FINANCIAL MANAGEMENT IN INTERNATIONAL ENVIRONMENT

FOREIGN EXCHANGE

CA. UDAY KULKARNI

UDAY KULKARNI-FCA,CIA,CISA

FINANCIAL MANAGEMENT IN INTERNATIONAL ENVIRONMENT

INTRODUCTION TO FOREIGH EXCHANGE FOREIGN CURRENCY FINANCE FINANACING FOR EXPORTS DOCUMENTS IN INTERNATIONAL TRADE

UDAY KULKARNI-FCA,CIA,CISA

FOREIGN EXCHANGE ???

FOREIGN CURRENCY- INDIAN CONTEXT- ANY CURRENCY OTHER THAN INDIAN RUPEE

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FOREIGN EXCHANGE MARKET

Decentralized world wide Market Connectivity 24 hours Major Centers-

London-Paris-New York-HongkongSingapore-Tokyo

Participants-

Central Banks-Commercial Banks-BrokersCorporates-Individuals

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FUNCTIONS OF FOREIGN EXCHANGE

Transfer of Purchasing Power across countries. Mechanism to Set Currency Prices.

Provides tools to manage exposures. Provides opportunity to Invest cross border.
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EXCHANGE RATE

The Price of Foreign Currency expressed in terms of Local Currency.

Convertibility- the degree that one currency can be exchanged for another one without difficulty.

Hard Currency is a currency that is convertible and is supported by a strong economy

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EXCHANGE RATEQUOTE

Direct The number of units of home currency to deal in one unit of foreign currency. $ 1 = Rs. 45.00 Indirect The number of units of foreign currency to deal one unit of home currency. Rs. 1 = $ 1/ Rs.45.00 = 0.0222
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FIXED- FLOATING EXCHANGE RATE

Fixed- Government or Central Bank Fix the exchange rate for its own currency. Official Rate of currency.
Floating- Government or Central Bank does not interfere in the value of currency. Currency is freely floating with market.
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EXCHANGE RATE CHANGE

Depreciation in Home CurrencyA rise in Home Currency Prices in exchange of Foreign Currency .

Appreciation in Home CurrencyA fall in Home Currency Prices in exchange of Foreign Currency .

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FOREIGN EXCHANGE TERMS

Bid Price- The price at which dealer is buying Foreign Currency. Offer Price- The price at which dealer is selling Foreign Currency. Spread- The difference between Bid Price & Offer Price is called Spread. Spot Rate- Exchange rate quoted for immediate delivery or within two working days. Forward Rate- Exchange rate quoted today for delivery at some future specified date.
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FOREIGN EXCHANGE RISK

Foreign Exchange Risk It is exposure to potential financial losses due to fluctuation in foreign exchange rate.

TRANSACTION EXPOSURE
TRANSLATION EXPOSURE ECONOMIC EXPOSURE
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TRANSACTION EXPOSURE

Risk arise due to fluctuation in exchange rate in the normal trading transactions of International Trade. Risk attached to the changes in the cash flow that result from existing contractual obligation in the normal business transactions. The risk of exchange rate fluctuation changes outstanding financial obligation.
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TRANSACTION EXPOSURE

Transaction exposure arises from:

A. Purchasing or selling on credit goods or

services whose prices are stated in foreign currencies. to be made in a foreign currency. exchange forward contract.

B. Borrowing or lending funds when repayment is

C. Being a party to an unperformed foreign

D. Otherwise acquiring assets or incurring

liabilities denominated in foreign currencies.
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TRANSLATION EXPOSURE

Also known as Accounting Exposure. Risk arises because of financial statements of a foreign branch or foreign subsidiary company are stated in foreign currency which needs to be converted in local currency at the time of consolidation of financial statements. Translation exposure is the potential for an increase or decrease in the parents net worth and reported net income caused by a change in exchange rates since the last translation.
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TRANSLATION EXPOSURE

Financial Statement Translation involves three methods-

Current Rate Method Historic Rate Method Average Rate Method

Organization needs to recognize Foreign exchange Profit or Loss or Accumulation of Reserves.

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TRANSLATION EXPOSURE

Monetary assets and liabilities are translated

Non-monetary assets and liabilities are
at current exchange rates.

Income statement items are translated at the

Dividends (distributions) are translated at the Equity items are translated at historical rates.
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translated at historical rates.

average exchange rate for the period.

exchange rate on the date of payment.

ECONOMIC EXPOSURE

Also known as Operative exposure, Competitive Exposure. Any change in the present value of a firm resulting from changes in future operating cash flows caused by an unexpected change in exchange rates. Planning for operating exposure is a total management responsibility because it depends on the interaction of strategies in finance, marketing, purchasing, and production.
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ECONOMIC EXPOSUREFACTORS

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FOREIGN CURRENCY FINANCE

FOREIGN DIRECT INVESTMENT- FDI FOREIGN CURRENCY CONVERTIBLE BONDSFCCB AMERICAN DEPOSITORY RECEIPTS- ADR GLOBAL DEPOSITORY RECEIPTS- GDR EXTERNAL COMMERCIAL BORROWINGS ECB

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FINANCING EXPORT

PRE SHIPMENT FINANCE POST SHIPMENT FINANCE ADVANCE AGAINST DRAFTS CREDIT INSURANCE FORFAITING PACKING CREDIT GUARANTEES

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PRE-SHIPMENT FINANCEPACKING CREDIT

PACKING CREDIT is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.
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PRE-SHIPMENT FINANCEPACKING CREDIT-PURPOSE

To Procure Raw Material Process /Manufacture export goods Provide secure warehouse facilities Packing of goods Shipment of goods

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POST-SHIPMENT FINANCE
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made.
It is a finance for export sales receivables.

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POST-SHIPMENT FINANCETYPES

PURCHASE/DISCOUNT EXPORT BILLS ADVANCE AGAINST BILLS SENT FOR COLLECTIONS ADVANCE AGAINST EXPORT ON CONSIGNMENT BASIS ADVANCE AGAINST DUTY DRAWBACKS

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CREDIT INSURANCE
Credit Insurance is special type of loan which pays back a fraction or whole of the amount to the borrower in case of death, disability, or unemployment. It protects open account sales against nonpayment resulting from a customer's legal insolvency or default. It is usually required by manufacturers and wholesalers selling products on credit terms to domestic and/or foreign customers. BENEFITS Expansion of export sales. Protection of Bad Debts in international market. Optimization of Bank Finance for export.

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PACKING CREDIT GUARANTEES

Guarantees issued by ECGC, to assure banks, in the event of an exporter failing to discharge his liabilities to the bank, ECGC would make good a major portion of the bank's loss.

It provides timely &adequate export finance facilities.

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INTERNATIONAL TRADE DOCUMENTS

Air Way Bill

Shipment Document Invoice for Freight Certificate for Insurance Guideline for Delivery, Handling etc.

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INTERNATIONAL TRADE DOCUMENTS

B/L- Bill of Lading

Document of Shipping Company Freight Payment Conditions- Payment by

Buyer or Seller Clean or Notification for Damage of Goods

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INTERNATIONAL TRADE DOCUMENTS

Certificate of Origin

Required by Custom Authority of Importer Used for Calculation of Custom Duty Issued by Organizations like Chamber of
Commerce of exporter Details of Exporter, Goods Description etc

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INTERNATIONAL TRADE DOCUMENTS

Multi-Modal Transport Document

one mode of Transportation.

Transportation of Goods by using More than

Commercial Invoice Bill of Exchange Insurance Certificate Packing List along with Inspection Certificate
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