International Financial Management

Finance Function in Global Scenario

Dr. Amit Kumar Sinha dramitksinha@gmail.com
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International Finance Function



Definition International Financial Management is a process or a system of effective mobilisation and utilization of funds (FOREX) in MNCs in whom forex operations have significant influence on decision making. OR It is a system of acquisition and utilization of funds consisting of forex in MNCs in such a way that the objectives of the Enterprise are achieved. 1

Definition of IFM as a Subject



International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, global financial system, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps. International finance is a branch of international economics 2

Characteristics of IFM
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Management of forex funds is core of function Raising of funds and utilization are major functions It relates to manage exchange-rate and exchangeinterestinterest-rate risks It is partly theoretical and partly analytical in nature It is futuristic in approach 3 It is still an evolving subject

Scope of IFM
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International financial environment Foreign exchange markets, spot and forward Foreign exchange rate determination Foreign exchange risk management International capital budgeting Capital structure problems of MNEs Working capital management in MNEs Tax management in MNEs Global acquisition and mergers
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Significance and Importance of IFM

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Helps to become a successful global MNC Helps in understanding complexities of global environment Helps in adjustment of impact of global financial events Allows to minimize the risks of foreign exchange transactions Helps to identify and exploit opportunities in foreign markets
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What s Special about International Finance?

   

Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set

What s Special about International Finance?



Foreign Exchange Risk



The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways.
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Political Risk


What s Special about International Finance?



Market Imperfections  Legal restrictions on movement of goods, people, and money  Transactions costs  Shipping costs  Tax arbitrage
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What s Special about International Finance?



Expanded Opportunity Set  It doesn t make sense to play in only one corner of the sandbox.  True for corporations as well as individual investors.

Goals for International Financial Management



The focus of the subject is to equip with the intellectual toolbox of an effective global manager but what goal should this effective global manager be working toward? Maximization of shareholder wealth? or Other Goals?
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Maximization of Shareholders Wealth



Long accepted as a goal in the Anglo-Saxon Anglocountries, but complications arise.  Who are and where are the shareholders?  In what currency should we maximize their wealth?

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Other Goals


In other countries shareholders are viewed as merely one among many stakeholders of the firm including:
  

Employees Suppliers Customers

In Japan, managers have typically sought to maximize the value of the organization.
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Other Goals


No matter what the other goals, they cannot be achieved in the long term if the maximization of shareholders/ corporate wealth is not given due consideration along with environmental and social concerns.

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Globalization of International Finance: Recent Trends

    

Emergence of Globalized Financial Markets Liberalization and Integration Privatization / Deregulation of Markets Disintermediation/Emergence of Equity Cult Emergence of New Markets like Hong Kong etc. Functional Unification (Banks Providing all Functions) Innovations/Financial Engineering 14 Automated Financial Services