International Finance, Essay Example

Bank Investments and Currency International Alliances

For banks to be able to gain control of the assets they acquire through three different operations. One way of earning is through presenting the capital monetary resource of the bank towards international markets. It could be realized that somehow, the condition of profitable references that the market offers makes up the overall value of the investment that the banks would want to put into such monetary policies providing them a more internationally defined source of earnings. For the case noted herein in relation to the situation aced by the Bank of Rotterdam, it is highly recommended that the bank invests in a different currency other than in Euros. This would allow a more defined indication on how earnings of the bank ought to be given attention to especially in relation to the risks that the monetary resource shall be subjected to.

Two particular currencies are being explored for this course of investment, the Serbian Dinar and the Russian Ruble. Separate references are to be presented for the sake of deciding on why these currencies would be the best choice for investment on the part of the Bank of Rotterdam. Following a five-year plan of investment, the options noted herein are among the most consistent pattern of development that the bank administrators could take into account in order to bring in better resources of improvement on how the bank itself could progress further especially in dealing with their international bank alliances.

Basically, the capacity of the bank to get hold of good investment policies in the international field of assumptive financial resource that they are going to get themselves involved in. Relatively, it could be realized that somehow, the willingness of the bank to research and find a more practically defined option of growth in the international market especially in determining the rate of profit that is expected to be garnered from such point of investment. In the case of finding the right policy and safe investment form to take into account, it is important to give consideration on the rate of inflation that a currency is undergoing at present. This includes a practical research on the current economic performance of particular nations and how these elements of national success affect the overall value of the currency in par with the value of Euros as part of the plan and the identifiable performance of the whole investment scheme that the bank shall be subjected to. The following calculations will help put the investment decision into perspective:

Various steps will be taken to increase the wealth of the bank through operations in the money and capital markets.

Step 1: Borrow 2 million euros from a Serbian bank for a period of five years. The money must be converted to the Serbian Dinars using the prevailing spot rates.

1 Serbian Dinar = 0.0084 Euros spot rate

2,000,000 Euros = 2000,000 X 1 / 0.0084

= 238,095,238 RSD

Step 2: This amount is borrowed from the Serbian bank at an interest rate of 6%. the liability the company will create in terms of the cost of financing will be:

Interest = 238,095,238 X 6/100 x 5

= 71,428,571 RSD

when this amount is converted back to euros at the current spot rate, the interest expense becomes:

=71,428,571 RSD x 0.0084 Euro/RSD

= 600,000 Euros

Step 3: This amount is converted to Russian Rubble and invested in the purchase of Delta Credit 5-year corporate bond that offers a coupon of 12% with the prevailing interest rates of 6.04 percent.

1 Serbian Dinar = 0.59 Ruble

= 238,095,238 x 0.59

= 140,476,190 Rubles

Step 4: This amount is then invested through the purchase of Delta Credit Bonds. To find the prevent value of cash flows form the bond, we have to discount using the current interest rates as the discounting rate:

Coupon rate = 12%

Total number of coupons = 10

Each coupon payment = 140,476,190 Rubles X 12% X ½

= 8,428,571 Rubles

Present value annuity factor for 10 periods at 3% is

8,428,571 ? PVAF _10/0.03 = 8428571 (1?(1+0.03) ? 100.03) = 8428571 (1?0.744093914896720.03) = 8428571(8.5302028367758)

= 71897420 Rubles

step 5: The terminal payment of the principle is computed by discounting back the future payments into present value.

FV = 140,476,190 Rubles

PV = FV X PVIF _3%10n

= 140,476,190 X 0.7441

= 124,528,333 Rubles

The total returns from investment will be:

= 124,528,333+71,897,420

= 196,425,753 Rubles

Converting these back to euros

1 Ruble = 0.014 Euro

196,425,753 Rubles = 196,425,753 X 0.014

= 2,802,417.24 Euros

Step 6: Decision – Since the investment in Russia have yielded 802,417 more in returns, this amount can cover the cost of financing from Serbia worth 600,000 euros and bring back 202,000 Euros profit in present value. Therefore, the investment is a worthwhile decision.

In the face of functioning in the middle of the challenges that the international market offers, it has been recounted that the economy of Serbia is currently grounded that the 87^th towards the 83^rd place to be among the largest performing and fastest growing economies in the world. This denotes that the currency that identifies with the currency has a strong standing in the international market thus making it easier for the investments handled in the country to be rather cushioned at a much better rate hence defining the proper management of such financial assets at a better process.

On the other hand, the Russian economy also rises accordingly through time. The national currency noted as the Russian Ruble does define a more improved essence on how the country’s current economic performance does provide a more dependable indication of how good finance-development could be expected from a specific investment that would be undergone  with institutions [especially on bank alliances that are formed within the country towards international connections]. The stability of the Russian Rubble’s exchange rate has been supported accordingly by President Putin himself in 2014. He pointed out that the balanced manner by which the currency is regulated in a seldom manner makes the investment in the said currency relatively extensive [thus yielding more positive results in the end]. However, the recent situations on the market shift practically directed by the failed production of oil and low point of determination on how the said currency fought back into the market, the Russian Ruble received a low rate of earning [given the perfect storm era] that challenged the capacity of the Russian currency to stay on top of the competition.

Nevertheless, economic analysts see Russia’s current economic standing to be productive. While it is not as steady as that of Serbia’s, it could be realized that somehow, the capacity of the nation to stick up to a more defined pattern of economic progress, gives it a more considerable process of redefining the way it provides the expectation of investors trusting its international economic performance. Most likely, it is expected that the overall economy of the country would bounce back from a lowered rate of earnings towards a more progressive pattern of gaining profit from its national operations basically designed to make a mark on how the country itself encounters the need to face the different challenges of operating internationally. Economic analysts are positive in pointing out that the current communist form of governance used to direct all the different operations that the country undergoes [including business and industrial development] is sure to provide a more established pattern of growth for the country’s currency-value especially in relation to investment rate exchange.

Going back to the case being realized herein, it could be noted that both the Serbian Dinar and the Russian Ruble provide a trustworthy ground for development in relation to the current performance of the Bank of Rotterdam in relation to the current performance of Euro in the current developmental status of the international market. Practically, this choice of investment would impose that the bank would undergo both a state of fast growth and change adjustments based on the Russian economy and a more stable economic performance from the Serbian base-economy. Investing in both countries and forming bank alliances within the said regions of the country would provide a relative source of earning within different points of profit-currencies. Given the different cues and economic performance from both nations, the bank is expected to earn well from both systems; especially in different time concentrations allowing the bank to receive a continuous flow of monetary revenue from the investment policies it enrolls in.

To weigh in the risks of both investment decisions, it is important to take note of the fact that a higher rate of investment ought to be subjected under the directive provision of the Serbian economy as the risk in this case would be lower and a constant flow of profit could be better defined under this condition. On the other end, a lower rate of investment could be subjected under the Russian alliance that the bank agrees to. While the risk in this policy would be high, it could be realized that the expected profit could also be expected to take a higher rate of revenue that balances out the rate of invested monetary asset subjected under international currency directive investment.

References

Data.worldbank.org,. (2015). Deposit interest rate (%) | Data | Table. Retrieved 19 October 2015, from http://data.worldbank.org/indicator/FR.INR.DPST

Eun, Cheol S.; Resnick, Bruce G. (2011). International Financial Management, 6th Edition. New York, NY: McGraw-Hill/Irwin.

Feenstra, Robert C.; Taylor, Alan M. (2008). International Macroeconomics. New York, NY: Worth Publishers

Gandolfo, Giancarlo (2002). International Finance and Open-Economy Macroeconomics. Berlin, Germany: Springer.

Madura, Jeff (2007). International Financial Management: Abridged 8th Edition. Mason, OH: Thomson South-Western.

Pilbeam, Keith (2006). International Finance, 3rd Edition. New York, NY: Palgrave Macmillan.

Ru.cbonds.com,. (2015). Cbonds. Domestic bonds: DeltaCredit Bank, 15-IP (41503338B, RU000A0JUW23, DeltaCredit CB 15-IP). Retrieved 19 October 2015, from http://ru.cbonds.com/emissions/issue/84911

Xe.com,. (2015). XE: (EUR/RUB) Euro to Russian Ruble Rate. Retrieved 19 October 2015, from http://www.xe.com/currencyconverter/convert/?Amount=1&From=EUR&To=RUB