Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
IFM.pptx
1. IFM
It is not exhaustive but contains some important points to remember
2. What is IFM
IFM is the study of the economic theories relating to interest rate differential
between different countries in terms of their respective currencies, price
differential between different countries for some fixed basket of
commodities whose prices are quoted in respective currencies, exchange
rate regimes of different countries (Mundell Fleming Model or international
ISLM model) and optimum currency areas in relation to currency unions or
blocks.
https://www.investopedia.com/terms/i/international-finance.asp
3. Note: Click all the links inside the webpages provided in this PPT, those links will take you to other
connected topics. Read those topics also.
Depreciation
• https://www.investopedia.com/terms/c/currency-
depreciation.asp#:~:text=Currency%20depreciation%20is%20a%20fall,or%20risk%20aversion%20
among%20investors.
• Devaluation
https://www.investopedia.com/terms/d/devaluation.asp
Purchasing power parity
https://www.investopedia.com/updates/purchasing-power-parity-ppp/
4. • Role of Finance Manager in an MNC
• Balancesheet and Income Statement of MNCs
• International cash flow – explained with the case
• International Financial Agencies
• MNCs operating in different countries
• Governments involved with MNCs in international business finance
All above explained with Chad-Cameroon case.
5. • Balance of Payments
• Current Account BoP or BoT or Trade Balance
• Capital Account
• https://www.investopedia.com/terms/b/bop.asp
• https://www.investopedia.com/ask/answers/122714/what-liquidity-
management.asp
6. • International financial environment
Transactions involving borrowers, lenders, investors, issuers, the platform of
transactions, rules and regulation on those transactions. All transactions are
in international currencies like USD, Euro etc.
Read Part I of the book provided 20 jan.
Forex Management by central bank
https://www.rbi.org.in/scripts/FS_Overview.aspx?fn=5
International Monetary System
International Finance environment + Governments + Central Banks
• https://www.investopedia.com/terms/i/international-finance.asp
7. • Credit rating - https://www.investopedia.com/terms/c/creditrating.asp
• History of exchange rate determination –
• World Wars I and II
• Bretton Woods System
• Gold Standard
• Lord Maynard Keynes role in the case of designing INR and its connection with international currency
• Connection between INR and USD today
• Evolution of INR
• Evolution of Nigerian Naira
• Similarity between monetary histories of India and Nigeria and some other African countries
To discuss in next class
Open economy macroeconomy
Mundell Fleming model
Spot, Forward, Option, Swap
8. Financial Markets means markets of financial assets – short term,
medium and long term.
Short term assets mean those having maturity below 1 year or 1.5
years.
Medium term refers to 1 year or 1.5 years and above but below 3 years
or somewhere 5 years.
Long term means 3 or 5 years and above upto 30 years.
9. • What is a fundamental financial asset?
It is something that gives the investor claim on the physical assets and
profits of the company, like stock, preferential share and debt
(bond/debenture/convertible debenture).
There are non-fundamental financial asset market like MF,
There are asset market like commodity market of assets like gold and
other metals.
Another non-financial market is the derivatives market.
What is the commonness among all these markets?
10. Capital Budgeting
It is a process to take decision, whether or not to invest for profit or
return in some project or asset or equipment as follows:
Example:
Business – Example whether to open a grocery, or restaurant, or say,
showroom of some branded electronic product or motor vehicle
Financial Asset –Example IPO of LIC India or in gold bond issued by GoI,
or in MF
Capital Asset or fixed asset or property – Buying aircraft for giving lease
to airlines companies,
11. • Present value
• Net present value
• Pay back period
• Internal rate of return
• Capital budgeting for investments in non financial business
• Capital budgeting for financial investments
12. • Components of International Financial Markets
• Interbank loan market - Banks in London, Tokyo, Sanghai, Singapore, Hong
Kong, Europe etc – interbank lending in fx (foreign exchange or currency),
LIBOR, MIBOR, TIBOR, EURIBOR
• FX cash market and participants - Direct buying and selling of fx by EXIM
banks for helping exporters and importers, international or fx treasuries of
banks for their non resident customers and asset liability management
purposes, NBFCs for asset liability management purposes and non-financial
business houses and central banks for maintaining exchanges rates
between domestic currencies and foreign banks. Central banks buy and sell
directly fx as monetary policy tool to control exchange rate
14. Suppose we are thinking of investing 10 lakh rupees in LIC IPO
NPV = PVs of all future dividends and capital gain – the present value of
present investment
No need to discount the present investment value.
Capital Budgeting means whether to accept the proposal to invest 10
lakh rupees in LIC IPO.
Yes if NPV > 0, No if NPV < 0,
Indifferent if NPV = 0, but if IRR > Bank Interest, we should go for the
investment.
15. Criteria for capital budgeting:
1. NPV
2. IRR
3. Pay back period
[{Dividend of Year 1/(1+r)^1} + {Dividend of Year 2 / (1+r)^2} + ….
Dividend of Year t/(1+r)^t] – Current Investment = 0
IRR: NPV = 0, t value is known, r is unknown, you need to solve for r
Payback period: NPV = 0, r is known, t is unknown, you need to solve
for t
NPV > = < 0 when both of r and t are known
16. Q 1. What is foreign exchange rate? Write an example. 2
A 1. The price of one currency in terms of another is known as FX. Example, price of
USD in terms of INR, i.e., 76 approximately.
Q2. What is the international currency market? Give example. 4
A2. An international currency market is a market where FX are directly bought or sold,
example, stock exchanges houses or commodity exchange houses where FX are sold
or bought. Another example where the international branches of different banks
conduct lending or borrowing activities online, e.g. in London, Tokyo or New York at
the interbank offer rates like GBP LIBOR, TIBOR or USD LIBOR, but there is no harm
if a bank in London lends or borrows in TIBOR
17. • Q3. What is the devaluation? 2
Q4. How does devaluation affect balance of payment? 6
Guidance to write answer.
Suppose there is a question of 2 marks. You need to write the answer in 2
sentences where one sentence could be a theoretical or descriptive sentence
and another sentence could consist of one example.
18. • Similarly suppose there is a question of 4 marks. You need to write the answer
in 4 sentences where one sentence could be 2 two theoretical or descriptive
sentences and other 2 sentences could consist of examples.
• Similarly suppose there is a question of 6 marks. You need to write the
answer in 6 sentences where one sentence could be 3 two theoretical or
descriptive sentences and other 3 sentences could consist of examples.
19. Back to Basics: Recap
• What is international finance?
• What is finance?
• Activities connected to B/S and P/L
• Lending vs. Investing
• Loan for non-finance purpose
• Connection between Finance and Capital
• Origin of the concept of capital
• Sources of Capital
• Suppliers of Capital and Financial Intermediaries
• Differences between loans and investments
• Sources of funds for international investments
20. • Difference between domestic investment and international
investment
• Source of funds for international investments
• Place of international financial txns in Financial Reports
• Effects of international finance on B/S
21. • Present value
• Capital Budgeting
• Foreign exchange risk
https://www.investopedia.com/terms/p/presentvalue.asp
https://www.investopedia.com/terms/c/capitalbudgeting.asp#:~:text=
Capital%20budgeting%20is%20the%20process,they%20are%20approve
d%20or%20rejected
22. • https://www.investopedia.com/terms/f/foreignexchangerisk.asp
• Chapter 9 of book of Jeff Madura, pp 295-296
• Book of Laurent Jackque, read chapter 9 and also the case study at p
629
• Working capital management - Up to section 4 of the journal paper
https://www.hindawi.com/journals/edri/2021/6681572/
• International balancesheet
https://www.moneycontrol.com/financials/kecinternational/balance-
sheetVI/KEC04
24. Discussion of the topics of syllabus are done. This slide is for links to
study materials.
Interbank rates: USD LOBOR (USA), pound LIBOR (UK), Euribor (an
member of EU), TIBOR (Tokyo) or JIBOR (Japan), MIACR
(Moscow,Russia), SIBOR (Shanghai, China)
25. • What a MNC need to know for establishing a subsidiary in a foreign country?
Hints:
Suppose a UK based company wants top open a subsidiary in India. It should know
1. Corporate law of the foreign country regarding incorporation or creation of the subsidiary or
opening a branch the foreign country, example Companies Act of India
2. FX related Act, i.e. FEMA of India
3. Income Tax laws relating to fund transfer
In the case of a bank, it needs to know the rules of the foreign central bank regarding permission
top open a subsidiary abroad or entry of a foreign country.
Read more in
https://www.omnipresent.com/resources/what-is-a-foreign-subsidiary
https://economictimes.indiatimes.com/news/economy/finance/et-in-the-classroom-what-is-the-
difference-between-branch-and-subsidiary-in-foreign-banks/articleshow/13142033.cms
26. If you find any question unknown, do not worry. Look at the marks,
write the required number of sentences applying your common sense
and GK.
