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International Banking-

Arbitrages
Submitted by -
1. Deepak saxena 18PGDM209
2. Megha Duttagupta 18PGDM156
3. Sarthak khullar-18PGDM046
4. Sakshi Soin- 18PGDM042
5. Vibhu Vyas- 18PGDM060
6. Varun Sareen - 18PGDM059
7. Sarthak Misra – 18PGDM190
Introduction

● International banking is an arrangement of financial service by a residential bank of one


country to the residents of another country.

● The bank may not necessarily own or hold a physical presence offshore as the financial
services to a resident of the foreign country can be provided via a foreign correspondent
or foreign agencies as well.

● International banking is indeed one of the important revenue streams for a bank, but it
has its share of risks which the bank has to circumvent.
Risks in International Banking
1. Country risk
Country risk involves the possibility that economic, social, or political conditions and events in a foreign
country will adversely affect an institution’s financial interests, such as defaults by obligors in a
foreign country.
2. Credit risk
Credit Risk refers to the potential inability of a borrower to comply with contractual credit terms. credit
analysis and requires the review of appropriate information, including the amount of credit
requested, loan purpose, collateral, anticipated terms, and repayment source.
3. Currency risk
It reflects the possibility that variations in value of a currency will adversely affect the value of
investment denominated in foreign currency.
Banks can attempt to reduce the market risk aspect of currency risk by lending and requiring repayment
in U.S. dollars, but it may simply substitute currency risk for transfer risk.
4. Transfer risk
Transfer risk reflects the possibility that an asset cannot be serviced in the currency of payment because
the obligor’s country lacks the necessary foreign exchange or has put restraints on its availability
International Banking Activities
1. Investments
Banks may periodically allocate capital, through international capital markets, to investments such as
foreign debt securities or debentures. Banks use the international capital markets to invest
funds at a competitive advantage to loans.
1. International Lending & deposits placement
Entities that borrow funds from banks include importers, exporters, multinational corporations,
foreign businesses, governments, consumers, foreign banks
3. Private banking
Providing the banking/products personalised for the foreign HNIs is at the core of the private banking
division. Private-banking departments may also provide customers typical financial services,
or complex assistance .
4. Global trade services
It includes various financial instruments and products that banks offer to foreign companies, to
facilitate international trade and commerce.
5. Foreign exchange services
Forex Services or Foreign Exchange Services is the exchange of a particular currency for another or
the conversion of currency to another.
International Banking: Arbitrages & its
relevance
● Arbitrage is a market concept wherein a currency, security or commodity is simultaneously
bought and sold in different markets to capitalise on a price difference existent in the two
markets. This process continues till the price level of the currency, security or commodity
becomes equal in both the markets.

● International arbitrage refers to the simultaneous buying and selling of a foreign security on two
different exchanges. The effect of international arbitrage is the most profitable when there are price
efficiencies that arise due to time or exchange rates of the two currencies involved.

● Types of arbitrage-.
1. Risk arbitrage 2.Retail arbitrage 3.Convertible arbitrage. 4. Negative arbitrage 5.Statistical
arbitrage

● Regulatory arbitrage is a practice wherein companies of one country exploit the loopholes present in the
regulatory systems to avoid their unfavourable impacts.
Analysis of International Banking arbitrages
● Regulatory arbitrage - According to statistics from the Bank of International Settlements, the
foreign claims of international banks increased from $1.12 trillion in the year 1987 to $34 trillion
in 2007 (Joel F. Houston, 2009). Hence the flow of capital across countries through international
banking and finance is a very widespread and important channel. On one hand, this cross-country
regulatory competition allows banks to avert costly regulations. On the other hand, this
encourages banks to take excessive risks and create regulatory arbitrage.

● Covered Interest Arbitrage: Covered interest arbitrage is a trading strategy wherein a trader
capitalizes on the difference in interest rates of two countries while using forward contracts to
eliminate or cover the exchange rate risk that exists between the two countries.

● Uncovered Interest Arbitrage: Uncovered interest arbitrage works on the interest rate differential
between two countries. However, as opposed to the covered interest arbitrage, there is no hedging
of the exchange rate risk by entering into forward contracts or any other financial instrument for
that matter.
Forex products in banks

 Import and Export Services

 Global Cash Managements & Financial Services

 International Bank Account Numbers (IBAN)

 Trade Financing

 Foreign Currency and exchange services

 International Correspondent Banking

 Online International Services

 Investment Services
Letter of credit – Need!
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount. In the event that the buyer is unable to make a
payment on the purchase, the bank will be required to cover the full or remaining amount of the
purchase. Due to the nature of international dealings, including factors such as distance,
differing laws in each country, and difficulty in knowing each party personally, the use of letters
of credit has become a very important aspect of international trade.

 Payment Assurance

 Set Payment Terms

 Buyer and Seller Protection


References

Investopedia. (2018, May 23). Regulatory Arbitrage. Retrieved from Investopedia:


https://www.investopedia.com/terms/r/regulatory-arbitrage.asp
Joel F. Houston, C. L. (2009). Regulatory Arbitrage and International Bank Flows. Journal of Finance, 61.
Money-zine.com. (2019). International Arbitrage. Retrieved from Money-Zine: https://www.money-
zine.com/definitions/investing-dictionary/international-arbitrage/
Wikipedia. (2019, July). Covered interest arbitrage- Wikipedia. Retrieved from Wikipedia:
https://en.m.wikipedia.org/wiki/Covered_interest_arbitrage
Mytradingskills (2019) Types of arbitrage Retrived from https://www.mytradingskills.com/what-is-arbitrage
https://www.bankingsupervision.europa.eu/press/speeches/date/2017/html/ssm.sp170915.en.html
Thank You

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