International

Financial
Management
R.Subharanja
ni

Course Title

: INTERNATIONAL FINANCIAL

MANAGEMENT
Course Code

: MB12IFM

Trimester / Credits

: IV / 3

Course Objectives
This course will provide a basic framework for making
corporate financial decisions in a global context. On
completion of this course students will be able to:
discuss the challenges and opportunities in the
global financial markets
classify the structure of foreign exchange market
analyse the economic determinants of foreign
exchange rate
2
measure and manage the foreign exchange

Course Coverage
1. Financial Management in a Global Context - The
Finance Function, The Emerging Challenges,
Recent Changes in Global Financial Markets
2. The Nature and Measurement of Exposure and
Risk Exposure and Risk: A Formal Approach,
Classification of Foreign Exchange Exposure and
Risk, Exchange Rates, Interest Rates, Inflation
Rates and Exposure, Interest Rate Exposure and
Risk
3. The International Monetary System - Exchange
Rate Regimes, International Monetary Fund
3
(IMF), The Economic and Monetary Union (EMU)

4. Global Financial Markets and Interest RatesDomestic and Offshore Markets, Euro Markets, An
overview of Money Market Instruments
5. The Foreign Exchange Market-Structure of the Forex
Market, Types of transactions and settlement dates
6. Currency and Interest Rate Futures
7. Currency Options - Options on Spot, Options on
Futures and Futures Style Options - Options
Terminology
8. Exchange Rate Determination and Forecasting
9. Short term Financial Management in a MNC
10.Long Term Borrowing in the Global Capital Markets

Text Book
Apte, P.G. (2011). International Financial
Management, 6/e; New Delhi: Tata McGrawHill
Additional Reading
Shapiro, Alan C. (2009). Multinational
Financial Management, 8/e; New Delhi:
Wiley India
Jain, P.K., Josette, Peyrard, and Surendra, S.
Yadav (2008). International Financial
Management; New Delhi: Macmillan India 5

IFM Introduction

What is International Business?

International

Business conducts
business transactions all over the
world.
These transactions include the
transfer of goods, services,
technology, managerial knowledge,
and capital to other countries.
International business involves
exports and imports.
7

Why firms engage in

International Business?
1.

Comparative Advantage
A country cannot produce all the products it
consumes
U.S, Europe, Japan-computer products
Asian and African Countries-agricultural products
Increases in production efficiency
Leads to penetration of foreign markets
Example: Vatican City-doesnt produce goods but
imports

2.

Imperfect Markets
Transfer of labour and resources for production is
difficult because of trade barriers, costs, etc.

Why firms engage in

International Business?
3.

Product cycle-Example: Nokia

Firm creates products to

accommodate local
demand
Firm differentiates
product
from competitors and/or
expands product line in
foreign country
Firms foreign business
declines as its
competitive
advantages are
eliminated.

Firm exports
products to
accommodate
foreign demand
Firm establishes
foreign
subsidiary to
establish
presence in
foreign
country and
possibly
to reduce costs.

Features of International
Business

10

Importance of International
Business

11

How firms engage in

international Business?
International

Trade

Licensing
Vodafone

Franchising
Dominos

Joint

Ventures

Starbucks-Tata Coffee

Acquisitions

of existing Operations

Tata buying the Jaguar production unit

Establishing

new Foreign Subsidiaries

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Management Structure of
an MNC-Centralized
Cash
Managem
ent
at A
Inventory and
Accounts
Receivable
Management at A
Financing at A
Capital
Expenditures
at A

Financia
l
Manage
rs
of
Parent

Cash
Managem
ent
at B
Inventory and
Accounts
Receivable
Management at B
Financing at B
Capital
Expenditures
at B

Management Structure of
an MNC-Decentralized
Cash
Managem
ent at A

Financia
l
Manage
rs
of A

Inventory and
Accounts
Receivable
Management at A
Financing at A
Capital
Expenditures at
A

Financia
Cash
l
Managem
Manage
ent at B
rs
Inventory and
of B
Accounts
Receivable
Management at B
Financing at B
Capital
Expenditures at
B

Topics for Reference

Currency

Appreciation/Depreciation
What is a Pip?
CRR/SLR/Repo Rate/Reverse Repo/Interest Rates
Current Account/Capital Account and Convertibility
Major Trade Agreements and India Specific Trade
Agreements
India WTO deadlines regarding removal of trade
barriers
The Great Depression, 1997 Asian and Russian Crisis,
2008 U.S Crisis and 2010-11 Europe Crisis, oil price
crisis 1973
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Introduction to
Derivatives

16

Derivatives
A

derivative instrument is a contract

between two parties that specifies
conditions (especially the dates,
resulting values of the underlying
variables, and notional amounts)
under which payments are to be
made between the parties

17

Derivatives - Forwards and

Futures

Forwards: A tailored contract between two

parties, where payment takes place at a specific
time in the future at today's pre-determined
price.
Futures: are contracts to buy or sell an asset on
or before a future date at a price specified today.
A futures contract differs from a forward contract
in that the futures contract is a standardized
contract written by a clearing house that
operates an exchange where the contract can be
bought and sold; the forward contract is a non-

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Derivatives Types Options

Options

are contracts that give the owner the

right, but not the obligation, at a future
maturity date
To buy (in the case of a call option) or
To sell (in the case of a put option) an asset
Strike price: Price at which the sale takes place.
European Style Option: the owner has the right to

require the sale to take place on (but not before)

the maturity date
American Style Option: the owner can require the
sale to take place at any time up to the maturity
date.
19

Derivatives - Option
Types

Options are of two types:

Call option : The buyer of a Call option has a
right to buy a certain quantity of the
underlying asset, at a specified price on or
before a given date in the future, he
however has no obligation whatsoever to
carry out this right
Put option : The buyer of a Put option has
the right to sell a certain quantity of an
underlying asset, at a specified price on or
before a given date in the future, he
however has no obligation whatsoever to
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Derivatives Binary Options,

Warrants

Binary options are contracts that provide the

owner with an all-or-nothing profit profile. At
present the market is based on purely binary
calls and binary puts but it is envisaged that as
the market matures more complex structured
binary options, e.g. tunnels, eachway calls,
accumulators, etc. will become commonplace.
Warrants: Apart from the commonly used shortdated options which have a maximum maturity
period of 1 year, there exists certain long-dated
options as well, known as Warrant (finance).
These are generally traded over-the-counter.
21

Derivatives - Swaps
Swaps

are contracts to exchange cash (flows) on or

before a specified future date based on the underlying
value of currencies exchange rates, bonds/interest
rates, commodities exchange, stocks or other assets.
Another term which is commonly associated to Swap is
Swaption which is basically an option on the forward
Swap.
Similar to a Call and Put option, a Swaption is of two
kinds:
a receiver Swaption : in case of a receiver Swaption there is

an option wherein you can receive fixed and pay floating

a payer Swaption : a payer swaption on the other hand is an

option to pay fixed and receive floating

22

Derivatives Swaps
Types
Swaps

can basically be categorized into

two types:
Interest Rate Swap: These basically necessitate

swapping only interest associated cash flows in

the same currency, between two parties.
Currency swap: In this kind of swapping, the

cash flow between the two parties includes

both principal and interest. Also, the money
which is being swapped is in different currency
for both parties.
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