Notes, summaries, assignments, exams, and problems for Economy

What is Prayatna (प्रयत्न)?

In Sanskrit phonetics (as described in texts like Paniniya Shiksha), Prayatna simply means "effort." It is the effort or action made by our speech organs (tongue, lips, vocal cords, etc.) to produce a sound.

Prayatna is divided into two main categories:

1. Ābhyantara Prayatna (आभ्यन्तर प्रयत्न): The Internal Effort
2. Bāhya Prayatna (बाह्य प्रयत्न): The External Effort

1. Ābhyantara Prayatna (Internal Effort)

This is the effort that happens inside the mouth, just before the sound is produced. It describes how the tongue and lips act to shape the sound. According to the Paninian tradition, there are five types of internal effort.

1. Spṛṣṭa (स्पृष्ट)

Competitiveness and Trade

Nominal Exchange Rates

When our currency's value increases, our competitiveness decreases, and importations increase in relative terms.

Price Levels

• Our Country: If prices in our country increase, our exports decrease, and imports increase.
• Foreign Country: If prices in foreign countries increase, our competitiveness increases, benefiting our exports, and our imports decrease.

Foreign Exchange Market

• Price Determination: The exchange rate between countries is established based on supply and demand.
• Hedging: Protection against currency fluctuations, safeguarding investors and businesses from losses due to currency appreciation or depreciation.
• International Finance: Countries can lend and borrow money by converting currencies.

Foreign Exchange Markets and Risk Management

Sectors of the Foreign Exchange Market

• Spot Market
• Forward Market
• Currency (Market)

Determinants of Foreign Exchange Rates

1. Interest Rate Differentials
2. Inflation Rate Differentials
3. Government Policies
4. Market Expectations
5. Investment Opportunities
6. Speculations

Risks Faced by International Companies (Exposure Types)

• Transaction Exposure Risk
• Economic Exposure Risk
• Translation Exposure Risk

Methods of Managing Foreign Exchange Risk

1. Exposure Netting
2. Forward Exchange Contracts
3. Currency Futures and Options
4. Currency Swaps Agreements
5. Foreign Currency Bank Accounts
6. Appropriate Capital Structure

Foreign Exchange Terminology

1. Exchange Rates
2. Spot Rate
3. Forward Rate
4. Direct Quote
5. Indirect Quote
6. Two-Way Quote
7. Bid Rate
8. Offer Rate
9. American Quote
10. European

Equity and Financial Concepts

Free Cash Flow (FCF)

FCF_t = EBIT + DEP - CAPEX - ΔWC - TAX

ΔWC = Δreceivables + Δinventories - Δpayables + Δother items

TAX = (EBIT-Y_t)*T = EBIT*T - Y_tT

FCFE = FCF_t - Y_t - PRINC_t

FCF_t^u = FCF_t - Y_tT

Y = k_dD₀ (interest paid is cost of debt*value of debt)

Standard WACC

k_s=(1-L)k_e + Lk_d(1-T) | Use Standard WACC with FCF_u | ITS is not included in both FCF_u & k_s | Need Constant Target Leverage Ratio (L)

k_e = reflects operating and financial risk faced by investors | k_u = unlevered cost of equity (if firm had no debt), reflects operating risk

V₀ = U₀ + I₀ (Enterprise Value = value of operations + value of ITS) | Leave space for Standard WACC equation if k_its = k_d OR k_its = k_u

Standard WACC model implicitly assumes k_its... Continue reading "Understanding Equity, WACC, and Discount Rates in Finance" »

Representation of Preferences by Indifference Curves

An indifference curve shows the consumption baskets that yield the same level of satisfaction to the consumer. The consumer is indifferent between various combinations within the indifference curve. The slope at any point on an indifference curve is equal to the rate at which consumers are willing to substitute one good for another. This relationship is called the marginal rate of substitution (MRS). The rate at which a consumer is willing to trade Pepsi for pizza depends on who has more hunger or thirst, which depends in turn on how much pizza and Pepsi they have.

As a consumer prefers a larger quantity of goods, they prefer higher indifference curves to lower ones.

Four Properties of Indifference

Central Banking: Concept and Meaning

What is Central Banking?

Central Banking refers to the functions and activities carried out by a central bank, which is the main monetary authority of a country responsible for managing the currency, money supply, and interest rates. It acts as a regulator and supervisor of the banking system and plays a crucial role in the economic and financial stability of the country.

Meaning of a Central Bank

A Central Bank is a government-owned or state-owned institution that controls the issuance of currency and regulates the banking system within a country. It does not typically engage in normal banking activities with the public but works primarily with commercial banks and the government.

Key Features of a Central Bank

1. Corporate Internationalization: Forms and Strategies

Corporate internationalization occurs when a company expands its business beyond its home country.

Main Forms of Internationalization

• Exports: The company produces in its home country and sells products abroad.
  • Example: A Spanish winery selling wine to Japan.
• Commercial Delegation: Production stays at home, but the company establishes a sales office or employs salespeople abroad.
  • Example: A French company with a sales office in Brazil.
• Production Plant Abroad: The company builds factories in the foreign country to produce and sell locally.

  This strategy helps reduce transport costs and avoid tariffs.

• Internationalization of Purchases: When a company buys materials or products from abroad.
• Imports:

१८५७ च्या उठावाचे परिणाम

१) १८५७ च्या उठावाचे परिणाम (थोडक्यात):

• ईस्ट इंडिया कंपनीचे शासन समाप्त: ब्रिटिश सरकारने ईस्ट इंडिया कंपनीचे भारतातील शासन संपवले आणि भारत थेट ब्रिटिश क्राउनच्या अधिपत्याखाली गेला.
• शासकीय बदल: १८५८ साली 'भारत शासन अधिनियम' लागू करण्यात आला. भारताचा व्हाइसरॉय नेमण्यात

Essential Functions of Stock Exchanges

Stock exchanges play a critical role in the financial ecosystem by performing several key functions that benefit investors, companies, and the national economy. These functions ensure market efficiency, safety, and capital mobilization.

1. Ensuring Marketability of Securities

   Stock exchanges serve as organized markets for the purchasing and selling of securities. By providing a ready and continuous market, they ensure that securities can be converted into cash without undue delay, thereby enhancing their liquidity and marketability.

2. Securities Evaluation and Price Determination

   The prices of securities are determined within stock exchanges through the interaction of investors’ demand and suppliers’ preferences.

Working Capital Fundamentals

• What is working capital? The difference between current assets and current liabilities.
• Which of the following is NOT a current asset? Equipment.
• Liquidity refers to a company’s ability to… Convert assets into cash quickly to meet short-term obligations.
• What does positive working capital indicate? The company can cover its short-term liabilities with its short-term assets.
• Which of the following is a cash outflow from financing activities? Paying dividends.

Working Capital True or False

• Efficient management of the working capital cycle ensures enough cash flow to meet obligations: True.
• Negative cash flow means more cash is coming into the business than going out: False.
• Accounts payable is an example of a current liability: