Q.Explain the various sources of international finance available to a business.

This is a broad recall-and-explain question, so the answer should briefly cover every named source from the chapter rather than going deep into just one.

A business seeking to raise international finance has several distinct sources available to it, each suited to a different purpose and carrying a different mix of cost, risk and control implications.

Foreign Direct Investment (FDI) is investment made by a foreign entity to acquire a lasting, controlling management interest in the business, commonly through setting up a subsidiary, entering a joint venture, or acquiring a controlling shareholding. It brings in not just capital but often technology and management expertise, and is generally long-term and stable, though it means giving up a degree of control.

Foreign Portfolio Investment (FPI) is investment by foreign individuals or institutions in the company's shares, bonds or other securities, made purely for financial return without seeking any control over management. It is raised through the stock/bond market, is highly liquid, but can also be withdrawn relatively quickly.

External Commercial Borrowings (ECBs) are foreign-currency loans raised from recognised lenders abroad, typically used to fund long-term capital expenditure or expansion; they must generally be repaid in the foreign currency borrowed and are subject to regulatory end-use conditions.

Global and American Depository Receipts (GDRs/ADRs) are certificates issued by a depository bank representing the company's shares, allowing them to be traded on a foreign stock exchange (Europe for GDRs, the United States for ADRs) so the company can raise equity capital internationally without a direct foreign listing.

International (Euro) Bonds are debt instruments issued by the company in a currency other than its own domestic currency, sold to investors in international capital markets, giving access to a larger and more diverse pool of lenders, at the cost of foreign-currency repayment risk.

Each of these sources differs in cost, in whether it exposes the business to currency risk, in how much control it involves giving up, and in the regulatory approvals it requires, so a business generally uses a combination of them depending on its specific financing need.

A common mistake is to list Letter of Credit and Bill of Exchange as 'sources of international finance'; these are instruments for financing and securing a single trade transaction, not sources of long-term capital, and should be kept separate in the answer.