International Business Finance

International Financial Management Foreign Exchange Market, Institutions and Environment26 September 2014Dr. Nagendran R1OBJECTIVE OF THE COURSETo 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

26 September 2014Dr. Nagendran R2Importance 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-unemploymentThe 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/

26 September 2014Dr. Nagendran R3What do you learn in this Unit I?International Business & its modesMultinational Corporations (MNC)The key participants in international financial functions Nature of International Finance Functions & scope of itFactors leading to fast strides in international finance functionsIFM & domestic financial management26 September 2014Dr. Nagendran R4Finance Functions26 September 2014Dr. Nagendran R5CFOManagement AccountingFinancial Accounting TreasurerControllerCapital budgetingFinancingFinancial PlanningRisk Management Portfolio Management Cash Management Working Capital Management Forex Management Cost AccountingAuditingData ProcessingTaxationNeed to consider the effect of exchange rates when operating in more than one currencyMust consider the political risk associated with actions of foreign governmentsMore financing opportunities when you consider the international capital markets, which may reduce the firms cost of capitalDefine a market imperfection as anything that interferes with trade

26 September 2014Dr. Nagendran R6

Whats Special about International Finance?

International Business & its Modes26 September 2014Dr. Nagendran R7IB ModesTrade Investments Contracts Exports / Imports of Goods / ServicesFDI FPIFranchising Projects Borrowing ECB$ 4,562.51 million ** As per RBI - Dec 2013 only26 September 2014Dr. Nagendran RFDI is concerned with the operations and ownership of host-country firmsGreenfield investments 1Brownfield investments 3M & A 2- Subsidiary - Investments in Equity of host-country firms- Outright purchase of firm running abroadAmalgamation Vertical orHorizontal

Combination of 1 & 2 8International Capital Budgeting Decisions Contractual26 September 2014Dr. Nagendran R9Provide Technical KnowhowAllow to use your Brand Turnkey projectsMain feature is no cash outflowbut reverse cash flow happens

26 September 2014Dr.R.Nagendran10YearExportImportTrade Balance(Including Re-export)2000-20014456050536-59762001-20024382751413-75862002-20035271961412-86932003-20046384378150-143072004-200583536111518-279822005-2006103091149166-460752006-2007126414185735-593212007-2008162904251439-885352008-2009182799298834-1160342009-2010178751288373-1096212010-2011251136369769-1186332011-2012 P277125446939-1698142012-2013 P*265946448037-1820902013-2014 P upto May4867086600-37931Source: http://www.indiastat.com/table/foreigntrade/12/foreigntrade/107/1691/data.aspx 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. 26 September 2014Dr. Nagendran R11The 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. 26 September 2014Dr. Nagendran R12Participants in Forex Market Dealers - large banks, Professional Asset Management Firms, Institutional Investors (mutual funds, Pension funds, Insurance companies)Hedge fundsCentral banks and GovernmentsCurrency speculators, Corporations, MNC or TNC Exporters and ImportersECBFinancial Institutions / Banks Travelers and Consumers of foreign goodsInvestors and speculators 26 September 2014Dr. Nagendran R13Trading 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 USA 16.24 USD trillion China 8.36 USD trillion Japan 5.96 USD trillion India 1.88 USD trillion

26 September 2014Dr. Nagendran R14Forex Turnover 26 September 2014Dr. Nagendran R15

Global FX Turnover 201326 September 2014Dr. Nagendran R16

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 base26 September 2014Dr. Nagendran R17The 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. 26 September 2014Dr. Nagendran R18Multinational CorporationA 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 quick-service restaurants like Unilever, Proctor & Gamble, Mc Donalds and Seven-Eleven

26 September 2014Dr. Nagendran R19MNCMNC represent a cluster of affiliated firms located in different countries that:Are linked through common ownershipCommon pool of resourcesRespond to common strategies High degree of integration among different unitsBased on strategies MNC are grouped asEthnocentric 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

26 September 2014Dr. Nagendran R20Transnational 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.

26 September 2014Dr. Nagendran R21Advantages of MNC's for the host countryThe 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 competitiveness26 September 2014Dr. Nagendran R22Domestic 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.

26 September 2014Dr. Nagendran R23Advantages of MNC's for the home countryMNC'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 culture brought by MNC's26 September 2014Dr. Nagendran R24Disadvantages of MNC's for the host countryMNC'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.

26 September 2014Dr. Nagendran R25Disadvantages of MNC's for the home countryMNC'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 development26 September 2014Dr. Nagendran R26Nature of international financial functions & scope of IFMForex Market and Derivatives Market Exchange Rate factors that affect Exchange Rate and determination of the sameExchange Rate Exposure Measurement and Management Exchange Rate regime and International liquidity Investments decision FDI & FPIInternational Financial Markets Regional Development Banks Eurocurrency market International securities Market Interest rate exposure Assessment and Management 26 September 2014Dr. Nagendran R27Nature 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 26 September 2014Dr. Nagendran R28