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International Financial Management - Coggle Diagram
International Financial Management
Why?
With globalization, world economies are connected to each other. The ease of sharing information, goods, and people because of deregulations have opened different opportunities for businesses.
This makes it important to consider various factors which are specifically arise because a business is running in multi-national setting. Thus an international financial management is a bit different from domestic financial management.
Advantages
Diversification
Access to larger pool of customers, raw materials and finance
More opportunity to grow
Disadvantages
Financial Risks: Financial crisis in the overseas country. It is a situation where the underlying financial instrument loses its value drastically. For example, currency crisis where the foreign currency loses its value in the international markets. Currency crisis can lead to various other affects: higher inflation, higher unemployment, higher debt
Political risk: A change of government can change the behavior towards a particular business. such as Enron where politicians said they do not require the project.
Market imperfections: restriction on movements of goods, people can impact business operations.
Also the international market integration can have adverse effects
Global ressision and risk spill over: when the crisis or recession in one country spills over and affects other dependant economy.
What is it?
What do we actually mean by Financial Management?
Financing decisions: From where to raise the capital for the business. Which avenues will be lucraative for the business to get the money.
Investment decisions: Where the firm can invest so as to make more profits and reduce the risk of the investments for longer periods.
Dividend decisions: To keep the investors and shareholders encouraged what kind percentage of profits to be shared with them.
4.Working capital decisions: How to keep up with the general day-to-day need of the capital required to run the business smoothly.
Country wise records
Balance of payment
It records all the financial transactions done by a country. This includes import, export, investments in the country, loans, etc.
Credit i.e. export, investments etc. should be higher
in the country than debit i.e. imports etc.
Diequillibrium rises if they are not balanced:
Economical factors
Regulation Factors
Measures are taken to make the equilibrium happen
Policy changes: changes in interest rates
regulations: putting tarrifs or extra taxes on the import
export promotions
Balance of trade
It only concerns with import and export.
International Monetary system
Pre -1814: Bimetallism
1814-1875: Gold Standard
1875-1914: Fixed rates of currencies linked
to currency and used for exchage of goods
1914-1944 world war: Unstatbility
1944-1971 Brettn woods: People met at this place and
decided that they will trade with dollar : us dollar to $35 ounce for gold
1971-1973 Smithsonian: Use currency devalued $38 for ounce gold, did not work for too long,
1973- present: Flexible exchange rates
Foreign Exchange Market
A place where currencies of different countries
are bought and sold.
Functions
Hedging: Facilitate operations so as to mitigate risk
Credit: make finance available for foreign trade
Transfer : Transfer of one currency to other.
Operators
Hedgers: want to mitigate the risk with different instruments
Speculators: Want to make money by speculating on hedgers.
Arbitrators: Bid in various exchange markets and make money from the currency exchange descripancies.
Indian Forex
It is regulated and controlled by RBI
Tier2: ADs and ADs among themselves
Tier 3: ADs and customers
Commercial banks
Corporations
Front currency exchange agencies
Exchange brokers
Tier 1: RBI and Authorized dealers can buy and sell currencies.
Foreign Exchange Transaction
Spot Transaction
The buyer and seller of the currency settle their
transactions within 2 days of the deal. The current rate
is used to exchange the currency.
Forward Transactions
Buyer and seller agree upon the future date and
fixed rate for exchanging currency.
Long:
Commitment to buy in forward contract
Short:
Commitment to sell in forward contracts.
Furture Contracts
Future contracts are like forward contract as they are also
settled in the future but they differ in some ways.
They are more formal and needs to be traded on proper
formal future markets. Forwards contracts can be obtained
at client's convinence.
Forward contacts can be negotiated or can be changed
for cleint's convinience but future contract's size, date are
fixed.
Margin is required in Future markets but not in forward contracts.
Swap Transactions
Option
Put
Call
Concept of hedging
Exchange Rate Determination
Factors that contribute to determining rates
Demand and supply
Import exports
Immigrants
Investments
Interest rates
Inflation Rates
Political risk
Government policies
Throries
Demand and Supply
Mint parity
Balance of payment
Interest rate parity
It is used to analyze the relationship between
spot rate and forward rates. This theory states that
that the interest rate differentials between countries
is in proportion to sopt rate and forward rate.
Covered interest rate parity
In theory there is no difference between
interest rate difference of the country and
spot rate and forward contracts.
Uncovered Interest rate
If the assumption does not hold then there is
a chance for arbitrage.
Purchase power parity PPP:
In absolute PPP, the ratio of goods in two contries
is excatly porportinal to their currency rates.
Foriegn Exchange Risk
Risk Meassurement:
Value Added Risk
Analytic VAR
It is determined by considering expected returns and standard deviation.
Historical VAR
Historical data in ascending order and then percentile
Monte Carlo VAR
Risk Management
Transaction Exposure
Econonim Exposure
Impact on Stock Markets
Inflation and interest rates
Job market
Real Estate
Portfolio Management and Diversification
Diversification
Mitigate the risk
Growth opportunity
Less correlation between assets
Naive Simple Diversification:
Simply increasing number of companies or industries
Can lead to mistakes.
Markowitz Diversification
Adding negatively correlated compnies.
Having net negative correlation can offset the risk.
Investments
Bond Market
Euro Bonds
Issued in different currency than that of the country.
Multi Currency Bonds
can be denominated in different currencies.
Foreign Bond
Issued by foreign company in the
same currency as the country.
Depository Reciepts
Trading foreign stocks on
foriegn stock exchange.
benficial for investors to invest in foreign
companies without the hassle of investing in
foreign markets.
Company increases visibility and can raise
more funds.
American Depository Reciepts
Global Depository Reciepts
Stock Market
Consider returns and risk of different markets
before investing to get expected average returns and
sd.
Capital Structure of the company
It consista of decision on debt and equity.
Factors affecting capital cost structure
Debt Cost
Equity Cost
Multinational Foreign Operation
Long term financing
More than 5 years, R&D, new equipments.
External Commercial Borrowings
Getting loan from foriegn investors
in domestic markets.
Short term financing
Day-to-day work, payroll, payables
International Payment and Recievables
Buyer's Credit
An overseas institiuiton gives loan to the importer.
Supplier's Credit
Supliers give money to buyer.
Letter of Credit
A bank issues this certificate and pays the money
if importer fails to give money to supplier.
Documentay Collection
Factor and Forfaiting.