INTERNATION

AL FINANCIAL
MANAGEMENT
Introduction
 Financial Management means
planning, organizing, directing and
controlling the financial activities such
as procurement and utilization of funds
of the enterprise. It means applying
general management principles
to financial resources of the enterprise.
Questions
 Why study “International” Finance?

 What’sSpecial about “International”

Finance?
Why Study “International”
Finance?
 Highly globalized and integrated world
economy. Consumption, Production, and
Investment are highly globalized.
Example Personal computers sold in
market have been assembled in Malaysia
with Taiwanese-made monitors, Korean-
made keyboards, US-made chips, and
preinstalled software packages jointly
developed by US and Indian engineers.
What’s Special about
“International” Finance?
 Foreign Exchange Risk.
 Political Risk.
 Market Imperfections.
 Expanded Opportunity Set
 Foreign exchange risk

In a domestic economy this risk is generally ignored because a single

national currency serves as the main medium of exchange within a country.
When different national currencies are exchanged for each other, there is a
definite risk of volatility in foreign exchange rates.
The present International Monetary System set up is characterised by a mix
of floating and managed exchange rate policies adopted by each nation
keeping in view its interests.
In fact, this variability of exchange rates is widely regarded as the most
serious international financial problem facing corporate managers and
policy makers.
 Political risk

 Political risk ranges from the risk of loss (or gain) from

unforeseen government actions or other events of a
political character such as acts of terrorism to outright
expropriation of assets held by foreigners.
For example, in 1992, Enron Development Corporation,a
subsidiary of a Houston based Energy Company, signed a
contract to build India’s longest power plant.
 Unfortunately, the project got cancelled in 1995 by the
politicians in Maharashtra who argued that India did
not require the power plant. The company had spent
nearly $ 300 million on the project.
Market Imperfections

 Domestic finance is that world markets

Today are highly imperfect
 Differences among nations’ laws, tax,
systems, business practices and general
cultural environments.
Expanded Opportunity Sets

 When firms go global, they also tend to benefit

from expanded opportunities which are
available now.

 They can raise funds in capital markets where

cost of capital is the lowest.

 The firms can also gain from greater

economies of scale when they operate on
a global basis.
Objective
The main objective of International Financial management is to
Maximize shareholder wealth

Adam Smith wrote in his famous title

 Wealth of Nations ”

that if a foreign country can supply us with a commodity cheaper than we

ourselves can make it, better buy it of them with some part of the produce of
our own in which we have some advantage.
Basic Functions
Acquisition of funds (financing decision)
 This function involves generating funds from internal as
well as external sources.
 The effort is to get funds at the lowest cost possible.

Investment decision
It is concerned with deployment of the acquired funds in a
manner so as to maximize shareholder wealth.
Other decisions relate to dividend payment, working capital
and capital structure etc.
In addition, risk management involves both financing and
investment decision.
Multinational companies
 These are corporate organizations that
own or control production of goods or
services in 2 or more countries other
than their home countries.
 Adidas
 Sony
 Suzuki
 Finance function of a multinational firm has
Two functions namely, treasury and control.
The Treasureris responsible for
financial planning, analysis fund ,acquisition,
investment financing, cash management,
investment decision and risk management
Controller deals with the functions related to
external reporting, tax planning and management,
management information system, financial and
management accounting, budget planning and
control, and accounts receivables etc.
International Business Methods

 Licensing

 Franchising

 Subsidiaries and Acquisitions

 Strategic Alliances

 Exporting
 What are Goals for International Financial
Management?
 What is Globalization of the World Economy
 How Globalized Financial Markets Emerged
 How Euro as a Global Currency Emerged
 What are Trade Liberalization and Economic
Integration .
 What is Privatization
 What is Multinational Corporations
Cash Flow Diagrams for MNCs
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