2.

1 ma of financial sevices

3. question

The process of Venture Capital Financing

VENTURE CAPITAL FINANCING IS GENERALLY
DONE FOLLOWING SIX MAIN STEPS, NAMELY:
 Deal Origination
 Screening
 Evaluation
 Deal Negotiation
 Post Investment Activity
 Exit Plan

The above-mentioned steps are explained in details below;

Deal origination

Origination of a deal is the primary step in venture capital financing. It is not

possible to make an investment without a deal therefore a stream of deal is
necessary however the source of origination of such deals may be various.
One of the most common sources of such origination is referral system. In
referral system deals are referred to the venture capitalist by their business
partners, parent organisations, friends etc.

Screening

Screening is the process by which the venture capitalist scrutinises all the
projects in which he could invest. The projects are categorised under certain
criterion such as market scope, technology or product, size of investment,
geographical location, stage of financing etc. For the process of screening the
entrepreneurs are asked to either provide a brief profile of their venture or
invited for face-to-face discussion for seeking certain clarifications.
 2

Evaluation

The proposal is evaluated after the screening and a detailed study is done.
Some of the documents which are studied in details are projected profile,
track record of the entrepreneur, future turnover, etc. The process of
evaluation is a thorough process which not only evaluates the project
capacity but also the capacity of the entrepreneurs to meet such claims.
Certain qualities in the entrepreneur such as entrepreneurial skills, technical
competence, manufacturing and marketing abilities and experience are put
into consideration during evaluation. After putting into consideration all the
factors, thorough risk management is done which is then followed by deal
negotiation.

Deal negotiation

After the venture capitalist finds the project beneficial he gets into deal
negotiation. Deal negotiation is a process by which the terms and conditions
of the deal are so formulated so as to make it mutually beneficial. The both
the parties put forward their demands and a way in between is sought to
settle the demands. Some of the factors which are negotiated are amount of
investment, percentage of profit held by both the parties, rights of the
venture capitalist and entrepreneur etc.

Post investment activity

Once the deal is finalised, the venture capitalist becomes a part of the
venture and takes up certain rights and duties. The capitalist however does
not take part in the day to day procedures of the firm; it only becomes
involved during the situation of financial risk. The venture capitalists
participate in the enterprise by a representation in the Board of Directors and
ensure that the enterprise is acting as per the plan.

Exit plan

The last stage of venture capital investment is to make the exit plan based
on the nature of investment, extent and type of financial stake etc. The exit
 3

plan is made to make minimal losses and maximum profits. The venture
capitalist may exit through IPOs, acquisition by another company, purchase
of the venture capitalists share by the promoter or an outsider.

Advantages and disadvantages of venture capital financing

The advantages and disadvantages of venture capital financing are various.

Some of the advantages and disadvantages are given below.

 The autonomy and control of the founder is lost as the investor becomes a
part owner.
 The process is lengthy and complex as it involves a lot of risk
 The object and profit return capacity of the investment is uncertain
 The investments made based on long term goals thus the profits are returned
late
 Although the investment is time taking and uncertain, the wealth and expertise
it brings to the investor is huge
 The sum of equity finance that can be provided is huge
 The entrepreneur is at a safer position as the business does not run on the
obligation to repay money as the investor is well aware of the uncertainty of
the project

Examples of venture capital funding[2]

Kohlberg Kravis & Roberts (KKR)

One of the top-tier alternative investment asset managers in the world, has
entered into a definitive agreement to invest USD150 million (Rs 962crore) in
Mumbai-based listed polyester maker JBF Industries Ltd. The firm will
acquire 20% stake in JBF Industries and will also invest in zero-coupon
compulsorily convertible preference shares with 14.5% voting rights in its
Singapore-based wholly owned subsidiary JBF Global Pte Ltd. The funding
provided by KKR will help JBF complete the ongoing projects.

Pepperfry.com
 4

India’s largest furniture e-marketplace, has raised USD100 million in a fresh

round of funding led by Goldman Sachs and Zodius Technology Fund.
Pepperfry will use the funds to expand its footprint in Tier III and Tier IV
cities by adding to its growing fleet of delivery vehicles. It will also open new
distribution centres and expand its carpenter and assembly service network.
This is the largest quantum of investment raised by a sector focused e-
commerce player in India

Conclusion
In India, the venture capital plays a vital role in the development and growth
of innovative entrepreneurs. Venture capital activities were primarily done by
only a few institutions to promote entities in the private sector with funding
for their business. In India, funds were primarily raised by public which did
not prove to be fruitful in the long run to the small entrepreneurs. The need
on venture capitals was recognised in the 7th five year plan and long term
fiscal policy of the government of India.

SEBI (Venture Capital Funds) Regulations 1996

 
Dec 04, 1996
|

Regulations

Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996
Date Details

SEBI( Venture Capital Funds) Regulations, 1996 updated upto 13-4-2010

13-Apr- Securities and Exchange Board of India (Venture Capital Funds) (Amendment) Regulations,
2010 2010

31-Mar- SEBI (Payment of Fees) (Amendment) Regulations, 2008

2008
 5

06-Sep- Securities And Exchange Board Of India (Venture Capital Funds) (Second Amendment)
2006 Regulations, 2006

25-Jan-2006 Securities And Exchange Board Of India (Venture Capital Funds) (Amendment)
Regulations, 2006

04-Dec- Securities and Exchange Board of India (Venture Capital Funds) Regulations 1996
1996

4.questio
The structure of banking varies widely from country to country. Often a
country’s banking structure is a consequence of the regulatory regime to
which it is subjected. The banking system in India works under the
constraints that go with social control and public ownership.
Nationalization, for instance, was a structural change in the functioning
of commercial banks which was considered essential to better serve the
needs of development of the economy in conformation with national
policy and objectives. Similarly, to meet the major objectives of banking
sector reforms, government stake was reduced up to 51 per cent in public
sector banks. New private sector banks were allowed and foreign banks
were permitted additional branches.

4.1 Structure of Indian Banking System

The Indian financial system comprises a large number of commercial and

cooperative banks, specialized developmental banks for industry,
agriculture, external trade and housing, social security institutions,
collective investment institutions, etc. The banking system is at the heart
of the financial system.
The Indian banking system has the RBI at the apex. It is the central
bank of the country under which there are the commercial banks
including public sector and private sector banks, foreign banks and local
area banks. It also includes regional rural banks as well as cooperative
banks.

Figure1
Indian Banking System
 6

4.2 Reserve Bank of India

The central bank plays an important role in the monetary and banking
structure of nation. It supervises controls and regulates the activities of
the banking sector. It has been assigned to handle and control the
currency and credit of a country. In older days, the central banks were
empowered to issue the currency notes and bankers to the Union
governments. The first central bank in the world was Riks Banks of
Sweden which was established in 1656. The Reserve Bank of India, the
central bank of our country, was established in 1935 under the aegis of
Reserve Bank of India Act, 1934. It was a private shareholders institution
till January 1949, after which it became a state-owned institution under
the Reserve Bank of India Act, 1948. It is the oldest central bank among
the developing countries. As the apex bank, it has been guiding,
monitoring, regulating and promoting the destiny of the Indian financial
system.
Objectives of RBI
It plays a more positive and dynamic role in the development of a
country. The financial muscle of a nation depends upon the soundness of
the policies of the central banking. The objectives of the central banking
system are presented below:
1. The central bank should work for the national interest of the
country.
 7

2. The central bank must aim for the stabilization of the mixed
economy.
3. It aims at the stabilization of the price level at average prices.
4. Stabilization of the exchange rate is also essential.
5. It should aim for the promotion of economic activities.
Constitution and Management
Reserve Bank of India has been constituted as a corporate body having
perpetual succession and a common seal. Its capital is Rs. 5 crore wholly
owned by the Government of India. The general superintendence and
direction of the affairs and business of the Bank has been vested in the
Central Board of Directors. The Central Government, however, is
empowered to give such directions to the Bank as it may, after
consultation with its Governor, consider necessary in the public interest.
The Central Board of Directors consists of the following:
a) A Governor and not more than four Deputy Governor to be
appointed by the Central Government.
b) Four directors to be nominated by the Central Government,
one from each of the four local boards.
c) Ten directors to be nominated by the Central Government.
d) One Government official to be nominated by the Central
Government.
Besides the Central Board of Directors, four Local Boards have also been
constituted for each of the four areas specified in the first schedule to
the Act. A Local Board has five members appointed by the Central
Government to represent as far as possible, territorial and economic
interests and the interests of cooperative and indigenous banks. A Local
Board advises the Central Board on matters referred to it by the Central
Board and performs such duties as are delegated to it by the Central
Board.
Functions of RBI
The RBI functions are based on the mixed economy. The RBI should
maintain a close and continuous relationship with the Union Government
while implementing the policies. If any differences arise, the
government’s decision will be final. The main functions of the RBI are
presented below:
1. Welfare of the public
2. To maintain the financial stability of the country.
3. To execute the financial transactions safely and
effectively.
4. To develop the financial infrastructure of the country.
5. To allocate the funds effectively without any partiality.
6. To regulate the overall credit volume for price stability.
Authorities
 8

The RBI has the full authority in the following aspects:

1. Currency issuing authority
2. Monitoring authority
3. Banker to the Union Government
4. Foreign exchange control authority
5. Promoting authority.

1. Currency Issuing Authority- The RBI has the sole authority

to issue the currency notes and coins. It is the fundamental
right of the RBI. The coins and one rupee notes are issued by
the Government of India and they are circulated through the RBI.
The notes issued by the RBI issues by the RBI will have legal
identity everywhere in India. The RBI issues the notes of the
denomination of RS. 1000, 500, 100, 50, 20 and 10. The RBI has
the authority to circulate and withdraw the currency from
circulation. It has also the authority to exchange notes and coins
from one denomination to other denominations as per the
requirement of the public. The currency notes may be distributed
throughout the country through its 15 full pledged offices, 2
branch offices, and more than 4000 currency chests. The
currency chests are maintained by different banks in various
locations. The RBI issues currency notes, based on the availability
of balances of gold, bullion, foreign securities, rupees, coins and
permitted bills.
2. Monitoring Authority- The RBI has the full authority to
control all the aspects of the banking system in India. The RBI is
known as the Banker’s Bank. The banking system in India works
according to the guidelines issued by the RBI. The RBI is the
premier banking institute among the commercial banks. All the
commercial banks, foreign banks and cooperative urban banks in
India should obey the rules and regulations which are issued by
the RBI from time to time. The RBI controls the deposits of the
commercial banks through the CRR and the SLRs. Every bank
should deposit a certain amount in the RBI. The commercial
banks have the power to borrow the money from the RBI when
they are in need of finance. Hence it is known as the lender of the
last resort. The RBI has the authority to control the credit supply
in the economy or monetary systems of the nation.
3. Banker to the Union Government- Generally in any country
all over the world the Central bank dominates the banking sector.
It advises the government on monetary policies. The RBI is the
 9

bankers to the Union Government and also to the state

governments in the country. It provides a wide range of banking
services to the government. It also transfers the funds, collects
the receipts and makes the payment on behalf of the
Government. It also manages the public debts. The Government
will not pay any remuneration or brokerage to the RBI for
rendering the financial services. Any deficit or surplus in the
Central Government account with the RBI will be adjusted by
creation or cancellation of the treasury bills. The treasury bills are
known as the Adhoc Treasury bills.
4. Foreign Exchange Regulation Authority- The RBI’s another
major function is to control the foreign exchange reserves
position from time to time. It maintains the stability of the
external value of the rupee through its domestic policies and
forex market. The RBI has the full authority to regulate the
market as discussed below:
· To monitor the foreign exchange control.
· To prescribe the exchange rate system.
· To maintain a better relation between rupee and other
currencies.
· To interact with the foreign counterparts.
· To manage the foreign exchange reserves.
It administers the FERA, 1973. It is replaced by the FEMA which would be
consistent with full capital account convertibility with policies of the
Central Government.
The RBI administers the control through the authorized forex dealers. The
RBI is the custodian of the country’s foreign exchange reserves. The
foreign exchange is precious and it takes the responsibility of the better
utilization.
5.Promoting Authority:
The RBI’s function is to look after the welfare of the financial system. It
renders the promotion services to strengthen the country’s banking and
financial structure. It helps in mobilizing the savings and diverting them
towards the productive channel. Thus the economic development can be
achieved. After the nationalization of the commercial banks, the RBI has
taken a number of series of actions in various sectors such as agriculture
sector, industrial sector, lead bank scheme and cooperative sector.

4.3 Commercial Banks

Amongst the banking institutions in the organized sector, commercial
banks are the oldest institutions, some of them having their genesis in the
nineteenth century. Initially, they were set up in large numbers, mostly
 10

as corporate bodies with shareholdings by private individuals. In the

sixties of the twentieth century, a large number of weaker and smaller
banks were merged with other banks. As a consequence, a stronger
banking system emerged in the country. Subsequently, there has been a
drift towards state ownership and control. Today 27 banks constitute
strong public sector in Indian commercial banking. Commercial banks
operating in India fall under different sub-categories on the basis of their
ownership and control over management.
Public Sector Banks
Public sector in Indian banking emerged to its present position in three
stages. First, the conversion of the then existing Imperial Bank of India
into the State Bank of India in 1955, followed by the taking over of the
seven state associated banks as its subsidiary banks, second the
nationalization of 14 major commercial banks on July 19, 1969 and last,
the nationalization of 6 more commercial banks on April 15, 1980. Thus
27 banks constitute the Public sector in Indian Commercial Banking.
Private Sector Banks
After the nationalization of major banks in the private sector in 1969 and
1980, no new bank could be set up in India for about two decades, though
there was no legal bar to that effect. The Narasimham Committee on
Financial Sector Reforms recommended the establishment of new banks
in India. Reserve Bank of India, thereafter, issued guidelines for the
setting up of new private sector banks in India in January 1993.
These guidelines aim at ensuring that the new banks are financially
viable and technologically up-to-date from the start. They have to
function in a professional manner, so as to improve the image of
commercial banking system and to win the confidence of the public.
In January 2001 Reserve Bank of India issued new rules for the licensing
of new banks in the private sector. The salient features are as follows:
1. A new bank may be started with a capital of Rs. 200 crore.
The net worth is to be raised to Rs. 300 crore in three years.
2. The promoter’s minimum holding in the capital shall be 40 per
cent with a lock-in-period of 5 years. Excess holding over 40 per
cent will have to be diluted within a year.
3. Non-resident Indians can pick up 40 per cent equity share in
the new bank. Any foreign bank or finance company may join as
technical collaborators or as co-promoter, but their equity
participation will be restricted to 20 per cent, which will be within
the ceiling of 40 per cent allowed to Non –resident Indians.
4. Corporates have been allowed to invest up to meet existing
priority sector norms and prudential norms and also to open 25
% of their branches in rural and semi-urban areas. Preference will
 11

be given to promoters with expertise in financing priority areas

and rural and agro based industries.
5. Non-banking finance companies may convert themselves into
banks if their net worth is Rs. 200 crore, capital adequacy ratio is
12%, non performing assets below 5% and possess triple A credit
rating.
In addition to the above guidelines, the new banks are governed by the
provisions of the Reserve Bank of India Act, the Banking Regulation Act
and other relevant statutes.

4.4 Local Area Bank

In 1996, Government decided to allow new local area banks with the twin
objectives of Providing an institutional mechanism for promoting rural
and semi-urban savings, and For providing credit for viable, economic
activities in the local areas.
Such banks can be established as public limited companies in the private
sector and can be promoted by individuals, companies, trusts and
societies. The minimum paid up capital of such banks would be Rs. 5
crore with promoter’s contribution at least Rs. 2 crore. They are to be set
up in district towns and the area of their operations would be limited to a
maximum of 3 geographically contiguous districts. At present, five Local
Area Banks are functional, one each in Punjab, Gujrat, Maharashtra and
two in Andhra Pradesh.

4.5 Foreign Bank

Foreign Commercial Banks are the branches in India of the joint stock
banks incorporated abroad. Their number has increased to forty as on
31st March, 2002. These banks, besides financing the foreign trade of the
country, undertake normal banking business in the country as well.
Licensing of Foreign Bank: In order to operate in India, the foreign banks
have to obtain a license from the Reserve Bank of India. For granting this
license, the following factors are considered:

1. Financial soundness of the bank.

2. International and home country rating.
3. Economic and political relations between home country and
India.
4. The bank should be under consolidated supervision of the
home country regulator.
5. The minimum capital requirement is US $ 25 million spread
over three branches - $ 10 million each for the first and second
branch and $5 million for the third branch.
 12

6. Both branches and ATMs require licenses and these are given
by the RBI in conformity with WTO’s commitments.
Function of Foreign Banks: The main business of foreign banks
is the financing of India’s foreign trade which they can handle
most efficiently with their vast resources. Recently, they have
made substantial inroads in internal trade including deposits,
advances, discounting of bills, mutual funds, ATMs and credit
cards. A large part of their credit is extended to large enterprises
and MNCs located mostly in the tier one cities- mainly the
metros, though some banks are now foraying in the rural sector
as well. Technology used by these banks has been a major driver
of change in the Indian banking industry. A highly trained and
efficient workforce and the huge pool of capital resources at the
disposal of these banks have created tremendous goodwill and
prestige of foreign banks in India.
Apart from their main businesses, foreign banks are also instrumental in
shaping the attitudes, perceptions and policies of foreign governments,
corporates and other clients towards India, especially in the following
areas:
1. Bringing together foreign institutional investors and Indian
companies.
2. Organizing joint ventures.
3. Structuring and syndicating project finance for
telecommunication, power and mining sectors.
4. Providing a thrust to trade finance through securitization of
export loan.
5. Introducing new technology in data management and
information systems.

Performance: Foreign banks are not subject to the stringent

norms regarding opening of rural branches, priority sector lending
or bound by the social philosophy of Indian banks. These factors
combined with the financial, technical and human resources of
the foreign banks have ensured a healthy growth of these banks
in India.

4.6 Co-operative Banks

Besides the commercial banks, there exist in India another set of banking
institutions called co-operative credit institutions. These have been in
existence in India since long. They undertake the business of banking
both in urban and rural areas on the principle of co-operation. They have
served a useful role in spreading the banking habit throughout the
country. Yet, their financial position is not sound and a majority of co-
 13

operative banks has yet to achieve financial viability on a sustainable

basis.
The cooperative banks have been set up under the various Co-operative
Societies Acts enacted by the State Governments. Hence the State
Governments regulate these banks. In 1966, need was felt to regulate
their activities to ensure their soundness and to protect the interests of
depositors. Consequently, certain provisions of the Banking Regulation
Act 1949 were made applicable to co-operative banks as well. These
banks have thus fallen under dual control viz., that of the State Govt. and
that of the Reserve Bank of India which exercises control over them so far
as their banking operations are concerned.
Features of Cooperative banks
· These banks are government sponsored government
supported and government subsidized financial agencies in India.
· Unlike commercial banks which focus on profits, cooperative
banks are organized and managed on principles of cooperation,
self help and mutual help. They function on a “no profit, no loss”
basis.
· They perform all the main banking functions but their range
of services is narrower than that of commercial banks.
· Some of them are scheduled banks but most are
unscheduled banks.
· They have a federal structure of three-tier linkages and
vertical integration.
· Cooperative banks are financial intermediaries only,
particularly because a significant amount of their borrowings is
from the RBI, NABARD, the central and state governments and
cooperative apex institutions.
· There has been a shift of cooperative banks from the rural to
the urban areas as the urban and non-agricultural business of
these banks has grown over the years.

Weaknesses: Cooperative banks suffer from too much dependence on RBI,

NABARD and the government.
· They are subject to too much officialization and politicization.
Both the quality of loans assets and their recovery are poor. The
primary agricultural cooperative societies- a vital link in the
cooperative credit system- are small in size, very week and many
of them are dormant.
· The cooperative banks suffer from existence of multiple
regulation and control authorities.
 14

· Many urban cooperative banks have failed or are in the

process of liquidation.
· Cooperative banks have increasingly been facing competition
from commercial banks, LIC, UTI and small savings organizations.

4.7 Regional Rural Banks

Regional Rural Banks are relatively new banking institutions which
supplement the efforts of the cooperative and commercial banks in
catering to the credit requirements of the rural sector. These banks have
been set up in India since October 1975, under the Regional Rural Banks
Act, 1976. At present there are 196 RRBs functioning in 484 districts. The
distinctive feature of a Regional Rural Bank is that though it is a separate
body corporate with perpetual succession and a common seal. It is very
closely linked with the commercial bank which sponsors the proposal to
establish it and is called the sponsor bank. The central government
establishes a RRB, at the request of the sponsor bank and specifies the
local limits within which it shall establish its branches and agencies.
Business of a Regional Rural Bank
A Regional rural bank carries on the normal banking business i.e., the
business of banking as defined in section 5(b) of the Banking Regulation
Act, 1949 and engages in one or more forms of businesses specified in
Section 6 (1) of that Act. A Regional rural bank may in particular,
undertake the following types of businesses, namely:
1. The granting of loans and advances, particularly to small and
marginal farmers and agricultural laborers, and to cooperative
societies for agricultural operations or for other connected
purposes, and
2. The granting of loans and advances, particularly to artisans,
small entrepreneurs and persons of small means engaged in
trade, commerce or industry or other productive activities within
the notified areas of a rural bank.
Regional Rural Banks are thus primarily meant to cater to the needs of
the poor and small borrower in the countryside.
Capital
The authorized capital of a RRB shall be Rs. 5 crore which may increased
or reduced(not below Rs. 25 lakh) by the Central Government in
consultation with NABARD and the sponsor bank. The issued capital shall
not be less than Rs. 25 lakh. Of the issued capital, the Central
Government shall subscribe fifty percent, the sponsor bank thirty five
percent and the concerned State Government fifteen percent.
The shares of the Rural Banks shall be deemed to be included in the
securities enumerated in Section 20 of the Indian Trusts Act, 1882 and
 15

shall also be deemed to be approved securities for the purpose of the

Banking Regulation Act 1949.
Management
Each Rural Bank is managed by a Board of Directors. The general
superintendence, direction and management of the affairs and business
vest in the Board. In discharging its functions the Board of Directors acts
on business principles and shall have due regard to public interests. A
regional rural bank is guided by the directions, issued by the Central
Government in regard to matters of policy involving public interest.

4.8 Annual Report

An annual report is a reflection of the company’s philosophy, policies,
achievements and shortcomings. The annual report gives general
information regarding the name(s) of the chairman/MD, chief executive
officer and all the directors, the bankers and auditors of the company,
registered office, date, time and venue of the annual general meeting.
An annual report comprises two parts.

Part I: It includes
Ø Notice of the meeting of the shareholders.
Ø Directors’ Report: The chairman of the company presents the
Director’s report which usually highlights the company’s
achievements in the given macro and micro-environment, new
initiatives/ products/ technology, etc. proposed to be used,
constraints if any faced by the company, future plans for
modernization, diversification, etc.
Ø The company’s philosophy that describes how the company does
business, is delineated in a separate section.
Ø Social responsibility report: It has initiatives for environment
conservation and corporate social responsibility. Since banks do
not manufacture goods, therefore, treatment of effluents is not
relevant. However, most banks do conduct a number of social
outreach programmes for education, training etc. for the poor
and underprivileged sectors of the society.
Ø Corporate Governance report: Corporate Governance deals with
conducting the affairs of the organization with integrity,
transparency and commitment to principles of good governance.
It has to be certified that all mandatory requirements as
stipulated by Securities and Exchange Board of India (SEBI) have
been complied with.
Ø Declaration of dividend (if any) is provided.
 16

Ø Retirement, reappointment of existing directors or appointment

of new directors.
Ø For the sake of uniformity and transparency in reporting, banks
are also supposed to give details of their non-performing assets
(NPA). NPAs are those assets which have remained unpaid for a
period of ninety days. They are further categorized as sub-
standard, doubtful and loss.
Part II: The second part of the report deals with performance
highlights of the organization.
Ø It includes a balance sheet, a profit and loss account, cash flow
statement and other statements and explanatory material that
are an integral part of the financial statements.
Ø An auditors’ report certifying that the financial statements
together present a true and fair view of the company’s affairs,
and are in compliance with existing accounting standards,
applicable laws and regulations.

4.9 Balance Sheet of a Commercial Bank

One of the best ways to learn about the business of banking is through
a perusal of a typical bank’s balance sheet. Balance sheet of a
commercial bank is a statement of its assets and liabilities at a
particular point of time. It throws light on the financial health or
otherwise of the bank.
Another way of viewing a balance sheet is as a statement of the
sources and uses of bank funds. Banks obtain funds in the form of
deposits (fixed, savings and current) by borrowing from other banks
(RBI, commercial banks, etc.) and by obtaining equity funds from the
owners (i.e. the shareholders of the bank) through the capital
account. All these constitute the liabilities of the bank. Banks use
these funds to grant loans, invest in securities, purchase equipment
and hold cash items such as currency and deposits in other banks. All
these are the assets of the bank.
According to section 29 of the Banking Regulation Act, 1949, at
the expiration of each calendar year (or at the expiration of a period
of twelve months ending with such date as the Central Government
may, by notification in the official gazette, specify in this behalf),
every banking company incorporated in India, in respect of all business
transacted through its branches in India, in respect of all business
transacted through its branches in India, shall prepare with reference
to that year or period, as the case may be, a balance sheet and profit
and loss account as on the last working day of the year or the period,
as the case may be, in the forms set out in the third schedule or as
near thereto as circumstances admit.
 17

The balance sheet and profit and loss account shall be signed:
in the case of a banking company incorporated in India, by the
manager or the principal officer of the company. Where there are
more than three directors of the company, by at least three are more
than three directors. Where there are not more than three directors,
by all the directors, and
in the case of a banking company incorporated outside India by the
manager or agent of the principal office of the company in India.

Audit
The balance sheet and profit and loss account prepared in accordance
with section 29 shall be audited by a person duly qualified under any
law for the time being in force to be an auditor of companies.
Where the Reserve Bank is of opinion that audit is necessary in the
interest of the public or the banking company or its depositors, it may,
at any time order a special audit of the banking company’s accounts,
for any such transaction or class of transactions or for some specific
period or periods as it deems necessary. The RBI may through its order
either appoint a person duly qualified under any law for the time being
in force to be an auditor of companies or direct the auditor of
companies or direct the auditor of the banking company himself to
conduct such special audit.
Submission of Returns
The accounts and balance sheet referred to in sanction 29 together
with the auditor’s report shall be published in the prescribed manner,
and three copies thereof shall be furnished as returns to the Reserve
Bank within three months from the end of the period to which they
refer.
A banking company which furnishes its accounts and balance sheet in
accordance with the provisions of section 31 shall send three copies of
such accounts, balance sheet and the auditor’s report to the registrar.
It is mandatory for all banking companies incorporated outside India
that before the first Monday in August of any year in which it has
carried on business, it must display a copy of its last audited Balance
Sheet and profit and Loss Account prepared under section 29, in a
conspicuous place in its principal office and every branch office in
India. These should be kept on display until they are replaced by a
copy of the subsequent Balance Sheet and profit and Loss Account.

Items of the Balance Sheet of a Bank

The balance sheet of a commercial bank like any other balance
sheet comprises two sides; conventionally the left side shows
liabilities and capital, while the right side shows assets. A
bank’s assets are indications of what the bank owns or the
 18

claims that the bank has on external entities: individuals,

firms, governments, etc. A bank’s liabilities are indications of
what the bank owes as claims which are held by external
entities of the bank. The net worth or capital is calculated by
subtracting total liabilities from total assets.
Assets-Liabilities = Net worth
Or
Assets= Liabilities+ Net worth

Liabilities and Assets of a Bank

Many institutions offer financial services. It is the taking of deposits
and granting of loans that single out a bank from other financial
institutions. Deposits are liabilities for banks, which must be managed
if the bank is to maximize profits. Likewise they need to manage the
assets created by lending. The liabilities and assets of a bank
explained below:
Liabilities of a Bank
Liabilities of a commercial bank are claims on the bank. They
represent the amounts which are due from the bank to its
shareholders, depositors, etc. Bank liabilities are the funds that banks
obtain and the debts they incur, primarily to make loans and purchase
securities. The major components of the liabilities of a bank are as
follows:
1. Capital: Capital and reserves what the customer
regards as an asset, the same bank deposit is a liability
for the bank as the customer gains claims over them. The
paid up share capital implies the liability of the bank to its
shareholders. It is the amount actually received by the
bank out of the total subscribed capital. Adequate share
capital is considered as a source of strength for the bank
as it provides confidence to the depositors about the
solvency of the bank.
2. Reserve Fund: Reserves are created out of the
undistributed profits which are retained over a period of
years by the bank. Creation of reserve fund is a statutory
requirement in most of the countries of the world.
Reserve requirements limit the portion of the bank’s
funds that it can use to give loans and purchase
securities. Banks build up reserves to strengthen their
financial position and also to meet unforeseen liabilities or
unexpected losses. Reserve fund, together with capital
represents the capital structure or net worth of the bank.
 19

Net worth is a residual term that is calculated by

subtracting total liabilities from total assets.
3. Deposits: Deposits constitute the major sources of
funds for banks. What the customer regards as an asset,
the same bank deposit is a liability for the bank as the
customer gains claim over them. Banks get funds from
investment and these are indirectly the source of its
income. Banks keep a certain percentage of its time and
demand deposits in cash and after meeting the liquidity
requirement, they lend the remaining amount on interest.
Indian banks accept two main types of deposits, demand
deposits and term deposits. Demand deposits, as the
name suggests, are repayable on particular period. The
prosperity, growth and goodwill of the bank depend upon
the amount of these deposits. Fixed deposits have specific
maturity and so can be used by banks to earn income.
Demand deposits can be further subdivided into current
and savings. Current deposits are chequeable accounts
with no restriction on the number of withdrawals. It is
possible to obtain clean on secured overdraft on these
accounts. Saving deposits are more liquid than fixed
deposits as money can be withdrawn when needed,
though some banks restrict the number of withdrawals
per-month or per-quarter.
4. Borrowing from Other Sources: In case of need, banks
can borrow from the Reserve Bank of India, other
commercial banks, development banks, non-bank
financial intermediaries like LIC, UTI, GIC, etc. Secured
loans are obtained on the basis of some recognized,
securities whereas unsecured loans are out of its reserve
funds lying with the central bank.
5. Other Liabilities: Other liabilities include bills payable,
bills sent for collection, acceptance, endorsement, etc.
The amounts of all such bills are shown on the liability
side of the balance sheet.
6. Contingent Liability: Contingent liabilities are those
liabilities which may arise in future but cannot be
determined accurately, e.g. guarantee given on behalf of
others, outstanding forward exchange contracts, etc.
These are shown on the liability side as a rough estimate.
7. Profit or loss: Profit is unallocated surplus or retained
earnings of the year after paying tax and dividends to
 20

shareholders. As shareholders have claim over the bank’s

profit, it is shown as a liability. In case of loss, the figure
will be shown on the assets side.

Assets of a Bank
Like all other business firms banks also strive for profit. Commercial
banks use their funds primarily to purchase income earning assets,
mainly loans and investments. These assets are shown in the balance
sheet of the bank in decreasing order of the liquidity. The major assets
of the bank include:
1. Cash: Cash in hand and cash balances with the
Reserve Bank of India are the most liquid assets of a
bank. Cash assets provide bank funds to meet the
withdrawals of deposits and to accommodate new loan
demand. Maintaining of cash reserve ratio with RBI is a
statutory requirement for the banks.
2. Money at Call and Short Notice: This is the money lent
by the banks to other banks, bill brokers, discount houses
and other financial institutions for a very short period of
time varying from 1 to 14 days. When these funds are
repayable on demand without prior notice, it is called
money at call. On the other hand, if some prior notice is
required, it is known as money at short notice. In the
balance sheet, both are shown as a single item on the
asset side. Banks charge very low rate of interest on
these. If the cash position continues to remain
comfortable, these loans may be renewed day after day.
3. Loans and Advances: Loans and advances are the
bank’s earning assets. The interests earned from these
assets generate the bulk of commercial bank revenues.
Loans may be demand loans or term loans which may be
repayable is single or in many installments. Advances are
usually made in the form of cash credit and overdraft.
4. Investments: Commercial banks use funds for
investment in various types of securities like the gilt
edged securities of the central and state government as
well as shares and debentures of corporate undertakings.
The securities issued by government are safe from the
risk of default though they are subject to risk from
change in rate of interest. These securities include
treasury bills, treasury deposit certificates, etc. The long-
term investments have the greatest profitability.
 21

5. Bills Receivable: Bills receivable and other credit

instruments accepted by the commercial banks on behalf
of their customers are also shown on the asset side of the
balance sheet. The reason is that the bank has a claim on
the payee, on whose behalf it has accepted the bills.
Thus, the same amount appears on assets as well as
liabilities sides of the balance sheet of the bank.
6. Other Assets: These include the physical assets of a
bank like the bank premises, furniture, computers,
machine equipment, etc. These also include the
collaterals which the bank has repossessed from the
borrowers in default.

4.10 Conclusion
The Indian financial system comprises a large number of commercial
and cooperative banks, specialized developmental banks for industry,
agriculture, external trade and housing, social security institutions,
collective investment institutions, etc. The banking system is at the
heart of the financial system. The Indian banking system has the RBI
at the apex. It is the central bank of the country under which there
are the commercial banks including public sector and private sector
banks, foreign banks and local area banks. It also includes regional
rural banks as well as cooperative banks. In India, only those banks are
called Commercial Banks which have been established in accordance
with Indian Companies Act 1913. Important commercial banks in India
are Punjab National Bank, Bank of Baroda, Indian Bank, Central Bank
of India, etc. State Bank of India and its 7 subsidiaries are not included
in the category of commercial banks because these were established
under a separate act. One of the best ways to learn about the business
of banking is through a perusal of a typical bank’s balance sheet.
Balance sheet of a commercial bank is a statement of its assets and
liabilities at a particular point of time. It throws light on the financial
health or otherwise of the bank.

4.11 Test Questions

Q1. Distinguish between Indian bank and Foreign bank..
Q2. Write a short note on Regional Rural Banks.
Q3. Explain the various assets and liabilities of a bank.

4.12 Further Readings

Varshney P.N.& Mittal D.K. , “ Indian Financial System”, Sultan Chand

&Sons
 22

G. Ramesh Babu, “ Financial Markets and Institutions”, Concept

Publishing Company.
Tripathi Prava Nalini, “ Financial Services”, Prentice Hall of India,
2008.

7 Ways to Improve Team

Performance
Mae West once said “An ounce of performance is worth pounds of promises.” Real success is
built from a combination of talent, innovation, effort and commitment. Here are seven factors
that positively influence team performance, and tips for incorporating them into your
workplace.

Support innovation.

To stay ahead, innovation is required. The most successful businesses are those that remain
flexible and innovative and build on current successes without consistently overtaxing their
teams. It can be difficult to demand innovation and creativity, but you can help set up a
workplace that supports them. Ideas flow more readily in a relaxed and agile work
environment.

Allow team members to work when they feel most productive, whether that’s the middle of the
night or 5 a.m. Encourage regular breaks and informal brainstorming sessions. Celebrate
breakthroughs, and don’t get hung up on attempts that didn’t succeed.

Leadership matters.

Innovation comes from inspiration. Teams must be led by managers that go beyond balancing
budgets and schedules. The strongest leaders set goals, priorities and roles for their teams,
and encourage each team member to achieve their personal best while keeping strategic
goals in mind.

Leaders must be clear on vision, know where the team is going and have a clear idea of how
individual efforts lead to accomplishing important strategic goals. If done well, leadership can
create a culture of continuous improvements to productivity. Leaders should be open to new
ideas and willing to take risks in order to reach higher performance levels.

Hire the right people.

Hiring well can be the single greatest factor in contributing to a company’s success. The right
person will bring not just a particular skill set or knowledge base, but will be a solid addition to
drive forward your company’s vision and values. That’s why it’s important to include vision and
values during the hiring and interview process. Ask the right questions that get at the
information you need to know. And make sure the appropriate people get looped into the
process.
 23

Research shows that candidates who interview with their potential team mates and high-level
managers have more success right out of the starting gate. Thinking in terms of retention and
innovation and how this person will fit before sending the job offer will result in a collaborative
team whose skills and vision meet and strengthen each other.

[Further Reading: 10 Killer Interview Questions for Hiring Project Managers]

Keep learning.

Productivity is increased when team members have all the skills they need to succeed. If you
identify someone with great enthusiasm who lacks practical skills, encourage them to take an
online course or be mentored by a colleague with more expertise. Be sure your team knows
that skill development is expected, and that no one should rest on their laurels. Letting
employees stretch their wings and take on new and different roles creates a culture of support
for learning and innovation. Have a graphic designer interested in writing copy? Give him/her a
chance to brainstorm with the marketing department. A project manager with a flair for event
planning? Offer the chance to be part of planning the company picnic. Small changes to roles
can fuel enthusiasm.

[Further Reading: 44 Learning Resources for New and Experienced Project Managers]

Streamline processes.

The start of a new year is a great time to step back and take a look at process integration in
the workplace. Streamlining processes between teams and departments can go a long way
towards maximizing productivity. Part of any process integration effort should focus on
breaking down obvious silos and barriers in order to help groups and individuals feel more
connected to the greater whole.

Part of innovation and enhanced productivity comes from fine tuning existing processes and
roles. Ask your team for their thoughts on ways to streamline processes, and encourage
brainstorming around process alignment.

Build commitment.

Use your company’s leadership around vision and values to build employee commitment. A
competitive business plan and strategy are important, yet a company culture that celebrates
innovation and dedication to that vision and strategy will do as much to motivate employees.

Recognize team members who go the extra mile and are willing to take risks on implementing
new ideas. Clear communication is paramount. Team communications should be transparent
and factual. Employees whose ideas and concerns are listened to and acted upon by
management will feel connected and part of the decision making process. Feeling part of goes
a long way toward building commitment and dedication.

Get the team involved in managing resources.

When you involve appropriate team members in the resource allocationprocess, you create a
spirit of collaboration on important decisions. Plus, you probably get more accurate outcomes
when recourses are being managed by the person who is most knowledgeable in their area.

Prioritize project resources based on what is most critical to the company’s mission; always
stay focused on strategic vision and planning. If team members propose a change in priorities,
 24

and have access to metrics to back up their case, hear them out. By including teams in
resource allocation can go a long way toward company-wide buy-in for decisions.

2.2 international finance

1.question
Foreign Exchange Market
REVIEWED BY JAMES CHEN

Updated May 22, 2018

What is the Foreign Exchange Market

The foreign exchange market is the market in which participants are able to
buy, sell, exchange and speculate on currencies. Foreign exchange markets
are made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors.

Forex Market Basics

BREAKING DOWN Foreign Exchange Market

The foreign exchange market – also called forex, FX, or currency market –
trades currencies. It is considered to be the largest financial market in the
world. Aside from providing a floor for the buying, selling, exchanging
and speculation of currencies, the forex market also enables currency
conversion for international trade and investments.

The forex market has unique characteristics and properties that make it an
attractive market for investors who want to optimize their profits.

Highly Liquid
The forex market has enticed retail currency traders from all over the world
because of its benefits. One of the benefits of trading currencies is its massive
trading volume, which covers the largest asset class globally. This means that
currency traders are provided with high liquidity.

Open 24 Hours a Day, 5 Days a Week

In the forex market, as one major forex market closes, another market in a
different part of the world opens for business. Unlike stocks, the forex market
operates 24 hours daily except on weekends. Traders find this as one of the
most compelling reasons to choose forex, since it provides convenient
 25

opportunities for those who are in school or work during regular work days and
hours.

Leverage
The leverage given in the forex market is one of the highest forms of leverage
that traders and investors can use. Leverage is a loan given to an investor by
his broker. With this loan, investors are able to enhance profits and gains by
increasing traders’ and investors’ control over the currencies they are trading.

For example, investors who have a $1,000 forex market account can trade
$100,000 worth of currency with a margin of 1 percent, with a 100:1 leverage.

The Biggest in the World of Finance

The foreign exchange market is unique for several reasons, mainly because of
its size. Trading volume in the forex market is generally very large because of
the number of people who participate, the ease of trading as well as
accessibility to the market. As an example, trading in foreign exchange
markets averaged $5.1 trillion per day in April 2016, according to the Bank for
International Settlements, which is owned by 60 central banks, and is used to
work in monetary and financial responsibility.

Benefits of Using the Forex Market

There are some key factors that differentiate the forex market from others like
the stock market. There are fewer rules, which means investors aren't held to
strict standards or regulations as those in other markets. There are no clearing
houses and no central bodies that oversee the forex market. Most investors
won't have to pay the traditional fees or commissions that you would on
another market. Because the market is open 24 hours a day, you can trade at
any time of day, which means there's nocut off time to be able to participate in
the market. Finally, if you're worried about risk and reward, you can get in and
out whenever you want and you can buy as much currency as you can afford.

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market, you've had the practice you need.
This is a Lecture Handout for the course of International Financial Management. The topic is
"Foreign Exchange Rates, Quotations and Arbitrage".
Contents of the topic: Foreign Exchange, Foreign Exchange Rates, Types of FX rates, Types
of Quotations, Direct Quotations, indirect quotations, American Quotations, European
 26

Quotations, Foreign exchange transaction, Arbitrage transaction, Exchange Rates and Export-
Import Business
Foreign Exchange Rate
A foreign exchange rate is the price of one currency expected in terms of another currency.
Cross Rate: A cross rate is an exchange rate between two currencies, calculated from their
common relationships with a third currency. When cross rates differ from the direct rates
between two currencies, intermarket arbitrage is possible
Exchange Rates Explanation:
Assume the quoted exchange rate is:
$/ £: 2.0000. There are a number of points to be noted about this:
 The first of this pair of currencies is the $ and the secondis £. This distinction is important
for definitions, rules etc.
 Exchange rates are always given in terms of the number of units of the first currencyper
single unit of the second currency; and so $/£: 2.0000 means that the exchange rate is
$2.0000= £1.
 The final point to note is that exchange rates are normally given to four decimal places-but
not necessarily. How many decimal places are used depends upon the size of the number
before the decimal point.
For example: $/£: 1.8525 and ¥/£: 225.40
Types of Foreign Exchange Quotation:
Foreign Exchange Quotation: A foreign Exchange quotation (or quote) is a statement of
willingness to buy or sell at an announced rate.
01. European Quote: The foreign currency price of one dollar
Example: BDT 75.2525/$, read as BDT 75.2525 per dollar
02. American Quote: The dollar price of a unit of foreign currency
Example: $0.0.01329/BDT, read as 0.0.01329 dollars per BDT
03. Direct Quote: A foreign exchange rate quoted as the domestic currency per unit of
the foreign currency.
Direct quotation: 1 unit of foreign currency = x Number of home currency
Example: $1 = Tk 83.7535 is a direct quote in Bangladesh
04. Indirect Quote: A foreign exchange rate quoted as the foreign currency per unit of the
domestic currency. In an indirect quote, the foreign currency is a variable amount and the
domestic currency is fixed at one unit.
Indirect quotation: 1 unit of home currency = x Number of foreign currency units
For example: Tk 1 = $ 0.01193 is an indirect quote in Bangladesh,
Transaction in the Foreign Exchange Market
A foreign exchange transaction is an agreement between a buyer and a seller that a fixed
amount of one currency will be delivered for some other currency at a specified
rate. Transactions within this market can be executed on a spot, forward, or swap basis
 A spot transaction requires almost immediate delivery of foreign exchange
 A forward transaction requires delivery of foreign exchange at some future date
 A swap transaction is the simultaneous exchange of one foreign currency for another
 27

Essay on the Euro Currency Market

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In this essay we will discuss about Euro Currency Market.

After reading this essay you will learn about:- 1. Meaning of
Euro Currency Market 2. Origin and Growth of Euro Currency
Market 3. Features 4. Functioning 5. Role in International
Financial System 6. Effects.
Contents:
1. Meaning of Euro Currency Market
2. Origin and Growth of Euro Currency Market
3. Features of Euro Currency Market
4. Functioning of Euro Currency Market
5. Role of Euro Currency Market in International Financial System
6. Effects of Euro Currency Market

Essay # 1. Meaning of Euro Currency Market:

Euro-currency is a currency held by individuals and institutions in a
European country other than its country of origin. It is accumulated
in European banks that deal in other currencies such as American
dollar, Japanese Yen, Swiss Francs, etc.

This market is the largest market in the international monetary

system. It has been playing a central role in short and medium term
international borrowing and lending by large corporations and banks
and for financing international trade.

Essay # 2. Origin and Growth of Euro Currency Market:

The origin of the Euro-currency market can be traced back to the
1920s when the US dollars were deposited in the European banks
which converted them into their local currencies for lending
purposes. But the real growth of the Euro-currency market began
after the Second World War.
 28

The following factors led to its growth:

1. Flow of US Aid:
The United States emerged as the most powerful nation in the post-
war period which spent huge sums of money on the rehabilitation of
Europe both in terms of economic and military aid. This led to the
transfer of a large number of dollars in Euro-banks.

2. Cold War:
The cold war which started in the 1950s led the Soviet Union and
the East European government to transfer their dollar deposits from
America to Euro-banks for fear that they might be blocked by the
American Government.

3. Decline in the Importance of Sterling:

In the post-war period Britain emerged as a debtor country.
Consequently, the British sterling which had dominated the
international financial market in the pre-war era gave place to the
dollar in the post-war period. The importance of sterling further fell
when the British Government placed severe restrictions on the
grant of sterling to central banks outside the sterling area under the
British Exchange Control Act in the early post-war period.

4. Regulation-Q:
Regulation-Q of the US Federal Reserve System had been a major
factor which gave rise to the Euro-currency market in the late
1960s. Under Regulation-Q, a ceiling was imposed on the interest
rate payable on time deposits with the US banks and it prohibited
the payment of any interest at all on deposits up to 30 days.

This encouraged the US banks to open branches in Europe and

attract dollar deposits to be used for financing international trade. In
particular, this happened in 1968 and 1969 and again from 1979
onwards when the Regulation-Q ceiling kept low interest rates on
time deposits.

Consequently, both the US citizens and foreigners having dollars in

excess of their transactions requirements transferred them in Euro-
banks because they paid higher interest rate than the US banks.
This also encouraged European lenders and borrowers to trade in
 29

dollars and their currencies in London and other European financial

markets rather than in New York.

5. Other US Measures:
There were some other measures which hampered the capacity of
US banks to compete for international business including curbs on
the release of taxes on profits earned by foreigners in the United
States, the introduction of the Interest Equalisation Tax in 1964,
controls over the US direct investment abroad, and tight monetary
policy to control inflationary pressures. These led to heavy
borrowing by US banks from the Euro-currency market to meet the
demand for dollars in the US.

6. BOP Deficits in US:

There have been large and persistent BOP deficits in the US
thereby leading to the outflow of the US dollars to the Euro-banks in
countries having surplus with it.

7. Petro-dollars:
The increase in the oil prices since 1973 has resulted in the
tremendous increase in the incomes of the oil producing countries
of the world which are known as petro-dollars. These are deposited
in Euro-banks. These have further expanded the Euro-currency
market.

8. Innovative Banking:
Because of special circumstances that were present in the 1950s,
there came into being a banking system distinct from but
supplementary to the banking system of Europe. Like any other
banking system, its elements consisted of reserves, deposits and
loans, in US dollars and other currencies and recorded in Euro-
banks.

Consequently, the Euro-currency market has grown rapidly, in

which deposits are received and loans made in currencies other
than that of the country in which the market is situated. Now the
Eurocurrency market dominates international transactions and
traditional foreign banking accounts of international banking
 30

European Credit Outlook for H2 2018 : Time to Buy ?

After more than one and a half year trending up, Euro credit markets have been under
pressure during the first half of 2018. Several factors have played a role, ranging from shifts
in monetary policy expectations to rising political risks on top of tight valuations and slowing
economic pace.

We believe most of these factors have either disappeared, faded out or weakened over the last
six months offering a chance to look once again with interest to Euro denominated corporate
and financials bonds.

Arbitrage
Definition
: It involves
no risk
and
no capital of your own
. It is an activity that takes advantages of
pricing mistakes in one or more markets.
There are 3 kinds of arbitrage
(1) Local (sets uniform rates across banks)
(2) Triangular (sets cross rates)
(3) Covered (sets forward rates)

Local Arbitrage
(One good, one market)
Example
: Suppose two banks have the following bid
-
ask FX quotes:
Bank A
Bank B
USD/GBP
1.50
1.51
1.53
1.55
Sketch of Local Arbitrage strategy:
(1) Borrow USD 1.51
(2) Buy a GBP from Bank A
(3) Sell GBP to Bank
B
(4) Return USD 1.51 and make a USD .02 profit (1.31% per USD 1.51 borrowed)
Note I
: All steps should be done simultaneously. Otherwise, there is risk! (Prices might change).
Note II
: Bank A and Bank B will notice a book imbalance. Bank A will see all ac
tivity at the ask side
(buy GBP orders) and Bank B will see all the activity at the bid side (sell GBP orders). They will notice
the imbalance and they’ll adjust the quotes. For example, Bank A can increase the ask quote to 1.54
USD/GBP.

Triangular Arb
itrage
 31

(Two related goods, one market)

Triangular arbitrage is a process where two related goods established a third price. In the FX Mkt,
Triangular arbitrage sets FX cross rates. Cross rates are exchange rates that do not involve the
USD. Most currencies
are quoted against the USD. Thus, cross
-
rates are calculated from USD
quotations.
The cross
-
rates are calculated in such a way that arbitrageurs cannot take advantage of the quoted
prices. Otherwise, triangular arbitrage strategies would be possible.

2.QUESTION