IF Unit 02

BCU – NON NEP
6TH SEM B.COM FINANCE ELECTIVE – INTERNATIONAL FINANCE FN.6.3
UNIT 02 - INTERNATIONAL FINANCIAL DECISIONS (15 Hrs)
INTERNATIONAL CAPITAL BUDGETING

CAPITAL BUDGET
→ It is a process of investigation and analysis that leads the to a key financial decision for both
purely domestic firms. & MNC's
→ It is used by companies to evaluate on the inflows and outflows associated with prospective
long term investment projects.
→ I It is defined as the process as of analyzing capital investment opportunities and deciding.

INTERNATIONAL CAPITAL BUDGETING:
It is the process of making investment decisions in real productive assets in foreign countries
IMPORTANCE OF INTERNATIONAL CAPITAL BUDGETING
1. Long term strategic Goals: A capital budgeting decision has it effect con over a long period
of time & helps to determine the future destiny of the Company.
2. Involvement of large amount of funds: capital budgeting decisions need substantial
amount of capital outlay because investment are move in international projects then
compared to domestic projects.
3. Future Uncertainty: longer the period of project, greater may be the risk & uncertainty
because future is uncertain & full of Risk.
4. Difficult to make: ICB is more complex than domestic capital budgeting because overseas
projects and investments typically large with different parameters and different decisions
variables
5. High Risk: Because of several factors in foreign currency dimension, different economic
indications in different countries & different risk characteristics with which the companies
entering foreign market.
FACTORS TO BE CONSIDERED IN ICB:

1. Complexities due to types of financing.
2. Difficulty in Recognizing The exact Remittances {different tax laws , Political system, financial
market, institution function of different Countries }
3. Hast government: Incentives on taxation policies, environmental policies, labor policies etc.
4. Fluctuations in Exchange Rate
5. Inflation
NETHRA HM – ASSOCIATE PROFESSOR

DEPARTMENT OF COMMERCE AND MANAGEMENT, SFGC 1 | 18
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6. Financing arrangement {they are usually captured by discount rate}

7. Uncertain salvage value will impact on NPV [Salvage valve means the book value of an asset
after all depreciation has been fully expensed]
FACTORS AFFECTING ICB
➢ Foreign Exchange Risk

➢ changes yes in Exchange Risk
➢ Tax Issues
➢ Effect of Inflation
➢ Segmented Markets
➢ changes in Accounting Rules
➢ Remittance Restrictions
➢ Salvage value
➢ political Risk
➢ complexities of Regulatory Environment
INFLUENCE OF INFLATION ON CAPITAL BUDGETING DECISIONS:

Inflation affects profitability in 4 ways: -
• It changes the cost of funds used to finance an enterprise
• It increases the costs of labor, materials & Material price of the product
• It affects the tax bill to be paid
• It causes shifts in demand patterns.
1. Cost of Borrowing: - Inflation well cause the imbalance b/w the demand & supply of
funds which will lead to the rising demand for funds, higher borrowing costs for
business, high interest risk.
2. Cost of Input: - to enable the steady production there is a need to build up working
capital increase of Smooth production process. If cost of goods is sold Grater than cost
of production its goods for the firm but vice versa can affect
3. Impact on Accounting practice: The withdrawals have to be replaced at current,
inflated prices. Then FIFO, LIFO may be applied in several countries for Certain items
under specific conditions Inflation has different effects on the Profit & loss account and
on the balance sheet.
4. Increases costs of labor: Inflation affects labor market efficiency by influencing terms
wage setting practices & compensation schemes. In economies with competitive labor,
capital and product markets, comparable workers at equivalent jobs will tend to be
compensated Similarly
5. Effects of Inflation on discount Rate: - It has become one of the central concepts of
finance. The selection of proper rate is critical which helps for making correct decision.
6. The Inflation Effects corporate finance and tax on Capital Return.

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FOREIGN PROJECTS
1. It is more complex than local / domestic project due to multiple factors
2. They are subjected to foreign exchange because foreign project cash flows are in foreign
currencies which must be converted to local currency.
3. Multiple tax jurisdictions
4. It must be evaluated from the perspective of the parent company.
5. Foreign currency cash flows should be projected based on the foreign currency inflation
Rate.
FOREIGN CURRENCY APPROACH

The foreign currency cash flows are discounted based on implied cost of capital that would apply
to the foreign currency to arrive at the foreign currency NPV.
The NPV denominated in foreign currency [INR] is then converted to domestic Currency exchange
rate
NPV under this second approach should be equal the NPV under the first approach i.e., domestic
currency approach.
HOME CURRENCY APPROACH

In the home currency approach, the NPV of a foreign project is determined by:
1. Converting the foreign currency cash flows of the project to the domestic currency based
on the expected forwards exchange rates.
2. Discounting the cash flows based on the domestic currency cost of capital.
FINANCE
The term finance is derived from the Latin word 'finis' which means end /finish. It can also be
interpreted in many ways like fund, money, investment, capital amount etc.
Finance is the life blood business and finance act as a medium for business which involves the
acquisition and usage of funds in various departments. It is an art and science of managing money
it is the set of activities dealing with management of funds.
MEANING OF FINANCE
It also refers to the science that describes management, creation and study of money, banking,
credit, investments, assets and liabilities.
Finance consists of financial systems, which include public, private and government bodies and
the study of finance and financial instruments, which can relate to countless assets and liabilities

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DEFINITION OF FINANCE
According to Paul G Massing’s "Finance is the management of the monetary affairs of a company.
PRINCIPLES OF FINANCE
1. Principle of Risk and Return: - It states that the potential return rises with an increase in
risk using these principles, individuals associate low levels of uncertainty with low
potential returns and high level of uncertainty or risk with high potential returns.
2. Principle of Time value of Money: it is the concept that money you have now is worth
more than the identical sum in the future due to its potential earning capacity. this Principle
of finance holds that provided money can earn interest, any amount of money is worth
move the sooner it is received.
3. Principles of profitability and liquidity: The company analysis is done through these 2
ways:
• Profitability: refers to the company improvement on margins.
Margins: - refers to reverse cost the more the margins are increasing. It reflects
enhanced profitability in the company for that financial year.
Profitability enhances the equity reserves and growth prospects of the company
• Liquidity: refers to the ability of the firm to meet short term and long term
obligations which the business needs to pay in the long run and the short
run the current portion of liabilities.
4. Cash Flow principals: Cash Flow is the increase or decrease in the amount of money a
business, institution or individual has
Cash Flow has many uses in both operating business and in performing financial
analysis.
a) Net present value: calculating the value of a discounting cash flow model
calculating the NPV
b) Internal Rate of Return: determining The IRR an investor achieves for
making an investment
c) Liquidity: assessing how well a Company can meet its short-term financial
obligations
d) Cash flow yield: measuring how much cash a business generates per share,
relative to its share price, expressed as a percentage.
e) Cash flow per share [CFPS]: cash from operating activities divided by the
number of shares outstanding.
f) P / CF Ratio: the price of a stock divided by the CFPS, sometimes used as an
alternative to the price - Earnings, or P/E ratio

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5. Cash conversion Ratio: The amount of time between when a business pays for its
inventory [ cost of goods sold] and receives payment from its customers is the cash
conversion ratio.
6. Funding Gap: a measure of the shortfall a company has to overcome [ how much more
cash it needs]
7. Dividend payments: CF can be used to fund dividend payments to investors.
8. Capital Expenditures: CF can also be used to fund reinvestment and growth in the
business
• Diversity Principle: In finance diversification is the process of allocating capital
in a way that reduces the exposure to any one particular asset to rick. It is to reduce
risk/volatility.
• Hedging Principles: - It brings the intention of reducing the risk of adverse price
movements in an asset. Hedge consists of taking off setting /opposite position in an
relating security.
Time period = long term, short term, medium term

Ownership and control = owned capital, Borrowed capital
Generation of capital = internal source, External source
FINANCE FUNCTION
It can be defined as "procurement of funds and their effective utilization in the business"
Classified into 2 types: -
1. Managerial Finance Functions

➢ Investment decisions involves the types and volume of assets to be acquired.
➢ Financial decision involves the decision about the various sources and the extent of funds
to be obtained
➢ Dividend decision involves the extent of profit to be allocated and the extent of profit to be
retained
In modern day enterprises the managerial finance functions are managed by the CFO
2. Routine finance functions

➢ Supervision of cash receipts and payments and safeguarding of cash balances
➢ Custody and safeguarding of securities policies and other valuable documents.
➢ Record Keeping of financial transactions and reporting
In modern day enterprises the Routine finance functions are managed by people at the operation
levels.

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AIMS OF FINANCE FUNCTION
• Acquiring adequate funds.

• Proper deployment of funds.
• Escalating profitability. And A Maximizing firm’s valve.
FINANCIAL SYSTEM
➢ It is the set of implemented procedures that track the financial activities of a country on a
regional scale.
➢ It is the system that enables lenders and borrowers to exchange funds.
➢ The global financial system is basically a broader regional system that encompasses all
financial institutions, borrowers and lenders within the global economy.
➢ The financial system is possibly the most important institutional & functional vehicle for
economic transformation
➢ The financial system provides services that are essential in a modern economy...
MEANING OF FINANCIAL SYSTEM
It refers to a set of complex and closely connected or interlinked financial institutions or organized
and unorganized financial markets, financial instruments and services which facilitate the transfer
of funds. A financial system consists of institutional arrangements through which financial Surplus
in the economy is mobilized from units having surplus funds and is transferred to units having
financial deficit.
Financial system is a total of: -
• Financial institutions.
• Financial Markets
• Financial services.
• Financial Practices & procedures.
DEFINITION OF FINANCIAL SYSTEM

According to Robinson, “financial System is the primary function of the system which is to provide
a link between savings and investments for the creation of new wealth and to permit portfolio
adjustment in the composition of the existing wealth".

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OBJECTIVES OF FINANCIAL SYSTEM

1. To mobilize the resources.
2. To create link between savers and investors.
3. To establish a regular smooth and efficient markets.
4. To create assets for the use of people.
5. To encourage savings and investment.
6. To facilitate economic development of the country.
7. To facilitate for expansion of financial markets
8. To promote for efficient allocation of financial resources.
9. To make sound decisions based on cash flow and available resources.
10. To establish financial control and clear accounting procedures which ensure that funds
are used for intended purposes.
PURPOSE OF FINANCIAL SYSTEM

1. Financial system is required for mobilization of savings and converting it into
investments.
2. Financial system is essential for providing required capital to the business organizations
to carry out their activities.
3. It is required for generating income or profit for both household and corporate sector.
4. It is necessary for increasing the productivity of capital through efficient and effective
allocation of funds and resources.
5. It is essential to accelerate the rate of economic growth and development.
6. It is helpful in providing mechanism to control risk and uncertainties in financial
transactions.
7. It is required to transfer the resources from one section or part of the economy to another
through effective allocation of resources to different investment channels.
FUNCTIONS OF FINANCIAL SYSTEM
1. Savings Function: This is one of the important functions of a financial system, it is to link
the savers and investors and thereby help in mobilizing and allocation the savings
efficiently and effectively. By aching efficient-conduct for allocation of resources, it
permits continuous upgradation of technologies for promoting growth.
2. Liquidity Function: It refers to ready cash or money and other financial assets which can
be converted into cash without loss of value and home. The major function of financial
system is the provision of money monetary assets for the purpose. Production of goods &
services, therefore all the financial activities are subjected to either provision of liquidity
or trading in liquidity.
3. Payment function: The financial system offers a very convenient mode for payment of
goods and services, cheque system, Credit card system etc., are the easiest method of

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payments, it provides a payment mechanism on for the exchange of goods and services and
transfers economic Resources through time and across geographic regions and industries.
4. Risk Function: The team risk and uncertainty relate to future which remains unknown for
the investors who expect future incomes through their savings. whenever mobilized
savings are invested in to different productive activities, the investors are exposed to lower
risk.
5. Policy function: - The government intervenes in the financial system to influence
macroeconomic variables like interest rate or inflation.
6. Provides Financial Services: A financial system minimizes situations where the
information is an asymmetric and likely to affect motivations.
7. Lowers the cost of Transactions: - A financial system helps in the creation of a financial
structure that lowers the cost of transactions and this benefits the rate of return to savers
and also reduces the cast of barrowing.
8. Financial deepening and Broadening: Financial deepening Refers to an increase of
financial assets as a percentage of the GDP. Financial Broadening refers to building an
increase number and variety of participants and instruments.
FINANCIAL DECISIONS
It refers to the decisions concerning financial matters of a business concern There are Kinds of
financial management decisions that the firm making in pursuit of maximizing wealth
TYPES OF FINANCIAL DECISIONS

1. Investment Decisions: It refers to the activity of deciding the Pattern of investment and
it is most important decision made for fixed assets and current assets. The funds invested
in assets should also yield maximum Return to the business concern, but as future is
uncertain the return expected -coves both risk and uncertainties. The selection of proposal
can be evaluated by using certain techniques such as costing technique, capital budgeting,
CUP analyses etc., before making a final decision on the investment avenues.
Investment Decisions can be classified into 2 types
a. Long term investment Decisions: - it refers to capital budgeting decisions and this the
process of making investment decisions in capital expenditure. These are expenditure
that benefit of which is expected to be received over a long period time. The investment
proposal should be evaluated in terms of profitability, cast involved and risk associated
with the project.
b. Short term investment Decisions: Also known as working capital Decisions It is
related the allocation of funds. towards current- assets and it ensures sound liquidity
position.
2. Financing decision: the profitability of the business depends upon the appropriate blend
of finance with debt and equity. The instruments that are to be selected must aim at

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maximizing returns to the investors and to protect the interest to the creditors. The finance
manages must decide the mode of having the funds to meet the firm’s investment
requirements and he has to strike a balance between debt and equity. Most of the earnings
will be used. on the payment of interest on the borrowed funds which is called as financial
risk.
3. Dividend decisions: It refers to Quantum of profits to be distributed among shareholders
and The Quantum of profits to be retained earnings. The higher rate of dividend may
increase the market price of shares and thus maximize the wealth of the shareholders. The
finance manager must decide whether the firm should distribute all profits as retain them
or distribute dividends is called the dividend payment ratio and the balance as as retained
earnings.
FACTORS INFLUENCING OF FINANCIAL DECISIONS

A. Internal factors
• Nature of business.
• Size of Business
• Structure of assets
• Economic life of business
• Legal Structure of business
• Regulatory of loan contract
• Business cycle
• Approach to the management
B. External factors
• Political and economic conditions
• Tax policy
• Structure of Money Market and capital market
PRINCIPLES OF FINANCIAL DECISIONS

1. Risk Return trade off
2. Time value of money
3. Maximization of wealth
4. suitability
5. Balance between liquidity and profitability
6. Diversification.

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INTERNATIONAL FINANCING DECISIONS

International financial decision is a mainly characteristic to multinational companies or to
companies located in countries with a reduced saving rate that is not sufficient to cover all internal
financing needs.
IMPORTANCE INTERNATIONAL FINANCING DECISIONS

1. International finance decisions is an important tool to find the exchange rates, compare
inflations rates, get an idea about investing in international debt securities, ascertain the
economic status of other countries and judge the foreign markets.
2. Exchange rate are very important in international finance decision, as they let us determine
the relative values of currencies.) International finance decision helps in calculating these
rates.
3. Various economic factors help in marketing international investment decisions. Economic
factors of economies help in determining whether or not investors' money is safe with
foreign debt securities.
4. Utilizing IFRS is an important factor for many stages of international finance decision.
Financial statements made by the countries that have adopted IFRS are similar. It helps
many countries to follow similar reporting systems.
5. IFRS system, which is a part of international finance decisions, also helps in saving money
by following the rules of reporting on a single accounting standard.
6. International finance decisions have grown in stature due to globalization. It helps
understand the basics of all international organizations and keeps the balance intact among
them.
7. An international finance decision maintains peace among the nations. Without a solid
finance measure, all nations would work for their self-interest. International finance helps
in keeping that issue at bay.
8. International finance organizations, such as IMF, the World Bank, etc., provide a
mediators' role in managing international finance disputes.
SOURCES OF FINANCE
I. ADR'S (AMERICAN DEPOSITARY RECEIPTS)
ADR's is a negotiable security that represent securities of a Non-US company that trades in the US
financial market securities of a foreign company that are represented by an ADR is called ADS
(American depositary shares). ADRIA are denominated and paid dividends is US dollar A
negotiable certificate issued by a US bank representing a specific number of shares in a foreign
stock that is traded on a US exchange Investors can purchase ADR's from brokers.

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ADR'S ARE LISTED ON

1. NYSE (New York Stock Exchange)
2. AMEX (American Express)
3. NASDAQ (National Association of Securities DE alite automated quotations)
4. OTC (over the counter) ...
FEATURES OF ADR'S
1. ADR can be listed on American stock exchange.

2. A single ADR can represent more than one shakes.
3. the holders of ADR's can get them converted into shares.
4. The holders of ADR have no right to vote in the company.
TYPES OF ADR'S
1. Unsponsored ADR: These facilities is created in response to a Combination of investor,
broker, dealer and depository interest which is initiated by third party.
2. Sponsored ADR: there facility is established jointly by an issuer and an depository
sponsored ADR facilitates are created is same manner like unsponsored ADR.
BENEFITS OF ADR'S
1. Benefits to the issuing company

• An ADR program can make the inventory more interest in them.
• It enables the company to use US equity market
• ADR's can provide increased communication with shareholders in the US.
• They provide any easy way to us employer of Non-US companies to invest in their
companies. Employee stock and purchase plan.
2. Benefits to the investor
• Depository receipt are registered with the US securities and exchange commission
and trade like any other US securities is the OTC market.
• Investors purchase and sell depository receipts through theirs US brokers in exactly
in the same way as they purchase or sell security of US company
• Depository receipts ore liquid because the Les can be winter changeable
• Depository receipts are negotiables US securities
• Dividend and other cash distribution are converted into dollars at comparative
foreign exchange rate.

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II. GDR’S (GLOBAL DEPOSITORY RECEIPTS)

GDR is a name of depository receipt where a certificate issued by a depositary bank which
purchase shares of foreign companies creates a security on a local of those shares. The global
equivalent of the original ADR'S on which they are based.
GAR's represent ownership of an underlying number of shares of a foreign company and are
commonly used to invest in companies from development or emerging markets by investors in
developed markets prices of GDR are based on the values related shares but they are traded and
settled independently by the underlying shares. Depositary receipts have spread to other parts of
the globe in the form of global depository receipts, European depository receipt, international
depository receipts.
Both ADR's and GDR's are usually denominated In US dollars but can also be denominated in
Euro's. A GDR works the same way as an ADR only in reverse.
III. ECB'S (EXTERNAL COMMERCIAL BORROWINGS)

ECB's are commercial losses widely used by eligible resident entities cube raise ECB’s from
recognized nonresident entities. ECB's are bounded by FEMA (foreign exchange management
act). It includes creation's like minimum maturity period, maximum all in cost, permitted and ∙non-
permitted and users. Therefore, it is Considered as fresh investment...
With reference to India FCR's is an instrument that helps Indian firms and organizations to raise
funds from outside India is foreign Currencies. The RBI has specified the borrowings structure in
curriculars’ and -formal guidelines the RBI has established the categories of eligible entities among
borrowers and recognized non-residence among potential lenders to ensure that the inflow remains
clean.
RECOGNIZED LENDERS ECB'S

1. International banks.
2. International Capital Markets
3. multi-lateral financial institutions
4. Export credit agencies
5. foreign collaboration
6. foreign equity holders
7. Overseas organization.
8. Individual lenders.

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METHODS TO AWARE ECB'S

1. Automated Routine: the government has created a number of eligibility requirement
for people who wants to use the automatic method receiving money.
2. Permission Routines: It is necessary to authorize from government before obtaining
funds through ECB
ADVANTAGES OF ECB'S
1. Low interest rate
2. Borrowings without giving control
3. Global exposure
4. Economic growth.
DISADVANTAGES OF ECB'S
1. Reckless borrowings.
2. Low credit worthiness
3. Stock decline
4. Currency swaps
5. Restriction to borrowings.
MASALA BONDS:
Masala Bonds are bonds issued outside India but on Indian entity or co-operate. These bonds are
issued in Indian currency than local currency. Indian corporate usually issue masala bonds to raise
funds from foreign investors. As it is pegged into Indian currency, if the rupee rate falls, investor
bear the work
GREEN MASALA BONDS:

Green masala bonds are the debt instruments but they have been utilized to support specific climate
related be environmental projects. these green masala bonds mainly come with the tax incentive
to attract more benefits from the investors. The funds are these bonds are mainly used for financial
projects like renewable and sustainable energy, solar, wind, bio- mass and other clean energy, etc
as per the applicable guidelines of regulations issued by RRT.

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INTERNATIONAL WORKING CAPITAL MANAGEMENT

It is needed to manage current assets and current liabilities to reduce funds tied in working capital
While simultaneously providing adequate funding and liquidly for the conduct of its global
business so as to enhance value to the equity shareholders and so also to the firm...
The basics of managing working capital are by and large the same both in a demotic or
multinational organization, risks and options involved in working capital management in MNCs
are much greater than their domestic counterparts.
ELEMENTS OF IWCM
1. Cash Management: CM of international firm involves minimizing the overall cash
requirements of the firm as a whole without adversely affecting the smooth functioning of the
company and each affiliate business unit, minimizing the currency exposure risk, minimizing
political risk, minimizing the transaction costs and taking full advantage of the economies of
scale as also to avail of the benefit of script’s --or knowledge of market forces. International
casts Management is a field that helps smooth the process of moving money between
countries.
2. Receivables management: the level of accounts receivable depends upon the volume of
credit sales and the average audit period and there 2 variables depend upon credit standards
credit terms and collection policy.
3. Inventory management: - Princess of ordering, storing, using and selling a company’s
inventories
NETTING
Netting or Intercompany Netting is the process- of reducing the risk of financial contracts by
combing 2 or more swaps resulting in final payment between the parties
Netting supports companies in making their cash management more efficient and less costly by
boosting cash flow efficiency, consolidating invoices and enabling faster cash allocation and
allowing companies to better calculate their foreign exchange exposure and hedge it strategically
Intercompany netting, intercompany invoices between 2 parties resulting in a final payment and
netted cashflow.
TYPES OF NETTING
1. Bilateral Netting: A bilateral netting agreement enables two counter parties is a financial
contract to offset claims against each other to determine a single net payment obligation
that is due from one counter party to the other such a provision would allow Companies,

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especially banks to set aside for lesser capital based on their not positions rather than gross
settlements where the entire amount due must be covered.
2. Multilateral netting: It is a process that consolidates and reduces the number of inter
company funds transfer payments thus minimizing the cost of intercompany transactions.
It is set up between the internal group entities / Subsidiary of internal companies so that
they can settle their invoices, and helps them to avoid multiple transactions.
3. Close out Netting: It occurs after default, when a party fails to make repayments,
transactions between the parties are netted for a single amount payable by one party.
4. Settlement Netting: It consolidates the amount due among parties and off sets the cash
flows into a single paymen.t the party only exchanges the net difference in the total amounts
with the net owned obligation.
5. Netting by novation: It refers to the cancellation offsetting swaps. it replaces them with
new obligations on calculating the Net amount, where two companies have obligation to
each other on the settlement date
ADVANTAGES OF NETTING SYSTEM

1. It reduces the number of cross border transactions on between subsidiaries, result in to
savings in the overall administration costs of such cash transfer
2. It reduces the necessity for foreign exchange conversion, results into decreases in
transaction costs associated with foreign exchange Conversion.
3. It supports to improve cash flow forecasting because only net cash transfer is made at
the end of each period.
4. it provides to the management an accurate report about cash position is future, and
settles accounts through coordinated efforts among all subsidiaries.
DISADVANTAGES OF NETTING SYSTEM
1. Netting doesn’t alter foreign currency rates it merely aids in their mgt.
2. Netting does not reduce tax liabilities that business may face for their myriad
transactions
3. Risk is distributed across an entire netting transaction; the risk of a single invoice may
be overlooked.
4. Some bilateral netting payment systems may come into conflict with law.
5. Netting could require a large outflow of cash at end of the month.

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LEADS AND LAGS

In international finance, leads and lags alteration of normal payment or receipts in a foreign
exchange transaction because of an expected change in exchange rates. A change in exchange rates
can be a cause of loss in international trade, thus the settlement of debts is expedited or delayed in
an attempt to minimize the loss or to maximize the gain. In the leads and lags, the premature
payment for goods purchased is called a "lead," while the delayed payment is called a "lag."
Leads will result when firms or individuals making payments expect an increase in the foreign-
exchange rate, while lags arise when the exchange rate is expected to fall. Leads and lags are used
in an attempt to improve profits. An expected increase in exchange rates is likely to speed up
payments, while an expected decrease in exchange rates will probably slow them down.
While practicing leading and lagging the management must realize that the performance
measurement of those subsidiaries which were asked to "lead" payments may suffer as they incur
losses on interest receivable and incurs interest charges on the funds 'led'. At times, lead and lag
techniques may also be constrained by local exchange control regulations. Practicing of leading
and lagging techniques indeed goes beyond the realm of risk minimization. It amounts to taking
aggressive stances on financing viz-a-viz anticipated movements in exchange rates. For instance,
an expected devaluation of host country's currency may make an international company borrow
locally and repay the foreign currency denominated borrowings.
ADVANTAGES OF LEADING AND LAGGING STRATEGIES

1. The biggest advantage with the leading and lagging strategies is that it is simple to execute.
2. This strategy is most often implemented within the organization and the company does not have
to consider a third party.
3. Leading and lagging can also be used in group tax-planning as of shifting intra- company funds,
and hence profitability.
4. Compared to direct intercompany loans, there is no need for a formal note of indebtedness with
leading and lagging since the amount of credit is just adjusted up and down by shortening and
lengthening the terms on the accounts. Thus, makes it much less time consuming and simpler
to utilize.
DISADVANTAGES OF LEADING AND LAGGING STRATEGIES

1. These strategies are difficult to implement.
2. The company must be in the position to exercise some control over payment terms.

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3 Leading and lagging is a win-lose game, thus while one party benefits, the counterparty loses.
The benefit gained from taking advantage of exchange rate movements may be outweighed by the
cost of losing business due to the zero-sum nature of this method.
QUESTIONS
SECTION A
1. What is international capital budgeting?

2. Give the meaning of capital budgeting decisions.
3. What do you mean by foreign projects?

4. What is meant by home currency approach?
5. Give the meaning of foreign currency approach.
6. What is international financing decisions?

7. What are sources of finance?
8.What is meant by ADRs?

9.Give the meaning of Global depositary receipts.
10. What do you mean by external commercial borrowings?

11. What is Foreign currency convertible bonds?
12. Expand ADRs, GDRs, ECBs, FCCBs.

13. What are masala bonds?
14. What is working capital management?

15. What do you mean by netting?
16. What is a leads and lags?
SECTION B AND C
1.What are the characteristics of international capital budgeting?
2. Explain the objectives in international capital budgeting.

3. State the factors affecting of international capital budgeting.
4. Discuss the process of international capital budgeting.

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5. Examine the impact on influence of inflation on capital budgeting decisions,

6. Briefly explain the evaluation of foreign projects.
7. Write the distinguish between home currency approach and foreign currency approach.
9. Discuss the importance of international financing decisions. 9. Briefly explain the sources of
finance.
10. Examine the advantages and disadvantages of American depositary receipts.
11. What are the features of global depositary receipts?

12. State the advantages and disadvantages of global depositary receipts.
13. Write the distinguish between American depositary receipts and Global depositary receipts.
14. What are the benefits of external commercial borrowings?
15. Examine the characteristics of foreign currency convertible bonds.
16. Explain the advantages and disadvantages of foreign currency convertible bonds.
17. Discuss the characteristics of masala bonds.
18. Briefly explain the advantages and disadvantages of masala bonds. 19. Explain the objectives
of international working capital management
20. What are the importance of international working capital management? Explain in details.
21. Explain the different types of netting.
22. Examine the benefits of netting.

23. Write a short note on leads and lags.


IF Unit 02

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BCU – NON NEP

6TH SEM B.COM FINANCE ELECTIVE – INTERNATIONAL FINANCE FN.6.3

UNIT 02 - INTERNATIONAL FINANCIAL DECISIONS (15 Hrs)

INTERNATIONAL CAPITAL BUDGETING

→ I It is defined as the process as of analyzing capital investment opportunities and deciding.

FACTORS TO BE CONSIDERED IN ICB:

NETHRA HM – ASSOCIATE PROFESSOR

6. Financing arrangement {they are usually captured by discount rate}

➢ Foreign Exchange Risk

INFLUENCE OF INFLATION ON CAPITAL BUDGETING DECISIONS:

NETHRA HM – ASSOCIATE PROFESSOR

FOREIGN CURRENCY APPROACH

HOME CURRENCY APPROACH

NETHRA HM – ASSOCIATE PROFESSOR

NETHRA HM – ASSOCIATE PROFESSOR

Time period = long term, short term, medium term

1. Managerial Finance Functions

2. Routine finance functions

NETHRA HM – ASSOCIATE PROFESSOR

AIMS OF FINANCE FUNCTION

• Acquiring adequate funds.

MEANING OF FINANCIAL SYSTEM

DEFINITION OF FINANCIAL SYSTEM

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OBJECTIVES OF FINANCIAL SYSTEM

PURPOSE OF FINANCIAL SYSTEM

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TYPES OF FINANCIAL DECISIONS

NETHRA HM – ASSOCIATE PROFESSOR

FACTORS INFLUENCING OF FINANCIAL DECISIONS

PRINCIPLES OF FINANCIAL DECISIONS

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INTERNATIONAL FINANCING DECISIONS

IMPORTANCE INTERNATIONAL FINANCING DECISIONS

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ADR'S ARE LISTED ON

1. ADR can be listed on American stock exchange.

1. Benefits to the issuing company

NETHRA HM – ASSOCIATE PROFESSOR

II. GDR’S (GLOBAL DEPOSITORY RECEIPTS)

III. ECB'S (EXTERNAL COMMERCIAL BORROWINGS)

RECOGNIZED LENDERS ECB'S

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METHODS TO AWARE ECB'S

GREEN MASALA BONDS:

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INTERNATIONAL WORKING CAPITAL MANAGEMENT

NETHRA HM – ASSOCIATE PROFESSOR

ADVANTAGES OF NETTING SYSTEM

NETHRA HM – ASSOCIATE PROFESSOR

LEADS AND LAGS

ADVANTAGES OF LEADING AND LAGGING STRATEGIES

DISADVANTAGES OF LEADING AND LAGGING STRATEGIES

NETHRA HM – ASSOCIATE PROFESSOR

1. What is international capital budgeting?

3. What do you mean by foreign projects?

6. What is international financing decisions?

8.What is meant by ADRs?

10. What do you mean by external commercial borrowings?

12. Expand ADRs, GDRs, ECBs, FCCBs.

14. What is working capital management?

16. What is a leads and lags?

2. Explain the objectives in international capital budgeting.