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International financial managment

International financial management deals with planning and managing financial operations of international activities of an organization. It includes managing foreign exchange risks, international taxation, financing decisions, investments in international financial markets, and accounting differences between nations. The key functions are performed by the treasurer, who manages cash and secures financing, and the controller, who handles accounting activities. The scope of international financial management encompasses balance of payments, international institutions like the IMF and World Bank, and financial markets like foreign exchange markets.

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Mohammed Umair umairsunni@gmail.com FINANCIAL INTERNATIONAL MANAGEMENT
1. Nature 2. Compared with domestic financial management 3. Scope 4. Current assets management, 5. Managing foreign exchange risks, 6. International taxation, 7. International financing decision, 8. International financial markets, 9. International financial investment decisions; 10.International financial accounting 11.National differences in accounting, attempts to harmonize differences. CONTENTS
Finance is the science and art of managing money and other assets. WHAT IS FINANCE? Study of Finance Public Finance Personal Finance Corporate Finance Thus the study of finance can be classified into following ways:- 1. Public Finance: Public finance deals with role of the government in managing financial requirements of the economy. 2. Personal Finance: Personal finance deals with monetary decisions and activities of an individual or a family unit that includes routine income and expenses planning. 3. Corporate Finance: It is concerned with planning, raising, investing and monitoring of finance in order to achieve the financial objectives of the company. .
R&D Improving existing products Explore new ways of producing Controlling costs Efficient methods of production Quality Management Finance function refers to action performed by a finance department that involves acquiring and utilizing funds of a business. WHAT IS FINANCE FUNCTION? Relationship of finance with other functional areas of Management Finance function is an integral part of all various functional areas of an organization such as Production, Marketing, Human Resource, R&D and Administration, it may be difficult to separate finance functions from these functional areas of management. Finance Function • Production • Marketing • HRM • R&D PRODUCTION Raw material Transportation Expansion of production capacity Operational expenses Plant and Machinery MARKETING Product development Promotion activities Distribution activities Pricing activities Customer Delight HUMAN RESOURCE Talent Acquisition and Retention Human Resource Development Compensation Management Employee health an d safety Social security WHAT IS THE ROLE OF FINANCE IN AN ORGANIZATION?
Procuring adequate funds Mobilization of funds Acceleration of profits Financial reporting Accounting and Analysis Maximize firm value The finance function supports the pursuit of business objectives by performing a number of functions such as: AIMS OF FINANCE FUNCTION
Name of Firm Nature of Business Funds Procured recently How the funds were mobilized? Net Profit Firm Value Per Share Bharthi Infratel Telecom tower infrastructure providers which deploys, owns and manages telecom towers and communication structures for all wireless operators Rs 4,500 Crore 1. Installation of 4,813 new towers; 2. Up gradation and replacement on existing towers; 3. Green initiatives at tower sites; 4. General corporate purposes; and Rs. 462.80 Crores Rs. 279.15 Rs. 200 Just Dial Local Search Engine: providing local search services over the Phone, Web, Mobile and SMS. Rs. 327 crore The funds will be used for expansion and to upgrade technology. Rs. 31.49 Crores Rs. 1,495 Rs. 530 PC Jeweller Ltd Operations include the manufacture, retail and wholesale of jewellery. Rs. 609.30 Crore 1. Finance establishment of new showrooms; 2. General corporate purposes. Rs. 69.59 Crores Rs. 236 Rs. 135 Channel Nine Entertain ment Business of Production, Marketing, Distribution of Television serials, Television Programmes, Films, Video films, Corporate Films, Feature films, Documentaries, and Marketing of sports and Entertainment events. Rs.11.7 Crore 1. To finance the estimated expenditure of production of two films; 2. Strengthening distribution operations; 3. Brand building Rs. 0.05 Crores Rs. 497.50 Rs. 25 AIMS OF FINANCE FUNCTION
MEANING & SCOPE OF FINANCIAL MANAGEMENT Financial management is the process of planning, raising, controlling and administering of funds used in the business. Financing Decisions Estimating the financial requirement. Determining the capital structure. Investing Decisions Assessing risk and return Investment of Funds Dividend Decisions Management of earnings Liquidity Decisions currents assets and current liabilities SCOPE OF FINANCIAL MANAGEMENT Decision Type Scope Key consideration Financing Decision Raising of Funds Cost and Risk Investment Decision Allocation of funds in assets Risk and Return Dividend Decision Distribution of profits Requirements of shareholders Working Capital Decisions Managing current assets & Lia. Liquidity & Profitability
WHAT IS INTERNATIONAL FINANCIAL MANAGEMENT? International financial management may be defined as management of financial operations of different international activities of an organization. DISTINGUISHING FEATURES OF INTERNATIONAL FINANCIAL MANAGEMENT Foreign exchange risk Variability of exchange rates is widely regarded as the most serious international financial problem facing corporate managers and policy makers. Political risk It the risk of losing money due to changes that occurs in a country’s government. Political actions and instability may make it difficult for companies to operate. Acts of war, terrorism, trade barriers and military coups are all extreme examples of political risk. Expanded opportunity sets Firms can raise funds in capital markets where cost of capital is the lowest. In addition, firms can also gain from greater economies of scale when they operate on a global basis. Market imperfections There are profound differences among nations’ laws, tax systems, business practices and general cultural environments.
2. The CONTROLLER The controller typically handles the accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. The treasurer’s focus tends to be more external, whereas the controller’s focus is more internal. 1. The TREASURER The treasury typically manages the firm’s cash, investing surplus funds when available and securing outside financing when needed. The treasury also oversees a firm’s investment plans and manages critical risks related to movements in foreign currency values, interest rates, and commodity prices. FUNCTIONS OF INTERNATIONAL FINANCIAL MANAGEMENT TREASURER  Procurement of funds  Banking relationship  Investor relations  Investment of funds  Cash management  Insuring assets  Credit appraisal and collections CONTROLLER  Accounting and auditing  Reporting of financial information  Custody of records  Budgeting  Interpretation of financial data  Appraisal of results  Preparation of taxes
International Institutions Balance of Payments International Financial Markets FOREX Markets International financial services International Taxation International Accounting SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International financial management may be defined as management of financial operations of different international activities of an organization. Scope of International finance
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT There are various global bodies regulating different aspects of international finance. A. INTERNATIONAL INSTITUTIONS • Supporting sustainable investments in the private sector of developing countries. • Source of multilateral loans and equity financing for projects undertaken by the private sector in developing countries. • Technical assistance to businesses and governments of developing countries. INTERNATIONAL FINANCE CORPORATION • Monitors the balance of payments of its member countries. • Lender of last resort for countries facing a financial crisis. INTERNATIONAL MONETARY FUND • It funds the development of projects, mainly in developing countries WORLD BANK • Resolves multilateral and bilateral trade disputes • Negotiation of different trade agreements WORLD TRADE ORGANIZATION
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. B. INTERNATIONAL FINANCIAL SERVICES  International Financial services can be defined as the products and services offered by institutions for the facilitation of various financial transactions and other related activities.  Equipment leasing/Lease financing  Hire purchase and consumer credit  Bill discounting  Venture capital  Insurance services  Factoring  Forfaiting  Mutual fund  Dealing in foreign exchange A. ASSET/FUND BASED SERVICES  Merchant banking  Project advisory  Custodian services  M&A services  Credit rating services  Capital restructuring services  Hedging of risks  Loan syndication  Securitization of debt B. FEE BASED FINANCIAL SERVICES Here funds are arranged and interest is charged. Advisory services for which bank charges fee and & renders service
D. BALANCE OF PAYMENTS  Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. CAUSES OF DISEQUILIBRIUM IN BALANCE OF PAYMENT ↓ Population Growth Development Programmes Demonstration Effect Natural Factors Cyclical Fluctuations Inflation Poor Marketing Strategies Flight of Capital Globalization
C. INTERNATIONAL FINANCIAL MARKET  International financial market is a broad term describing any global marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. InternationalFinancial Markets Money Market Forex market Eurocurrency market General Currency Market Capital Markets Euro Bond Market Depository Receipts Institutional Finance FCCB
C. INTERNATIONAL FINANCIAL MARKET SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. FOREX Market • The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Eurocurrency market • The Eurocurrency market is made up of several large banks called Eurobanks that accept deposits and provide loans in various currencies. Eurocredit market • Loans of one year or longer are extended by Eurobanks to MNCs or government agencies in the Eurocredit market. These loans are known as Eurocredit loans. Eurobond market • A bond issued in a currency other than the currency of the country or market in which it is issued. • The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy, sell, and transfer Eurobonds.
C. INTERNATIONAL FINANCIAL MARKET SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. ADR • American Depositary Receipt: A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. GDR • Global Depositary Receipt: A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. FCCB • FCCB: 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.
F. FOREX MARKETS  The foreign exchange market (Forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. Its huge trading volume, leading to high liquidity; Its geographical dispersion; Its continuous operation: 24 hours a day The variety of factors that affect exchange rates; The low margins of relative profit compared with other markets of fixed income; and The use of leverage to enhance profit margins with respect to account size. FEATURES OF FOREX MARKETS
F. FOREX MARKETS SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. MARKET PARTICIPANTS OF FOREX MARKETS Banks Commercial companies Central banks Investment management firms Retail foreign exchange traders Money transfer/rem ittance companies IPORTANCE OF FOREX MARKETS Liquidity Rates Reserves Hedging International Trade
F. FOREX MARKETS SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. TYPES OF EXCHANGE RATES A country's exchange rate regime under which the government or central bank ties the official exchange rate to another country's currencyA-FIXED EXCHANGE RATE Advantages of the Fixed Exchange Rate 1. Reduced risk in international trade 2. Introduces discipline in economic management 3. Fixed rates should eliminate destabilizing speculation 4. Promotes International Investment 5. Suitable for Currency Area 1. No automatic balance of payments adjustment 2. Large holdings of foreign exchange reserves required 3. Loss of freedom in your internal policy 4. Fixed rates are inherently unstable. Disadvantages of the Fixed Exchange Rate
F. FOREX MARKETS SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. TYPES OF EXCHANGE RATES A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. B-Floating Exchange Rate Advantages of the Floating Exchange Rate 1. Automatic balance of payments adjustment 2. Freeing internal policy 3. Absence of crises 4. Flexibility 5. Lower foreign exchange reserves 1. Uncertainty 2. Lack of investment 3. Speculation 4. Inflation Disadvantages of the Floating Exchange Rate
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT F. FOREX MARKETS FOREIGN EXCHANGE RISK Exchange Risk Exchange exposure Transaction exposure Translation exposure Economic exposure Liquidity risk Interest rate risk Foreign-exchange risk is the risk that an asset or investment denominated in a foreign currency will lose value as a result of unfavourable exchange rate Transaction exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. BILLS PAYABLES Goods bought from US Co;  On credit term of 6 months  Value of Goods ($500)  At time of purchase ($1=Rs 45) Case 1: Value of $ ↑ E.g.: Rs. 50=$1 Rs. 50 x $500 =Rs 25,000 Case 2: Value of $ ↓ E.g.: Rs. 40=$1 Rs. 40 x $500 =Rs 20,000 INTEREST ON DEPOSIT  Amt deposited in Swiss Bank  Principle Amount : €10,000  Interest rate : 10% P.A  Interest Amount : €1000  At the time of Dep : 1€ = Rs. 60 Case 1: Value of € ↑ E.g.: 1€ = Rs. 75 Rs. 75 x €1000 =Rs 75,000 Case 1: Value of € ↓ E.g.: 1€ = Rs. 50 Rs. 50 x €1000 =Rs 50,000 TRANSACTION EXPOSURE Dividends Interest Royalty TAX
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT F. FOREX MARKETS FOREIGN EXCHANGE RISK ‘Translation Exposure' The risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes Balance Sheet Assets - 1/01/2016  Plant and Machinery  Inventory  Cash Infosys .Inc (USA) Subsidy of Infosys India $ 200000 $ 100000 $ 20000 $ 320000 Exchange rate as on 1/01/2016 $1= Rs. 45 Therefore translated value of these assets as on 1/1/2010 is Rs 45 X $ 320000 = 1,44,00,000 Balance Sheet Assets - 31/12/2016  Plant and Machinery  Inventory  Cash Infosys .Inc (USA) Subsidy of Infosys India $ 200000 $ 100000 $ 20000 $ 320000 Exchange rate as on 31/12/2016 $1= Rs. 46 Therefore translated value of these assets as on 1/1/2010 is Rs 46 X $ 320000 = 1,47,20,000 Infosys Ltd (India) Infosys .Inc (USA) Subsidy of Infosys India Therefore translation gain 1,47,20,000- 1,44,00,000 = Rs. 3,20,000
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT F. FOREX MARKETS FOREIGN EXCHANGE RISK Economic exposure is the risk that a company's cash flow, foreign investments, and earnings may suffer as a result of fluctuating foreign currency exchange rates. Liquidity Risk Liquidity refers to the amount of market interest (the number of active traders and the overall volume of trading) present in a particular market at any given time.  From an MNC perspective, liquidity is usually experienced in terms of the volatility of price movements.  A highly liquid market will tend to see prices move very gradually and in smaller increments.  A less liquid market will tend to see prices move more abruptly and in larger price increments. Interest rate risk the risk that rising interest rates will make their fixed interest rate bonds less valuable.
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT F. FOREX MARKETS MANAGING FOREIGN EXCHANGE RISKS Many firms are exposed to foreign exchange risk - i.e. their wealth is affected by movements in exchange rates - and will seek to manage their risk exposure. The internal techniques Invoice in home currency Leading and lagging Matching Decide to do nothing? The external techniques Forward contracts Money market hedges Futures contracts Options Currency swaps
Futures Trading: Example of a Futures Contract Let us say after completing MCm your planning to study in Harvard USA. For which you have to pay college fee of $1000. You have to Pay this in December. You call up ICICI bank and check the rate and find . But you need $1000 in December. Underlying asset: USD Expiry Date December Strike price $1=Rs. 47 Current price Rs. 200/-. This difference between the strike price and the current price is Cost of Carry. =Rs 2/- contract size Strike price X Quantity (Rs. 47/- X 1000 USD = Rs 47,000 Margin Rs. 23500 Delivery Method ? QUANTITY 1000 USD
Valuation of Futures Scenario: 1 Scenario: 2 End of the expiry date $1=Rs. 49↑ End of the expiry date $1=Rs. 43 ↓ Rs. 49 - Rs. 47 = Rs. 2 (Rs. 2x1000 USD = Rs.2000) will be paid to you by Seller. Rs. 47 - Rs. 43 = Rs. 4 (Rs. 4x1000 USD = Rs. 4000) will be paid to you by Buyer.
What is International taxation?  International taxation refers to tax levied on the cross –border transaction.  The transaction may take place between two or more persons or entity in two or more countries or tax jurisdiction.  Such a transaction may involve a person in one country with property and income flows in another. TYPES OF INTERNATIONAL TAXATION • Residence based taxation: • Residents of the country are taxed on their worldwide (local and foreign) income. • Source Based Taxation: • Only local income from a source inside the country is taxed. Usually non-residents are taxed only on their local income.
TAX IMPLICATIONS OF MNCs OPERATING IN INDIA  Resident:  INDIAN COMPANY : The Company registered in India is an Indian Company.  Indian Company is always treated as Resident in India whether Control & Management is in India or Outside India.  FOREIGN COMPANY : If Control & Management of the affairs of the business of Foreign Company is situated wholly in India then its residential status is Resident in India. Sec.6(3), Residential Status of foreign Company  Non-Resident:  If its Control & Management of the affairs of the business is situated wholly / partially outside India then its Residential Status is Non‐Resident in India. *BOD MEETING
INCIDENCE OF TAX SECTION 5 Type of income Ordinary Resident (OR) Non Resident (NR) 1. Indian income Taxable Taxable 2. Foreign income 3. Income from foreign remittances 4. Income from business or profession on the Basis of Place of Control a) Income from business wholly or partly controlled from India a) Income from business wholly controlled from outside India Taxable Taxable Taxable Taxable No Tax No Tax No Tax No Tax 5. past untaxed profit brought into India During the previous year. No Tax No Tax
OBJECTIVES OF INTERNATIONAL FINANCIAL MANAGEMENT Goals or objectives describe a particular result aimed to achieve with a prescribed time frame and with available resources. Goals of Financial Management Profit Maximization Wealth Maximization Profit Maximization The prime motto of any kind of business activity is earning profit Sales - Expenses = Profit The term ‘profit maximization’ implies generation of huge amount of profits over the time period, this includes both short-term and long-term. Decisions whether investment, financing, dividend or working capital management should focus on maximization of profits
FAVORABLE ARGUMENTS FOR PROFIT MAXIMIZATION Is profit maximization an ethical Goal?  Barometer of Performance  Economic survival  Expansion and Diversification Why Profit Maximization?  Attracts investors  Maximize stakeholders return  To fulfil social desire MERITS
Concept of WEALTH MAXIMIZATION Wealth Maximization is process of increasing shareholders wealth by way of maximizing the market value of firm’s common stock.  Serves interest of Society  Benefits customers  Considers timing of benefits & risk  Benefits employees  Prescriptive idea  Leads to controversy  Not socially desirable  Ownership and Management conflict MERITS DEMERITS
OBJECTIVES OF INTERNATIONAL FINANCIAL MANAGEMENT Goals or objectives describe a particular result aimed to achieve with a prescribed time frame and with available resources. • Goal - Maximize Shareholder Wealth • maximize Capital Gains and Dividends taking into account risk • A company’s stock price is very important (incorporates all relevant information) • This goal applies in the Anglo-American World [U.S., U.K., Canada, Australia and New Zealand]. • Goal in Continental Europe and Japan – Stakeholder Capitalism Model • Maximize Corporate Wealth (not only stockholder wealth but also wealth of managers, labor, local community, suppliers and creditors). • Wealth not just financial wealth but also • The firm’s technical, market and human resources.  There are different goals in different countries.  What we believe in the U.S. is not necessarily followed in other countries  There appears to be a trend toward more use of the shareholder wealth maximization model.

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International financial managment

  • 1.
  • 2.
    1. Nature 2. Comparedwith domestic financial management 3. Scope 4. Current assets management, 5. Managing foreign exchange risks, 6. International taxation, 7. International financing decision, 8. International financial markets, 9. International financial investment decisions; 10.International financial accounting 11.National differences in accounting, attempts to harmonize differences. CONTENTS
  • 3.
    Finance is thescience and art of managing money and other assets. WHAT IS FINANCE? Study of Finance Public Finance Personal Finance Corporate Finance Thus the study of finance can be classified into following ways:- 1. Public Finance: Public finance deals with role of the government in managing financial requirements of the economy. 2. Personal Finance: Personal finance deals with monetary decisions and activities of an individual or a family unit that includes routine income and expenses planning. 3. Corporate Finance: It is concerned with planning, raising, investing and monitoring of finance in order to achieve the financial objectives of the company. .
  • 4.
    R&D Improving existing products Explorenew ways of producing Controlling costs Efficient methods of production Quality Management Finance function refers to action performed by a finance department that involves acquiring and utilizing funds of a business. WHAT IS FINANCE FUNCTION? Relationship of finance with other functional areas of Management Finance function is an integral part of all various functional areas of an organization such as Production, Marketing, Human Resource, R&D and Administration, it may be difficult to separate finance functions from these functional areas of management. Finance Function • Production • Marketing • HRM • R&D PRODUCTION Raw material Transportation Expansion of production capacity Operational expenses Plant and Machinery MARKETING Product development Promotion activities Distribution activities Pricing activities Customer Delight HUMAN RESOURCE Talent Acquisition and Retention Human Resource Development Compensation Management Employee health an d safety Social security WHAT IS THE ROLE OF FINANCE IN AN ORGANIZATION?
  • 5.
    Procuring adequate funds Mobilizationof funds Acceleration of profits Financial reporting Accounting and Analysis Maximize firm value The finance function supports the pursuit of business objectives by performing a number of functions such as: AIMS OF FINANCE FUNCTION
  • 6.
    Name of Firm Nature ofBusiness Funds Procured recently How the funds were mobilized? Net Profit Firm Value Per Share Bharthi Infratel Telecom tower infrastructure providers which deploys, owns and manages telecom towers and communication structures for all wireless operators Rs 4,500 Crore 1. Installation of 4,813 new towers; 2. Up gradation and replacement on existing towers; 3. Green initiatives at tower sites; 4. General corporate purposes; and Rs. 462.80 Crores Rs. 279.15 Rs. 200 Just Dial Local Search Engine: providing local search services over the Phone, Web, Mobile and SMS. Rs. 327 crore The funds will be used for expansion and to upgrade technology. Rs. 31.49 Crores Rs. 1,495 Rs. 530 PC Jeweller Ltd Operations include the manufacture, retail and wholesale of jewellery. Rs. 609.30 Crore 1. Finance establishment of new showrooms; 2. General corporate purposes. Rs. 69.59 Crores Rs. 236 Rs. 135 Channel Nine Entertain ment Business of Production, Marketing, Distribution of Television serials, Television Programmes, Films, Video films, Corporate Films, Feature films, Documentaries, and Marketing of sports and Entertainment events. Rs.11.7 Crore 1. To finance the estimated expenditure of production of two films; 2. Strengthening distribution operations; 3. Brand building Rs. 0.05 Crores Rs. 497.50 Rs. 25 AIMS OF FINANCE FUNCTION
  • 7.
    MEANING & SCOPEOF FINANCIAL MANAGEMENT Financial management is the process of planning, raising, controlling and administering of funds used in the business. Financing Decisions Estimating the financial requirement. Determining the capital structure. Investing Decisions Assessing risk and return Investment of Funds Dividend Decisions Management of earnings Liquidity Decisions currents assets and current liabilities SCOPE OF FINANCIAL MANAGEMENT Decision Type Scope Key consideration Financing Decision Raising of Funds Cost and Risk Investment Decision Allocation of funds in assets Risk and Return Dividend Decision Distribution of profits Requirements of shareholders Working Capital Decisions Managing current assets & Lia. Liquidity & Profitability
  • 8.
    WHAT IS INTERNATIONALFINANCIAL MANAGEMENT? International financial management may be defined as management of financial operations of different international activities of an organization. DISTINGUISHING FEATURES OF INTERNATIONAL FINANCIAL MANAGEMENT Foreign exchange risk Variability of exchange rates is widely regarded as the most serious international financial problem facing corporate managers and policy makers. Political risk It the risk of losing money due to changes that occurs in a country’s government. Political actions and instability may make it difficult for companies to operate. Acts of war, terrorism, trade barriers and military coups are all extreme examples of political risk. Expanded opportunity sets Firms can raise funds in capital markets where cost of capital is the lowest. In addition, firms can also gain from greater economies of scale when they operate on a global basis. Market imperfections There are profound differences among nations’ laws, tax systems, business practices and general cultural environments.
  • 9.
    2. The CONTROLLER Thecontroller typically handles the accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. The treasurer’s focus tends to be more external, whereas the controller’s focus is more internal. 1. The TREASURER The treasury typically manages the firm’s cash, investing surplus funds when available and securing outside financing when needed. The treasury also oversees a firm’s investment plans and manages critical risks related to movements in foreign currency values, interest rates, and commodity prices. FUNCTIONS OF INTERNATIONAL FINANCIAL MANAGEMENT TREASURER  Procurement of funds  Banking relationship  Investor relations  Investment of funds  Cash management  Insuring assets  Credit appraisal and collections CONTROLLER  Accounting and auditing  Reporting of financial information  Custody of records  Budgeting  Interpretation of financial data  Appraisal of results  Preparation of taxes
  • 10.
    International Institutions Balance ofPayments International Financial Markets FOREX Markets International financial services International Taxation International Accounting SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International financial management may be defined as management of financial operations of different international activities of an organization. Scope of International finance
  • 11.
    SCOPE OF INTERNATIONALFINANCIAL MANAGEMENT There are various global bodies regulating different aspects of international finance. A. INTERNATIONAL INSTITUTIONS • Supporting sustainable investments in the private sector of developing countries. • Source of multilateral loans and equity financing for projects undertaken by the private sector in developing countries. • Technical assistance to businesses and governments of developing countries. INTERNATIONAL FINANCE CORPORATION • Monitors the balance of payments of its member countries. • Lender of last resort for countries facing a financial crisis. INTERNATIONAL MONETARY FUND • It funds the development of projects, mainly in developing countries WORLD BANK • Resolves multilateral and bilateral trade disputes • Negotiation of different trade agreements WORLD TRADE ORGANIZATION
  • 12.
    SCOPE OF INTERNATIONALFINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. B. INTERNATIONAL FINANCIAL SERVICES  International Financial services can be defined as the products and services offered by institutions for the facilitation of various financial transactions and other related activities.  Equipment leasing/Lease financing  Hire purchase and consumer credit  Bill discounting  Venture capital  Insurance services  Factoring  Forfaiting  Mutual fund  Dealing in foreign exchange A. ASSET/FUND BASED SERVICES  Merchant banking  Project advisory  Custodian services  M&A services  Credit rating services  Capital restructuring services  Hedging of risks  Loan syndication  Securitization of debt B. FEE BASED FINANCIAL SERVICES Here funds are arranged and interest is charged. Advisory services for which bank charges fee and & renders service
  • 13.
    D. BALANCE OFPAYMENTS  Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. CAUSES OF DISEQUILIBRIUM IN BALANCE OF PAYMENT ↓ Population Growth Development Programmes Demonstration Effect Natural Factors Cyclical Fluctuations Inflation Poor Marketing Strategies Flight of Capital Globalization
  • 14.
    C. INTERNATIONAL FINANCIALMARKET  International financial market is a broad term describing any global marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. InternationalFinancial Markets Money Market Forex market Eurocurrency market General Currency Market Capital Markets Euro Bond Market Depository Receipts Institutional Finance FCCB
  • 15.
    C. INTERNATIONAL FINANCIALMARKET SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. FOREX Market • The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-the-counter financial market for the trading of currencies. Eurocurrency market • The Eurocurrency market is made up of several large banks called Eurobanks that accept deposits and provide loans in various currencies. Eurocredit market • Loans of one year or longer are extended by Eurobanks to MNCs or government agencies in the Eurocredit market. These loans are known as Eurocredit loans. Eurobond market • A bond issued in a currency other than the currency of the country or market in which it is issued. • The Eurobond market is made up of investors, banks, borrowers, and trading agents that buy, sell, and transfer Eurobonds.
  • 16.
    C. INTERNATIONAL FINANCIALMARKET SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. ADR • American Depositary Receipt: A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. GDR • Global Depositary Receipt: A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. FCCB • FCCB: 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.
  • 17.
    F. FOREX MARKETS The foreign exchange market (Forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. Its huge trading volume, leading to high liquidity; Its geographical dispersion; Its continuous operation: 24 hours a day The variety of factors that affect exchange rates; The low margins of relative profit compared with other markets of fixed income; and The use of leverage to enhance profit margins with respect to account size. FEATURES OF FOREX MARKETS
  • 18.
    F. FOREX MARKETS SCOPEOF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. MARKET PARTICIPANTS OF FOREX MARKETS Banks Commercial companies Central banks Investment management firms Retail foreign exchange traders Money transfer/rem ittance companies IPORTANCE OF FOREX MARKETS Liquidity Rates Reserves Hedging International Trade
  • 19.
    F. FOREX MARKETS SCOPEOF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. TYPES OF EXCHANGE RATES A country's exchange rate regime under which the government or central bank ties the official exchange rate to another country's currencyA-FIXED EXCHANGE RATE Advantages of the Fixed Exchange Rate 1. Reduced risk in international trade 2. Introduces discipline in economic management 3. Fixed rates should eliminate destabilizing speculation 4. Promotes International Investment 5. Suitable for Currency Area 1. No automatic balance of payments adjustment 2. Large holdings of foreign exchange reserves required 3. Loss of freedom in your internal policy 4. Fixed rates are inherently unstable. Disadvantages of the Fixed Exchange Rate
  • 20.
    F. FOREX MARKETS SCOPEOF INTERNATIONAL FINANCIAL MANAGEMENT International finance is related to management, economic and commercial activities and accounting sciences. TYPES OF EXCHANGE RATES A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. B-Floating Exchange Rate Advantages of the Floating Exchange Rate 1. Automatic balance of payments adjustment 2. Freeing internal policy 3. Absence of crises 4. Flexibility 5. Lower foreign exchange reserves 1. Uncertainty 2. Lack of investment 3. Speculation 4. Inflation Disadvantages of the Floating Exchange Rate
  • 21.
    SCOPE OF INTERNATIONALFINANCIAL MANAGEMENT F. FOREX MARKETS FOREIGN EXCHANGE RISK Exchange Risk Exchange exposure Transaction exposure Translation exposure Economic exposure Liquidity risk Interest rate risk Foreign-exchange risk is the risk that an asset or investment denominated in a foreign currency will lose value as a result of unfavourable exchange rate Transaction exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. BILLS PAYABLES Goods bought from US Co;  On credit term of 6 months  Value of Goods ($500)  At time of purchase ($1=Rs 45) Case 1: Value of $ ↑ E.g.: Rs. 50=$1 Rs. 50 x $500 =Rs 25,000 Case 2: Value of $ ↓ E.g.: Rs. 40=$1 Rs. 40 x $500 =Rs 20,000 INTEREST ON DEPOSIT  Amt deposited in Swiss Bank  Principle Amount : €10,000  Interest rate : 10% P.A  Interest Amount : €1000  At the time of Dep : 1€ = Rs. 60 Case 1: Value of € ↑ E.g.: 1€ = Rs. 75 Rs. 75 x €1000 =Rs 75,000 Case 1: Value of € ↓ E.g.: 1€ = Rs. 50 Rs. 50 x €1000 =Rs 50,000 TRANSACTION EXPOSURE Dividends Interest Royalty TAX
  • 22.
    SCOPE OF INTERNATIONALFINANCIAL MANAGEMENT F. FOREX MARKETS FOREIGN EXCHANGE RISK ‘Translation Exposure' The risk that a company's equities, assets, liabilities or income will change in value as a result of exchange rate changes Balance Sheet Assets - 1/01/2016  Plant and Machinery  Inventory  Cash Infosys .Inc (USA) Subsidy of Infosys India $ 200000 $ 100000 $ 20000 $ 320000 Exchange rate as on 1/01/2016 $1= Rs. 45 Therefore translated value of these assets as on 1/1/2010 is Rs 45 X $ 320000 = 1,44,00,000 Balance Sheet Assets - 31/12/2016  Plant and Machinery  Inventory  Cash Infosys .Inc (USA) Subsidy of Infosys India $ 200000 $ 100000 $ 20000 $ 320000 Exchange rate as on 31/12/2016 $1= Rs. 46 Therefore translated value of these assets as on 1/1/2010 is Rs 46 X $ 320000 = 1,47,20,000 Infosys Ltd (India) Infosys .Inc (USA) Subsidy of Infosys India Therefore translation gain 1,47,20,000- 1,44,00,000 = Rs. 3,20,000
  • 23.
    SCOPE OF INTERNATIONALFINANCIAL MANAGEMENT F. FOREX MARKETS FOREIGN EXCHANGE RISK Economic exposure is the risk that a company's cash flow, foreign investments, and earnings may suffer as a result of fluctuating foreign currency exchange rates. Liquidity Risk Liquidity refers to the amount of market interest (the number of active traders and the overall volume of trading) present in a particular market at any given time.  From an MNC perspective, liquidity is usually experienced in terms of the volatility of price movements.  A highly liquid market will tend to see prices move very gradually and in smaller increments.  A less liquid market will tend to see prices move more abruptly and in larger price increments. Interest rate risk the risk that rising interest rates will make their fixed interest rate bonds less valuable.
  • 24.
    SCOPE OF INTERNATIONALFINANCIAL MANAGEMENT F. FOREX MARKETS MANAGING FOREIGN EXCHANGE RISKS Many firms are exposed to foreign exchange risk - i.e. their wealth is affected by movements in exchange rates - and will seek to manage their risk exposure. The internal techniques Invoice in home currency Leading and lagging Matching Decide to do nothing? The external techniques Forward contracts Money market hedges Futures contracts Options Currency swaps
  • 25.
    Futures Trading: Exampleof a Futures Contract Let us say after completing MCm your planning to study in Harvard USA. For which you have to pay college fee of $1000. You have to Pay this in December. You call up ICICI bank and check the rate and find . But you need $1000 in December. Underlying asset: USD Expiry Date December Strike price $1=Rs. 47 Current price Rs. 200/-. This difference between the strike price and the current price is Cost of Carry. =Rs 2/- contract size Strike price X Quantity (Rs. 47/- X 1000 USD = Rs 47,000 Margin Rs. 23500 Delivery Method ? QUANTITY 1000 USD
  • 26.
    Valuation of Futures Scenario:1 Scenario: 2 End of the expiry date $1=Rs. 49↑ End of the expiry date $1=Rs. 43 ↓ Rs. 49 - Rs. 47 = Rs. 2 (Rs. 2x1000 USD = Rs.2000) will be paid to you by Seller. Rs. 47 - Rs. 43 = Rs. 4 (Rs. 4x1000 USD = Rs. 4000) will be paid to you by Buyer.
  • 27.
    What is Internationaltaxation?  International taxation refers to tax levied on the cross –border transaction.  The transaction may take place between two or more persons or entity in two or more countries or tax jurisdiction.  Such a transaction may involve a person in one country with property and income flows in another. TYPES OF INTERNATIONAL TAXATION • Residence based taxation: • Residents of the country are taxed on their worldwide (local and foreign) income. • Source Based Taxation: • Only local income from a source inside the country is taxed. Usually non-residents are taxed only on their local income.
  • 28.
    TAX IMPLICATIONS OFMNCs OPERATING IN INDIA  Resident:  INDIAN COMPANY : The Company registered in India is an Indian Company.  Indian Company is always treated as Resident in India whether Control & Management is in India or Outside India.  FOREIGN COMPANY : If Control & Management of the affairs of the business of Foreign Company is situated wholly in India then its residential status is Resident in India. Sec.6(3), Residential Status of foreign Company  Non-Resident:  If its Control & Management of the affairs of the business is situated wholly / partially outside India then its Residential Status is Non‐Resident in India. *BOD MEETING
  • 29.
    INCIDENCE OF TAXSECTION 5 Type of income Ordinary Resident (OR) Non Resident (NR) 1. Indian income Taxable Taxable 2. Foreign income 3. Income from foreign remittances 4. Income from business or profession on the Basis of Place of Control a) Income from business wholly or partly controlled from India a) Income from business wholly controlled from outside India Taxable Taxable Taxable Taxable No Tax No Tax No Tax No Tax 5. past untaxed profit brought into India During the previous year. No Tax No Tax
  • 30.
    OBJECTIVES OF INTERNATIONALFINANCIAL MANAGEMENT Goals or objectives describe a particular result aimed to achieve with a prescribed time frame and with available resources. Goals of Financial Management Profit Maximization Wealth Maximization Profit Maximization The prime motto of any kind of business activity is earning profit Sales - Expenses = Profit The term ‘profit maximization’ implies generation of huge amount of profits over the time period, this includes both short-term and long-term. Decisions whether investment, financing, dividend or working capital management should focus on maximization of profits
  • 31.
    FAVORABLE ARGUMENTS FORPROFIT MAXIMIZATION Is profit maximization an ethical Goal?  Barometer of Performance  Economic survival  Expansion and Diversification Why Profit Maximization?  Attracts investors  Maximize stakeholders return  To fulfil social desire MERITS
  • 32.
    Concept of WEALTHMAXIMIZATION Wealth Maximization is process of increasing shareholders wealth by way of maximizing the market value of firm’s common stock.  Serves interest of Society  Benefits customers  Considers timing of benefits & risk  Benefits employees  Prescriptive idea  Leads to controversy  Not socially desirable  Ownership and Management conflict MERITS DEMERITS
  • 33.
    OBJECTIVES OF INTERNATIONALFINANCIAL MANAGEMENT Goals or objectives describe a particular result aimed to achieve with a prescribed time frame and with available resources. • Goal - Maximize Shareholder Wealth • maximize Capital Gains and Dividends taking into account risk • A company’s stock price is very important (incorporates all relevant information) • This goal applies in the Anglo-American World [U.S., U.K., Canada, Australia and New Zealand]. • Goal in Continental Europe and Japan – Stakeholder Capitalism Model • Maximize Corporate Wealth (not only stockholder wealth but also wealth of managers, labor, local community, suppliers and creditors). • Wealth not just financial wealth but also • The firm’s technical, market and human resources.  There are different goals in different countries.  What we believe in the U.S. is not necessarily followed in other countries  There appears to be a trend toward more use of the shareholder wealth maximization model.