International finance


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International finance

  1. 1. International Financial Management Global Management of Financial Resources
  2. 2. Globalization <ul><li>Capital - Financial Resources - Features </li></ul><ul><ul><li>Fastest in factor mobility </li></ul></ul><ul><ul><li>Most convenient in factor mobility </li></ul></ul><ul><ul><li>Most inexpensive to make mobile-transfer </li></ul></ul><ul><li>Dismantling of barriers </li></ul><ul><li>Emergence of trade facilitating institutions </li></ul><ul><ul><li>Banks </li></ul></ul><ul><ul><li>Stock Exchanges </li></ul></ul><ul><ul><li>Liberal Forex Laws </li></ul></ul><ul><ul><li>Insurance institutions </li></ul></ul><ul><ul><li>Watchdogs – Pressure groups- Tainted money – drug money </li></ul></ul>
  3. 3. Requirements and Reasons <ul><li>Organizations are becoming global – part of dismantling of trade barriers </li></ul><ul><li>Organizations need most inexpensive source of capital </li></ul><ul><li>Domestic resources may not be available – developing countries </li></ul><ul><li>Purposes: </li></ul><ul><ul><li>Establishment </li></ul></ul><ul><ul><li>Working capital </li></ul></ul><ul><ul><li>Collaboration </li></ul></ul><ul><ul><li>Expansion </li></ul></ul><ul><ul><li>Investment </li></ul></ul><ul><ul><ul><li>FDI </li></ul></ul></ul><ul><ul><ul><li>FII </li></ul></ul></ul>
  4. 4. <ul><ul><li>Retaining of liquidity </li></ul></ul><ul><ul><li>Legal requirements – CRR by central banks </li></ul></ul><ul><ul><li>Restrictions by domestic governments on fund raising: </li></ul></ul><ul><ul><ul><li>In terms of amount </li></ul></ul></ul><ul><ul><ul><li>In terms of duration </li></ul></ul></ul><ul><ul><ul><li>In terms of exchange transfer restrictions- Profits made from domestic capital may not be allowed to be transferred </li></ul></ul></ul><ul><ul><ul><li>Channels and sources may be restricted </li></ul></ul></ul><ul><ul><ul><li>Form may be restricted </li></ul></ul></ul><ul><ul><ul><ul><li>Debt, equity, private placement, </li></ul></ul></ul></ul>
  5. 5. <ul><li>Consist of </li></ul><ul><ul><li>bank loans </li></ul></ul><ul><ul><li>suppliers' and buyers' credits </li></ul></ul><ul><ul><li>fixed and floating rate bonds (without convertibility) </li></ul></ul><ul><ul><li>borrowings from private sectors </li></ul></ul><ul><ul><li>multilateral Financial Institutions International Finance Corporation. </li></ul></ul><ul><ul><li>Euro-issues Convertible bonds, ADRs and GDRs. </li></ul></ul>External Commercial Borrowings (ECBs)
  6. 6. Overseas Equity Markets <ul><li>Placing the stocks on overseas markets </li></ul><ul><ul><li>Advantages </li></ul></ul><ul><ul><ul><li>Availability of funds - if the markets are rich – higher GDP, per capita income, practice, culture of investment rather than saving and less risky conservative static modes of return like FDs </li></ul></ul></ul><ul><ul><ul><li>Transparent systems </li></ul></ul></ul><ul><ul><ul><li>Regulation </li></ul></ul></ul><ul><ul><ul><li>Diversification of risk </li></ul></ul></ul><ul><ul><ul><li>If issues are very large need multiple big markets to source funds (KLM) </li></ul></ul></ul><ul><ul><ul><li>Protection against economic and political risks </li></ul></ul></ul><ul><ul><ul><li>Provides international image to the organization – branding and stability issues _ Apple in Nikkei (Tokyo) and Dax (Franfurt) </li></ul></ul></ul><ul><ul><ul><li>May reduce cost of capital </li></ul></ul></ul><ul><ul><ul><li>Confidence to the buyers of the product and suppliers of inputs </li></ul></ul></ul><ul><ul><ul><li>Access to the market- local company BPO registered in US will get tax benefits </li></ul></ul></ul><ul><li>A </li></ul>
  7. 7. <ul><ul><ul><li>24 hours trading </li></ul></ul></ul><ul><ul><li>Disadvantages </li></ul></ul><ul><ul><ul><li>Management cost – Floating of issues, advertizement at multiple location </li></ul></ul></ul><ul><ul><ul><li>Forex risk </li></ul></ul></ul><ul><ul><ul><li>Denial of transfer of dividends </li></ul></ul></ul><ul><ul><ul><li>All political and economic risks </li></ul></ul></ul>
  8. 8. Debts <ul><li>Can be accessed from banks outside domestic boundaries </li></ul><ul><li>Establishment of development banks </li></ul><ul><li>Purpose: </li></ul><ul><ul><li>Generally include that funding which is not attractive to equity/stock holders </li></ul></ul><ul><ul><ul><li>Infrastructure projects- Road, Dams, Powerhoueses, Metro </li></ul></ul></ul><ul><ul><ul><li>Gestation period ism long, BEP is late returns very late. </li></ul></ul></ul><ul><ul><ul><li>Even Governments /PSUs require such funding – DMRCs </li></ul></ul></ul><ul><ul><li>Three types of banks </li></ul></ul><ul><ul><ul><li>World Bank Group </li></ul></ul></ul><ul><ul><ul><li>Regional Development banks </li></ul></ul></ul><ul><ul><ul><li>National development banks </li></ul></ul></ul>
  9. 9. <ul><li>World Bank Group </li></ul><ul><ul><li>World bank or IBRD </li></ul></ul><ul><ul><li>International Financial Corporation (IFC) </li></ul></ul><ul><ul><li>International Development Association (IDA) </li></ul></ul><ul><ul><ul><li>Espcialy for LDCs soft loans as high as 50 years at 1% interest rates </li></ul></ul></ul><ul><li>Regional Development Banks </li></ul><ul><ul><li>For 5-15 years for agriculture, mining etc. </li></ul></ul><ul><ul><li>European Investment Bank </li></ul></ul><ul><ul><li>Inter American Development Bank </li></ul></ul><ul><ul><li>Asian Development Bank </li></ul></ul><ul><ul><li>African Development Bank </li></ul></ul><ul><ul><li>EBRD </li></ul></ul><ul><ul><li>Arab Fund for Reconstruction and Development </li></ul></ul>
  10. 10. Euro Currency- Euro Markets <ul><li>Any Freely convertible currency deposited outside domestic boundaries become Euro Currency </li></ul><ul><ul><li>USD deposited in France will become EuroDollar </li></ul></ul><ul><ul><li>Will become Eurocurrency even if deposited in foreign branch of national banks </li></ul></ul><ul><ul><li>Euro Banks – banks take and make loans in foreign currency – have nothing to do with Euro as currency of EU </li></ul></ul><ul><li>Origin – USSR </li></ul>
  11. 11. Advantages of Euro Currency Loans <ul><li>Reserve requirements by central banks that reduce earning by the asset does not take place. This allows banks to lend at lower rate </li></ul><ul><li>Charges and taxes required to be paid to domestic bank are not required to pay. Service tax, insurance charges for each account </li></ul><ul><li>Special concessionary lending is not required such as to farming sector- increases the earning capacity of the deposit </li></ul>
  12. 12. Euro Bonds <ul><li>Are the bonds that are sold outside the country in whose currency they are denominated. </li></ul><ul><li>GM Bond of US$ 200 millions in British Pound is a Euro bond </li></ul><ul><li>These are almost absolutely free of govt. regulations. </li></ul><ul><li>Are generally possible for organizations with large, long historical record of exponential growth like GE, GM, Unilever, P&G DuPont, 3M </li></ul>
  13. 13. Euro Bonds- FCCBs <ul><li>Types: </li></ul><ul><ul><li>Fixed Rate </li></ul></ul><ul><ul><ul><li>Coupon Payment is generally once in a year </li></ul></ul></ul><ul><ul><ul><li>Interest rate is calculated on IRR </li></ul></ul></ul><ul><ul><li>Floating Rate </li></ul></ul><ul><ul><ul><li>Is a fixed spread over a reference rate usually LIBOR (London Interbank Offered Rate) </li></ul></ul></ul><ul><ul><ul><li>Reset period is usually 3 to 6 months </li></ul></ul></ul><ul><ul><li>Equity Related </li></ul></ul>
  14. 14. Equity Related <ul><li>A type of convertible bond issued in a currency different than the issuer's domestic currency.  </li></ul><ul><li>A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock </li></ul>
  15. 15. <ul><li>These bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. </li></ul><ul><li>Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs </li></ul>
  16. 16. <ul><li>ADRs </li></ul><ul><ul><li>Is negotiable certificate issued in USA for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale in US only through the various bank branches of the depository bank, which purchases shares of foreign companies and deposits it on the account. </li></ul></ul><ul><ul><li>ADS - certificate issued by a US bank representing a specified number of shares in a foreign stock that is traded on a U.S. exchange </li></ul></ul><ul><ul><ul><li>Ratio 1:5- One certificate means holding of 5 shares </li></ul></ul></ul><ul><ul><li>ADRs are denominated in US$ with the underlying security held by a US financial institution overseas </li></ul></ul><ul><ul><li>ADRs reduce administration and duty costs that would otherwise be levied on each transaction </li></ul></ul><ul><ul><li>ADRs do not eliminate the Forex, Economic and Political Risks </li></ul></ul><ul><ul><ul><li>Dividend payments in Yen would be converted into US$ net of conversion expenses and foreign taxes and in accordance with the deposit agreement </li></ul></ul></ul>
  17. 17. <ul><li>GDRs </li></ul><ul><ul><li>Is a certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank in the country of the offering. The shares trade as domestic shares, but are offered for sale globally </li></ul></ul><ul><ul><li>GDRs facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. </li></ul></ul><ul><ul><li>International banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. They trade on the International Order Book (IOB) of the London Stock Exchange. Normally 1 GDR = 10 Shares, but not always </li></ul></ul>
  18. 18. <ul><li>Off Shore Banking </li></ul><ul><li>HNIs </li></ul>