Unit-1 International Financial Environment

Program Semester Subject Code Subject Name Unit number

: MBA : IV : MF0015 :International Financial Management :1

Unit Title

:International Financial Environment

Lecture Number : 1

1
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Lecture Outline
Introduction Multinational Corporation The Process of Overseas

Expansion
Features of International Finance International Business Methods Measurement of Exposure and Risk

International Monetary System

Government Influence on Different Exchange Rate Systems International Financial Institutions

2
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

International Financial Environment Objectives

Explain the meaning of Multinational Corporation

Define the goals of MNC State the different methods of international business Describe the international monetary system

Explain the government influence on exchange rates

3
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Introduction
In this unit, we will learn that how the world trade has grown faster over the last few decades than the world GNP.

One of the most important motivations for companies to expand their

operation internationally is the low-cost factors of production in

developing countries like China and India.

4
PREVIOUS HOME NEXT

Multinational Corporation The Process of Overseas Expansion Meaning of MNC

A company involved in producing and selling goods and services in more

Unit-1 International Financial Environment

than one country.

MNC's create an economic development which is described as sustained growth in income per capita over a period of time.

It usually involves a structural and institutional change in an economy.

MNC's goals are the reduction of relative and absolute poverty, the increase of employment and the improvement of social welfare.

5
PREVIOUS HOME NEXT

Multinational Corporation The Process of Overseas Expansion

Unit-1 International Financial Environment

Globalization
Globalization encompasses a range of social, political, and economic changes.

It increases the ability of firms to do business across national boundaries.

Globalization is a phenomenon that no development agenda can afford to ignore. National countries. governments generally face frustrations in dealing with

Globalization and these frustrations are magnified for small developing

Objective of the Multinational Corporations

To maximise shareholders wealth.

To maximize the value of their firms or the rate of return from foreign
operations

6
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Features of International Finance

Foreign exchange risk Political risk

Expanded opportunity sets

Market imperfections

7
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

International Business Methods

METHODS OF INTERNATIONAL BUSINESS

LICENSING

FRANCHISING

JOINT MANAGEMENT ESTABLISHING VENTURE CONTRACTS NEW FOREIGN SUBSIDARY

8
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Measurement of Exposure and Risk

The foreign exchange market consists of the spot market and the forward or futures market. Transactions in the spot market quote rates of exchange prevalent at the time the transactional took place. Exchange rates are considered by MNCs as a crucially important factor affecting their profitability.

Exchange risk
Foreign exchange risk is the possibility of a gain or loss to a firm that occurs due to unanticipated changes in exchange rate. If the value of the foreign currency rises, the Indian firm has to pay more domestic currency to get the required amount of foreign currency.

9
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Measurement of Exposure and Risk

TYPES OF EXPOSURE

Translation exposure

Transaction exposure

Economic exposure

10
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

International Monetary System

Evolution International of the New International Monetary System

Monetary

System can be analysed in four stages:

The Gold standard,

1876-1913 The Inter-war Years,

1914-1944 The Bretton Woods

System, 1945-1973 Flexible Exchange Rate Regime since 1973

11
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Government Influence on Different Exchange Rate Systems

More flexible exchange rate systems: Japan and United States are in a more flexible exchange rate system. Currency values are allowed to float in relation to each other.

Government intervention has a significant impact on currency values,

especially in the short-term.

Pegged exchange rate systems:

Currency values are fixed in relation to another currency such as the US

dollar, Euro or to a currency basket such as the Special Drawing Right (SDR).

Special Drawing Right (SDR)

SDR are an international reserve created by the IMF and allocated to member countries to supplement foreign exchange reserves
12
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Government Influence on Different Exchange Rate Systems

Limited flexibility exchange rate systems
Consists of two groups: The first group- several gulf countries with currencies that have shown limited flexibility in terms of the US dollar The second group- countries in the European Exchange Rate Mechanism (ERM).

The European monetary system

European countries were concerned about the negative impact of volatile exchange rates on their respective economies since the collapse of the Bretton Woods Agreement on fixed exchange rates in the early 1970s. This was the Smithsonian Agreement which was signed in December 1971 Also known as the snake.

13
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

International Financial Institutions

Bretton Woods Conference in 1944 decided to establish a new monetary order that would expand international trade, promote international capital flows and contribute to monetary stability.

The World Bank

A multinational financial institution Established at the end of World War II (1944) To help provide long-term capital for the reconstruction and development of member countries International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA)
14
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

International Financial Institutions

International Monetary Fund (IMF)
IMF works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable

economic growth, and reduce poverty around the world.

Created in 1945, governed by and accountable to the 186 governments of the countries

Asian Development Bank (ADB)

An international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Headquartered in Manila, established in 1966, owned and financed by its 67 members ADB's main partners are governments, the private sector, non-government organizations, development agencies, community-based organizations, and foundations
15
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

Activity
Activity 1
Collect a few recent annual reports of MNCs of your choice. Can you comment on the impact of the MNCs foreign business and how the MNC has benefited from its international operations? You could also perform the above analysis industry-wise.

Activity 2
Review the changing role of the ADB in the context of the objectives set by the charter.

16
PREVIOUS HOME NEXT

Unit-1 International Financial Environment

THANK YOU

17
PREVIOUS HOME NEXT