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Module - 1

INTERNATIONAL FINANCIAL ENVIRONMENT

MEANING OF IFM: It is defined as management of finance in an international business environment . Planning, organizing directing & controlling of money value in foreign exchange is called IFM. Doing business with making money through the exchanging of foreign currency is called IFM . International finance is the branch of financial economics concerned with monetary and macroeconomic interrelations between two or more countries. It is also known as international monetary economics or international macroeconomics or multinational finance . International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade. NATURE & SCOPE OF IFM 1. Foreign Exchange Market 2. Exchange Rate Determination 3. Exchange Rate Risk and its Management (Futures, Options, Swaps, FRA etc) 4. Financing and Working Capital Decisions of the MNCs 5. MNCs Investment Decisions 6. International Accounting and Taxation 7. Management of International Indebtedness Foreign Exchange Market: It is a market where foreign currencies are bought and sold by exporters, importers, tourists, bankers etc. It studies how the transactions are carried out in various types of markets such as Spot, forwards & futures markets etc. Major players : Bankers, hedgers, speculators, arbitrageurs, tourists, exporters importers etc. Features 1. It is an over-the-counter market (OTC) 2. Transactions are based normally on oral followed by written communication. 3. Time of transaction differs from one place to another depending upon the longitude of the place. 4. In order to accommodate dealers from different countries, the foreign exchange market has to function round-the-clock. 5. Currencies transacted in the foreign exchange markets are normally the strong, stable and convertible. Types of markets (Spot Market and Forward Market): Currencies are traded for immediate delivery at a rate existing on the day of transaction. Contracts are made to buy and sell currencies for future delivery, say, after a fortnight, one month, two months.

Exchange Rate Determination: It studies how the exchange rate is determined. Exchange rate is determined by the forces of demand & supply of the currency which in turn depends upon various macroeconomic variables such as inflation, interest rate etc. In case of managed floating, the monetary authorities intervene in the foreign exchange market to stabilise the exchange rate. Exchange Rate Risk and its Management: It studies how changes in exchange rate impacts on international business. How this risk can be managed. Exchange risk can be managed by using various tools such as futures, forwards, swaps etc. Financing and Working Capital Decisions of the MNCs: IFM studies how different instruments are issued to raise funds and use of currency swaps to minimise cost of funds. It also evaluates different sources of working capital so as to get finance at cheaper cost. Various strategies for minimising cost of working capital are studies-Netting, Leads & Lags, Parallel Loans, Use of blocked funds, Transfer pricing, changing dividend payout policy etc. MNCs Investment Decision: It evaluates whether investment in a particular country is financially viable or not through the analysis of cash inflow and outflow during life of the project. Besides, it considers foreign exchange risk & political risk, various theories of overseas production, various strategies of investment. International Accounting & Taxation: It analyses the techniques for consolidation of financial statements of various international affiliates, financial reporting, international auditing & international taxation. Transfer pricing (an important area of international accounting) is used to lower overall burden of taxes and tariff. Management of International Indebtedness: It enables to manage external indebtedness of a country arising out of deficit BOP and developing an effective macroeconomic policy. Domestic Vs. Multinational Financial Management (Risks of IFM) Though objective of both domestic and international financial management remains same (i.e. Wealth maximization),international finance is different from domestic finance in many aspects. Foreign Currency Exposure: Foreign currency exposure exists in international business with regards to purchase from suppliers, selling to customers, investing in P & M, fund raising etc. Macro Business Environment: An international business is exposed to a different economic and political environment. An international business is exposed to a different economic and political environment. Trade policies differ from country to country. One country may have business friendly policies and other may not. Financial manager has to critically analyse the policies to make out the feasibility and profitability of their business propositions. Legal & Tax Environment: Tax impacts directly the product costs and net profits. The finance manager has to see the taxation structure and find out whether the business is feasible or not in the foreign country. Different Group of Stakeholders: Various stakeholders in international business such as international suppliers, customers, lenders & shareholders etc. matters a lot. Because, they carry altogether a different culture, different set of values and most importunately different language. The business will not have any clue about the likes and dislikes of these stakeholders. A business is driven by these stakeholders and keeping them happy is must. Different Standards of Reporting: When a business has its operations in multinationals, it has to maintain its books of accounts as per accounting standards of host country. The standards of accounting differ from one country to another. The financial manager has to be familiar with accounting standards of different countries. However, this limitation is removed by introducing IFRS by various countries. Capital management: In case of MNCs, the financial manager has ample options of raising the capital. However, more number of options creates more challenge with respect to selection of right source of capital to ensure lowest possible cost of capital.

Importance (Objectives) of International Business Companies are motivated for international business for the following reasons efficiently produce products in foreign markets than that domestically. Obtain the essential raw materials needed for production Broadening the market and diversification of the business To increase bottom line of the business To have global presence of the business

MODES OF INTERNATIONAL BUSINESS: 1.Foreign Trade 2.Licensing 3. Management contracting 4. Joint ventures Foreign Trade: A firm imports its necessary inputs from the cheapest source., while it exports its output to different countries in order to earn foreign exchange. No overseas manufacturing. It is an oldest mode of international business. Licensing: When a firm lacks capital and detailed knowledge about a foreign market, it gives technology, patent, trade mark etc. for a fee. It requires relatively less time or depth of involvement in foreign markets. It is used when the host government puts restrictions on the inflow of foreign capital investment. Brand licensing is a well-established business, both in the area of patents and trademarks. Trademark licensing has a rich history in American business, largely beginning with the rise of mass entertainment such as the movies, comics and later television. 's Mickey Mouses popularity in the 1930s and 1940s resulted in an explosion of toys, books, and consumer products, none of which were manufactured by the Walt Disney Company. The liberalisation of the Indian economy in 1992 brought a host of international brands to India. Many of these brands have been licensed to Indian companies. Arvind represent Wrangler, Arrow, Nautica, Jansport and Kipling. The Murjani group is the licensee for FCUK (French Connection) and Tommy Hilfiger. Beverly Hills Polo Club (BHPC) is licensed to Spencers Retail. Management Contracting: The company sells a particular resource, like management skills for a specific fee. The contract is for a given certain number of years during which it manages the affairs of the company. Management contracts are used widely in the airline industry, and when foreign government action restricts other entry methods. Management contracts are often formed where there is a lack of local skills to run a project. It is an alternative to FDI as it does not involve as high risk and can yield higher returns for the company. The first recorded management contract was initiated by Qantas and Mr Duncan Upton in 1978. The Marriott International Corporation operates solely on management contracts. Joint Ventures: It represents a partnership agreement in which the venture is owned jointly by the international company and a company of host country. Both the firms use comparative advantages in the given project. Contractual Agreement. JVs are established by express contracts that consist of one or more agreements involving two or more individuals or organizations and that are entered into for a specific business purpose. Specific Limited Purpose and Duration. JVs are formed for a specific business objective and can have a limited life span or be long-term.