International finance

International Financial Management

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Global Management of Financial Resources

GlobalizationCapital - Financial Resources - Features

Fastest in factor mobilityMost convenient in factor mobilityMost inexpensive to make mobile-transfer

Dismantling of barriers Emergence of trade facilitating institutions

BanksStock ExchangesLiberal Forex LawsInsurance institutionsWatchdogs – Pressure groups- Tainted

money – drug money

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Requirements and Reasons

Organizations are becoming global – part of dismantling of trade barriers

Organizations need most inexpensive source of capital

Domestic resources may not be available – developing countries

Purposes:EstablishmentWorking capitalCollaborationExpansionInvestment

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Retaining of liquidityLegal requirements – CRR by central banksRestrictions by domestic governments on

fund raising:In terms of amountIn terms of durationIn terms of exchange transfer restrictions- Profits

made from domestic capital may not be allowed to be transferred

Channels and sources may be restrictedForm may be restricted

Debt, equity, private placement,

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Consist of bank loanssuppliers' and buyers' creditsfixed and floating rate bonds (without convertibility)borrowings from private sectorsmultilateral Financial Institutions International

Finance Corporation. Euro-issues Convertible bonds, ADRs and GDRs.

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External Commercial Borrowings (ECBs)

Overseas Equity MarketsPlacing the stocks on overseas markets

AdvantagesAvailability of funds - if the markets are rich – higher GDP, per capita income,

practice, culture of investment rather than saving and less risky conservative static modes of return like FDs

Transparent systemsRegulationDiversification of riskIf issues are very large need multiple big markets to source funds (KLM)Protection against economic and political risksProvides international image to the organization – branding and stability issues

_ Apple in Nikkei (Tokyo) and Dax (Franfurt)May reduce cost of capitalConfidence to the buyers of the product and suppliers of inputsAccess to the market- local company BPO registered in US will get tax benefits

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24 hours tradingDisadvantages

Management cost – Floating of issues, advertizement at multiple location

Forex riskDenial of transfer of dividendsAll political and economic risks

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DebtsCan be accessed from banks outside domestic

boundariesEstablishment of development banksPurpose:

Generally include that funding which is not attractive to equity/stock holdersInfrastructure projects- Road, Dams, Powerhoueses, MetroGestation period ism long, BEP is late returns very late. Even Governments /PSUs require such funding – DMRCs

Three types of banks World Bank GroupRegional Development banksNational development banks

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World Bank GroupWorld bank or IBRDInternational Financial Corporation (IFC)International Development Association (IDA)

Espcialy for LDCs soft loans as high as 50 years at 1% interest rates

Regional Development BanksFor 5-15 years for agriculture, mining etc.European Investment BankInter American Development BankAsian Development BankAfrican Development BankEBRDArab Fund for Reconstruction and Development

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Euro Currency- Euro Markets

Any Freely convertible currency deposited outside domestic boundaries become Euro CurrencyUSD deposited in France will become EuroDollarWill become Eurocurrency even if deposited in

foreign branch of national banksEuro Banks – banks take and make loans in foreign

currency – have nothing to do with Euro as currency of EU

Origin – USSR

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Advantages of Euro Currency Loans

Reserve requirements by central banks that reduce earning by the asset does not take place. This allows banks to lend at lower rate

Charges and taxes required to be paid to domestic bank are not required to pay. Service tax, insurance charges for each account

Special concessionary lending is not required such as to farming sector- increases the earning capacity of the deposit

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Euro Bonds

Are the bonds that are sold outside the country in whose currency they are denominated.

GM Bond of US$ 200 millions in British Pound is a Euro bond

These are almost absolutely free of govt. regulations.

Are generally possible for organizations with large, long historical record of exponential growth like GE, GM, Unilever, P&G DuPont, 3M

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Euro Bonds- FCCBs

Types:Fixed Rate

Coupon Payment is generally once in a yearInterest rate is calculated on IRR

Floating Rate Is a fixed spread over a reference rate usually LIBOR

(London Interbank Offered Rate) Reset period is usually 3 to 6 months

Equity Related

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Equity Related

A type of convertible bond issued in a currency different than the issuer's domestic currency. 

A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock

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These bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock.

Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point. Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs

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ADRsIs negotiable certificate issued in USA for shares in a foreign

company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale in US only through the various bank branches of the depository bank, which purchases shares of foreign companies and deposits it on the account.

ADS - certificate issued by a US bank representing a specified number of shares in a foreign stock that is traded on a U.S. exchangeRatio 1:5- One certificate means holding of 5 shares

ADRs are denominated in US$ with the underlying security held by a US financial institution overseas

ADRs reduce administration and duty costs that would otherwise be levied on each transaction

ADRs do not eliminate the Forex, Economic and Political RisksDividend payments in Yen would be converted into US$ net of

conversion expenses and foreign taxes and in accordance with the deposit agreement16

GDRsIs a certificate issued in more than one country for

shares in a foreign company. The shares are held by a foreign branch of an international bank in the country of the offering. The shares trade as domestic shares, but are offered for sale globally

GDRs facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets.

International banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche Bank, Bank of New York. They trade on the International Order Book (IOB) of the London Stock Exchange. Normally 1 GDR = 10 Shares, but not always

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Off Shore Banking

HNIs

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