1. 24/02/2012
UNIT-1
INTERNATIONAL FINANCIAL MANAGEMENT
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2. 24/02/2012
CONTENTS
Introduction to financial management
An overview of international economy in India
International financial environment
Multinational Corporations
Theories of International business,
International Business Methods,
International Monitory system
International risk exposure
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3. FINANCIAL MANAGEMENT
Financial Management represents the bridge between the firms
real assets and financial assets
(Financing)
(Capital budgeting) Financial Loans
Management Equity
Real assets
shares

4. Objectives of F M
Primary - Profit maximization
- Maximize the wealth of the owners (share holders)
Others - Ensure financial stability
Functions of F M
Planning - Ascertain and determine the source of financing the needs
Organization - Procurement and allocation of funds.
Control - Monitoring of funds through financial discipline.

5. PRIMARY ROLE OF F M
Mobilization Deployment Control end Risk-return
of funds of funds Use of funds Trade-off
From where ? Fixed assets Ascertaining facts Investment
& figures through (Risk-return)
At what cost ? Current assets Reports
Financing
In what time ? Investments Cash flow (debt-equity)
Repayment of
debts

6. OTHER ROLES-
Treasury Foreign Financial Maintaining
operations exchange structuring share price
Short term funds Currency fluctuation Debt- equity Dividend policy
Management
Hedging Arbitrage Bonus policy
Speculative gains by
anticipating interest Forward Contract . Pricing of new issue Healthy level of
rate movements share price.

7. FINANCIAL FUNCTIONS
Anticipation Acquire the Utilization Increase Maximize
Of funds needed funds needed Of the funds profitability Firms value
For financing the Long term Most profitable Reducing the costs Proper planning
assets / projects manner.
Short Term Efficient allocation Effective monitoring
Domestic
International
At least cost

8. 24/02/2012
OVERVIEW TO I F M
India is not a land of billion problems , but a land of billion opportunities
Mukesh Ambani
 I F M has assumed significance after liberalization
 More & more FDI’s, FII’s & F F I’s are in Indian market
 F F I’s hold over 20% of market capitalization
 Many Indian corporates are listed in foreign stock exchanges.
 Indian exports are growing at a rate of 12%/ annum with 50% of
manufacturing items being exported.
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9. 24/02/2012
OVERVIEW TO I F M
 Total forex trade has crossed 450 billion US $ & forex assets are over
US $ 300 billions
 India is a creditor country among IMF members. Many Indian
companies have acquired big ones abroad (Indian MNC)
 FDI & NRI continue to grow even in the recession years though there
may be a negative situation at times.
 Many international companies look to India for their market.
 The GDP continue to grow over 7 %
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10. 24/02/2012
OVERVIEW TO I F M
 With such a scenario and the future though tense is bright too , it is
essential for the Finance managers to have fairly good knowledge on
international financial management.
 The company’s operations today are global & the finance man has to
be well aware of the various intricacies on export/ import/ forex front.
 The mutual interactions between foreign sector of various countries
lead us to International financial system .
 The institutions operating in the international financial system are
closely connected with the foreign sectors of various economies.
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11. INTERDEPENDENCE
Equity Investment Granting Technical
J V in third
Participation In bonds Loans/ credits Consultancy
countries
In Indian & debentures on Govn,t Transfer of
companies to Govn,t basis, Technology
Party to
Party basis
In view of global importance to the operations in international trade &
funds flow, the importance of international financial management has
assumed vital role.,

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IFM TO TODAY MANAGERS
Managers should have a good knowledge of both domestic &
international markets in globalized world.
Operations of domestic & international markets are different & hence
the factors influencing them should be studied separately.
Survival of the fittest is the watch word. A right exposure in
international & domestic finance for managers are preferred.
The activities of MNC with international forces today needs managers
with good command over international operations.
No manager can be blind on the international economic & financial
operations today.
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INTERNATIONAL ENVIRONMENT
International environment
Economic Political Social Demographic Natural Technological
& & & factors environment & other
Financial Government Cultural factors
factors policies factors
Recession Stability Public interest Size, age, gender Climatic condition Quality
Depression Legal system Taste of the Transport Standards
Boom Efficiency Consumption Population Power Efficiency
Inflation executive/ Beliefs Language, caste Standards Skills
GDP Legislative Religion of living
Exchange rate /judiciary
Currency fluctuation Corruption
Commodity price Fiscal policy
Other policies
standards
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14. 24/02/2012
M N C’S
A MNC is an enterprise which has its managerial H Q located in one country
& operations in number of countries.
They expand either by setting up branches abroad , JV, subsidiaries etc.
Expansion takes place through vertical / horizontal / conglomerate route.
 MNC trade & production has been increasing over the last decades
 They control 1/3 rd of world production is controlled by MNC’s.
 The total sales of MNC will be 25% of world sales
 Bulk pvt investments are from MNC’s
 Induction of latest technology & exploitation of natural resources are
by MNC’s.
Globalization led to the growth of MNC”s
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M N C- OBJECTIVES
 Economies of scale, expansion of operations globally
 Diversification of product range to reduce risk
 Cost minimization & profit maximization
 International collaboration
 Secure inputs & intermediaries from different countries at low cost ,
assemble them in their own country & sell them back globally
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M N C- FEATURES
They have different state of mind. They think global, plan global, act global.
The plant size, operations, activities, place are global.
The MNC’s F M differs from D FM in many ways.
 Seeking capital at low cost markets on international basis
 Investment proposals are decided on global basis.
 Integrate their world wide operations
 Flexible in planning , adaptability to the environment, quickness in
decisions , innovative , vision, selecting best talent , profitable ,
efficient MIS, well developed R & D etc
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M N C’S - DC’S
Larger investments in R & D Less investments in R & D
Control on cheaper capital Not much excess reserves
Rating is higher Struggle to get good rating
Capital intensive Not Capital intensive
International diversification Domestic diversification
Ambitious & expansionist Less ambitious
Sound F M Not efficient F M
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18. INTERNATIONAL TRADE THEORIES
Classical theory Modern theory Some recent theories
(General Equilibrium theory )
Barter V/s money trade Karvis theory
Heckscher Ohlin theorem
Absolute advantage theory Technology & trade theory
Comparative advantage theory
Reciprocal demand theory

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CLASSICAL THEORIES
Barter trade V/S Money trade
Trade between commodities without any exchange of money.. This was
prevalent between any two countries. After advent of IMF , multilateral
trade is encouraged . Still some countries practice barter trade on a
limited basis
Classical trade theory- Absolute Advantage ( A A)
Value of product in a country is determined by its labour contents. As
labour cannot move internationally , this was used as absolute
advantage by some countries as per Adam Smith.
Production of one man in one week
product In USA In India
wheat 8 kgs (A A) 2 kgs
Cloth 2 yards 6 yards ( A A)
Exchange rate between wheat & cloth in India is 1;3 whereas it is 4;1 in USA
If wheat of USA is exchanged for cloth of India, the ratio will be between 1: 3 & 4:119

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CLASSICAL THEORIES
Comparative advantage theory
Developed by David Ricardo
The country would export that commodity in which it had a greater
Comparative advantage & import a commodity in which it had a greater
Comparative disadvantage.
Example-
 If no trade takes place , India will have only 2 kgs of wheat & 6 yds of
cloth.
 With trade taking place, it can produce 12 yds of cloth, export 6 yds &
retain balance for its use.
 It can also get 3 kgs of wheat even at domestic exchange ratio in US.
(Assumption- Only labour is taken into consideration, no trade &
tariffs, unrestricted flow of trade, cost of transport & insurance ignored )
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CLASSICAL THEORIES
Reciprocal Demand theory
Propounded by J S Mill
 Law of comparative costs determines the supply of goods in foreign
trade as per David Recardo.
 Law of reciprocal demand sets the price at which the trade will take
place. i.e , it is the law of supply & demand that will determine the
price. ( It is the US demand for Indian cloth & Indian demand for US
wheat)
 The offer & bids in the international trades are represented by offer
curves. These curves can be regarded as demand curves
representing various amounts of cloth which USA would demand in
exchange for a unit of wheat & units of wheat which India would
demand for exchange of one unit of cloth.
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22. Modern theory of international trade
Classical theory explains trade based on the cost difference which in turn
Is dependent on the labour or other factor efficiencies.
The modern theory also called general equilibrium theory is based on demand
& supply principles.
It shows that there is hardly any difference between internal & international
theories.
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23. Modern theory of international trade
Modern economists were of the view that there is no need for a separate theory
in view of the following
1. Factor mobility among countries is restricted as in case of regions within a
country .
2. Difference in currencies among nations do not stand in any way of trade as
there is arrangement for exchange of currencies in forex market.
3. Transport cost is there both for international & domestic trade.
4. Comparative cost difference is there both for domestic & international trade.
5. The other differences such as habits, customs, trade restrictions are not
insurmountable.
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INTERNATIONAL BUSINESS THEORIES
Heckscher- Ohlin theorem
According to this theory , a country with capital abundance will export capital
goods & those countries with labour abundance will export labour intensive
goods.
Ex- USA can export capital intensive goods in exchange for labour intensive
goods by India.
(PK/ PL) A < ( PK/ PL)
P= price factor , K= capital, L = labour, A & B are two countries.
For trade to take place between two countries , there should be difference in
factor efficiencies and for each commodity .
What is said for factor of production can also be true for goods as they are the
inputs in productive activities
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25. RECENT THEORIES
Karvis theory Technology & Trade theory
Also called availability theory Technology difference may lead to
trade advantages.
Those countries which have exportable
surplus will export to other countries. Introduction of new technology may
lead to trade in that goods & from that
Consumers preference for the goods of a country.
particular country also holds good.
The country which introduces new
technology first will increase its exports
Emerging models of international theories as per economists are
Ricaro goods, Herkscher – Ohlin goods & Technology goods

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INTERNATIONAL BUSINESS METHODS
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27. Globalization
Globalization / deregulation / liberalization has made business more
competitive & challenging.
Indian companies have become MNC’s & foreign MNC’s have entered India .
Business methods adopted by various companies have also undergone changes.
Globalization had brought remarkable effect on following areas.
1. corporate strategy & corporate Governance.
2. Corporate goals & objectives
3. Corporate financial strengths & weakness
4. Input market, output market both in direction & content.
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28. International Business environment.
Financial markets opened up & are dynamic & volatile in globalized set up
IT & telecommunication media has made world a global village.
Competition is severe & those who are weak/ late will not survive.
Natural forces will act, interest rates moves freely & exchange rates are dynamic.
Those who are agile & alert can survive.
Those management who have skilled power/ financial strong / optimize share
holders value by adopting to changes can be global MNC’s.
Corporate management have to adapt to new situation .
They have to change strategies & undergo a deep transformation
to meet the challenges
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29. Global factors
Capital flow will be from less efficient / less profitable ventures / markets
to more efficient & profitable markets.
Capital can now be sourced from cheaper markets internationally.
Human skills & technology will also see mobility.
Free exports & imports can reduce the costs due to comparative advantages
Both short term & long term finances can be available both from Domestic
& international markets.
Availability of capital when required can reduces locking of funds at
high cost borrowings.
JV, M & A, Disinvestments , putting weight in profitable directions
will be the order of the day.
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30. Global factors- (Contd)
Multicurrency loans, flexi rate loans, ECB,s , guarantees , bridge loans will be
available in global markets.
Changes in legal frame work has brought in International court of justice.
Borrower & Lender have to abide by a legal system which is acceptable to
both.
International chamber of commerce & International court of justice are the
agencies on legal issues.
The documents & agreements between parties may specify the law of their
choice which should govern their contract.
Government will take up with international court of justice
Individuals & corporate bodies can approach the International chamber of
Commerce for adjudication.
Production sharing will be the most important form of economic
integration Peter Drucker
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31. Global sourcing
One of the main characteristics of MNC is global sourcing for inputs & financial
resources.
Japan/ USA increasingly depend on outside source depending on lowest global
cost alternatives.
Toyota of Japan outsource 60 to 70% of their requirements & General Motors
of US to the extent of 30-40% .
Reasons for global sourcing are
1. Price/ cost/ quality
2. Advanced technology
3. Prompt , co-operative delivery & consistent attitude.
4. Agreement with subsidiaries/ counter trade requirement.
5. Reduction of use of capital/ labour.
The issues in global sourcing are
1. Reduction in flexibility of own planning
2. There might be some hidden cost
3. Possibilities of changes in currency exchange rate. 31

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GLOBAL ORGANIZATIONAL STRUCTURE
 organization under globalization is a dynamic phenomenon.
 It involves integration of organization theory, organization functions,
organization design, organization performance etc.
 Organization, components, activities are influenced by environment
which is influenced through human behaviour.
 This involves human adaptation & behavioral adaptation of the
organization.
 Each organization has evolved on the basis of culture, tradition &
precedents.
Organization design for globalization involves various factors
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ORGANIZATIONAL – DESIGN FOR GLOBALIZATION
Steps for globalization
1. Size & type 2. Structure , 3. Human 4. Human
of business strategies & behaviour Resources
systems & culture Development
Training Adaptation Professionalism Mind set
Foreign Government Foreign Global Business Law Attitude
technology Policies & finance Practices of
procedures Foreign Banks
of host/ home & markets
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countries

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INTERNATIONAL MONITORY SYSTEM
IMF
WORLD BANK
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35. International Monitory –Pre war period
Gold standard was followed by various countries prior to first world war -1914.
The exchange rate between two countries was determined on the basis of the
rates at which two countries could convert their currencies for one ounce of gold.
Ex- If one ounce of gold was $ 400 in Us & sterling Pounds 200 in G B,
then the $ - pound convertible rate was $ 2 / pound.
Countries continued on Gold standards due to its inherent advantages.
( Price stability of gold)
This was abandoned with the advent of W W 1 and modified version of Gold standard
Called gold exchange standards came into force.
In this system, some countries committed converting their currencies into the currencies
of other countries on gold standards rather than gold.
II W W effectively stopped all international economic activities.
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36. International Monitory system-
Bretton Woods system
Second world war has led to international monitory disorder , Exchange restrictions,
undesirable trade practices.
Need for international monitory co-operation & understanding was greatly felt after
the war.
Britton Woods conference resulted in establishment of IMF & ( IBRD ) world bank.
44 member countries met at Britton woods , New Hampshire , USA & signed
an agreement for establishing a new monetary system .
Later more countries joined & almost all countries (184) are now members .
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37. Objectives of International Monitory Fund (
IMF)
1. To promote international co-operation through consultation & mutual
collaboration
2. To promote exchange stability & maintain orderly exchange arrangements.
3. Avoid competitive exchange depreciation
4 To help members of temporary balance of payment difficulties & to tide
over them without resort to exchange restrictions.
5. To promote growth of multilateralism in trade payments & expand world trade
6. To help achieve balance of payments equilibrium , shorten the duration of
disequilibrium & promote orderly international relations.
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38. Importance of IMF
In all matter of exchange rate changes, , imposition of restrictions on current
account , use of discriminatory practices, members are obliged to consult IMF
If the members fail to consult IMF, they would be ineligible to have recourse
to financial resources.
The consultations include the following
1. Supply of economic & financial data to the fund by the member countries
2. The staff of the fund can call various types of data from a member country
on ad hoc basis.
3. The staff team visits member countries once an year for a first hand study
on economic & financial conditions in the member country.
4. Formal & informal consultations are held with member countries when they
approach for standby arrangement or credit withdrawal.
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39. Sources of funds for IMF- The Quotas
 Every member country in the IMF has been allotted a quota ,
 The formula was worked out based on the following
1. 2 % of the national income
2. 5 % of the gold & $ balances
3. 10% of the average annual exports
4. 10% of the maximum variation of annual exports
5. The sum of the above , increased by the % ratios of average annual exports
to national income of the member.
Each member’s quota was fixed as their initial contribution to the fund.
The total quotas as on 1944 of 44 countries was $ 8800 million & by 1994 the
number of countries were 178 & quota was SDR- 144,620 million
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40. Special drawing rights ( S D R )
Historically Gold was taken by the US $ & U K sterling pound in inter war &
post war period.
This was replaced by Special drawing rights ( S D R ) after seventies.
SDR is now the standard unit account whose value will be fixed in terms of
basket of currencies.
SDR is a source of augmenting international liquidity.
This is an asset specially intended to replace Gold and is called paper gold.
The value of SDR is fixed on daily basis as weighted average of a basket of
16 currencies of countries with more than 1 % of world trade .
Since 1981, the value of SDR is based on the weighted average of 5 major
currencies namely US $, DM, UK pound sterling, French Frank & Yen,
Since 2005 , it is UK pound sterling, US $, Euro & Japanese Yen. 40

41. Other sources of fund for IMF
 IMF holds substantial quantum of gold reserves which was received as
Quota from its members . Only 25% of the gold was converted into SDR’s.
 In 1975 , IMF sold 1/6 th of gold reserves in auction which realised US $
5.7 billions
 Under general agreement to borrow, IMF could borrow from its participating
members ( G-10 countries), which will be repaid with interest in 5 years period.
 IMF can also acquire any currency in exchange for its gold reserves.
 The repayment made by member countries is also a source for further lending.
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I M F- BOARD
 There are 22 directors on Board.
 6 of them are appointed by those governments who hold largest quotas.
 The rest are appointed by other countries
 The M D / Chairman is appointed for 5 years period.
 The board meets once an year to take major policy decisions.
 Its members are mostly finance ministers / central bank governors of
member countries
 All member countries are represented on this board.
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I M F- LENDING OPERATIONS
 Provides temporary assistance for balance of payment purposes.
 A member can draw up to 25% of its quota (Gold tranche) in gold
automatically.
 Further 100% of its quota can be borrowed in 4 stages with strict
restrictions.
 If that country has 10% credit position as its quota as borrowings by
other countries ( super gold tranche) , it can draw up to 35 % of its
quota.
 IMF lends under various schemes
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I M F- SCHEMES
Standby Compensating Buffer stock Extended
Arrangement Finance Facility Financing Facility 1974
1952 1963 Facility 1969
country can Borrow Financial assistance Financial assistance Borrow on medium
at first Indication To countries facing For purchase of Term basis to
Without getting the Temporary shortfall Approved primary Overcome
Loan approval Products to avoid Balance of payment
to save time Price shocks Problem due to
Structural imbalance
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POST BRITTON WOODS SYSTEM
(CURRENT SYSTEM)
 Britton woods system was abandoned & most of the countries
shifted to floating exchange system from 1976.
 Under this system, countries were given flexibility to choose the
exchange system they wanted to follow in managing their exchange
rates.
 The countries can float / peg their currencies with basket of
currencies / SDR. Pegging with gold was abandoned.
 Members no longer required to deposit their quota in gold.
 IMF reduced the role of gold and SDR became reserve asset.
 IMF became more powerful & was given the responsibility of
supervising the monitory system.
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POST BRITTON WOODS SYSTEM
(CURRENT SYSTEM)
 As of 1995, of 155 members in the fund, the following were the
exchange rate mechanism followed by various countries
Currencies pegged to No of
countries
US$ 27
French frank 14
SDR 6
Currency basket 34
Independent float 27
Joint Float 5
Other currencies 42
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POST BRITTON WOODS SYSTEM (CONT’D)
PRINCIPLES OF EXCHANGE RATE MANAGEMENT
 A member country neither should manipulate the exchange rates in
such a way to prevent a correction in BOP position.
 Countries should use the exchange rate to gain competitive
advantage in international market.
 Member country shall intervene in the exchange market If necessary
to counter disorderly conditions
 While intervening in exchange markets, , a member country should
keep the interest of other countries in mind.
 Members are free to choose their exchange rate arrangements
except to maintain value in terms of SDR
 They should co-operate with fund in orderly exchange
arrangements. 47

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IMPORTANCE OF RESERVES
 Just as one needs domestic cash requirements for transactions,
countries need reserves to meet payments in international
transactions.
 The adequacy of reserves is also important ( reserves to imports,
rate of growth of world trade to rate of growth of reserves &
magnitude of balance of payments deficit)
 Under floating rate system, a larger need for reserves is a must to
meet the BoP.
 Increasing BOP by non oil producing countries require more reserves
to meet the deficit.
 Many poor countries have their exchange rates pegged to a
currency or basket of currency for which central bank intervention is
needed in the market 48

49. 24/02/2012
INDIA'S - RESERVES
 Indians currency exchange rate is linked to basket of currencies.
 India’s reserves position is comfortable and is now almost equal to
one year’s imports .
 The reserve’s position comprises of Gold, Foreign exchange assets,
& SDR’s. The reserve levels over the last 50 years (Rs in crs) are as
follows.
March 71 March 81 Jan 94 Dec 99 June 02 June09
Gold 182 226 12,665 12,790 16,272 46,914
Forex 438 4,822 61,440 1,39,134 2,67,333 12,16,345
assets
SDR 112 497 233 18 47 2
Total 732 5,545 74,338 1,51,942 2,83,652 12,63,261
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UNIT-1
CONCLUDED
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