Test: International Financial Markets & Instruments - UGC NET MCQ

- Assertion Analysis: The assertion is true; GDRs do simplify the process of investing in foreign companies by eliminating some regulatory barriers.

- Reason Analysis: The reason is false; GDRs are typically traded on international stock exchanges, not limited to the issuing country.

- Explanation of Relationship: Since the assertion is true and the reason is false, the correct answer is Option C.

Both statements presented are correct.

Statement 1 accurately describes the nature of foreign bonds, emphasizing their issuance by foreign entities in their own currency and their listing on domestic exchanges.

Statement 2 correctly identifies that external bonds are indeed issued by local firms but denominated in foreign currencies, and it existence of FCCBs, which offer the conversion feature into shares.

Therefore, the correct answer is Option C: Both 1 and 2.

International financial markets primarily serve as a platform that enables the exchange of various financial assets, such as stocks, bonds, and currencies, among individuals and nations. This global arena is crucial for facilitating capital flow, allowing entities with surplus funds to invest in opportunities worldwide while providing those in need of funds the means to access them. An interesting fact is that these markets operate 24/7, allowing for continuous trading across different time zones, which is essential for maintaining liquidity and responsiveness to global economic changes.

- The Assertion is true because ADRs indeed allow U.S. investors to invest in foreign companies, thus enhancing portfolio diversification.

- The Reason is also true; ADRs are issued by U.S. banks, representing shares from foreign corporations, which facilitates this access.

- The Reason correctly explains the Assertion as it describes how ADRs function to enable international investment.

Companies seeking long-term funding in foreign currencies typically issue two main types of international bonds: foreign bonds and Eurobonds. Foreign bonds are issued in a domestic market by a foreign borrower, while Eurobonds are issued in a currency that is not the currency of the country where they are sold. This distinction allows companies to tap into international capital markets and diversify their funding sources effectively.

The foreign exchange market, or Forex market, plays a crucial role in the global economy by allowing for the buying and selling of foreign currencies. This function is essential for international borrowing and investment, as it enables businesses and investors to convert one currency into another to facilitate trade and investment across borders. An interesting fact about the Forex market is that it is the largest financial market in the world, with daily trading volumes exceeding $6 trillion.

Statement 1 is correct because international financial markets indeed facilitate the exchange of financial assets across borders, which is essential for global trade and investment. Statement 2 is incorrect because while these markets aim to manage and mitigate financial risks, they cannot completely eliminate all risks associated with cross-border transactions, such as currency fluctuations and geopolitical uncertainties. Therefore, the correct answer is Option A: 1 Only.

- The assertion is correct; companies do issue shares internationally to boost their global market presence.

- The reason is false; companies typically turn to international markets when their domestic market cannot accommodate large offerings, not the other way around.

- Therefore, while both statements are true, the reason does not explain the assertion correctly.

- The assertion is false; the international money market is focused on short-term funding, not long-term.

- The reason is true; it is the nature of transactions in the international money market.

- Since the assertion is false and the reason is true, the correct option is C.

Real estate is not typically traded in international financial markets as a financial instrument. While real estate can be a significant investment, it is generally considered a physical asset rather than a financial asset like stocks, commodities, or derivatives. These latter instruments are standardized and traded in exchanges or over-the-counter markets, making them more suitable for the international financial landscape. A related fact is that commodities, such as oil and gold, are often traded in futures contracts, which are agreements to buy or sell at a predetermined price at a specified future date, illustrating the complexity and variety within international financial markets.