introduction the emergence and rise of multinational companies has resulted in high levels of...

INTERNATIONAL FINANCE

INTRODUCTION The emergence and rise of multinational companies has resulted in high levels of international business activities

The emergence and rise of multinational companies has resulted in high levels of international business activities. International business encompasses commercial transactions like sales, investment and transportation between two or more companies.

These cross border flows has resulted in world economy. Due to this there is a need to manage the international finance

INTRODUCTION

MEANING & SCOPEInternational finance is an area of financial economics

that deals with monetary interactions between two or more countries

concerning itself with the topics such as currency exchange rates, international monetary system, FDI including risk

it helps multinational corporations in dealing with cross border transactions by detailing various financial aspects involved to these transactions.

   With increasing volumes and complexities of international business, the study of international finance has become a specialized subject dealing with study of-

Foreign exchange markets Exchange rates MNC financial systems Risk management International accounting systems

1} foreign exchange markets

It is the market in which currencies are bought & sold against each other.

No single physical location.A world wide network of primarily banks connected through a telecommunication network.

foreign exchange market

spot transactio

ns

forward transactions derivatives

2}Exchange rates Another aspect covered in international finance

is that of exchange rate & its determination In case a fixed exchange rate system is

prevalent, their each member country sells a fix value for its currency inventories of gold or US dollar

In case of floating exchange rate, it is the demand & supply of the currency which determines exchange rate

Demand & supply of currency dependent on factors like interest rate, monetary & fiscal policy, BOP etc.

variable unit- home currency

constant unit- foreign currency

direct quote variable

unit- foreign currency

constant unit- home currency

indirect quote

EXCHANGE RATE QUOTATIONN

Two ways in which currency is quoted:

3} Multinational financial system multinationals are the single most largest players

responsible for international business & international finance.

MNC has numerous kinds of flows between the parent company , foreign business clients

MNC take decision on the nature of fund movement Important variables in context of MNCs – A} mode of transfer of funds-decision regarding

funds like dividends, loans, interest payment etc.

B} planning for payment schedule. C} managing the firm value

4} Risk management The earnings of firms engaged in

international business are subject to fluctuations due to floating exchange rate.

5} International accounting

International finance also studies the techniques of preparing consolidated financial statements of MNCs. Like international audit, international taxations etc.

Need an importance of international

finance

Diminishing national boundaries

Efficiently produce products in foreign markets 

Broaden markets and diversifyEarn higher returns

Single market Competitive advantage

Rise in global companies

New Technologies

Rising world trade volumes

Increased cross border capital flow

FDI Flows by Region (in us $Million)

Region FDI inflows

FDIOutflows

2011 2012 2013 2011 2012 2013

World 1700 1330 1451 1711 1346 1410

Developedeconomies

880 516 565 1215 852 857

Developing economies

724 729 778 422 440 454

Changing nature of money and capital markets

Online transaction New technology Awareness about services offered in other countries

Expanding technical infrastructure

Global consumers and global competition

Development of supporting financial infrastructure

Increased competition at global level

Domestic companies too feel the heat

Recent trends in international finance

De-regulation of financial markets Financial deregulation can be referred to a

variety of changes in the law which allow financial institution more freedom in how they compete.

So deregulation is very important as: It helps in creation and expansion of world

wide banking structure. by increasing competition it increases ,it

increases efficiency of business also.

But there were criticisms also for this excessive deregulation As according to the UN report a sustained process of deregulation within countries and between countries can lead to global crisis.Suggestions :Those financial instrument which do not contribute to long term economic growth should be removed, and speculative and risky activities should be encouraged.

Cross border M and A activity

Mergers It refers to legal consolidation of two companies into one entity . Acquisition

It occurs when one company takes over another and completely established itself as the new owner.

In 2007 when the economic conditions were good there was an increase of about 27% .

But in 2008 it slowed down because of financial crisis.

But till 2014 it has increased to double..

Rising popularity of Euro marketsEuro market It is a kind of market which is virtually free

from regulations ,which provides excellent opportunities for investment ,funding and speculation.

Also provide risk management products.

Emergence of MNCs from emerging economies. The last two decades have seen the

emergence of a large number of multinational companies from emerging economies .

About 22 MNCs from top 100 infrastructure MNCs are headquartered in developing economies .

Example :TATA

Integration of markets globally

Through integration ,domestic investors can buy foreign asset and foreign investors can buy domestic asset .

So this gives the investors the freedom and opportunity to raise funds and to invest anywhere in the world, through any type of instrument.

Integration has lead to redistribution of financial resource from the surplus to deficit countries.

External Commercial Borrowing [ECB] As the name suggest, ECB- when company

borrows money from external [non-trading/foreign] sources.

Money is borrowed from non- resident lenders.

Via bank loans, fixed rate bonds, non- convertible shares, optionally convertible or partially convertible preference shares etc.

For a minimum average of 3 years.

From where can Indian company arrange for money ?

Within India

Outside India

1. Short term funds – money market

2. Long term funds – capital market

ADR , GDR, ECB , FCCB

Who can borrow ? Hotel , infrastructure, IT , hospital sector.

[but company must have registered itself under Companies Act 2013]

Micro finance institutions [MFI] can borrow via ECB.

NGOs, NBFCs, Companies can borrow via ECB, if they are involved in micro- finance activity.

SEZ units

AMERICAN DEPOSITORY RECEIPT [ADR] From American’s point of view, it allows a foreign Co. [e.g.

Indian] to raise money from American financial market. Suppose, Indian Co. wants to raise money from America,

by issuing shares in American Stock Exchange. But then Indian Co. will have to maintain accounts

according to American standards. To prevent this problem, Indian Co. gives its shares to

American bank. American bank gives that Indian Co. receipts [called ADR]

in return of these shares. Then Indian Co. can trade those ADR receipts in American share market, to raise money.

But then Indian Co. will have to pay dividends to those investors in dollar currency.

INDIAN DEPOSITORY RECEIPTS [IDR] From India’s point of view, it allows a

foreign company [e.g. America, British] to raise money from Indian financial market.

GLOBAL DEPOSITORY RECEIPTS [GDR] GDR enable a company, the issuer, to access

investors in capital markets outside of its home country.

It is listed & traded in the stock exchange. If for example an Indian company which has

issued ADRs in the American market wishes to further extend it to other developed and advanced countries such as Europe, then they can sell these ADRs to the public of Europe & the same would be named as GDR.

FOREIGN CURRENCY CONVERTIBLE BONDS [FCCBs] FCCB means a convertible bond issued by an Indian

Co. expressed in foreign currency & the principal & interest in respect of which is payable in foreign currency i.e. the payment of principal & interest is usually in the currency in which the money is raised. The option of converting bonds into equity at a price determined at the time the bond is issued.

It also has the benefits of a debt instrument as it includes guaranteed returns or yields which are payable in foreign currency.

FCCB have maturity period of about 5 years. Currently, Indian companies can raise upto $50 million

in a FY through issue of such bond via automatic route.

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