International Financial

Management
Foreign Exchange Market,
Institutions and
Environment

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Dr. Nagendran R

OBJECTIVE OF THE COURSE

To provide a framework for making Financial
Decisions in the current International scenario
To create an awareness about the importance
of International Financial Management in the
changed global scenario
To familiarize the students with various
concepts of Exchange Rate Theories
To ensure that students understand the
current developments in the Forex Markets
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Importance of this course

A wide coalition of US trade unions and members of
Congress is stepping up pressure on President Barack
Obama to confront China over alleged illegal currency
manipulation that could have cost millions of American
jobs. Ewen MacAskill in Washington theguardian.com,
Wednesday 20 May 2009 22.00 BST

http://

www.theguardian.com/world/2009/may/20/obama-china-currency-unemployment

The US Senate has voted through a bill that aims to

aims to put pressure on China to increase the value of
its currency, the yuan 12 October 2011
http://www.bbc.co.uk/news/business-15269123

Paul Ryan hit the Obama administration for delaying the

decision to label China a currency manipulator until
after Election Day, Oct 13, 2012 2:38pm
http://abcnews.go.com/blogs/politics/2012/10/ryan-hits-obama-for-not-being-tough-on-china/

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Dr. Nagendran R

What do you learn in this Unit I?

International Business & its modes
Multinational Corporations (MNC)
The key participants in international financial
functions
Nature of International Finance Functions &
scope of it
Factors leading to fast strides in international
finance functions
IFM & domestic financial management

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Finance Functions
CFO
Treasur
er
Financi
al
Plannin
g

Financi
ng

Cash
Manageme
nt

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Capital
budgeti
ng
Risk
Manageme
nt

Portfolio
Working
Manageme
Capital
nt
Management
Forex
Manageme
nt
Dr. Nagendran R

Controlle
r
Financial
Accounti
ng

Manageme
nt
Accountin
g

Cost
Accounti
ng

Auditing

Taxation

Data
Processing

Whats Special about

International Finance?

Need to consider the effect of exchange rates

when operating in more than one currency
Must consider the political risk associated with
actions of foreign governments
More financing opportunities when you consider
the international capital markets, which may
reduce the firms cost of capital

Define a market imperfection as anything that

interferes with trade

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International Business & its Modes

Borrowing
Trade
IB
Modes

ECB$ 4,562.51 million *

Exports / Imports of
Goods / Services
FDI

Investments

FPI
Franchising

Contracts
*

As per RBI - Dec 2013 only

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Projects
7

FDI is concerned with the operations and

ownership
of host-country firms
Greenfield investments M & A Brownfield investments
1
2
3

- Subsidiary - Outright purchase ofCombination of

1&2
- Investments firm running abroad
- Amalgamation
in
- Vertical or
Equity of
Horizontal
hostcountry
firms International Capital Budgeting
Decisions

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Contractual

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Provide Technical Knowhow

Allow to use your Brand
Turnkey projects
Main feature is no cash outflow
but reverse cash flow happens

Dr. Nagendran R

EXPORTS AND IMPORTS IN INDIA

500000
450000
400000
350000

Source: http://
www.indiastat.com/table/fore
igntrade/12/foreigntrade/107
/1691/data.aspx

Exports

300000

Export

250000

Year

200000
150000

Trade
Balance

(Includin Import
g Reexport)

100000

2000-2001

44560

50536

-5976

50000

2001-2002

43827

51413

-7586

2002-2003

52719

61412

-8693

2003-2004

63843

78150

-14307

2004-2005

83536

111518

-27982

500,000

2005-2006

103091

149166

-46075

450,000

2006-2007

126414

185735

-59321

2007-2008

162904

251439

-88535

2008-2009

182799

298834 -116034

2009-2010

178751

288373 -109621

2010-2011

251136

369769 -118633

2011-2012P
2012-2013
P*
2013-2014P
uptoMay

277125

446939 -169814

265946

448037 -182090

400,000
350,000

Exports

300,000
250,000
200,000
Million USD
150,000
100,000
50,000
0

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Dr.R.Nagendran

48670

86600

10

-37931

 International Finance revolves around foreign

exchange market. The Foreign Exchange
Market (also known as the currency, forex,
or FX) is where currency trading takes place. It
is a market where banks, companies,
exporters,
importers,
fund
managers,
individuals,
central
banks
of
different
countries buy and sell of foreign currencies.

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The forex market is an ongoing 24-hour, 365 days year

market. Trading in forex market does not necessarily
involve an exchange. Hence, the trading goes on the
over-the-counter market (OTC market henceforth).
Major foreign currency trading centers are located in
London, Tokyo, New York. As the markets remain open
at different time on a given day, normally GMT is used
to refer the trading hours at different locations. For
example, the trading duration in
Asia
from GMT.00.00 till GMT 08.00.
London GMT 07:00 till GMT 15:00.
USA
GMT 13.00 till GMT 22.00.
Tokyo
GMT 0.00 (midnight) and ends GMT 9.00.
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Participants in Forex Market

Dealers - large banks,
Professional Asset Management Firms,
Institutional Investors
(mutual funds, Pension funds, Insurance companies)
Hedge funds

Central banks and Governments

Currency speculators,
Corporations,
MNC or TNC
Exporters and Importers
ECB

Financial Institutions / Banks

Travelers and Consumers of foreign goods
Investors and speculators
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 Trading in the FX market reached an all-time

high of $5.3 trillion per day in April 2013, a
35% increase relative to 2010 (http://
www.bis.org/publ/qtrpdf/r_qt1312e.htm)

ECB USD 54750.12 Million India (approx)

The world GDP itself USD 72 trillion

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USA 16.24 USD trillion

China 8.36 USD trillion
Japan 5.96 USD trillion
India 1.88 USD trillion

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Forex Turnover

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15

Global FX Turnover 2013

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 Trading activity since 2010 has risen fairly

evenly across instruments (Graph 1, left-hand
panel, and Table 1). That said, spot was the
largest contributor to turnover growth,
accounting for 41% of the turnover rise. At
$2.05 trillion per day, spot trading almost
reached the same volume as FX swaps ($2.23
trillion). Turnover in FX OTC derivatives such
as forwards (up 43%) and FX options (up 63%)
also grew strongly, albeit from a lower base

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 The spot market relates to immediate

purchase and sale of foreign currency
forward transaction parties agree to buy
and sell foreign currency later.
In swap transactions, parties agree to swap
payment and receipt of foreign currency over
a specified period.
In later modules , these contracts are
explained in detail.

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Multinational Corporation
A corporation that has its facilities and other assets
in at least one country other than its home country.
Such companies have offices and/or factories in
different countries and usually have a centralized
head office where they co-ordinate global
management. Very large multinationals have
budgets that exceed those of many small countries.
Examples:
Mostly consumer goods manufacturers and quickservice restaurants like Unilever, Proctor & Gamble,
Mc Donalds and Seven-Eleven

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MNC
MNC represent a cluster of affiliated firms located in
different countries that:
Are linked through common ownership
Common pool of resources
Respond to common strategies

High degree of integration among different units

Based on strategies MNC are grouped as
Ethnocentric
Home-policy: No difference between domestic and other
country policies

Polycentric
Policies as per the demands of that foreign countries: Host
country orientated policies

Geocentric
Balance between the above two policies
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Transnational Corporations
(TNC)
TNC has been technically defined by United Nations
Commission
on
Transnational
Corporations
and
Investment as enterprises which own or control
production or service facilities outside the country in
which they are based.
They have invested in foreign operations, have a central
corporate facility but give decision-making, R&D and
marketing powers to each individual foreign market.
Petroleum, I.T. consulting, pharmaceutical industries
among others. Examples are Shell, Accenture, Deloitte,
Glaxo-Smith Klein, and Roche.

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Advantages of MNC's for the

host country
The investment level, employment level, and income
level of the host country increases due to the operation
of MNC's.
The industries of host country get latest technology
from foreign countries through MNC's.
The host country's business also gets management
expertise from MNC's.
The domestic traders and market intermediaries of the
host country gets increased business from the
operation of MNC's.
MNC's break protectionalism, curb local monopolies,
create competition among domestic companies and
thus enhance their competitiveness

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 Domestic industries can make use of R and D

outcomes of MNC's.
The host country can reduce imports and
increase exports due to goods produced by
MNC's in the host country. This helps to
improve balance of payment.
Level of industrial and economic development
increases due to the growth of MNC's in the
host country.

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Advantages of MNC's for the

home country
MNC's create opportunities for marketing the
products produced in the home country
throughout the world.
They create employment opportunities to the
people of home country both at home and
abroad.
It gives a boost to the industrial activities of
home
country.
MNC's help to maintain favourable balance of
payment of the home country in the long run.
Home country can also get the benefit of
foreign
by MNC's
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Disadvantages of MNC's for the

host country
MNC's may transfer technology which has become
outdated in the home country.
As MNC's do not operate within the national
autonomy, they may pose a threat to the economic
and political sovereignty of host countries.
MNC's may kill the domestic industry by monpolising
the host country's market.
In order to make profit, MNC's may use natural
resources of the home country indiscriminately and
cause depletion of the resources.
A large sums of money flows to foreign countries in
terms of payments towards profits, dividends and
royalty.

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Disadvantages of MNC's for the

home country
MNC's transfer the capital from the home
country
to various host countries causing unfavourable
balance of payment.
MNC's may not create employment
opportunities
to the people of home country if it adopts
geocentric approach.
As investments in foreign countries is more
profitable, MNC's may neglect the home
countries
industrial and economic development
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Nature of international financial functions

& scope of IFM
Forex Market and Derivatives Market
Exchange Rate factors that affect Exchange Rate
and determination of the same
Exchange Rate Exposure Measurement and
Management
Exchange Rate regime and International liquidity
Investments decision FDI & FPI
International Financial Markets
Regional Development Banks
Eurocurrency market
International securities Market

Interest rate exposure Assessment and

Management
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Nature of international financial functions &

Scope of IFM
MNCs Working capital Management
International accounting and taxation
strategies
Balance of Payments analysis and uses
International indebtness and Management

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28