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S
International
Financial
Management
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Te essence ofinternational /nancial
management IFM0 is a popular concept ic means
management of /nance in an international *usinessen"ironment it implies doing of trade and ma$ingmone troug te e4cange of foreign currenc.
Te international /nancial acti"ities elp teorgani5ations to connect it international dealingsit o"erseas *usiness partners0 customers
suppliers lenders. It is also used * go"ernmentorgani5ation and non0pro/t institutions.
f
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Te main o*6ecti"e of international /nancialmanagement is to maximise shareholderwealth.
7dam Smit rote in is famous title 8Wealth ofNations9 tat if a foreign countr can suppl us
it a commodit Ceaper tan e oursel"es canma$e it *etter *u it of tem it some part ofte produce of our on in ic e a"e somead"antage.
Te essence ofinternational /nancial
management
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!asic Functions
!"#ISITI$% $F F#%&S 'FI%%!I%G&(!ISI$%)
Tis function in"ol"es generating fundsfrom internal as ell as e4ternal sources.
Te eort is to get funds at te loest costpossi*le.
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!asic Functions
I%*(STM(%T &(!ISI$%
It is concerned it deploment of teac;uired funds in a manner so as toma4imi5e sareolder ealt.
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%ature + Sco,e
The treasurer is responsi*le for :
/nancial planning analsis
fund ac;uisition
in"estment /nancing
cas management
in"estment decision and
ris$ management
!ontrollerdeals it te functions related to :
e4ternal reporting
ta4 planning and management
management information sstem
/nancial and management accounting
*udget planning and control and accounts recei"a*les etc.
Finance function of a multinational rmhas two functions
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(n-ironment at
International .e-el
te $noledge of latest canges in fore4 rates
insta*ilit in capital mar$et
interest rate =uctuations
macro le"el carges
micro le"el economic indicators
sa"ings rate
consumption pattern
in"estment *ea"ior of in"estors
e4port and import trends
Competition
*an$ing sector performance
in=ationar trends
demand and suppl conditions etc.
International nancial management ,ractitioners arere/uired the 0nowledge in the following elds
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Foreign exchange ris0
In a domestic econom tis ris$ is generall ignored *ecause a
single national currenc ser"es as te main medium of
e4cange itin a countr.
#en dierent national currencies are e4canged for eac
oter tere is a de/nite ris$ of "olatilit in foreign e4cange
rates.
Te present International Monetar Sstem set up is
caracteri5ed * a mi4 of =oating and managed e4cange rate
policies adopted * eac nation $eeping in "ie its interests.
In fact tis "aria*ilit of e4cange rates is idel regarded as
te most serious international /nancial pro*lem facing
corporate managers and polic ma$ers
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olitical ris0
Political ris$ ranges from te ris$ of loss >or gain? from
unforeseen go"ernment actions or oter e"ents of a
political caracter suc as acts of terrorism to outrigt
e4propriation of assets eld * foreigners.
For e4ample in 1@@2 Anron ,e"elopment Corporation a
su*sidiar of a Bouston *ased Anerg Compan signed a
contract to *uild Indias longest poer plant.
Dnfortunatel te pro6ect got cancelled in 1@@' * te
politicians in Maarastra o argued tat India did not
re;uire te poer plant. Te compan ad spent nearl E
3 million on te pro6ect
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(x,anded $,,ortunit
Sets
#en /rms go glo*al te also tend to *ene/t
from e4panded opportunities ic are a"aila*leno.
Te can raise funds in capital mar$ets ere costof capital is te loest.
Te /rms can also gain from greater economies ofscale en te operate on a glo*al *asis
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International Trade
Theories
Theor ofMercantilism
Theor of4solute !ost
d-antage
Theor of!om,arati-e
!ost
d-antage
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Theor of Mercantilism
Tis teor is during te si4teent to te tree0
fourts of te eigteent centuries.
It *eliefs in nationalism and te elfare of te
nation alone planning and regulation of
economic acti"ities for acie"ing te national
goals restriction imports and promoting
e4ports.
It *elie"ed tat te poer of a nation lied in its
ealt ic gre * ac;uiring gold from
a*road.
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Theor of Mercantilism
Mercantilists failed to reali5e tat simultaneous e4port
promotion and import regulation are not possi*le in all
countries and te mere control of gold does not
enance te elfare of a people.
Geeping te resources in te form of gold reduces te
production of goods and ser"ices and tere* loers
elfare.
It as re6ected * 7dam Smit and icardo * stressing
te importance of indi"iduals and pointing out tat
teir elfare as te elfare of te nation.
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Theor of 4solute
!ost d-antage Tis teor as propounded * 7dam Smit >1++)?
arguing tat te countries gain from trading if te
specialise according to teir production ad"antages.
Te pre0trade e4cange ratio in Countr I ould *e251B and in Countr II I52B.
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Theor of 4solute
!ost d-antage
If it is nearer to Countr I domestic e4cange ratio
ten trade ould *e more *ene/cial to Countr II and"ice "ersa.
7ssuming te international e4cange ratio isesta*lised I5IB6
Te terms of trade *eteen te trading partners oulddepend upon teir economic strengt and te*argaining poer.
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Theor of !om,arati-e
!ost d-antage
icardo >1-1+? toug adering to te
a*solute cost ad"antage principle of 7damSmit pointed out tat cost ad"antage to
*ot te trade partners as not a necessar
condition for trade to occur.
7ccording to icardo so long as te oter
countr is not e;uall less producti"e in alllines of production measura*le in terms
of opportunit cost of eac commodit in
te to countries it ill still *e mutuall
gainful for tem if te enter into trade.
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Theor of !om,arati-e
!ost d-antage
In te e4ample gi"en te opportunit cost of one
unit of 7 in countr I is .-@ >-H@? unit of good !and in countr II it is 1.2 >12H1? unit of good !.
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Theor of !om,arati-e
!ost d-antage
Te opportunit cost of te to goods are dierent in
*ot te countries and as long as tis is te case teill a"e comparati"e ad"antage in te production ofeiter good 7 or good ! and ill gain from traderegardless of te fact tat one of te trade partnersma *e possessing a*solute cost ad"antage in *ot
lines of production. Tus countr I as comparati"e ad"antage in good 7
as te opportunit cost of its production is loer in tiscountr as compared to its opportunit cost in countrII ic as comparati"e ad"antage in te production
of good ! on te same reasoning.
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International Business
Methods
icensing
Francising
Su*sidiaries and 7c;uisitions
Strategic 7lliances
A4porting
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icensing
.icense0means to gi"e permission. 7 license ma *e
granted * a part >licensor? to anoter part>licensee? as an element of an agreement *eteentose parties.
7 license ma *e issued * autorities to allo an acti"it
tat ould oterise *e for*idden. It ma re;uire paing
a fee andHor pro"ing a capa*ilit. Te re;uirement maalso ser"e to $eep te autorities informed on a tpe ofacti"it and to gi"e tem te opportunit to setconditions and limitations.
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Francising
Franchisingis te practice of selling te rigt to use a/rmJs successful *usiness model. For te francisor te
francise is an alternati"e to *uilding Jcain storesJ todistri*ute goods tat a"oids te in"estments andlia*ilit of a cain. Te francisorJs success depends onte success of te francisees. Te francisee is said toa"e a greater incenti"e tan a direct emploee*ecause e or se as a direct sta$e in te *usiness.
Te francisor is a supplier o allos an operator or afrancisee to use te supplierJs trademar$ anddistri*ute te supplierJs goods. In return te operatorpas te supplier a fee.
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Su*sidiaries and7c;uisitions
7 su4sidiar is a compan tat is completel or partl oned
* anoter corporation tat ons more tan alf of tesu*sidiarJs stoc$ and ic normall acts as a oldingcorporation ic at least partl or a parent corporation ollcontrols te acti"ities and policies of te daugter corporation.
Mergers and ac/uisitionsare *ot aspects of corporate
strateg corporate /nance and management dealing it te*uing selling di"iding and com*ining of dierent companiesand similar entities tat can elp an enterprise gro rapidl inits sector or location of origin or a ne /eld or ne locationitout creating a su*sidiar oter cild entit or using a 6oint"enture.
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Strategic 7lliances
7 strategic allianceis an agreement *eteen to or
more parties to pursue a set of agreed upon o*6ecti"esneeded ile remaining independent organi5ations. Tis
form of cooperation lies *eteen Mergers & 7c;uisitionM&7 and organic grot.
Partners ma pro"ide te strategic alliance it resources
suc as products distri*ution cannels manufacturingcapa*ilit pro6ect funding capital e;uipment $noledge
e4pertise or intellectual propert. Te alliance is acooperation or colla*oration ic aims for a snergere eac partner opes tat te *ene/ts from te
alliance ill *e greater tan tose from indi"idual eorts.
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Section II
General directions ofInternational Financial
Management
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Metods of capital!udgeting
7ccounting rate of return
Pa*ac$ period
Net present "alue
Pro/ta*ilit inde4
Internal rate of return
Modi/ed internal rate of return
A;ui"alent annuit
eal options "aluation
Tese metods use teincremental cas =os fromeac potential in"estment orpro6ect
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Factors in=uencing Capital!udgeting
7"aila*ilit of funds
Structure of capital
Ta4ation Polic
(o"ernment Polic
ending Policies of Financial Institutions
Immediate need of te Pro6ect
Aarnings
Capital eturn
Aconomic Kalue of te Pro6ect
#or$ing Capital
7ccounting Practice
Trend of Aarning
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Foreign PortfolioIn"estment
Foreign ,ortfolio in-estmentis te entr of funds into acountr ere foreigners ma$e purcases in te countrs
stoc$ and *ond mar$ets sometimes for speculation.
It is a usuall sort term in"estment as opposed to telonger term Foreign ,irect In"estment partnersipin"ol"ing transfer of tecnolog and $no0o.
Foreign Portfolio In"estment 'FI): passi"e oldings ofsecurities and oter /nancial assets ic do N
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#or$ing CapitalManagement
#or$ing capital management is concerned it te pro*lems tatarise in attempting to manage te current assets te currentlia*ilities and te interrelations tat e4ist *eteen tem.
Current assets refer to tose assets ic in te ordinar course of*usiness can *e or ill *e con"erted into cas itin one earitout undergoing a diminution in "alue and itout disruptingte operations of te /rm.
A4amples0 cas mar$eta*le securities accounts recei"a*le andin"entor.
Current lia*ilities are tose lia*ilities ic are intended at teirinception to *e paid in te ordinar course of *usiness itin aear out of te current assets or te earnings of te concern.
A4amples0 accounts paa*le *ills paa*le *an$ o"erdraft andoutstanding e4penses
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Concepts and ,e/nitionsof #or$ing Capital
Tere are to concepts of or$ing capital:
Gross and %et
(ross or$ing capital0 means te total current assets.
Net or$ing capital0 can *e de/ned in to as0
o Te dierence *eteen current assets and current lia*ilities.
o Te portion of current assets ic is /nanced it longterm funds
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,eterminants of #or$ingcapital e;uirement
(eneral nature of *usiness
Production ccle
!usiness ccle =uctuations
Production polic
Credit polic
(rot and e4pansion
Pro/t le"el
e"el of ta4es
,i"idend polic
,epreciation polic
Price le"el canges
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#or$ing capital: Policand Management
Te or$ing capital management includes and refers to te
procedures and policies re;uired to manage te or$ingcapital.
Tere are tree tpes of or$ing capital policies ic a /rmma adopt :
Moderate or$ing capital polic
Conser"ati"e or$ing capital polic
7ggressi"e or$ing capital polic.
Tese policies descri*e te relationsip *eteen te sales le"el
and te le"el of current assets.
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Tpes of or$ing capitalneeds
Te or$ing capital need can *e *ifurcated into permanent or$ing
capital and temporar or$ing capital.
ermanent wor0ing ca,ital Tere is alas a minimumle"el of or$ing capital ic is continuousl re;uired * a /rm inorder to maintain its acti"ities li$e cas stoc$ and oter currentassets in order to meet its *usiness re;uirements irrespecti"e of tele"el of operations.
Tem,orar wor0ing ca,ital
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Trade Finance
For a trade transaction tere sould *e a Seller to sell
te goods or ser"ices and a !uer o ill *u tegoods or use te ser"ices. Karious intermediaries sucas >*an$s Financial Institutions? can facilitate tistrade transaction * /nancing te trade.
#ile a seller >te e4porter? can re;uire te purcaser>an importer? to prepa for goods sipped tepurcaser >importer? ma is to reduce ris$ *re;uiring te seller to document te goods tat a"e*een sipped. !an$s ma assist * pro"iding "ariousforms of support.
Te folloing are te most famous
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Te folloing are te most famous,roducts7ser-icesoered * "arious
!an$s and Financial Institutions in Trade
Finance Segment:
.etter of credit Ban0 Guarantee
!ollection and &iscounting of Bills
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.etter of !redit
It is an underta$ing promise gi"en * a
!an$HFinancial Institute on *ealf of te!uerHImporter to te SellerHA4porter tat if teSellerHA4porter presents te compling documentsto te !uerJs designated !an$HFinancial Instituteas speci/ed * te !uerHImporter in te Purcase7greement ten te !uerJs !an$HFinancialInstitute ill ma$e pament to te SellerHA4porter
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Ban0 Guarantee
It is an underta$ing promise gi"en * a !an$ on
*ealf of te 7pplicant and in fa"our of te!ene/ciar. #ereas te !an$ as agreed andunderta$es tat if te 7pplicant failed to ful/ll iso*ligations eiter Financial or Performance as perte 7greement made *eteen te 7pplicant andte !ene/ciar ten te (uarantor !an$ on*ealf of te 7pplicant ill ma$e pament of teguarantee amount to te !ene/ciar upon receiptof a demand or claim from te !ene/ciar.
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!ollection and&iscounting of Bills
It is a ma6or trade ser"ice oered * te !an$s.
Te SellerJs !an$ collects te pament proceedson *ealf of te Seller from te !uer or !uerJs!an$ for te goods sold * te Seller to te !ueras per te agreement made *eteen te Sellerand te !uer.
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,i"idend Polic
&i-idend ,olic is concerned it /nancial policies
regarding paing cas di"idend in te present or paing anincreased di"idend at a later stage. #eter to issuedi"idends and at amount is determined mainl on te*asis of te companJs unappropriated pro/t andin=uenced * te companJs long0term earning poer.#en cas surplus e4ists and is not needed * te /rm
ten management is e4pected to pa out some or all oftose surplus earnings in te form of cas di"idends or torepurcase te companJs stoc$ troug a sare *u*ac$program.
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is$ Management
8is0 managementis te identi/cation assessment and
prioriti5ation of ris$s folloed * coordinated andeconomical application of resources to minimi5e monitorand control te pro*a*ilit andHor impact of unfortunatee"ents or to ma4imi5e te reali5ation of opportunities.
is$s can come from uncertaint in /nancial mar$ets
treats from pro6ect failures >at an pase in designde"elopment production or sustainment life0ccles?legal lia*ilities credit ris$ accidents natural causes anddisasters as ell as deli*erate attac$ from an ad"ersaror e"ents of uncertain or unpredicta*le root0cause.
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Metods of ris$management
Identif caracteri5e treats
7ssess te "ulnera*ilit of critical assets tospeci/c treats
,etermine te ris$ >te e4pected li$eliood and
conse;uences of speci/c tpes of attac$s onspeci/c assets?
Identif as to reduce tose ris$s
Prioriti5e ris$ reduction measures *ased on astrateg
i i l f i 0
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rinci,les of ris0management
is$ management sould:
create "alue resources e4pended to mitigate ris$ sould *e less tan te conse;uence of inaction or >as in"alue engineering? te gain sould e4ceed te pain
*e an integral part of organi5ational processes
*e part of decision ma$ing process
e4plicitl address uncertaint and assumptions
*e sstematic and structured process
*e *ased on te *est a"aila*le information
*e tailora*le
ta$e uman factors into account
*e transparent and inclusi"e
*e dnamic iterati"e and responsi"e to cange
*e capa*le of continual impro"ement and enancement
*e continuall or periodicall re0assessed
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Conclusions
Compared to national /nancial mar$ets international mar$ets a"e a
dierent sape and analtics. Proper management of international /nancescan elp te organi5ation in acie"ing same eLcienc and eecti"eness inall mar$ets ence itout IFM sustaining in te mar$et can *e diLcult.
Companies are moti"ated to in"est capital in a*road for te folloingreasons:
0ALcientl produce products in foreign mar$ets tan tat domesticall.
0
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Tan$ ou for 7ttentionO