Final Exam
By
Avijit Majumder Ankan
ID- 22364095
Course: ECO502
Section: 01
Master of Business Administration,
BRAC University.
1. Discuss the major types of investment. Discuss “crowding out effect” of deficit financing.
Discuss the direct and indirect impacts of foreign direct investment (FDI).
Ans:
Major Types of Investment:
If you want to grow money and have a financial strategy, investing is a must. Different investment
kinds have different risk and return profiles:
1. Stocks: Purchasing stock entails acquiring ownership stakes in a company. How well a firm
does and how the market is doing are two main factors that affect stock prices.
2. Bonds: Investors may enter into a loan agreement with governments or businesses and get
interest payments on a monthly basis and the principal amount back at maturity using bonds.
3. Real Estate: Purchasing properties with the hope of future appreciation or rental revenue is
known as real estate investment.
4. Cryptocurrency: In recent years, digital or virtual currencies like Ethereum and Bitcoin have
become popular as an alternative investment option. Having said that, they're notoriously
unpredictable.
5. Commodities: Purchasing tangible items, such as agricultural products, oil, or gold, is what
commodities investing is all about. A hedge against inflation and a source of diversity, it offers
both.
6. Retirement Accounts: People can save more for retirement by putting their money in taxadvantaged retirement accounts like IRAs and 401(k)s.
Crowding Out Effect of Deficit Financing:
When the government spends more money, usually via borrowing, private investment drops, a
phenomenon known as the crowding-out effect occurs. There is competition in the financial
markets for available cash when the government borrows substantially to finance its budget
deficit.
Interest rates are set to climb due to the government's increased borrowing needs. Borrowing
money to invest becomes more costly for people and companies when interest rates are high.
"Crowding out"" of private sector investment by government borrowing could happen if private
investment drops because it costs more to borrow money.
It is possible that the economy will not expand as rapidly as it ought to due to this occurrence. This
is due to the fact that long-term impact of deficit expenditure on investment and development
may be relatively minimal. It could increase consumer spending and benefit the company in the
short term.
Direct and Indirect Impacts of Foreign Direct Investment (FDI):
Foreign direct investment (FDI) occurs when a company based in the United States invests in a
company based in another nation. There are a number of methods in which FDI could be
detrimental to the economy of the receiving nation:
1. Direct Impacts:
• Job Creation: The host country's economy benefits from FDI because new jobs are
created, which helps reduce unemployment and boosts economic development.
•
Technology Transfer: Increases in the host country's industrial capacity may result
from the introduction of cutting-edge technology, management techniques, and
specialized knowledge by foreign investors.
• Infrastructure Development: Because foreign investors may put money into
constructing facilities and enhancing transportation networks, FDI may help with
infrastructure development.
2. Indirect Impacts:
• Increased Exports: Since foreign enterprises may sell products and services produced
in the host nation to other markets, FDI may increase a country's exports.
• Economic Growth: By boosting different industries and creating a more competitive
business climate, FDI may help the economy expand as a whole.
• Knowledge Spillover: When foreign investors work with local businesses and
industries, the local economy could see a "knowledge spillover".
Foreign direct investment (FDI) can only be maximized if safeguards against abuse, environmental
damage, and dependence on outside funding are put in place.
2. What are the main reasons for keeping foreign reserve? Discuss optimum level of foreign
reserve. How foreign exchange rate management can be improved in Bangladesh?
Ans:
Why Bangladesh Needs Foreign Reserves and How Much It Should Have:
An essential component of a robust and growing economy is the accessibility of a nation's money,
sometimes known as its foreign reserves. It is crucial for Bangladesh to maintain adequate reserves
because of its substantial reliance on imports and vulnerability to external shocks. The most
important justifications for:
1. Import Financing: Fuel, equipment, and raw materials are some of Bangladesh's most
important imports. Reserves held abroad provide as a safety net for these imports, easing
trade flows and warding off shortages that may otherwise derail economic growth.
2. Exchange Rate Stability: Reserves held abroad protect a country's economy against
unanticipated events, such as changes in exchange rates or the flight of capital. To safeguard
local companies and consumers against unpredictable price fluctuations, the central bank
might sell foreign currency to interfere in the market and stabilize the exchange rate.
3. Investor Confidence: A stable economy that has sufficient reserves is attractive to investors
from other countries. The fact that Bangladesh has substantial reserves makes the nation more
attractive to investors since they believe it will be better able to weather economic storms.
4. Debt Repayment: Other nations owe Bangladesh money. Maintaining a country's
creditworthiness and future borrowing capacity requires foreign reserves to guarantee timely
repayment of loans.
5. Economic Resilience: In case of a natural disaster or economic collapse, emergency imports
and social safety nets might be paid for out of foreign reserves. As a result, shocks are lessened
and the recovery time is shortened.
Having a sizable emergency fund does not, however, come without its problems. Holding foreign
currency often yields lower interest than investing in local assets, which means that high reserve
levels might reduce investment returns. Also, the cost of amassing reserves may be high as it forces
the central bank to sell local currency, which might lead to interest rates going higher.
Finding the optimal number of foreign reserves is, then, of paramount importance. Without
compromising economic efficiency, reserves should be enough to cover imports for a certain
number of months and any external shocks.
Three to four months of import coverage is considered to be the ideal amount for Bangladesh. This
is in line with global standards and strikes a good compromise between the competing demands
of stable exchange rates, effective resource allocation, and the funding of imports.
Improving Foreign Exchange Rate Management:
The management of Bangladesh's foreign currency reserves has improved, although there is room
for further development in this area:
• Transparency: Businesses and investors alike may benefit from transparent reporting of
reserve composition and management practices.
• Market-based mechanisms: To make foreign currency distribution more efficient and less
dependent on administrative constraints, more use of flexible exchange rate mechanisms is
needed.
• Diversification: One way to reduce exposure to currency risk is to diversify reserve holdings
outside USD and other major currencies.
• Export promotion: Reducing dependence on reserves for import finance may be achieved by
policies that increase exports, which in turn produce new inflows of foreign currency.
• Financial sector development: More international investment and a more diverse supply of
foreign money may result from a strengthened banking industry.
To secure its foreign currency reserves adequately support economic development and stability,
Bangladesh may follow these steps and keep an eye on the ideal reserve level. This would set the
country up for future prosperity.
3. Discuss the benefits of capital market. Discuss the reasons for underdeveloped share
market in Bangladesh. Discuss the measures to develop bond market in Bangladesh.
Ans:
A Dynamic Bond Market and the Influence of Capital Markets: Opportunities and Threats in
Bangladesh. A robust economy cannot function without capital markets, which facilitate the
trading of financial products such as stocks and bonds. Investors looking for good returns and firms
in need of expansion financing might connect via them. Come with me as I explore the advantages
of a strong capital market, the difficulties Bangladesh is experiencing, and possible solutions to
help grow its bond market.
Advantages of Financial Markets:
1. Economic Growth: Markets for capital effectively mobilize resources by directing savings
towards investments that provide productive returns. This drives the growth of businesses,
the creation of jobs, and the general development of the economy.
2. Financial Stability: Capital markets provide a variety of diversification choices that help firms
and investors reduce risk. The long-term health of an economy depends on a secure financial
system, which this helps to cultivate.
3. Corporate Governance: Better corporate governance standards are a result of the heightened
scrutiny and responsibility that publicly listed firms in the stock market experience.
Transparency is improved, and investors are attracted, as a result.
4. Infrastructure Development: A nation's growth depends on its infrastructure, and the capital
markets make it possible to finance these initiatives over the long term. Example uses for
bonds include funding infrastructure projects like power plants, highways, and bridges.
5. Wealth Creation: People may invest in capital markets and perhaps increase their fortune. A
higher quality of life is the result of increased economic engagement and pride in one's
possessions.
Challenges in Bangladesh's Share Market:
The share market in Bangladesh has a lot of promise, but it also has certain restrictions:
1. Limited Investor Base: Retail investors are not as active as institutional investors in the market.
Because of this, market liquidity and activity are reduced generally.
2. Corporate Governance Concerns: Some publicly traded corporations' lackluster corporate
governance measures discourage investment and damage investor confidence.
3. Information Asymmetry: It is difficult to make educated investment judgements due to a lack
of trustworthy financial data about listed corporations.
4. Market Manipulation: Manipulation of the market and insider trading undermine trust among
investors and make the market less trustworthy.
5. Lack of Diversification: Investors have fewer alternatives and less appeal due to the market's
lack of diversity in investment vehicles.
Developing Bangladesh's Bond Market:
In addition to the stock market, a strong bond market may greatly aid in economic growth. Possible
steps in this direction include these:
1. Government Issuance of Bonds: A benchmark yield curve may be created and investors can
be attracted by the regular issue of government bonds with varied maturities.
2. Corporate Bond Issuance: One way to diversify funding alternatives and deepen the market is
to encourage well-managed enterprises to issue bonds.
3. Investor Education: The key to active involvement in the bond market is raising knowledge of
bond market products among both institutional and individual investors.
4. Regulatory Reforms: Increased openness and trust from investors may be achieved via tighter
rules and better market infrastructure.
5. Development of Financial Institutions: Building a solid network of investment banks and asset
managers helps facilitate bond issuance and trading.
Unlocking the power of capital markets might be a game-changer for Bangladesh's economic
progress. Crucial steps in this approach include resolving issues with the stock market and
deliberately building a strong bond market. Bangladesh can accelerate its economic development
and realize the full potential of its capital markets via the implementation of efficient regulations,
the promotion of investor confidence, and the construction of strong market infrastructure.