International Financial Management

P G Apte

1.1 Why Study International

Finance
In today's world finance
anything but international

cannot

be

Enormous growth
international trade

volume

of

in

the

Cross border capital flows and, in

particular, direct investment have also
grown enormously

1.1 Why Study International

Finance (contd.)
Veritable revolution has been taking place
in the money and capital markets around the
world
Liberalization, integration and innovation
have created a giant international financial
market which is extremely dynamic and
complex

1.1 Why Study International

Finance (contd.)
Multilateral negotiations regarding phased
removal of trade barriers have made
considerable progress and WTO had emerged as
a meaningful platform
Post war, World trade has grown faster than
World GDP
Almost all countries getting integrated with
the global economy

1.1 Why Study International

Finance (contd.)
Indian economy needs substantial amounts
of foreign capital to augment domestic
savings
Technology up-gradation in India will
require continuing import of foreign
technology, hardware and software
Indias increasing recourse to commercial
borrowings and direct and portfolio
investments by nonresidents

1.1 Why Study International

Finance (contd.)
The efforts of Indian companies to diversify
into exports of engineering equipment and
turnkey projects will have to be supported
by the ability to offer long term financing to
buyers
A number of companies particularly in the
Indian IT sector have begun venturing
abroad for strategic reasons either as
partners in joint ventures or by establishing
foreign subsidiaries

1.1 Why Study International

Finance (contd.)
India's growing dependence on international
financial markets
Debt
Equity
FII investment

Indian companies have also been venturing

abroad for setting up joint ventures and
wholly owned subsidiaries

1.1 Why Study International

Finance (contd.)
For those who are willing to master its
complexities the global financial market
provides endless opportunities for creative
financial management; for the unwary, it is
a minefield
Finance managers must come to grips with
with the conceptual foundations and
practical issues of instruments and markets

The Finance Function

The finance function in a firm can be
conveniently divided into two subfunctions viz. accounting and control
and treasury management
Decisions taken by the treasurer have
implications for the controller and vice
versa

The Finance Function

The Emerging Challenges

To keep up-to-date with significant environmental
changes and analyze their implications for the firm.
To understand and analyze the complex
interrelationships between relevant environmental
variables and corporate responses - own and
competitive - to the changes in them.
To be able to adapt the finance function to significant
changes in the firm's own strategic posture.
To take in stride past failures and mistakes to
minimize their adverse impact.
To design and implement effective solutions to take
advantage of the opportunities offered by the markets
and advances in financial theory.

GLOBALIZATION On or Off?
Economic "globalization" refers to the increasing integration
of economies around the world, particularly through the
movement of goods, services, and capital across borders. The
term sometimes also refers to the movement of people (labor)
and knowledge (technology) across international borders.
The term "globalization" began to be used more commonly in
the 1980s, reflecting technological advances that made it
easier and quicker to complete international transactions
both trade and financial flows.

There are countless indicators that illustrate how goods, capital,

and people, have become more globalized.
The value of trade (goods and services) as a percentage of world
GDP increased from 42.1 percent in 1980 to 62.1 percent in 2007.
Foreign direct investment increased from 6.5 percent of world
GDP in 1980 to 31.8 percent in 2006. The stock of international
claims (primarily bank loans), as a percentage of world GDP,
increased from roughly 10 percent in 1980 to 48 percent in 2006.
All these trends have continued beyond 2006 but some reversal
is predicted after the current crisis and economic slowdown
The number of foreign workers has increased from 78 million
people (2.4 percent of the world population) in 1965 to
191 million people (3.0 percent of the world population) in 2005.

FOREX MARKET TURNOVER (NET)

DAILY AVERAGE, APRIL 2007
(US$ BILLION)
TOTAL

3988

SPOT

1305

OUTRIGHT FORWARDS
SWAPS
US$ vs. OTHERS
EURO vs. OTHERS

433
2250
2660.262
1139.406

JPY vs. OTHERS

509.731

GBP vs. OTHERS

460.779

FOREX MARKET DAILY TURNOVER

According to David Krutz from the Financial Times

website :
"The foreign exchange market will have doubled in size
in just three years next year, thanks to increased
participation by fund managers and pension funds".
TowerGroup, a financial services research consultancy,
said it expected total global average daily volumes on
the FX market to exceed $3,000bn in 2007. It has
happened.
FX volumes, which rose from $1,770bn in 2004 to
$2,000bn in 2005, were set to rise to $2,600bn in 2006
and $3,600bn for 2007 and $5000 billion by 2010.

* Indias net international liabilities increased by US $8.06

billion between end-March 2008 and end-March 2009, as the
decline in international assets (US $ 35.64 billion) exceeded the
decrease in international liabilities (US $27.58 billion).
* The decline in international assets was mainly on account of
decrease in portfolio investments, both equity (about 0.7
billion), debt securities (about $67 million) and loans (a little
over $5 billion).
* On the other hand, the decrease in international liabilities
was mainly on account of the decrease in portfolio investment
(equity securities) amounting to over US $35 billion

Gramm-Leach-Bliley Act
Summary of Provisions
TITLE I -- FACILITATING AFFILIATION AMONG
BANKS, SECURITIES FIRMS, AND INSURANCE
COMPANIES
Repeals the restrictions on banks affiliating with
securities firms contained in sections 20 and 32 of
the Glass-Steagall Act.
Creates a new "financial holding company" under section 4 of the Bank
Holding Company Act. Such holding company can engage in a statutorily
provided list of financial activities, including insurance and securities
underwriting and agency activities, merchant banking and insurance
company portfolio investment activities. Activities that are
"complementary" to financial activities also are authorized. The
nonfinancial activities of firms predominantly engaged in financial activities
(at least 85% financial) are grandfathered for at least 10 years, with a
possibility for a five year extension.