worth of gasoline, and sell the gasoline for $100. You now have $100 cash, $100 of crude oil, and owe $100 worth of gasoline. Your assets are $200, and liabilities are $100, so accounting leverage is 2 to 1. You have $200 in notional assets plus $100 in notional liabilities, with $100 of equity, so your notional leverage is 3 to 1. The volatility of your position might be half the volatility of an unlevered investment in the same assets, since the price of oil and the price of gasoline are positively correlated, so your economic leverage might be 0.5 to 1.
• Buy $100 of a 10-year fixed-rate treasury bond, and enter into a fixed-for-floating 10-year interest rate swap to convert the payments to floating rate. The derivative is off-balance sheet, so it is ignored for accounting leverage. Accounting leverage is therefore 1 to 1. The notional amount of the swap does count for notional leverage, so notional leverage is 2 to 1. The swap removes most of the economic risk of the treasury bond, so economic leverage is near zero.

Abbrevations

• EBIT means Earnings before interest and taxes.
• DOL is Degree of Operating Leverage
• DFL is Degree of Financial Leverage
• DCL is Degree of Combined Leverage
• ROE is Return on Equity
• ROA is Return on assets

Corporate finance

Accounting leverage has the same definition as in investments.^[10] There are several ways to define operating leverage, the most common.^[11] is:

Financial leverage is usually defined^[8][12] as:

or:

Banking in India

Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct.
The largest bank, and the oldest still in existence, is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. For many years the presidency banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935.
In 1969 the Indian government nationalised all the major banks that it did not already own and these have remained under government ownership. They are run under a structure know as 'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is made up of four types of banks, as well as the PSUs and the state banks, they have been joined since the 1990s by new private commercial banks and a number of foreign banks.
Generally banking in India was fairly mature in terms of supply, product range and reach-even though reach in rural India and to the poor still remains a challenge. The government has developed initiatives to address this through the State Bank of India expanding its branch network and through the National Bank for Agriculture and Rural Development with things like microfinance.
Indian Banking Industry currently employes 1,175,149 employees and has a total of 109,811 branches in India and 171 branches abroad and manages an aggregate deposit of 67504.54 billion (US$1.1 trillion or €840 billion) and bank credit of 52604.59 billion (US$870 billion or €650 billion). The net profit of the banks operating in India was 1027.51 billion (US$17 billion or €13 billion) against a turnover of 9148.59 billion (US$150 billion or €110 billion) for the financial year 2012-13

FINANCIAL DERIVATIVES

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.