International Financial

Management

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R.Subharanjani

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Course Title : INTERNATIONAL FINANCIAL MANAGEMENTCourse Code : MB12IFMTrimester / 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 • measure and manage the foreign exchange

exposure

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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 (IMF), The Economic and Monetary Union (EMU)

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4. Global Financial Markets and Interest Rates-Domestic 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

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Text Book

• Apte, P.G. (2011). International Financial Management, 6/e; New Delhi: Tata McGraw-Hill

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

IFM Introduction

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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.

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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-doesn’t produce goods but

imports

2. Imperfect Markets Transfer of labour and resources for production is

difficult because of trade barriers, costs, etc. Example: Pepsi utilizing the water resources to

produce soft drinks8

Why firms engage in International Business?

3. Product cycle-Example: Nokia

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Firm creates products to accommodate local

demand

Firm exports products to

accommodate foreign demand

Firm differentiates product

from competitors and/or expands product line in

foreign countryFirm’s foreign business

declines as its competitive

advantages are eliminated.

Firm establishes foreign

subsidiary to establish

presence in foreign

country and possibly

to reduce costs.

Features of International Business

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Importance of International Business

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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

FinancialManagersof Parent

Capital Expendituresat A

Inventory andAccountsReceivableManagement at A

CashManagementat A

Financing at A

Capital Expendituresat B

Inventory andAccountsReceivableManagement at B

CashManagementat B

Financing at B

Management Structure of an MNC-Decentralized

FinancialManagersof A

Capital Expenditures at A

Inventory andAccountsReceivableManagement at A

CashManagement at A

Financing at A

Capital Expenditures at B

Inventory andAccountsReceivableManagement at B

CashManagement at B

Financing at B

FinancialManagersof 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

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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

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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-standardized contract written by the parties themselves.

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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.

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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 carry out this right 20

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 short-dated 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.

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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 floating22

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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