Once upon a time there were three rich men in the United States of America. People nick named ‘Three Musketeers’. Three Musketeers were seeking opportunity to invest their capital in to emerging countries. One fine morning they heard about place called ‘India’. Three Musketeers decided to invest their USD 2, 00,000, a country called India. India’s currency is measured in rupee, widely known as Indian rupee or INR. Three Musketeers choose to invest in Indian secondary markets. To invest in Indian securities they need to convert USD to INR. Hypothetically, As per the 1st May, 2001 1 USD=51 INR. Three Musketeers invest USD 2, 00,000 on 1st May, 2001.
Three rich men done one mistake, they forget to calculate risk on currency fluctuation. They contact risk manager from such and such risk analysis firm. Hypothetically, Risk manager predicted two situations, to ensure whether Three Musketeer’s invested money is safe or not based on INR fluctuation.
First he assumed, on 2nd May, 2001 INR appreciate up to 50 INR against 1 USD. Here we assumed that Three Musketeers investment has not done any profit or loss on their invested capital. Suppose if they want to pull out their invested money then they get USD 2, 04,000 (after converting it from INR to USD as per current currency rate). Without doing anything they earn USD 4,000 (ignoring all taxes).
Assumed, on 2nd May, 2001 INR depreciate up to 52 IND against 1 USD. Here we assumed that Three Musketeers investment has not done any profit or loss on their invested capital. Suppose if they want to pull out their invested money then they get USD 1, 96,153 (after converting it from INR to USD as per current currency rate). Without doing anything they earn USD 3,847 (ignoring all taxes).
From both of these case situations we can conclude that how important is to understand forex market and currency fluctuation of domestic and international country.
In these hypothetically situations we neither took profit and loss in calculation nor levied taxes.
Just think and assume situation B, even if Three Musketeers make profit of INR 50,000, they occur loss of USD 2,885 (ignoring all taxes) if they pull out their money on 2nd May, 2001.
Indian rupee depreciation and currency fluctuation are the biggest concern for Foreign Institutional Investors (FIIs).
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