international financial managment

Mohammed [email protected]

FINANCIALINTERNATIONAL

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 FirmNature of Business

Funds

Procured

recently

How the funds were mobilized? Net ProfitFirm 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


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 MANAGEMENTInternational 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.


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.


Inte

rna

tiona

l Fi

nanc

ial

Ma

rkets

Money Market

Forex market

Eurocurrency market

General Currency Market

Capital Markets

Euro Bond Market

Depository Receipts

Institutional Finance

FCCB



FOREX Market• The foreign exchange market (forex, FX, or currency

market) is a worldwide decentralized over-the-counterfinancial market for the trading of currencies.

Eurocurrencymarket

• The Eurocurrency market is made up of several largebanks called Eurobanks that accept deposits andprovide loans in various currencies.

Eurocredit market

• Loans of one year or longer are extended byEurobanks to MNCs or government agencies in theEurocredit market. These loans are known as Eurocreditloans.

Eurobond market

• A bond issued in a currency other than the currency ofthe country or market in which it is issued.

• The Eurobond market is made up of investors, banks,borrowers, and trading agents that buy, sell, andtransfer Eurobonds.



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.


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


MARKET PARTICIPANTS OF FOREX MARKETS

BanksCommercial companies

Central banks

Investment management

firms

Retail foreign

exchange traders

Money transfer/rem

ittance companies

IPORTANCE OF FOREX MARKETS

Liquidity Rates Reserves HedgingInternational

Trade

F. FOREX MARKETS


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


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


F. FOREX MARKETS

FOREIGN EXCHANGE RISK

Exchange Risk

Exchange exposure Transaction

exposureTranslation 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


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


$ 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)


Therefore translation gain

1,47,20,000- 1,44,00,000

= Rs. 3,20,000


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.


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 HarvardUSA. For which you have to pay college fee of $1000. You have toPay 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 MANAGEMENTGoals 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 MAXIMIZATIONIs 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 MAXIMIZATIONWealth 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 MANAGEMENTGoals 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.

international financial managment

Education