INTERNATIONALFINANCIALMANAGEMENT

Sixth Edition

Vyuptakesh Sharan

LM

BP

IS

B

EA

International Financial Management

Vyuptakesh SharanEmeritus Professor

Chandragupt Institute of Management Patna

and

Former Emeritus FellowSouth Asian Studies Division

School of International StudiesJawaharlal Nehru University

New Delhi

InternationalFinancial Management

SIXTH EDITION

New Delhi-1100012012

INTERNATIONAL FINANCIAL MANAGEMENT, Sixth EditionVyuptakesh Sharan

© 2012 by PHI Learning Private Limited, New Delhi. All rights reserved. No part of this book may bereproduced in any form, by mimeograph or any other means, without permission in writing from thepublisher.

ISBN-978-81-203-4586-7

The export rights of this book are vested solely with the publisher.

Fourteenth Printing (Sixth Edition) ººººº ººººº ººººº May, 2012

Published by Asoke K. Ghosh, PHI Learning Private Limited, M-97, Connaught Circus,New Delhi-110001 and Printed by Mudrak, 30-A, Patparganj, Delhi-110091.

Dedicated toMy Parents

Smt. Kalyani Devi and Shri Hrishikesh Sharan

Preface xv

Preface to the First Edition xvii

Part 1 International Financial and Monetary Environment

1. International Financial Management—An Overview 3–13Learning Objectives 3International Business and Its Modes 3Multinational Corporations: The Key Participant in International

Financial Functions 5Nature of International Financial Functions and the Scope of IFM 6Factors Leading to Fast Strides in International Financial Functions 9IFM and Domestic Financial Management 11Structure of the Book 11Review Questions 12References 13Suggested Further Reading 13

2. International Flow of Funds: Balance of Payments 14–41Learning Objectives 14Structure of Balance of Payments 14Equilibrium, Disequilibrium and Adjustment 20Different Approaches to Adjustment 21Capital Account Convertibility 28Summary 31CASE STUDY 1 INDIA’S BALANCE OF PAYMENTS DURING LIBERAL ECONOMIC

REGIME 32

Contents

vii

viii Contents

CASE STUDY 2 CAPITAL ACCOUNT CONVERTIBILITY IN INDIA 33Review Questions 39References 40Suggested Further Reading 41

3. Developments in International Monetary System 42–74Learning Objectives 42Specie Commodity Standard 43Gold Standard 43Bretton Woods System of Exchange Rates 47Exchange Rate Regime Since 1973 49International Liquidity 57IMF Solution for Financial Crisis 63Summary 66STUDY TOPIC CHANGING FACE OF EUROPEAN ECONOMIC AND

MONETARY UNION (EMU) 67Review Questions 71References 72Suggested Further Reading 74

4. Exchange Rate Mechanism 75–107Learning Objectives 75Exchange Rate Quotations 76Nominal, Real and Effective Exchange Rates 80Determination of Exchange Rate in the Spot Market 83Factors Influencing Exchange Rate 84Exchange Rate Determination in Forward Market 91Theories of Exchange Rate Behaviour 96Summary 99CASE STUDY INTRODUCTION OF MANAGED FLOATING EXCHANGE RATE

REGIME IN INDIA 100Review Questions 102References 104Suggested Further Reading 107

Part 2 Markets for Foreign Exchange and Derivatives

5. Foreign Exchange Market 111–128Learning Objectives 111Distinctive Features 112Major Participants 112Spot Market 114Forward Market 116Summary 121STUDY TOPIC INDIAN FOREIGN EXCHANGE MARKET 122

ixContents

CASE STUDY FOREIGN EXCHANGE TRANSACTIONS TURNOVER

IN INDIAN MARKET 125Review Questions 126Suggested Further Reading 128

6. Market for Currency Futures 129–145Learning Objectives 129Recent Upsurge in Currency Futures Contracts 129Features of Currency Futures Contracts 130Hedging in Currency Futures Market 135Speculation with Currency Futures 136Futures Prices, Forward Prices and Expected Spot Prices on

Delivery 139Summary 140STUDY TOPIC CURRENCY FUTURES MARKET IN INDIA 141Review Questions 142References 144Suggested Further Reading 145

7. Market for Currency Options 146–168Learning Objectives 146Broad Features 147Options Terminology 150Gains or Losses of the Option Traders 151Options Pricing 153Hedging with Currency Options 156Speculating with Options 158Summary 163STUDY TOPIC CURRENCY OPTIONS TRADING AT PHILADELPHIA STOCK

EXCHANGE (PHLX) 164CASE STUDY CURRENCY OPTIONS TRADING IN INDIA 165Review Questions 166References 168Suggested Further Reading 168

Part 3 Foreign Exchange Exposure Management

8. Forecasting Exchange Rates 171–181Learning Objectives 171Need for Exchange Rate Forecasts 172Techniques of Forecasting 174Forecast in a Controlled Exchange Rate Regime 178Summary 179Review Questions 179References 180Suggested Further Reading 181

x Contents

9. Nature and Measurement of Foreign Exchange Exposure 182–199Learning Objectives 182The Concept 182Transaction Exposure 184Real Operating Exposure 187Translation Exposure 190Summary 195STUDY TOPIC A NOTE ON ACCOUNTING STANDARD 11 OF INDIA 196Review Questions 197References 199Suggested Further Reading 199

10. Management of Foreign Exchange Exposure 200–216Learning Objectives 200Need for Hedging 200Hedging of Transaction Exposure 201Hedging of Real Operating Exposure 209Managing Translation Exposure 212Summary 213CASE STUDY MANAGING EXCHANGE RATE RISK 214Review Questions 214References 216Suggested Further Reading 216

Part 4 International Investment Decision

11. Foreign Direct Investment 219–242Learning Objectives 219Theories of FDI 220Costs and Benefits of FDI 225Strategy for FDI 229Control of MNCs 234Summary 236CASE STUDY FDI AND DEVELOPMENT IN LEAST DEVELOPED

COUNTRIES (LDCS) 238Review Questions 239References 240Suggested Further Reading 242

12. International Capital Budgeting 243–275Learning Objectives 243Evaluation Criteria 244Computation of the Cash Flow 247Cost of Capital 256Adjusted Present Value Approach 261Sensitivity Analysis 263Real Options and Project Appraisal 264

xiContents

Evaluating M&As 266Non-financial Factors in Capital Budgeting 269Summary 270CASE STUDY DAIICHI SANKYO OF JAPAN BUYS OUT 34.8 PER CENT STAKE

IN RANBAXY OF INDIA 271Review Questions 272References 274Suggested Further Reading 275

13. Evaluation and Management of Political Risk 276–289Learning Objectives 276Meaning and Forms of Political Risk 276Evaluation of Political Risk 279Management of Political Risk 281Summary 285CASE STUDY 1 POLITICAL TURMOIL AND FDI IN PAKISTAN LATE 2000S 285CASE STUDY 2 SOME CASES OF POLITICAL RISKS IN MINERALS-RICH

HOST COUNTRIES 286Review Questions 287References 288Suggested Further Reading 289

14. International Portfolio Investment 290–308Learning Objectives 290Concept of Optimal Portfolio 291Benefits of International Portfolio Investment 298Problems of International Investment 299Modes of International Portfolio Investment 301Identification of Optimal International Investment Portfolio 301Summary 303STUDY TOPIC TRENDS IN FIIS’ INVESTMENT IN INDIA 303Review Questions 306References 307Suggested Further Reading 308

Part 5 International Financing Decisions

15. Overview of the International Financial Market 311–324Learning Objectives 311Channels for International Flow of Funds 312Changing Structure of the International Financial Market 313Selection of Sources and Forms of Funds 319Summary 322Review Questions 323References 324Suggested Further Reading 324

xii Contents

16. Multilateral Development Banks 325–346Learning Objectives 325The World Bank 325International Finance Corporation (IFC) 333Asian Development Bank 336Summary 340CASE STUDY AN EVALUATION OF IFC’S FRONTIER COUNTRY STRATEGY 341Review Questions 345References 346Suggested Further Reading 346

17. International Banking 347–367Learning Objectives 347Process of Internationalisation 348The Financial Intermediation Function 352Direction and Purposes of Lending 356Concerns of the Lenders, Borrowers and Depositors 358The Credit Creation Function 360Global Cash Management 360Intermediation in the Foreign Exchange Market 362Control of International Banks 362Summary 364CASE STUDY ABN AMRO BANK AND CORRESPONDENT BANKING IN INDIA 365Review Questions 365References 366Suggested Further Reading 367

18. International Financial Market Instruments 368–387Learning Objectives 368International Equities 368International Bonds 371Secondary Market Operation of International Securities 377Gains from International Issues 378Short-term and Medium-term Instruments 379Summary 381STUDY TOPIC EURO-ISSUES OF THE INDIAN FIRMS 382Review Questions 385References 386Suggested Further Reading 387

19. Financial Swaps 388–403Learning Objectives 388Interest-Rate Swap 389Currency Swap 393Equity Swap 397Some Aspects of Swap Management 398Swaps in India 400Summary 401Review Questions 402Suggested Further Reading 403

xiiiContents

20. Management of Interest-Rate Risk 404–423Learning Objectives 404Nature of Interest-Rate Exposure 405Bond Yield, Term Structure and Interest-Rate Risk 406Techniques of Managing Interest-Rate Exposure 409Summary 419STUDY TOPIC FORWARD RATE AGREEMENTS (FRAS) IN INDIA 419Review Questions 421Reference 423Suggested Further Reading 423

Part 6 Management of Short-term Funds

21. International Working Capital Management 427–449Learning Objectives 427Working Capital Policy 428Basics of Managing Cash and Near-cash Assets 430Steps in Management of Cash and Near-cash Assets 434Management of Receivables 442Management of Inventory 444Financing of Current Assets 445Summary 447Review Questions 448Reference 449Suggested Further Reading 449

22. Financing of Foreign Trade 450–467Learning Objectives 450Foreign Trade Documentation 450Modes of Payment in International Trade 454Methods of Trade Financing 455Export-Import Bank of India 462Summary 463CASE STUDY FORFAITING AGREEMENT BETWEEN GHANA COMMERCIAL BANK

AND VIKAS INTERNATIONAL 464Review Questions 466References 467Suggested Further Reading 467

Part 7 Miscellaneous Issues

23. International Accounting 471–494Learning Objectives 471Globalisation of the Concept of Accounting 471Consolidation of Financial Statements 473Accounting of Foreign Currency Translation 477Accounting for Inflationary Trends 479

xiv Contents

Analysing Foreign Financial Statements 481Transfer Pricing 482Summary 491Review Questions 491References 493Suggested Further Reading 494

24. International Indebtedness 495–513Learning Objectives 495External Resources and Development 496Nature and Magnitude of External Debt 498Factors Behind the Debt Crisis 500Management of External Indebtedness 503Challenges Ahead 508Summary 509CASE STUDY INDIA’S GROWING EXTERNAL INDEBTEDNESS 509Review Questions 511References 512Suggested Further Reading 513

25. International Taxation 514–526Learning Objectives 514Bases of International Tax System 515Types of Taxes 516Tax Havens 517Modes of Double Taxation Relief 519International Tax Management Strategy 520Indian Taxation Scenario 521Summary 525Review Questions 525References 526Suggested Further Reading 526

Glossary 527–540

Country and Currency 541–542

Answers to Objective Type Questions 543–545

Answers to Numerical Problems 547–549

Author Index 551–553

Subject Index 555–558

International finance is a subject where changes and developments are very fast. It needsto be updated. Thus, the primary purpose of the sixth edition is to acquaint the readerswith the developments that have occurred after the last edition had come out.

It is not simply updating of the subject. The study on international financial crisis hasbeen expanded in view of the growing relevance of such crises for the Indian economy. Thediscussion has been elaborated in many other chapters in order to create greater interestof the readers in the subject.

A number of boxes have been added to the main discussion so that the readers couldgrasp the term more intensively or they could correlate the theory with the real worlddevelopments.

Last but not least, some case studies/study topics have been inserted that are morerelevant in the present-day world.

I am sure the readers will find the new edition highly useful.

Vyuptakesh Sharan

Preface

xv

With the growing acceptance of the policy of economic liberalisation and globalisation,there has been fast expansion in international trade, in the activities of the multinationalcorporations and in the international financial market. Recent times have witnessedremarkable growth in international transactions. To handle these transactions effectively,it is imperative to have qualified and trained personnel. In fact, this is one of the mainreasons that the subject of international financial management has gained importance inthe area of international financial dealings and in the curricula of business managementcourses all over the world and especially in the developing countries.

I have been teaching this subject not only at the Jawaharlal Nehru University (JNU),New Delhi, but I have also been delivering lectures on it at different institutions in thecountry as a visiting faculty. It is my students at different institutions who insisted andmotivated me to write a textbook on this subject. So, the credit for this text goes to them.

Today, we find that though there are a few good textbooks on this subject, they lacksome of the important perspectives of the developing countries. My effort has been to fillthis gap and to shape this book to suit the interests of the readers of both the developedand the developing countries. I have tried to include almost all the topics that have beencovered by the existing textbooks and to make the explanation lucid and intelligible evento a general reader who does not necessarily have a strong background of economics orcommerce. The size of the book has been kept reasonable since the business managementstudents get less than a month for one course on an average. If any student likes to delvedeeper into a particular topic, he or she can do so through the Suggested Reading at theend of each chapter.

Quite a number of people—my colleagues and others—have helped me considerablyduring the preparation of this manuscript. I am grateful to Prof. I.N. Mukherji of theJawaharlal Nehru University, and Prof. R.S. Nigam, Prof. Y.P. Singh and Prof. D.P.S.Varma of the Delhi School of Economics, University of Delhi, for their useful suggestions.

Preface tothe First Edition

xvii

International Financial Management

Publisher : PHI Learning ISBN : 9788120345867 Author : Vyuptakesh Sharan

Type the URL : http://www.kopykitab.com/product/10349

Get this eBook

25%OFF