NAME ANKIT JUGRAN

PROGRAM MASTER OF BUSINESS ADMINISTRATION (MBA)

SEMESTER IV
COURSE CODE & NAME DFIN401 – INTERNATIONAL FINANCIAL
MANAGEMENT
ROLL NO. 2114101713
SESSION AUG/SEP 2022

ASSIGNMENT SET-I

Q.1) Discuss the Concept of Globalization. Elaborate types of globalization.

Answer: Globalization is the process of increasing interconnectedness and integration among
people, businesses, and countries throughout the world. It is a complex phenomenon that affects
all aspects of modern life, including politics, economics, culture, and technology. The process of
globalization has been enabled by advances in transportation, communication, and technology. It
has brought about both benefits and challenges for societies and individuals around the world.
There are several types of globalization, including:

1) Economic Globalization: It refers to the integration of national economies into the

global economy through trade, investment, and capital flows. Economic globalization has
led to increased competition, lower prices, and greater efficiency in the production of
goods and services.

2) Political Globalization: It refers to the spread of political ideas and institutions across
national borders. Political globalization has led to greater cooperation among nations,
increased participation in international organizations, and the spread of democratic
governance.

3) Cultural Globalization: It refers to the spread of cultural values, beliefs, and practices
across national borders. Cultural globalization has led to greater exposure to different
cultures, increased cultural exchange, and the creation of new cultural forms.

4) Environmental Globalization: It refers to the spread of environmental problems and the

need for global solutions. Environmental globalization has led to greater awareness of
global environmental issues, increased cooperation among nations, and the creation of
global environmental agreements.
 5) Technological Globalization: It refers to the spread of technology and the increasing
interconnectedness of the world through technology. Technological globalization has led
to greater access to information, increased efficiency, and the creation of new
technologies.
Each type of globalization has its benefits and challenges. Economic globalization has
created opportunities for businesses to expand their markets, but it has also led to job loss
and economic inequality. Political globalization has increased cooperation among nations,
but it has also led to challenges to national sovereignty and cultural identity. Cultural
globalization has increased exposure to different cultures, but it has also led to the
homogenization of cultures. Environmental globalization has increased awareness of global
environmental problems, but it has also led to challenges in implementing global
environmental agreements. Technological globalization has increased access to information
and new technologies, but it has also led to concerns about privacy and security.
In conclusion, globalization is a complex and multifaceted process that affects all aspects of
modern life. It has brought about both benefits and challenges for societies and individuals
around the world. Understanding the types of globalization and their impacts can help
individuals and organizations to navigate the challenges and opportunities presented by
globalization.

Q.2) What is Balance of Payment? Explain the components of balance of payment.

Answer: Balance of payments (BOP) is a systematic record of all economic transactions
between the residents of a country and the rest of the world during a specific period, usually a
year. The balance of payments is an important tool to analyse a country's international trade and
financial transactions. It helps in identifying whether a country is running a surplus or deficit in
its transactions with other countries.
The balance of payments consists of three components, which are the current account, capital
account, and financial account.

1) Current Account: The current account of the balance of payments records all
transactions involving goods, services, and income flows between residents of a country
and the rest of the world. It includes the following sub-accounts:

• Goods Account: It records exports and imports of goods between countries.

• Services Account: It records exports and imports of services such as tourism,

transportation, and financial services.

• Income Account: It records income flows between countries, such as wages, salaries,
and dividends earned by citizens and businesses.
 2) Capital Account: The capital account of the balance of payments records all transactions
involving the transfer of ownership of assets between residents of a country and the rest
of the world. It includes the following sub-accounts:

• Direct Investment: It records investment in physical assets such as buildings,

machinery, and land.

• Portfolio Investment: It records investment in financial assets such as stocks, bonds,

and mutual funds.

• Other Investments: It records loans, trade credits, and deposits.

3) Financial Account: The financial account of the balance of payments records all
transactions involving financial assets between residents of a country and the rest of the
world. It includes the following sub-accounts:

• Direct Investment: It records the acquisition and disposal of foreign assets by domestic
investors and domestic assets by foreign investors.

• Portfolio Investment: It records the purchase and sale of foreign securities by domestic
investors and domestic securities by foreign investors.

• Other Investments: It records short-term loans, trade credits, and deposits.

In summary, the balance of payments is a comprehensive record of all economic transactions

between a country and the rest of the world. It is an important tool for understanding a
country's international trade and financial transactions. The three components of the balance
of payments - current account, capital account, and financial account - provide a detailed
breakdown of these transactions.

Q.3) Write detailed note on Foreign Exchange market. Describe different types of Foreign
Exchange rates with suitable examples.
Answer: The Foreign Exchange (Forex) market refers to the network of individuals, institutions,
and financial institutions that buy and sell different currencies. It is the most liquid financial
market globally, with an average daily turnover of over $5 trillion. The foreign exchange market
plays a vital role in facilitating international trade, investment, and tourism by providing a medium
for currency exchange between nations.
Types of Foreign Exchange Rates:
1) Fixed Exchange Rate: A fixed exchange rate is a type of exchange rate system where a
country's currency is fixed or pegged to another country's currency or commodity such as
gold. This type of exchange rate regime was prevalent in the Bretton Woods era, where the
U.S. dollar was fixed to gold, and other currencies were pegged to the U.S. dollar. India,
too, followed a fixed exchange rate regime before adopting the liberalization policies in
1991.

2) Flexible Exchange Rate: A flexible exchange rate is a type of exchange rate system where
the value of a currency is determined by the supply and demand of the currency in the
foreign exchange market. In a flexible exchange rate system, the central bank of a country
does not intervene in the foreign exchange market, allowing the exchange rate to fluctuate
freely. India, after the liberalization policies of 1991, moved from a fixed exchange rate
system to a flexible exchange rate system.

3) Managed Float: A managed float is a hybrid exchange rate system where the central bank
of a country intervenes in the foreign exchange market to control the fluctuations in the
exchange rate. In this type of exchange rate system, the central bank sets a target exchange
rate and intervenes in the market by buying or selling currencies to maintain the target
exchange rate.

Foreign Exchange Market in India:

The foreign exchange market in India is regulated by the Reserve Bank of India (RBI). The
RBI regulates the forex market through various measures such as setting interest rates,
regulating the flow of foreign capital, and maintaining foreign exchange reserves. In India, the
exchange rate is determined by the supply and demand of the currency in the foreign exchange
market.

Indian Rupee Exchange Rates:

The Indian Rupee (INR) is a free-floating currency, and its exchange rate is determined by the
demand and supply of the currency in the foreign exchange market. The INR is widely traded
in the forex market, and its exchange rate is determined against major international currencies
such as the US Dollar, Euro, Japanese Yen, and British Pound.
The exchange rate of INR against the US dollar has been quite volatile in the past few years. In
2013, the INR depreciated significantly against the US Dollar due to a widening current
account deficit. However, in recent years, the INR has appreciated against the US Dollar due
to various measures taken by the government to boost the economy and attract foreign
investment.
 Conclusion:
The foreign exchange market plays a critical role in facilitating international trade, investment,
and tourism. The exchange rate of a country's currency affects its international
competitiveness, and hence, it is crucial for policymakers to manage the exchange rate to
ensure economic stability. In India, the exchange rate of the INR is determined by the demand
and supply of the currency in the foreign exchange market, and its value is influenced by
various economic and political factors.

ASSIGNMENT SET-II

Q.4) Explain the meaning of foreign exchange exposure. Explain in brief the types of foreign
exchange exposure.
Answer: Foreign exchange exposure refers to the risk that a company faces due to fluctuations in
the exchange rates of foreign currencies, which can affect the company's financial position,
profitability, and cash flows. This exposure arises due to the involvement of a company in
international trade and transactions that involve foreign currencies.
There are three main types of foreign exchange exposure, which are as follows:
1) Transaction Exposure: Transaction exposure refers to the risk associated with the effect
of exchange rate fluctuations on the financial obligations of a company that are
denominated in foreign currencies. It arises when a company has a binding agreement to
pay or receive a certain amount of foreign currency at a future date, and the exchange rate
changes in the meantime. For example, if an Indian company has a binding contract to
receive payment of USD 10,000 from a US customer after three months and the exchange
rate of USD/INR changes from 75 to 80, then the company will receive only INR 8,00,000
instead of INR 7,50,000, which was the value of USD 10,000 at the previous exchange
rate.

2) Translation Exposure: Translation exposure refers to the risk associated with the effect of
exchange rate fluctuations on the financial statements of a company that has subsidiaries or
assets and liabilities denominated in foreign currencies. This exposure arises due to the
need to translate the financial statements of foreign subsidiaries into the reporting currency
of the parent company. For example, if an Indian company has a subsidiary in the US, then
it needs to translate the financial statements of the US subsidiary from USD to INR for
reporting purposes. If the exchange rate changes during the translation process, then it can
affect the reported earnings of the company.

3) Economic Exposure: Economic exposure refers to the risk associated with the effect of
exchange rate fluctuations on the future cash flows of a company that arise from its
 business operations in foreign countries. It arises due to the changes in the competitiveness
of a company's products or services in foreign markets due to changes in the exchange
rates. For example, if an Indian company exports its products to the US, and the exchange
rate of USD/INR changes in favour of the US, then the products of the company will
become relatively expensive in the US market, and the demand for the products may
decrease, affecting the future cash flows of the company.

In conclusion, foreign exchange exposure is a crucial aspect that needs to be managed

effectively by companies engaged in international trade and transactions. Companies can
use various hedging strategies, such as forward contracts, options, and futures, to mitigate
their exposure to exchange rate fluctuations. By doing so, companies can ensure that they
are protected against the adverse effects of currency fluctuations and can maintain their
financial stability and profitability.

Q.5) What is the nature of international capital structure? Describe in detail about the
measuring of capital structure and its various factors.
Answer: The international capital structure refers to the way in which companies finance their
operations and investments in foreign markets through equity and debt. The nature of the
international capital structure is influenced by several factors, including the availability and cost of
capital, currency risks, regulatory requirements, tax laws, and market conditions.
Measuring the capital structure involves analysing the proportion of equity and debt financing
used by a company to support its operations and investments. The capital structure is typically
measured using the debt-to-equity (D/E) ratio, which shows the amount of debt relative to equity
financing used by a company. A high D/E ratio indicates that the company is relying more heavily
on debt financing, while a low D/E ratio suggests that the company is more reliant on equity
financing.
Several factors can influence a company's capital structure. These include the company's growth
prospects, industry characteristics, and overall market conditions. For example, a company in a
high-growth industry may need to use more debt financing to fund its operations and investments,
while a company in a mature industry may rely more heavily on equity financing.
Another factor that can influence the international capital structure is the regulatory environment
in different countries. Some countries may have strict regulations on foreign investment or may
require companies to meet certain requirements before they can access capital markets. These
regulations can limit the amount of debt or equity financing available to companies operating in
these countries.
Currency risks can also play a significant role in the international capital structure. When a
company operates in multiple countries, it may be exposed to fluctuations in currency exchange
rates, which can impact its financial performance. To mitigate these risks, companies may use
financial instruments such as derivatives to hedge against currency fluctuations.
In conclusion, the international capital structure is influenced by several factors, including the
availability and cost of capital, currency risks, regulatory requirements, tax laws, and market
 conditions. Measuring the capital structure involves analysing the proportion of equity and debt
financing used by a company to support its operations and investments, with the D/E ratio being a
commonly used metric. Factors such as industry characteristics, growth prospects, and the
regulatory environment can impact a company's capital structure, as can currency risks.
Companies must carefully consider these factors when determining their optimal capital structure
for operating in foreign markets.

Q.6) a) Briefly explain the procedure to measure country risk.

b) What are the methods to calculate transfer price?
Answer: a) Procedure to Measure Country Risk
Country risk refers to the risk associated with investing in a foreign country. It is a measure of the
economic, political, and social risks that may affect a foreign investment in a particular country.
Measuring country risk is crucial for companies as it helps them to make informed decisions
regarding their foreign investments. The following steps are involved in measuring country risk:
1) Define the objective: The first step in measuring country risk is to define the objective of
the analysis. The objective should be specific and should focus on the particular risk that the
company is concerned about.

2) Identify the risk factors: The next step is to identify the risk factors that may affect the
investment. These risk factors may include economic, political, and social factors.

3) Assess the risk factors: Once the risk factors have been identified, the next step is to assess
the level of risk associated with each factor. This can be done by analysing the historical
data and current trends.

4) Assign weights to the risk factors: After assessing the risk factors, the next step is to assign
weights to each factor based on their importance. This helps to give more weight to the
factors that are more critical to the investment.

5) Calculate the risk score: The risk score is calculated by multiplying the score of each risk
factor by its weight and then summing up all the scores. The higher the risk score, the higher
the country risk.

6) Monitor and review: Country risk is not a static measure, and it can change over time.
Therefore, it is essential to monitor and review the country risk regularly.
b) Methods to Calculate Transfer Price
Transfer pricing refers to the price at which goods and services are transferred between related
parties, such as a parent company and its subsidiary. Transfer pricing is a significant issue for
multinational companies as it can impact the profits, taxes, and cash flows of the company. There
are several methods to calculate transfer price, and some of them are:
1) Comparable Uncontrolled Price (CUP) Method: This method compares the price of a
product or service being transferred between related parties with the price charged for a
similar product or service in an uncontrolled transaction.

2) Resale Price Method: This method calculates the transfer price by subtracting a reasonable
profit margin from the resale price of the product or service.

3) Cost Plus Method: This method calculates the transfer price by adding a reasonable profit
margin to the cost of producing the product or service.

4) Profit Split Method: This method divides the profits generated from the product or service
being transferred between related parties based on the contribution of each party to the
transaction.

5) Transactional Net Margin Method (TNMM): This method compares the net profit margin
of a related party with the net profit margin of an independent party engaged in a similar
transaction.

In conclusion, measuring country risk and calculating transfer price are essential tasks for
multinational companies. Measuring country risk helps companies to make informed decisions
about their foreign investments, while calculating transfer price helps companies to ensure that
they are charging a fair price for goods and services transferred between related parties.