Mohammed Umair

umairsunni@gmail.com

INTERNATIONAL
FINANCIAL
MANAGEMENT
CONTENTS

1. Nature
2. Compared with domestic financial management
3. Scope
4. Current assets management,
5. Managing foreign exchange risks,
6. International taxation,
7. International financing decision,
8. International financial markets,
9. International financial investment decisions;
10.International financial accounting
11.National differences in accounting, attempts to harmonize differences.
WHAT IS FINANCE?
Finance is the science and art of managing money and other assets.
Thus the study of finance can be classified into following ways:-

Study of
Finance

Public Personal Corporate

Finance Finance Finance

1. Public Finance: 2. Personal Finance: 3. Corporate Finance:

Public finance deals with role
of the government in managing
financial requirements of the
economy.
Personal finance deals with
monetary decisions and activities
of an individual or a family unit
that includes routine income and
expenses planning.
It is concerned with planning,
raising, investing and monitoring
of finance in order to achieve the
financial objectives of the
company. .
WHAT IS THE ROLE OF FINANCE IN AN ORGANIZATION?

WHAT IS FINANCE FUNCTION?

Finance function refers to action performed by a
finance department that involves acquiring and
utilizing funds of a business.
• Production Finance
• Marketing Function
• HRM
• R&D

Relationship of finance with other functional areas of Management

PRODUCTION MARKETING HUMAN RESOURCE R&D
Raw material Product development Talent Acquisition and Retention Improving existing products
Transportation Promotion activities Human Resource Development Explore new ways of producing
Expansion of production capacity Distribution activities Compensation Management Controlling costs
Operational expenses Pricing activities Employee health an d safety Efficient methods of production
Plant and Machinery Customer Delight Social security Quality Management
Finance function is an integral part of all various functional areas of an organization such as Production, Marketing, Human Resource, R&D and
Administration, it may be difficult to separate finance functions from these functional areas of management.
AIMS OF FINANCE FUNCTION

Procuring adequate funds

Mobilization of funds

The finance function supports the

pursuit of business objectives by Acceleration of profits
performing a number of functions
such as:
Financial reporting

Accounting and Analysis

Maximize firm value

AIMS OF FINANCE FUNCTION
Funds
Name Firm Value
Nature of Business Procured How the funds were mobilized? Net Profit
of Firm Per Share
recently
Bharthi Telecom tower infrastructure Rs 4,500 Crore 1. Installation of 4,813 new towers; Rs. 462.80 Rs. 279.15
Infratel providers which deploys, owns 2. Up gradation and replacement on Crores Rs. 200
and manages telecom towers and existing towers;
communication structures for all 3. Green initiatives at tower sites;
wireless operators 4. General corporate purposes; and
Just Dial Local Search Engine: providing Rs. 327 crore The funds will be used for expansion Rs. 31.49 Rs. 1,495
local search services over the and to upgrade technology. Crores Rs. 530
Phone, Web, Mobile and SMS.
PC Operations include the Rs. 609.30 1. Finance establishment of new Rs. 69.59 Rs. 236
Jeweller manufacture, retail and wholesale Crore showrooms; Crores Rs. 135
Ltd of jewellery. 2. General corporate purposes.
Channel Business of Production, Rs.11.7 Crore 1. To finance the estimated Rs. 0.05 Rs. 497.50
Nine Marketing, Distribution of expenditure of production of two Crores Rs. 25
Entertain Television serials, Television films;
ment Programmes, Films, Video films, 2. Strengthening distribution
Corporate Films, Feature films, operations;
Documentaries, and Marketing of 3. Brand building
sports and Entertainment events.
MEANING & SCOPE OF FINANCIAL MANAGEMENT
Financial management is the process of planning, raising,
controlling and administering of funds used in the
business.
Financing Investing Dividend Liquidity
Decisions Decisions Decisions Decisions
Estimating the currents assets
SCOPE OF FINANCIAL financial Assessing risk Management of and current
and return earnings
MANAGEMENT requirement. liabilities

Determining Investment of
the capital Funds
structure.

Decision Type Scope Key consideration

Financing Decision Raising of Funds Cost and Risk
Investment Decision Allocation of funds in assets Risk and Return
Dividend Decision Distribution of profits Requirements of shareholders
Working Capital Decisions Managing current assets & Lia. Liquidity & Profitability
WHAT IS INTERNATIONAL FINANCIAL MANAGEMENT?
International financial management may be defined as management of financial operations
of different international activities of an organization.
DISTINGUISHING FEATURES OF INTERNATIONAL FINANCIAL MANAGEMENT
Foreign exchange risk
Variability of exchange rates is widely regarded as the most serious international financial problem facing
corporate managers and policy makers.
Political risk
It the risk of losing money due to changes that occurs in a country’s government. Political actions and instability may make it
difficult for companies to operate. Acts of war, terrorism, trade barriers and military coups are all extreme examples of political
risk.
Expanded opportunity sets
Firms can raise funds in capital markets where cost of capital is the lowest. In addition, firms can also gain from greater
economies of scale when they operate on a global basis.
Market imperfections
There are profound differences among nations’ laws, tax systems, business practices and general cultural environments.
 FUNCTIONS OF INTERNATIONAL FINANCIAL MANAGEMENT
1. The TREASURER 2. The CONTROLLER
The treasury typically manages the firm’s cash, investing The controller typically handles the accounting activities,
surplus funds when available and securing outside such as corporate accounting, tax management, financial
financing when needed. The treasury also oversees a accounting, and cost accounting. The treasurer’s focus tends
firm’s investment plans and manages critical risks related to be more external, whereas the controller’s focus is more
to movements in foreign currency values, interest rates, internal.
and commodity prices.

TREASURER CONTROLLER
 Procurement of funds  Accounting and auditing
 Banking relationship  Reporting of financial information
 Investor relations  Custody of records
 Investment of funds  Budgeting
 Cash management  Interpretation of financial data
 Insuring assets  Appraisal of results
 Credit appraisal and collections  Preparation of taxes
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International financial management may be defined as management of
financial operations of different international activities of an organization.

Scope of International Institutions

International Balance of Payments
finance
International Financial Markets

FOREX Markets

International financial services

International Taxation

International Accounting
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT

A. INTERNATIONAL INSTITUTIONS
There are various global bodies regulating different aspects of international finance.
INTERNATIONAL FINANCE CORPORATION
• Supporting sustainable investments in the private sector of
developing countries.
• Source of multilateral loans and equity financing for
projects undertaken by the private sector in developing countries.
• Technical assistance to businesses and governments of
developing countries.
INTERNATIONAL MONETARY FUND
• Monitors the balance of payments of its member countries.
• Lender of last resort for countries facing a financial crisis.
WORLD BANK
• It funds the development of projects, mainly in developing
countries
WORLD TRADE ORGANIZATION
• Resolves multilateral and bilateral trade disputes
• Negotiation of different trade agreements
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.

B. INTERNATIONAL FINANCIAL SERVICES

 International Financial services can be defined as the products and services
offered by institutions for the facilitation of various financial transactions and
other related activities.
A. ASSET/FUND BASED SERVICES B. FEE BASED FINANCIAL SERVICES
Here funds are arranged and Advisory services for which bank
interest is charged. charges fee and & renders service
 Equipment leasing/Lease financing  Merchant banking
 Hire purchase and consumer credit  Project advisory
 Bill discounting  Custodian services
 Venture capital  M&A services
 Insurance services  Credit rating services
 Factoring  Capital restructuring services
 Forfaiting  Hedging of risks
 Mutual fund  Loan syndication
 Dealing in foreign exchange  Securitization of debt
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
D. BALANCE OF PAYMENTS
 Balance of payments (BOP) accounts are an accounting record of all monetary
transactions between a country and the rest of the world.

CAUSES OF DISEQUILIBRIUM IN BALANCE OF PAYMENT ↓

Population Development Demonstration Natural Cyclical Inflation

Growth Programmes Effect Factors Fluctuations

Poor Flight of
Marketing Capital Globalization
Strategies
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
C. INTERNATIONAL FINANCIAL MARKET
 International financial market is a broad term describing any global marketplace where
buyers and sellers participate in the trade of assets such as equities, bonds, currencies and
derivatives.
Forex market

Money Market Eurocurrency market

International Financial
Markets General Currency Market

Euro Bond Market

Depository Receipts
Capital Markets
Institutional Finance

FCCB
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
C. INTERNATIONAL FINANCIAL MARKET

• The foreign exchange market (forex, FX, or currency

FOREX Market market) is a worldwide decentralized over-the-counter
financial market for the trading of currencies.

Eurocurrency • The Eurocurrency market is made up of several large

market banks called Eurobanks that accept deposits and
provide loans in various currencies.
• Loans of one year or longer are extended by
Eurocredit market Eurobanks to MNCs or government agencies in the
Eurocredit market. These loans are known as Eurocredit
loans.
• A bond issued in a currency other than the currency of
the country or market in which it is issued.
Eurobond market • The Eurobond market is made up of investors, banks,
borrowers, and trading agents that buy, sell, and
transfer Eurobonds.
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
C. INTERNATIONAL FINANCIAL MARKET

• American Depositary Receipt: A negotiable certificate

issued by a U.S. bank representing a specified number
ADR of shares (or one share) in a foreign stock that is traded
on a U.S. exchange.

• Global Depositary Receipt: A negotiable certificate

held in the bank of one country representing a specific
GDR number of shares of a stock traded on an exchange of
another country.

• FCCB: A convertible bond is a mix between a debt and

equity instrument. It acts like a bond by making regular
FCCB coupon and principal payments, but these bonds also
give the bondholder the option to convert the bond into
stock.
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
F. FOREX MARKETS
 The foreign exchange market (Forex, FX, or currency market) is a global, worldwide
decentralized financial market for trading currencies.

FEATURES OF FOREX MARKETS

Its huge trading Its geographical Its continuous

volume, leading to dispersion; operation: 24 hours a
high liquidity; day

The low margins of

The variety of factors relative profit The use of leverage to
that affect exchange compared with other enhance profit margins
with respect to account
rates; markets of fixed size.
income; and
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
F. FOREX MARKETS
MARKET PARTICIPANTS OF FOREX MARKETS

Investment Retail Money

Banks Commercial Central management foreign transfer/rem
companies banks firms exchange ittance
traders companies

IPORTANCE OF FOREX MARKETS

International
Liquidity Rates Reserves Hedging Trade
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
F. FOREX MARKETS
TYPES OF EXCHANGE RATES A country's exchange rate regime under which the
government or central bank ties the official exchange
A-FIXED EXCHANGE RATE rate to another country's currency
Advantages of the Fixed Exchange Rate Disadvantages of the Fixed Exchange Rate

1. Reduced risk in 1. No automatic balance of

international trade payments adjustment
2. Introduces discipline in 2. Large holdings of foreign
economic management exchange reserves
3. Fixed rates should required
eliminate destabilizing 3. Loss of freedom in your
speculation internal policy
4. Promotes International 4. Fixed rates are inherently
Investment unstable.
5. Suitable for Currency Area
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
International finance is related to management, economic and commercial activities and accounting sciences.
F. FOREX MARKETS
TYPES OF EXCHANGE RATES
B-Floating Exchange Rate
A country's exchange rate regime where its currency
is set by the foreign-exchange market through
supply and demand for that particular currency
relative to other currencies.

Advantages of the Floating Exchange Rate Disadvantages of the Floating Exchange Rate
1. Automatic balance of
1. Uncertainty
payments adjustment
2. Lack of investment
2. Freeing internal policy
3. Speculation
3. Absence of crises
4. Inflation
4. Flexibility
5. Lower foreign exchange
reserves
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
F. FOREX MARKETS Foreign-exchange risk is the risk that an asset or investment
FOREIGN EXCHANGE RISK denominated in a foreign currency will lose value as a
result of unfavourable exchange rate
Exchange exposure Transaction
exposure
Exchange Risk Liquidity risk Translation exposure

Interest rate risk Economic exposure

BILLS PAYABLES INTEREST ON DEPOSIT TRANSACTION

Goods bought from US Co;
 On credit term of 6 months
 Value of Goods ($500)
 At time of purchase ($1=Rs 45)
Case 1: Value of $ ↑
E.g.: Rs. 50=$1
Rs. 50 x $500 =Rs 25,000
Case 2: Value of $ ↓
E.g.: Rs. 40=$1
Rs. 40 x $500 =Rs 20,000
 Amt deposited in Swiss Bank
 Principle Amount : €10,000
 Interest rate : 10% P.A
 Interest Amount : €1000
 At the time of Dep : 1€ = Rs. 60
Case 1: Value of € ↑
E.g.: 1€ = Rs. 75
Rs. 75 x €1000 =Rs 75,000
Case 1: Value of € ↓
E.g.: 1€ = Rs. 50
Rs. 50 x €1000 =Rs 50,000
EXPOSURE
Transaction exposure is the risk,
faced by companies involved in
international trade, that currency
exchange rates will change after
the companies have already
entered into financial obligations.
Dividends
Interest
Royalty
TAX
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
F. FOREX MARKETS
‘Translation Exposure' The risk that a company's
FOREIGN EXCHANGE RISK equities, assets, liabilities or income will change in
value as a result of exchange rate changes
Infosys .Inc (USA) Subsidy of Infosys India Infosys .Inc (USA) Subsidy of Infosys India

Balance Sheet Assets - 1/01/2016 Balance Sheet Assets - 31/12/2016

 Plant and Machinery $ 200000  Plant and Machinery $ 200000

 Inventory $ 100000  Inventory $ 100000
 Cash $ 20000  Cash $ 20000 Infosys Ltd (India)
$ 320000 $ 320000 Infosys .Inc (USA)
Subsidy of Infosys India

Exchange rate as on 1/01/2016 Exchange rate as on 31/12/2016

$1= Rs. 45 $1= Rs. 46
Therefore translated value of Therefore translated value of
these assets as on 1/1/2010 these assets as on 1/1/2010 Therefore translation gain
is Rs 45 X $ 320000 is Rs 46 X $ 320000 1,47,20,000- 1,44,00,000
= 1,44,00,000 = 1,47,20,000 = Rs. 3,20,000
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
F. FOREX MARKETS
FOREIGN EXCHANGE RISK
Economic exposure is the risk that a company's cash flow, foreign investments, and
earnings may suffer as a result of fluctuating foreign currency exchange rates.
Liquidity Risk
Liquidity refers to the amount of market interest (the number of active traders and
the overall volume of trading) present in a particular market at any given time.
 From an MNC perspective, liquidity is usually experienced in terms of the
volatility of price movements.
 A highly liquid market will tend to see prices move very gradually and in
smaller increments.
 A less liquid market will tend to see prices move more abruptly and in larger
price increments.

Interest rate risk the risk that rising interest rates will make their fixed
interest rate bonds less valuable.
SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT
F. FOREX MARKETS
MANAGING FOREIGN EXCHANGE RISKS
Many firms are exposed to foreign exchange risk - i.e. their wealth is affected by
movements in exchange rates - and will seek to manage their risk exposure.

The internal techniques The external techniques

Invoice in home currency Forward contracts

Leading and lagging Money market hedges

Matching Futures contracts

Decide to do nothing? Options

Currency swaps
Futures Trading: Example of a Futures Contract

Let us say after completing MCm your planning to study in Harvard

USA. For which you have to pay college fee of $1000. You have to
Pay this in December. You call up ICICI bank and check the rate and
find . But you need $1000 in December.

Underlying asset: USD

QUANTITY 1000 USD

Expiry Date December

Strike price $1=Rs. 47

Current price Rs. 200/-.

This difference between the strike price and the current price is Cost of Carry. =Rs 2/-
contract size Strike price X Quantity (Rs. 47/- X 1000 USD = Rs 47,000
Margin Rs. 23500

Delivery Method ?
Scenario: 1 Scenario: 2

End of the expiry date End of the expiry date

$1=Rs. 49↑ $1=Rs. 43 ↓

Rs. 49 - Rs. 47 = Rs. 2 Rs. 47 - Rs. 43 = Rs. 4

(Rs. 2x1000 USD = Rs.2000) (Rs. 4x1000 USD = Rs. 4000)

will be paid to you by Seller. will be paid to you by Buyer.

Valuation of Futures
What is International taxation?
 International taxation refers to tax levied on the cross –border transaction.
 The transaction may take place between two or more persons or entity in two or
more countries or tax jurisdiction.
 Such a transaction may involve a person in one country with property and income
flows in another.
TYPES OF INTERNATIONAL TAXATION

• Residence based taxation:

• Residents of the country are taxed on their worldwide (local and foreign) income.
• Source Based Taxation:
• Only local income from a source inside the country is taxed. Usually non-residents are
taxed only on their local income.
TAX IMPLICATIONS OF MNCs OPERATING IN INDIA
Sec.6(3), Residential Status of foreign Company

 Resident:
 INDIAN COMPANY : The Company registered in India is an Indian Company.
 Indian Company is always treated as Resident in India whether Control &
Management is in India or Outside India.
 FOREIGN COMPANY : If Control & Management of the affairs of the business
of Foreign Company is situated wholly in India then its residential status is
Resident in India.

 Non-Resident:
 If its Control & Management of the affairs of the business is situated wholly
/ partially outside India then its Residential Status is Non‐Resident in India.

*BOD MEETING
INCIDENCE OF TAX SECTION 5

Type of income Ordinary Non Resident

Resident (NR)
(OR)
1. Indian income Taxable Taxable
2. Foreign income Taxable No Tax

3. Income from foreign remittances Taxable No Tax

4. Income from business or profession on the Basis of Place

of Control
Taxable No Tax
a) Income from business wholly or partly controlled from
Taxable No Tax
India

a) Income from business wholly controlled from outside

India
5. past untaxed profit brought into India During the No Tax No Tax
previous year.
OBJECTIVES OF INTERNATIONAL FINANCIAL MANAGEMENT
Goals or objectives describe a particular result aimed to achieve with a prescribed time frame and with available resources.

Profit Maximization
Goals of Financial
Management
Wealth Maximization

Profit Maximization The prime motto of any kind of business activity is earning profit
Sales - Expenses = Profit
The term ‘profit maximization’ implies generation of huge amount of profits over the time
period, this includes both short-term and long-term.
Decisions whether investment, financing, dividend or working capital management should
focus on maximization of profits
FAVORABLE ARGUMENTS FOR PROFIT MAXIMIZATION
Is profit maximization an ethical Goal?

Why Profit Maximization?  Attracts investors

MERITS
 Barometer of Performance
 Economic survival  Maximize stakeholders return
 Expansion and Diversification  To fulfil social desire
Concept of WEALTH MAXIMIZATION by way of maximizing the market
Wealth Maximization is process of increasing shareholders wealth
value of firm’s common stock.

MERITS DEMERITS

 Serves interest of Society  Prescriptive idea

 Benefits customers  Leads to controversy
 Considers timing of benefits & risk  Not socially desirable
 Benefits employees  Ownership and Management conflict
OBJECTIVES OF INTERNATIONAL FINANCIAL MANAGEMENT
Goals or objectives describe a particular result aimed to achieve with a prescribed time frame and with available resources.

• Goal - Maximize Shareholder Wealth

• maximize Capital Gains and Dividends taking into account risk
• A company’s stock price is very important (incorporates all relevant information)
• This goal applies in the Anglo-American World [U.S., U.K., Canada, Australia and New
Zealand].
• Goal in Continental Europe and Japan – Stakeholder Capitalism Model
• Maximize Corporate Wealth (not only stockholder wealth but also wealth of managers, labor, local
community, suppliers and creditors).
• Wealth not just financial wealth but also
• The firm’s technical, market and human resources.

 There are different goals in different countries.

 What we believe in the U.S. is not necessarily followed in other countries
 There appears to be a trend toward more use of the shareholder wealth maximization
model.