International Fin Mgt

8/14/2019 International Fin Mgt

1/98

S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

International Fin Mgt

A Brief Introduction

Sep 2009


2/98

IFM - framework

A. Fin environment

Overview

International Monetary system

International FIs and Dev Banks

BOPs

B. Forex Markets

Derivatives

Forex Currency futures and options

Forex markets

Forex Rate theories

C. Forex exposure mgt

Mgt of Forex risk

Translation exposure and

Transaction exposure

D. Fin mgt of MNC firm

FDI

WACC and Cap structure of an MNC MNC Capital budgeting / Cash Mgt / Taxation

Country Risk Mgt

E. Financing foreign operations

Eurocurrency markets

Interest rate and currency swaps

Depository receipts


3/98

Why IFM

1. Why IFM

a. World is inter-dependent (Resources are scattered Goods, labour and Capital)b. Globe is getting more inter-connected thru Tech improvements (Telecom, Web)

c. Finance flows @ the speed of nanoseconds now.

2. Empirically Global barriers are shrinking and global trade is growing

a. In 2002 - 6.4 Trillion

b. In 2008 - 15 Trillion

1. Emerging economies are growing ther GDP and trade faster than Developed ones

2. For eg

1. 2007 - Emerging - GDP gr - 7.5% : Trade Gr : 10.5%

2. - Developed - GDP Gr - 2.5% : Trade Gr : 5.3%

3. 1991 : Watershed yr For India. Liberalization and Globalizationa. Easing of Quantitative Restrictions (Trade, labour and Capital)

b. Lowering of Import Duties

c. Foreign Investments on the rise controls lowered

d. Current A/c convertibility

e. Trend towards gradual lowering of Cap a/c convertibility provisos


4/98

0

2 0 0 0

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6 0 0 0

8 0 0 0

1 0 0 0 0

1 2 0 0 0

1 9 6 1 1 9 7 1 1 9 8 1 1 9 9 1 2 0 0 1 2 0 0 5

0

5 0 0

1 0 0 0

1 5 0 0

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G l o b e A d va n c e d A s ia O t h e r

Global trade Stats (figs in Bil $)


5/98


6/98

$ Billion

Particulars 1999 2004 2006

Total Debt 96.88 125.18

L/T Debt 92.61 116.39

S/T Debt 4.27 8.79

Cumulative FII investment in Stock Mkts 30.3

Total Mkt Cap 383.6

FII Invt as a % of Mkt Cap 7.9%

Cumul Mkt T/O Apr-Dec 04 83.13

Purch by FII Apr - Dec 04 31.17

FII purch/Mkt T/O 37.5%

Sales by FII's 24.02

FII Sales as a % of Mkt TO 28.9%

FII ownership in Indian co 50.0%

Capital flow Some stats - India (Billion $)


7/98

Capital Flows some more info

1. Since 1992, no of GDR issues > 50 with Value of > $ 50 billion are listed overseas

2. Over 10 convertible bonds totalling to more than $ 1 billion listed overseas

3. Many IT companies have gone in for ADR issues.

4. Many Investment banks from OECD countries have become active in India

5. Many IT companies have invested over $ 5 billion abroad.

6. The above amounts are insignificant by global standards. But are bound to grow

7. The IFM course will deal with the Treasurers more than the controllers function

8. Treasury Function Acquisition and allocation of Fin resources

To maximize rewards and

Minimize costs

Consistent with the level of fin risk acceptable to the firm


8/98


9/98

Setbacks

East Asian crisis 97-98

Doubts about capital a/c convertibility started surfacing

Benefits of unfettered capital flows were overestimated and

The damage an enormous outflow of S/T money can cause has beenunderestimated

Consensus on addl safeguards and checks but not much on the form it needs totake

By 99 some semblance of recovery started and al forgotten soon

Financial meltdown 2008

Sub prime the ostensible cause.

Toxic assets (CDS s etc.) were the other manifestation

Real causes were consumption and savings imbalances between the advancedeconomies and the Asian tigers


10/98

International flows Status now

Still, With growth in trade, labour movements, capital also has started flowing freely

Hence, the emergence of Multinational corporations

Some studies predict the possibility of 500 of them owning 2/3rd of world FA in 10 yrs

FDI flows, for eg. have grown in India

Following factors have made IFM an indispensable tool esp for Global corps A. Growth in internationals savings and reserves

B. An ever expanding and an elaborate network of global banks and FIs

C. Various forms of Fin instruments, guarantees and insurance products

D. Innovative Risk mgt products and processes

E. Emergence of sophisticated payments systems

F. Efficient mechanisms for dealing with S/Term imbalances

For an IF Manager the following are the variety of choices before them Funding techniques

Investment Vehicles

Risk Mgt products

Speculative opportunities based on risk-reward profiles

Hence, for those willing to learn the complexities, there are opportunities

for others, there is a minefield


11/98

Inflows

A. 2 categories

1. FDI : Invt in real assets or in cos in the host country

2. Portfolio flows : Invt in financial assets of a host country

B. Economic benefits of FDI

1. Prod of goods/serv in locations of comp advantage

2. Enhancement of labour productivity in the host country

3. Adoption of new technology & Mgt techniques to optimally utilize resources

4. Helps raise the level of competition, provides new/improved products

C. International biz methods

Licensing : Typically to use IPR-related

Franchisee : To Permit the use of brands /Logo etc.

JV : P/sip jointly owned/operated by 2 or more firms

Subsidiaries: New operation in the host country by parent corp. Mgt contract: one firm owning and another Managing (eg. Magunta Oberoi)

D. Tactical Issues

1. Licensing involves lower risks but inflexible and host dependent

2. Subsidiary is preferred to JV. JVs over Licensing


12/98

Role of MNC firm

A. To maximize shareholder wealth / satisfice stakeholder interests

B. Whichever of the above 2 win eventually, the MNC still has to grapple with theenvironment it operates in. Environment consists of

1. International Fin system. Official

and others MNC banks and OTC deals/ cap markets

2. Forex market : MNC banks, Forex dealers. 24 hr operation

3. Host country environment : Political, social, cultural and other systems

C. MNC faces myriad of Complexities and challenges wrt ;

Multiple Taxation laws

Multiple currencies

Multiple and differential policy frameworks

Multiple political Systems

Agency problem. : Stands for conflict of goals between MNC shareholders and managers of the subsidiaries.

D. But an MNC can make the same diversity & complexity work in its favor

eg. Geo Diversification


13/98

as

as

Objectives

Sales Expansion

Supply source acquisition

DiversificationInvestment Optimization

Influences : Ext enviornment

Geograhic

Historical

PoliticalLegal

Economic

Cultural

Operational

Import & Export

Transport

LicensingFranchising

Mgt Contact

Turnkey

FDI

Portfolio Invt

Means

Functional

Production

MarketingAccounting

Finance

Personnel

Competitive environment

Speed of Product Changes

Optimum Production site

No of customersAmount bought by each customer

Homogeneity of customers

Local Vs International competitors

Cost of moving products

Unique capabilities of competitors


14/98

MNC Vs Local Firm Cost Benefit matrix

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1 2 3 4 5 6 7 8

M NC Ret

Loca l Re t

M NC W A CLoc al W A


15/98

IFM as a Discipline

A.

1. Till early 90s, IFM as a separate discipline was not much in demand as a specialization

2. Things have changed since then.

3. Indias share of Total Global trade may not be significant and is in fact declining

4. While tariff barriers and quotas are being dismantled. Still they are high

B. Yet, it is nave to conclude from above that the Developments in Intt. Fin are of littleinterest to us

1. To maintain tempo of eco growth, India needs substantial FDI to augumentdomestic savings

2. Tech up gradation needs continuing import of technology3. Indian export initiatives need L/T financing to buyers abroad

4. Indian IT sector is beginning to venture abroad. For both organic/ Inorganic gr.Needs Finance

5. Policy stance is in favor of more openness and greater competition


16/98


17/98

Emerging Challenges For IF Managers

1. The 80/s 90s were marked by unprecedented pace of environ changes as below

Political uncertainties at Home and abroad

Economic Liberalization at home

Greater Exposure to international markets

Increase in volatility of key economic & financial variables like Exchange /Interest rates

Increased competition with increased threats of take over

Globalisation has increased the frustrations for Emerging economies due to the challenges

But have also offered many opportunities to benefit from. Look at china for eg

2. 21st century is marked by even greater changes in the environment

WTO deadlines wrt removal of trade barriers likely to lead to even greater competition

Capital A/C convertibility of the rupee leading to even greater capital flows and challenges

Ceilings on FII and FDI Investments being revised upwards

Indian Rupee Appreciated from 2004 till 2007, squeezing the margins of exporters

To sum up, integration of India with the global economy is likely to accelerate

Hence, exposure for Indian Corporates to global Financial Markets is likely to increase


18/98

Fin Mgrs to do

1. To Be updated with environmental changes

Exch / Intt rates,

fiscal,monetary developments,

Industrial, tax, Exim policies,

Fin mkt trends

New fin instruments, their Risk-reward implications

2. To understand and analyze the complex r/ships between environ variables and corp Fin Ext

Eg Stock market crash on credit conditions in intl markets

Implications on our global funding prospects of default by a debtor country

3. Adoption of Fin function to Changes in firms own strategic postures - Internal

Changes in product market mix

New M&A opportunity

4. To address the consequences of past decisions

A major take over decision that has gone awry

5. To leverage opportunities offered by the environment


19/98


20/98

IFB - framework

A. Fin environment

Overview

International Monetary system

International FIs and Dev Banks

BOPs

B. Forex Markets

Derivatives

Forex Currency futures and options

Forex markets

Forex Rate theories

C. Forex exposure mgt

Mgt of Forex risk

Translation exposure and

Transaction exposure

D. Fin mgt of MNC firm

FDI

WACC and Cap structure of an MNC MNC Capital budgeting / Cash Mgt / Taxation

Country Risk Mgt

E. Financing foreign operations

Eurocurrency markets

Interest rate and currency swaps

Depository receipts


21/98

International Monetary System

A. Gold standard (1875 1914) Each country to peg currency to an ounce of gold.

Free import and export of Gold

Two way convertibility between currencies and gold

B. Example for US $ and $ 20.67 / ounce of gold and 4.247 / ounce of Gold

(20.67 / 4.247) = $ 4.866 / unit of

C. Gold Import / export Points (a Hypothetical example) Assumptions

1 ounce of gold = 20 $ / 4 (ie 5$ / ) Shipping Cost = 0.20 $/ounce US importer imports worth 4 / US exporter exports worth 4 US importer cam pay 1 ounce Gold or 4 : US exporter ok to accept 4 / 1 ounce gold

Workings : If Exchange Rate has moved to (say) 5.1 $ / unit of Either the US importer can pay 4 paying $ 20.40 to get the same (rate 5.1/ ) or Ship 1 ounce gold : Cost of Gold + shipping cost = $ (20 +0.20) = $ 20.20 This is Called the Gold Export Point

Thus, If the Rate exceeds $ 5.05 / , the US importer would rather export Gold than pay

Workings : If Exchange Rate is (say) 4.90 $ / unit of Either the US exporter can get 4 or $ 19.60 (since Rate is 4.9) now or Accept 1 ounce gold : Cost of Gold - shipping cost = $ (20 - 0.20) = $ 19.80 This is called the Gold Import Point

Thus, if the Exch rate moves < 4.95$ , US Exporter would rather accept Gold into US than 4


22/98

A. Gold Standard Equilibrium maintained thru Price-Specie Flow mechanism

B. Price Specie Flow Mechanism

Assume a country experiences Trade deficit (Imports more thane exports)

Currency loses competitiveness

Exchange rate reaches Gold Export Point. Thus, Gold gets exported

Results in loss of Gold reserves

Thus money supply to be downsized

Accompanied by high intt rates, lower Prod /employment, lower demand for Cons/ Import

With reduced imports, Trade balance improves / with high intt rates, Fund inflows improve

Hence, Exchange rate appreciates

C.

Assume a country experiences Trade Surplus (Exports more than Imports)

Currency gains competitiveness

Exchange rate reaches Gold import Point. Thus, Gold flows into the country

Results in increase in Gold reserves Thus money supply increases

Accompanied by Low intt rates, higher prod, employment, higher demand for Cons/ Import

With higher imports, trade balance suffers / with lower intt rates, Fund outflows increase

Hence, Exchange rate depreciates

International Monetary System


23/98

Gold standard : Why abandoned

1. The 3 Golden rules of Gold Standard were highly restrictive

(A) Rate peg (B) Free Export / Import of Gold (C) Currency stock = F (Gold reserves)

2. Gold being scarce, Gold volume could not grow fast enough to cope with Eco Gr

3. Gold reserves were with countries politically sensitive (eg. Russia, South Africa)

4. Nations had to subordinate their National Eco goals to the dictates of Global trade.

5. This proved to be unrealistic, given the political costs of such a presumption

Many developing countries faced External trade imbalances during this time

Instead of having the courage to face unemployment at home, countries resorted to Tariffs

This affected the international trade

6. Hence, the system was eventually abandoned


24/98


25/98

Bretton woods.

1. Creation of 2 new institutions IMF and world bank

2. IMF for addressing balance of payments problems.

3. World bank to address for post war reconstruction and General Eco Development

4. US $ and became the reserve currencies

5. Each member would establish a par value with the reserve currency

6. And maintain it within 1% of the par value. intervene else. Ie Fixed peg with

7. US $ was pegged to 35 $/ oz Gold. US agreed to exchange $ for gold/ vice versa

8. Member could change par value with Fund approval /fundamental disequilibrium

9. Currencies became freely convertible.

10. To defend, countries had to keep a lot of dollar reserves and US, Gold reserves

11. Member countries to make subscription to the fund


26/98

Break down of Bretton woods

1. 1947 71 ; Stable. World Trade expanded faster than world output

2. There was imbalance. Countries with deficits had to undergo conditionalities

3. Countries with surplus treated favorably, though persistent surplus was inflationary

(Contrast with approach to Chinese surplus now)

4. Esp rigid was the approach to BOP disequilibria .

5. Conditionalities were stringent

6. Low levels of conditionalies where member needs funds only for a short period

7. Higher levels, where member wants a larger access to funds resources

8. Involved stabilization programs to achieve IMF objectives .

9. Led to interference in their independent Monetary and fiscal policy pursuits


27/98

Smithsonian Agreement

1. 1971 : Post Vietnam war, Dollar started weakening and

2. Various countries started becoming more protectionist

3. Hence, Worlds leading 10 countries, produced smithsonian agreement

4. US $ was still defined in terms of Gold and all other currencies in terms of $/gold

5. Band around $/gold was 2.25% on either direction (4.5% total)

6. Band across currencies could be as high as 9%

7. This band was more than permitted under earlier dispensation (1%)

8. Had the flexibility of a floating system while retaining the discipline of fixed rates


28/98

Flexible rates 1973 to now

1. Since 1973, it is the flexible Each rate system that is being practized

2. Variations thereof are being practiced as below

3. Crawling Peg

Infrequent adjustment of IMF par value needed larger devaluation of larger rate

Crawling peg tried to change incrementally by small amounts, continuously

As little as 0.5% pm. To reduce speculative profits vide massive delay Countries had to maintain ample reserves for prolonged incremental

adjustments

4. Wider Band : over and above the 1% band permitted by IMF

Snake in the Tunnel by European countries

Their currencies values were fixed to one another with a band of 2.25% With $, an important currency not in the loop, the system faultered

Under inflationary conditions, the rate slipped faster, hit the floor

Thereafter, had to suffer the consequences of a fixed rate system.


29/98

Fixed Vs flexible : An evaluation

Fixed Rates :

Certainty & rigidity promote Eco efficiency, public confidence and Inflation control Downsides : Work well in periods of stability. Massive O/F during crises. FM closes

Floating rates

System causes uncertainty. Promotes speculation instead of trade

Fixed rate system also encourages speculation, once upper band was reached. The bets were one-way with no loss since parity was to be restored

Conclusion : Fixed rate system suffered from all that flexible systems had &more

Systems in vogue now :

Flexible ones : like US $, Japanese Yen. But Interventions are a reality Pegged Systems : To a base like US $. : Countries need to defend with Res


30/98

EMU and Euro

A. There are two categories of limited Flexibility

Gulf countries whose currencies are pegged to the $

European countries whose values were arranged around Europeancurrency unit (now Euro)

Mechanism (Initial) : Snake in the tunnel

Snake : 1.125% band for EEC countries Exch. rates

Tunnel : 2.25% for other countries rates

B. EMU

To form a zone of monetary stability in Europe

To coordinate Exchange rate policies vis--vis non-EMS currencies To develop a European Common currency unit (ECU Euro)

European Monetary cooperation fund (EMCF)


31/98

EMU and Euro

C. Exchange rate Mechanism

Managed thru a Parity grid mechanism

Bilateral exch rates amongst membercurrencies

Float allowed around 2.25% of the parvalue

Each ER has a par value a max & a minrate

Divergence invites action

Bilateral Resp foe ER maintenance

Reserves needed to maintain ER

For irretrievable divergence, realignment

The responsibility with both

countries as against one under IMF EMCF (Com fund) : ST and M/T cr to

member countries and

SGL banker to bilateral assistance

FF BF SF SK DM DG

FF X 1.0 2.0 3.0 4.0 5.0

BF 1.0 X 1.5 2.5 3.5 4.5

SF 0.5 0.7 X 1.3 2.3 3.3

SK 0.3 0.4 0.8 X 1.8 2.8

DM 0.3 0.3 0.4 0.6 X 1.8

DG 0.2 0.2 0.3 0.4 0.6 X


32/98

Global financial Institutions

Sl no Particulars IBRD IDA IFC

1 Purpose To Help war ravagedeconomies thru Tech and

Fin help

Same as for IBRD(Aid instead of

loan)

To promote eco dev inDeveloping nations by

assisting pvt sector

2 Target Customers Govt / Govt agencies / Pvtsector that can get a

Govt guarantee

Governments Pvt sector / Govtorganizations that help

Pvt enterprises

3 Nature of Assistance Loan Concessional Aid Loan

4 Type of countries All Developing other than thePoorest Poor countires All developing countries fromthe poorest to the moreadvanced

5 Tenor 15 - 20 yrs 50 yrs 7 - 12 yrs

6 Grace period 3 - 5 yrs 10 yrs 3 yrs

7 Pricing @ 10% 0% Mkt linked

8 Govt Guarantee Yes Yes No

9 Method of raisingFinance

Borrowings, Capital Markets Grants from worldGovt's

Borrowings and Capital,subscribed by members


33/98

World Bank

1. Objectives

Assist the rehabilitation of economies disrupted by war Promote flow of Foreign pvt capital thru guarantees, provide Own funds

Promote L/T Balanced growth of Global trade and

BOP equilibrium thru LT Invt (FDI) flows

To make the transition to peacetime from war time smoother

3. Composition Membership is a function of countrys eco might

G7 have nearly 45% share and voting rights (USA 17%)

Change in Capital base/AOA need 85% votes (USA veto)

All other matters incl loan approvals need simple majority

Exec Board is in Washington DC

By and large Coop in spirit. Voting has been rare.

2. Affiliates IBRD, IDA, MIGA


34/98

World Bank

4. How Does it assist Bank uses its Fin resources, Knowledge Base and Network

Emphasizes on

Social (People) development (Health, Education etc.) and inclusion

Environment protection

Encouraging Private sector Invts/ initiatives

Goading Govts towards reform and efficient delivery of public services

Institution building and Governance

5. Affiliates IBRD, IDA, MIGA (for Country-risk mitigation)

6. Borrowings thru AAA-rated bonds issued in global cap mkts To Banks, Pension funds, Insurance cos, other Corporations

Very conservatively managed. No defaults of either IBRD / IDA loans so far

7. Reforms Program The tougher part of IBRD assistance. Calls for politically harsh decisions

Poor donot suffer. Eg. Conditions include safety nets. L/T-Reforms Help poor

Covenants for Adv countries too : Eg. Efforts to reduce US deficits

IBRD


35/98

IBRD

1. Loans are to Govt for Infra projects generally (multiplier effect)

2. Members : 151

3. Sources : Subscription, Cap mkt borrowings, Retained earnings

4. Focus : Emerging economies

5. Tenors : Longer (15 = 5 +10)

6. Nature of Assistance : Loans / Guarantees for Pvt sector loans

7. Obligations of assisted Governments Development of Industrial zones that facilitate free trade

Polices that Promote of exports and Forex earnings

Provision of Backward Linkages

Improving institutions that promote trade facilitative zones

Emphasis on Environmental / Womens empowerment / child labor issues

IDA


36/98

IDA

1. Aids to Developing countries (LDCs) for Infra, typically

2. Members : 137

3. Sources : Subscription by Rich members, Retained earnings

4. Focus : Poorer nations amongst LDCs (Per apita < $ 480)

5. Tenors : Extremely Long ( 50 = 10 + 40)

6. Nature of Assistance : Cheaper Loans

7. Admin : Same staff as IBRD. Focus Countries - different

7. Obligations of assisted Governments Inclusive growth

Emphasis on Environmental / Womens empowerment / child labor issues

Conditionalities (Structural )

IFC


37/98

IFC

1. Target :Private sector in developing countries

2. Members : 133

3. Sources : Member subscription, Retained earnings

4. Tenors : Long ( 15 = 5 + 10)

5. Nature of Assistance

Providing Risk capital to Tgts : Equity and LT loans

Encouraging local Cap mkts : Eg U/writing

Providing Tech and Fin assistance

6. Assistance covers a spectrum of industries

IMF


38/98

IMF

1. Commences operations in 1947

2. Membership is 182 countries (Initial m/ship 39)

3. Total Member quotas - $ 300 Billion (Member shares are a constant)

4. Participation voluntary

5. Currency unit - SDR ( = $ 1.3703)

6. Members came together to enjoy the advantages of a stable system of exch rates

7. Lends to Support Exchange rate stabilization, s/to members u/taking Structural adj

8. Has withstood the test of time & facilitated increased volumes of Global Trade/Invt

IMF


39/98

IMF

1. Roles Exchange rate stability, Global trade promotion, Payment facilitation

2. Activity ER Surveillance (Bilateral and multilateral), Tech assistance, Fin assistance

3. Nature of Fin assistance 3 major ones A. Standby Arrangements

For S/T BOP deficits of a cyclical nature

Tenor upto 18 mths. Drawings periodic and conditional cascade of tranche release Purchase of member country currency/sale of another to support its parity Repurchase after 4-5 yrs

B. Extended Arrangements For Medium Term Structural BOP problems Purchase based support. Repurchase max 10 yrs

C. Structural Adjustment facility Loans not purchases for typically LDCs. Drawals semi annual Designed to address L/T structural imbalances in BOP situation Easier terms. 0.5% Intt. 10 yr Tenor. 1st Semi-annual repayment 5.5 yrs


40/98

Asian Development Bank

1. Strategic Objectives Assist Small and less developed countries of the region

Economic Growth across sectors

Poverty reduction

Human development

Gender Development

Environmental Development

2. Composition Membership open to Countries in the Asia Pacific Region

Two largest share holders US and Japan with 16% each

3. Evaluations

Country and project evaluation Project effectiveness (Viability, Impact, implementability, sustainability)

operational evaluation (project completion evaluation etc)


41/98


42/98

Balance of Payment Accounting


43/98

No Transaction Normal A/ctng BOP A/ctng Books of country 'A'


44/98

No Transaction Normal A/ctng BOP A/ctng Books of country A

Debit Credit

1 Res Exports worth $1,000 agt Bills

2 Exporter discountsbill with ResBank

3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50

4 A Imports of $ 800from B. Paidthru loan fromAs Bank



45/98


Debit Credit


B/ Recbl Dr 1,000

Sales - exports Cr 1,000






46/98


Debit Credit


B/ Recbl Dr 1,000 S/T foreignAssets- BR

1,000

Sales - exports Cr 1,000 Export 1,000






47/98


Debit Credit



1,000



Cash Dr 1,000

B/ Recbl Cr 1,000





48/98


Debit Credit



1,000



Cash Dr 1,000

B/ Recbl Cr 1,000


Cash Dr 50 S/T Forn Asst(Cash)

1,050

ST ForeignAsset (BR)

1,000

Intt Income Cr 50 Interest Income 50

4 A Imports of $ 800from B. Paid

thru loan fromAs Bank



49/98


Debit Credit



1,000



Cash Dr 1,000

B/ Recbl Cr 1,000



1,050


1,000


4 A Imports of $ 800from B. Paid

thru loan fromAs Bank

Imports Dr 800 Imports 800

A Bank loan Cr 800 ST ForeignAsset 800



50/98

g g y

Debit Credit



1,000


2 Exporter discountsbill with Res Bank

Cash Dr 1,000

B/ Recbl Cr 1,000

3 On due Date, Bankgets funds FromB bank & keepsfunds therein. Intt$ 50


1,050


1,000


4 A Imports of $ 800from B. Paid thruloan from As

Bank

Imports Dr 800 Imports 800

A Bank loan Cr 800 ST Foreign

Asset

800



51/98

g g y

Debit Credit

5 Res (x) spends $ 5000during foreign travel,by buying equivalent

Bs currency in B

6 X finds $ 100 by chance

on the Road

7 Expat sends $ 100 to hisfamily in B TheFamily buys a $bond from A



52/98

g g y

Debit Credit


Bs currency in B

Travel Dr 5,000 Travel 5,000

Cash Cr 5,000 ST Foreign Liab 5,000

6 X finds $ 100 by chanceon the Road




53/98

Debit Credit


Bs currency in B




Cash Dr 100 ST foreignassets

100

Misc Income 100 Transfers 100




54/98

Debit Credit


Bs currency in B




Cash Dr 100 ST foreignassets

100

Misc Income 100 Transfers 100


Trfr Dr 100 Transfers 100

Bond Cr 100 LT Forn Liab 100


55/98

Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'


56/98

g g y

8 Biz man ships Eqptabroad to build

factory $ 50,000

F Assets Dr 50,000 LT Investments 50,000

Sales - exports 50,000 Exports 50,000

9 Addl Invt of $ 20,000paid thru bonds

10 Y makes a profit of $10,000 and uses itto Buy Back Bsbonds

11 A buys B's bondsback (50%)



57/98

g g y


factory $ 50,000





Bonds payable 20,000 LT foreignLiabilities

20,000





58/98

g g y


factory $ 50,000





Bonds payable 20,000 LT foreignLiabilities

20,000


Bonds Dr 10,000 LT Foreign liab 10,000

Cash 10,000 ST Liabilities 10,000


Sl No Transaction Normal A/ctng BOP A/ctng Books of country


59/98

g g y'A'

12 Z from B migrates tocountry A with

Property worth $

9000

13 Of the above, house

worth $ 8,000 soldfor 8000 (4000

now : 4000 Defd)

14 Gives $ 1000 back tothe church


60/98



61/98

'A'


Property worth $

9000

ST For Assets 1,000

Assets 9,000 LT Investments 8,000

Misc receipts(trfr)

9,000 Transfers 9,000


worth $ 8,000 soldfor 8000 (4000

now : 4000 Defd)

Cash 4,000 ST Foreign

Assets

4,000

A/Recbls 4,000 LT foreign Assets 4,000

F Assets 8,000 LT Investments 8,000




62/98

'A'


Property worth $

9000

ST For Assets 1,000

Assets 9,000 LT Investments 8,000

Misc receipts(trfr)

9,000 Transfers 9,000


worth $ 8,000 soldfor 8000 (4000

now : 4000 Defd)

Cash 4,000 ST Foreign

Assets

4,000

A/Recbls 4,000 LT foreign Assets 4,000



Gift Expense 1,000 Trfr Exps 1,000

Cash 1,000 ST Foreignassets

1,000


63/98

,.Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'

15 Gold imports into

'A' - $ 300000

16 Migrant inheritswealth of $

3,000

17 Gift of dressworth $ 200

sent to A


64/98



'A' - $ 300000

Gold 200,000

Imports 300,000 Imports 100,000

Bank (Deposit) 300,000 ST Liab to forn 300,000


3,000

17 Gift of dressworth $ 200

sent to A


65/98



'A' - $ 300000

Gold 200,000




3,000


Bank 1,000 ST Foreign Finassets

1,000

Misc Income Transfers 3,000

17 Gift of dress

worth $ 200sent to A


66/98



'A' - $ 300000

Gold 200,000




3,000


Bank 1,000 ST Foreign Finassets

1,000

Misc Income Transfers 3,000

17 Gift of dress

worth $ 200sent to A

Exports 200 Transfer gift 200

Cash 200 Export 200


67/98

,.


18 Farm sold for $ 2000.

This + 1000invested in Bonds

in 'B'

19 Gift to 'B' $ 600 in A'scurrency

,.


68/98

,.




in 'B'

Bonds Dr 3,000 ST FA 2,000

Assets Cr 2,000 LT Invst 2,000

Bank Cr 1,000

LT FA 3,000

STFA 3,000

19 Gift to 'B' $ 600 in A'scurrency

,.


69/98

,.




in 'B'

Bonds Dr 3,000 ST FA 2,000

Assets Cr 2,000 LT Invst 2,000

Bank Cr 1,000

LT FA 3,000

STFA 3,000

19 Gift ($600) to 'B' - $100 note + $ 500

of watch

Gift Exp Dr 600 Transfers 600

Cash Cr 100 ST Fin Liab. 100

Sales Cr 500 Exports 500

ST Foreign Assets Exports


70/98

Exports (1) 1,000 ST Fin Asst(1)

1,000

Interest Income(3)

50 Trfr (14) 1,000 LT Invt (8) 50,000

Trfrs (6) 100 Trfrs (17) 200

ST For Ass(19)

500

LT FA (18 a) 3,000 Bal 51,700 51,700

LT Invt (13) 4,000

Transfers (12) 1,000 Imports (4) 800 Imports

Transfer (19) 0

LT Invst (18) 2,000

Trfr (16) 1,000 ST ForAssets(4)

800

9,150 4,800 ST For Liab(15)

100,000

100,800 Bal 100,800

LT Foreign Assets Trfrs


71/98

LT Invt (13) 4,000 ST For Ass(14)

1,000

ST FA (18 a) 3,000 Exports (17) 200 STF Asset(6)

100

7,000 0 LT Forn Liab(7)

100

Gold ST FA + Exp(19)

600 ST + LT Invts(12)

9,000

ST For Liab(15)

200,000 LT Inv / ST As(16)

3,000

200,000 0 ST For Ass(19)

0

LT Direct Investment 1,900 12,100

Exports (8) 50,000 Services

LT For Liab (9) 20,000 ST/LTF Asset(13)

8,000 ST Forn Liab(5)

5,000 ST Foreign(3)

50

Transfers (12) 8,000 ST FA (18) 2,000 5,000 50

Transfers (16) 2,000

80,000 10,000

LT Liabilities


72/98

ST forn Liab(11)

10,000 LT Dir Invt (9) 20,000

Transfers (7) 100 Cash

Notes Recbl(2)

1,000

10,000 20,100

ST Liabilities

Travel (5) 5,000 Notes Receivable

Imports (15) 100,000 Cash (2) 1,000

Gold (15) 200,000

LT Forn Liab(11)

10,000

Exp + Trfr (19) 100

0 315,100 1,000 1,000

BOP A/cs

Debit Credit


73/98

Debit Credit

Exports 51,700

Imports 100,800

Net Trfs 10,200

Services 4,950

Cur Ac Balance 105,750 61,900 43,850

LT FA 7,000

LT Dir Invs 70,000

LT For Liab 10,100

LT Cap ac 77,000 10,100 66,900

ST For Liab 315,100Gold 200,000

ST Fin Assets 4,350

ST Cap Ac 204,350 315,100 (110,750)

Net Fin flows

0

Current AC Inflow Outflow


74/98

Exports Merchandize Inflow

Services Inflow

Factor Income Inflow

Import Merchandize Outflow

Services Outflow

Factor Income Outflow

Nett UnilateralTrfr

Pvt Trfr Recevie Give

Official Trfr Recevie Give

Balance on Cur Ac

Capital Ac Receive Payment from


75/98

Foreigner, Sell ForeignAssets / DomesticAssets to foreigners

Net Direct Investment Make Payment toforeigner, Sell

foreign Assets /domestic Assets to

foreigners

Portfolio Investment

Other Capital

Balance on Cap Ac

Statistical Discrepency

Overall balance

Official reserveAc

Indian official Reserve + Balance - Balance

Foreign Official Reserve + Balance - Balance Balance of Reserve + Balance - Balance


76/98

Derivatives


77/98

1. Value is derived from another underlying contract, reference or index

2. Recent developments have transformed them into a cheap & efficient means of

Hedging : Neutralizes risk by fixing the price in Adv. For eg. Price of $ = 47 Rs on 1.Dec 09 Arbitraging : Take adv of discrepancy in prices across markets.

Speculating : Take a directional bet. Thus contribute liquidity

3. Arrival of Floating Intt rate regime post 73, heralded the need for Risk mitigation mechanisms

4. Led to the development of Exchange traded Forex futures in Chicago

5. Computers expedited growth, since fast computing of complex derivative pricing became feasible

6. Three risks

Market : The Value of derivative changing, esp as expiry approaches

Basis : Hedge may not be a perfect match to the Risk one is exposed to

Counter Party risk : CP not paying up. Less than for Loans, for only diff is at stake

7. 4 products Forwards : Two-way negotiated agreement. OTC. Gen, when Exact date unknown

Futures : Exchange traded. Standard Contracts wrt Price, settlement date, contracts no.

Options : Right but not obligation to buy/sale. Option to Buy - call. Option to sell - Put

Swaps : 2-way Contr. to exchange 2 streams of payment for a period. Fix to float

Spot 45.000 Assumptions


78/98

C a l l o p t i o

( 3 . 0 0 0 )

( 2 . 0 0 0 )

( 1 . 0 0 0 )

0 . 0 0 0

1 . 0 0 0

2 . 0 0 0

3 . 0 0 0

4 . 0 0 0

4 2 . 0 0 04 4 . 0 0 04 6 . 0 0 04 8 . 0 0 05 0 . 0 0 05 2 . 0 0 0

C a l l o p t i o

Re / $ ExchRate

Call optionpay-off

43.000 (2.500)

44.000 (2.500)

45.000 (2.500)

46.000 (1.500)

47.000 (0.500)

48.000 0.500

49.000 1.500

50.000 2.500

51.000 3.500

Strike 45.000 Put Strike 48.000

Call option price 2.500 Put option price 1.700

Spot 45.000 Assumptions


79/98

( 2 . 0 0 0 )

( 1 . 0 0 0 )

0 . 0 0 0

1 . 0 0 0

2 . 0 0 0

3 . 0 0 0

4 . 0 0 0

4 2 . 0 0 04 4 . 0 0 04 6 . 0 0 04 8 . 0 0 05 0 . 0 0 05 2 . 0 0 0

P u t o p t i o n

Re / $ ExchRate

Put optionPay off

43.000 3.300

44.000 2.300

45.000 1.300

46.000 0.300

47.000 (0.700)

48.000 (1.700)

49.000 (1.700)

50.000 (1.700)

51.000 (1.700)

Strike 45.000 Put Strike 48.000

Call option price 2.500 Put option price 1.700


80/98

Can change text around


81/98

Mature

process

Ne

w

process

NewVendor

MatureVendor

New

Clie

nt

Mature

Clie

nt

R1

R4

R1

BSP

Scaling up:Smooth, fast, easier

Training / higher riskFocus on integration / migration

Long time / high risk

Training / high risk Building on ExistingRelationship

R2R3

R3

Level

high

low

R4

R3R2

R1

g


82/98

Flexible system


83/98

1. Dollar started losing its value due to Vietnam War .

US allowed free float of $ from 15 Aug 1971.

2. Smithsonian agreement - Devaluation of $ by 10.35%

3. 1973 Renewed $ crisis. Watergate, OPEC, Inflation

another 10% devaluation. Helped US trade

4. 1978 : Another crisis. OPEC, Inflation, Stock mkt plunge and $ suffered

5. Some drastic measures like Gold sale, $ buy and Hike in disc rates ensued

6. Thus alternately, major currencies suffered as below

Surplus - Appreciation, Mass reserves and loss of competitiveness

Deficit - Depreciation, Reserve Depletion and Lower consumption


84/98


85/98

Decision Variables

Biz StakeholdersBiz Stakeholders


86/98

Society

ShareHolders

Decision

Variable

Global /NationalPolity /

Global /NationalEconomy

Customers

Employeessuppliers

Regulators

Lenders

lysis

lysis


87/98

Enviro & strat.analysis

Eco /Industryanalysis

Strategyanalysis

A/ctnganalysis

Prosp.Analysis

ProfitabilityAnalysis

Financialanalysis

RiskAnalysis

Cash flowanalysis

WACC Est. Intrinsic

value

BizAna

lys

BizAna

lys

com

pone

nts

com

pone

nts


88/98


89/98

Timeline with movable breaks

For process flows etc.


90/98

Circular flow


91/98


92/98

Low

High

Low High

Take away text comes here

World Map


93/98

high

R4

R3



94/98

Mature

process

New

process

NewVendor

MatureVendor

New

Clie

nt

Mature

C

lient

R1

R4

R1

BSP

Scaling up:Smooth, fast, easier

Training / higher riskFocus on integration / migration

Long time / high risk

Training / high risk Building on ExistingRelationship

R2R3

R3

Level

low

R3

R2

R1



95/98

Bumps inthe initialstages oftheengagemen

t

Lack ofexpertise due toattrition

Unsalvag-ableengage-ment

Contingency Plan/Roadmap

Vendor indemnity

SLAs geared towardspeople

Dry runs of engagement/ Time series evaluation of risk



96/98

Contract

signing

Re-validate

ReviseObjective

Document

Fin Products

Life cycle Needs & Products (Farmer)

Target

CoverageZone/ State Location

Product Market size for the product(Rs in Cr)

Total Agri Market size (Rsin Cr)


97/98

Land

PloughingTilling

Seed, FertIrrigation

Weeding

Harvesting

Transportation

Storage

Sales

PriceRealization

KCC - TL

FM

KCC

GCC

SL

Savings/Re Invst.

KCC : Working Capital/Term loan

FM : Farm Mechanization LoanGCC : General Credit Card

SL : Storage Loan

Fin Products

CASA : Current A/c , Savings A/c

Billdisc

g

Target

Target

TL : Term loan

AP Kakinad TL,FM, PAy 20513

MP Chind PL, Card, Payment 11133

Paymnt

gate

way

Target

Wealth

Mgt

Model 1- Ind - Non HNI-Rural- LinkedModel 1- Ind - Non HNI-Rural- Linked


98/98

RIL Solar Bank Cooperative Society

Customer walks in

Meets RIL Solar executive

Customer Interaction

Places order for PVLS

Customer meets Bank personnel

Document check list

Documents delivered by customer

Approval ( Sanction/rejection)

Verification by Bank

Pays Margin Money

Farmer delivers Jetrophato Coop, in due course

Cooperative deposits revenuein Bank account

Bank deducts EMI from

Farmers account

System installed

thru cooperative
http://images.google.co.in/imgres?imgurl=http://thefraserdomain.typepad.com/photos/uncategorized/jetropha_curcus.jpg&imgrefurl=http://thefraserdomain.typepad.com/energy/2007/02/jetropha_europe.html&h=231&w=200&sz=10&hl=en&start=4&um=1&tbnid=d7zQ-c42ibThxM:&tbnh=108&tbnw=94&prev=/images%3Fq%3Djetropha%26um%3D1%26hl%3Denhttp://www.rics.org/NR/rdonlyres/24D71D5C-2AAF-42F1-A675-983958C32A39/0/solar_panel.jpg