International Finance

Emerging trends in global market Session 1 & 2

International Finance.. From Corporate perspective

DOMESTIC

FUNDING REQUIREMTNS
IF MANAGING RISKS GLOBAL

Short term Medium term Long term

Export related for foreign trade related operations Import related Short term Domestic Simple working capital loan in INR

ECB Debt Long term equity

FCCB
ADR/GDR

risks

Currency exposure

Counter party default exposure

Country exposure

Emerging global environment

Trends to be taken note of Removal of country barriers for Cross Border Trade & Capital flows Significant shift towards
Open economy Liberalization of imports rationalization of import tariff Concerted efforts for export promotion Freedom for raising capital from global markets Availing cheaper credit from Off-shore markets Reduction of currency control

Global economy
slow down Recession . Depression? Revival.?

Corporate today.
Fully conversant with Euro dollars / offshore currencies Reuter screen / Bloomberg Currency movements Interest rate movements / LIBOR Arbitrage opportunities Speaks more confidently on Joint Ventures / WOS / Cross border trade finance

Libor explained
http://www.bbalibor.com/bbaliborexplained/faqs http://www.bbalibor.com/bbaliborexplained/the-basics

Present day scenario.

One set of transaction
Bank / financial institution in Singapore Organizing credit in USD/EUR Borrower in Dubai / India Project in Nigeria

Joint venture in South African Pharma Industry

Parent company organizing guarantee from Europe Funding through banks in London / Frankfurt Arranger in London

Trading office in Dubai / Singapore

Procurement from Korea Direct dispatch to Europe / any third country

Need for International finance

Counter party can be anywhere no barrier for either trade or financial services Country need not consume all the items produced by them Country may not produce whatever they need Theory of comparative advantage
Sourcing of inputs from anywhere moving the manufacturing unit to a comfort zone Raising Credit in foreign currency depending on the exposure Domestic savings may not be sufficient for major projects Cost of funding may be cheaper from global markets at International market rates . Offshore markets

Absolute advantage in production of certain goods

Development of Euro / offshore markets..

Euro /offshore markets.

Originated with former Soviet Union and Soviet bloc

End of 1950s wanted to keep USD deposits outside USA due to anti-soviet sentiments
First transaction from Soviet Union with Banque Commerciale de LEurope due Nord, Paris EURO BANK Eurodollar market was born.

Further developments 1960 - 70s

Ceiling on interest rate for deposits in US Banks Regulation Q

Euro /offshore markets

Interest rates offered to investors were lower due to
Regulation M - reserve requirements Deposit insurance (FDIC) cost in US

Above restrictions impact on cost of funds for branches operating in US but not applicable for branches outside US
Example..Citi Bank operating in London

Euro /offshore markets.

BOP crisis in 60s due to which US govt. introduced
credit restraint programme Voluntary Foreign Credit Restraint Programme (VFCRP) tax on interest earnings Interest Equalisation Tax (IET) 1963

In UK
Restrictions placed by UK authorities on use of GBP for financing third country trade British banks turned to use USD for financing third country trading

cost of funds
In US interest rate for investments 6% Statutory reserve in US 5%*** Deposit Insurance in US 0.05% What will be the cost for mobilizing and maintaining USD 100?

net cost of funds will be (6% + 0.05% ) = 6.05% For lending USD 95 Actual cost of funds works out to be 6.05/95*100 Equivalent to 6.3684% Adding cushion for profit, other expenses prime rate will be arrived at..

 If the same funds are to be lent from a country which is not subject to all the above regulationsthat is from London lending rate will be comparatively.

How euro / off-shore market operates

Illustration.
IBM USA has account with Citi Ny with balance USD500 mn IBM is looking for short term investment opportunities

got the best quote from Standchart London.

Invested USD400 mn for 91 days How funds are transferred from Citi New York to SCB London.. From City NY to SCB New York for the account of their London branch

 On maturity IBM wants to continue their investment at the best possible interest rate
IBM was able to get best quote from BHF Bank Frankfurt Investment shifted from London to Frankfurt How transfer will be effected From SCB London to BHF Frankfurt From SCBs account with their New York branch to BHFs account withJP Morgan New York

 In the meantime
One of the leading construction company in Singapore, under a joint venture with Italian collaborator is looking for a syndicated loan Amount USD300 mn BHF Bank, Frankfurt quotes a competitive interest rate This local company can use these funds for its overseas project or for one of their local projects How funds will be transferred,,,,,,?

Whether global markets are really integrated.?.

Country specific legal provisions. Non-residents either denied to invest in financial markets or controlled access Local tax law may discriminate between domestic and foreign investors Different accounting practices.disclosure norms market practices effect

Creating Informational asymmetries

 Exchange risks.

FII Invested in Indian stock market when USD was at Rs.52.45 (May 2012) Presently USD is around Rs.54.60. Are they benefited by USD appreciation? If your company forwards a proposal to pay your salary in USD instead of INR Will it be a better offer.????

Country specific guidelines

Depending on the countrys Balance of Trade / BOP / Forex reserve Country specific policy on full convertibility Influence on external environments

reserve
BOP surplus Gold reserve Balance with IMF Undrawn SDRs Special Drawing Rights

Certain concepts balance of trade /payment reserves.

Balance of Trade Current account transactions
Merchandise trade /services / unilateral transfers / interest and dividend remittances (Factor income)
Investment income inflow / investment income outflow

Capital account transactions

In bound - FDI / FII / equities / ECBs / Non resident investments Out bound

Balance of Payment Countrys reserve position Impact of these data for a MNC or any corporate who intends to expand their activities globally

Certain examples..
Outward remittance OF USD 130 Mn by TATA TELESERVICES.. for import of equipments from KOREA If the same company avails a foreign currency loan of USD 130 mn from HSBC HONGKONG to meet their import commitment loan component will be treated as If the same company is raising a loan in USD with State Bank of India, Mumbai Branch SINGTEL , SGP remits USD 80 mn for investment in India with one of the leading Telecom companies for 3G allotment One of the Non Resident Indians, remitting INR 100,000 to his bank account in India through SBI New York. He remits USD 25000 to his family member towards family maintenance (remittance in the name of the family member) Family member who receives this remittance wants to keep Resident Foreign currency account with this funds. SUZUKI MOTORS wants to remit dividend earnings (160% dividend) from their investment in Maruti Udyog Ltd in USD to their parent company in Japan.

Impact of BOT / BOP data

BOT surplus / deficit US economy how US economy is managing their trade deficit

around 3 Tn USD investments by different countries in US treasury instruments

Current account deficit / surplus

Deficit pressure on servicing the debts

Impacts
Encourage inflows through capital flow or borrowings Preferably medium and long term flows Pressure on trade payments Comparative GDP growth Interest rates Pressure on the domestic currency demand and supply for currency and its impact on the exchange rate

BOP surplus

components of inflows short term or long term .South East Asian crisis

Components of reserve
BOP surplus Gold reserve Undrawn SDRs Balance with IMF

Full convertibility of a currency

Freedom to: Posses foreign exchange without any limit either in the form of currency notes or in the form of assets bank balances Permitted to use foreign exchange for any purpose either for current or capital account transactions without any limit Convert Home currency (HC)to Foreign currency (FC)or FC to HC at the market exchange rates

Freedom to

Possess forex without any limit

Use forex for any purpose

Convert HC to FC and FC to HC at market rates

Convertibility and foreign exchange market

Supply and demand for a currency

Impact of
Increasing demand Increase in supply

 Purpose of publishing the data International performance in trading Maintaining record of inflow and outflow of capital Provides data on currency supply and demand Balance of payment data Export of goods demand for USD will .. Invisibles services tourism consultancy Insurance Income transfer of income to home country

 Unilateral transfers Foreign aid, economic grants, private gifts or donations

Inflow increases the demand for that currency in the global market

Accumulating foreign assets by selling home currency (by residents) local currency depreciates impact of inflation Sterilization operation Building foreign assets in home country more foreign investment flows local currency appreciates

Impact of full convertibility on corporate

Free movement of capital Both inbound and outbound Inbound investments / borrowings at comparatively cheaper cost
Cost of funds and competitive production cost

Outbound investment resulting in

Strategic acquisition of industries abroad Moving the manufacturing activities at the best location bringing down the cost of production Inflow of dividends and earnings from the Regulators view respective govts advantage

Certain cases ..
Mexican Peso Crisis South East Asian Crisis
Origin of Asian Crisis Lessons from this crisis

Argentine Peso Crisis

Mexican Peso crisis

Left blank waiting for the group presentation

Followed by Asian Crisis

blank

When a country can have full convertibility

Rate of Inflation under control Volatility of exchange rates- stable exchange rates NPA level in financial sector at the minimum levels Interest rates - low Cash Reserve Ratio at minimum level CAD 2% of GDP

AVERAGE DAILY TURNOVER

Global Forex market

: : : : : : : : USD 590 bn USD 820 bn USD 1.190 tn USD 1.490 tn USD 1.2 tn USD 1.880 tn USD 3.2 tn USD 4.0 Tn

APRIL 1989 APRIL 1992 APRIL 1995 APRIL 1998 APRIL 2001 APRIL 2004 APRIL 2007 APRIL 2010

Source ..BIS data Sep 2010

Market turnover by currency pair

USD/EUR USD/YEN USD/GBP USD/AUD USD/CHF USD/OTHERS 27% 13% 12% 6% 5% 19%

CURRENCY DISTRIBUTION ..TURNOVER

USD 86.3% EUR 37% YEN 16.5% CHF 6.8% Emerging market currencies 19.8% (all currencies 200%)

Components of forex transactions

Trade related transactions (1.5%) Non-refundable remittances (0.5%) Gifts / foreign aids / donations /freight related remittances /invisible / services / interest and dividend payments Capital transfers (8%) Balance (90%) - ?

 The London Interbank Bid Rate (LIBID) is a bid rate the rate bid by banks on off - shore deposits (i.e., the rate at which a bank is willing to borrow from other banks). It is "the opposite" of the LIBOR (an offered, hence "ask" rate).

 Whilst the British Bankers Association set LIBOR rates, there is no correspondent official LIBID fixing. Dictionary Libid is also known as the antonym of livid or being progressively mad.

 Conventional wisdom used to assert that a LIBID rate could be calculated by subtracting a fixed amount (often given as 1/8th of 1%) from the prevailing BBA LIBOR rate, however this is no longer the case as bid/offer spreads have tightened in recent years..

 Additionally, it cannot be the case that the LIBOR / LIBID spread is always 1/8th of 1% for all maturities and all currencies all the time

 How to manage the above exposures through various instruments & institutions?

Topic for the next session

Different types of international exposures and the relevant risk factors
Types of exposures
Short term / medium term / long term
Debt or equity maturity

Types of risks
Commercial risk Exchange rate risk

Regulations in International exposures

Foreign Exchange Management Act (FEMA) 1999
On flow of foreign exchange payment or receipt of foreign exchange

Foreign Trade Policy 2009-14 (FTP)

Movement of goods and export promotional measures

International Chamber of Commerce (ICC Paris)

Trade related instruments (UCP 600/ ISBP 681/ URDG 758 / Incoterms 2010)

FEDAI guidelines

 Authorised Persons
Authorised Dealer Category I AD Category II- remittances of Current Account Money Changer TC /FC issue or encash

END OF SESSION