International Financial Management

International Financial Management ,International Money Market,International Capital Market,International Bond Market,Bench Marking,Euro currency Market

1. INTERNATIONAL FINANCIAL MANGEMENT Prepared By Ms.Jissy.C Assistant Professor

2. UNIT I International Financial Management – Definition – Meaning - International Money Markets – Money Market Instruments – International Capital Markets – Comparison of New York, Indian Money Market – International Bond Market – Bond Issue Drill – Bench Mark Drill – Euro Currency Market – Euro Dollar – Euro Deposit and Loans.

3. FINANCE Finance is a management of money and other valuables, which can be easily converted into cash. Finance is concerned with the maintenance and creation of economic value or wealth. A science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities.

4. Finance Finance is the science and art of managing money and other assets the study of finance can be classified into following ways: Study of Finance PUBLIC FINANCE: deals with the role of government in managing financial requirements of the economy PERSONAL FINANCE deals with the monetary decisions and activities of an individual or a family unit that includes protein income and expenses planning CORPORATE FINANCE it is concerned with the planning rising investing and monitory of finance in order to achieve the financial objectives of company

5. INTERNATIONAL FINANCIAL MANAGEMENT

6. International financial management International financial management, also known as international finance is the management of finance in an international business environment; that is, trading and making money through the exchange of foreign currency. The international financial activities help the organizations to connect with international dealings with overseas business partners- customers, suppliers, lenders etc. It is also used by government organization and non-profit institutions Difference Between International and Domestic Financial Management Foreign exchange risk Political risk Extended opportunity Market imperfections

7. SCOPE OF INTERNATIONAL FINANCIAL MANAGEMENT International finance is subject to several external forces. Foreign exchange market Currency convertibility International monetary system Balance of payments International financial system

8. Basic Functions : Acquisition of funds 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.

9. ADVANTAGES OF INTERNATIONAL FINANCIAL MANAGEMENT Access to capital markets across the world enables a country to borrow during tough times and lend during good times It promotes domestic investment and growth through capital import Worldwide cash flows can exert a corrective force against bad government policies It prevents excessive domestic regulation through global financial institutions International Finance leads to healthy competition and hence a more effective banking system It provides information on the vital areas of investment and leads to effective capital allocation

10. RISKS OF INTERNATIONAL FINANCIAL MANAGEMENT Currency risks Political/country risks Financial risks .Interest rate risk Commercial risks Liquidity risk

11. FINANCIAL MARKET MONEY MARKET CAPITAL MARKET PRIMARY MARKET SECONDARY MARKET

12. Money Market The term ‘Money Market’ is used to define a market where short-term financial assets with a maturity up to one year are traded. The assets are a close substitute for money and support money exchange carried out in the primary and secondary market Money market is not a fixed geographical area but it constitutes all organizations and institutions which deal with short term debts. The common institutes are Reserve Bank of India, State Bank of India, other Commercial Banks, LIC, GIC, UTI etc.

13. Money market instruments Investment of money market is done through money market instruments Promissory Note: Bills of exchange or commercial bills Treasury Bills (T-Bills) Call and Notice Money Inter-bank Term Market Commercial Papers (CPs) Certificate of Deposits ( CD’s ) Banker’s Acceptance (BA) Repurchase Agreements (Repo)

14. Functions of Money Market Instruments Provides Funds Use of Surplus Funds No need to borrow from banks Helps Government Helps in Monetary Policy Helps in Financial Mobility Promotes Liquidity and Safety Equilibrium between Demand and Supply of Funds Economy in Use of Cash

15. Advantages of Money Market Instruments Safe to park funds Higher return on investments Tax- free Liquidity Less or no fee Disadvantages of Money Market Instruments Purchasing power can get impacted  Some returns can vary and can be riskier   opportunity cost

16. INTERNATIONAL MONEY MARKET

17. The international money market is a market where international currency transactions between numerous central banks of countries are carried on. The transactions are mainly carried out using gold or in US dollar as a base. The basic operations of the international money market include the money borrowed or lent by the governments or the large financial institutions. The international money market is governed by the transnational monetary transaction policies of various nations’ currencies. The international money market’s major responsibility is to handle the currency trading between the countries. This process of trading a country’s currency with another one is also known as  Forex trading .

18. The International Monetary Market (IMM) was formed in December 1971 and was established in May 1972. The roots of IMM can be linked to the finish of Bretton Woods via the 1971 Smithsonian Agreement and then, Nixon's abolition of US dollar's convertibility to gold. The IMM was formed as a separate entity of the Chicago Mercantile Exchange (CME). By the end of 2009, IMM was the second biggest futures exchange in terms of currency volume in the world. The major purpose of the IMM is to trade currency futures. It is comparatively a new product which was earlier studied by the academics as a tool to operate a freely-traded exchange market to initiate trade among the nations.

19. INTERNATIONAL MONEY MARKET INSTRUMENT Treasury bills short-term obligations issued by the U.S. government discount yield, 360 day basis. Also as bond equivalent basis using 365 day basis Commercial Paper – short-term unsecured promissory notes issued by a company to raise short-term cash discount yield, 360 day basis Banker Acceptances - time draft payable to seller of goods, with payment guaranteed by a bank , discount yield, 360 day basis

20. Negotiable Certificates of Deposit – negotiable bank- issued time deposit with specified interest rate and maturity discount yield, 360 day basis Repurchase Agreements agreement involving the sale of securities between parties with a promise to repurchase the security at a specific date and price - bond equivalent basis, 360 day basis

21. INTERNATIONAL CAPITAL MARKET

22. INTERNATIONAL CAPITAL MARKET International capital market is that financial market or world financial center where shares, bonds, debentures, currencies, hedge funds, mutual funds and other long term securities are purchased and sold. International capital market is the group of different country's capital market. They associate with each other with Internet. They provide the place to international companies and investors to deal in shares and bonds of different countries.

23. INTERNATIONAL CAPITAL MARKET INSTUMENTS Global Depository Receipts: Foreign Currency Convertible Bonds American Depository Receipts External Commercial Borrowing

24. GLOBAL DEPOSITARY RECEIPT A global depositary receipt (GDR) is a bank certificate issued in more than one country for  shares  in a foreign company. FOREIGN CURRENCY CONVERTIBLE BOND A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of foreign currency. A convertible bond is a mix between a debt and equity instrument . 

25. AMERICAN DEPOSITARY RECEIPT An American depositary receipt (ADR) is a  negotiable  certificate issued by a U.S. depository bank representing a specified number of shares—or as little as one share—investment in a foreign company's stock. The ADR trades on markets in the U.S. as any stock would trade EXTERNAL COMMERCIAL BORROWING An external commercial borrowing (ECB) is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency. The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.

26. Components of the International Capital Markets International Equity Markets International Bond Markets Eurocurrency Markets Offshore Centers

27. INTERNATIONAL BOND MARKET WHAT IS BOND MARKET ? The bond market is a financial market where participants buy and sell debt securities , usually in the form of bonds .The bond market primarily includes:- I) Government-issued securities. II) Corporate debt securities.

28. MEANING OF INTERNATIONAL BOND A bond issued in a country or currency other than that of the investor or broker. They include Eurobonds, which are issued in a foreign currency, foreign bonds, which are issued by a foreign government or corporation in the domestic market, and global bonds, which are issued in both domestic and international markets.

29. Currencies

30. International Bond Market is very big and has an estimated size of more than 60 trillion dollars, and the size of the US bond market is the largest in the world. The US bond market's outstanding debt is more than $25 trillion There are bonds from many developing countries that may offer excellent returns. This is because international bonds from developing nations may be somewhat riskier. The four major currencies used to denominate bonds are : 1. Euro 2. U.S. dollar 3. British pound sterling 4. Japanese yen.

31. THE STRUCTURE OF INTERNATIONAL BOND MARKET The International Bond Market is an investment market just like the stock market, but there are some differences in the structure of these two markets. The usual trading of bonds occurs on the over the counter market, and not on the exchanges like stocks are. The structure of the international bond market is all electronic. There are a few corporate bonds which are the exception, because these may be traded on the exchanges. Bonds are normally traded using networks, which are set up to utilize electronic trading. Unlike the stock market, whose physical location is on Wall Street, there is no physical marketplace for the bond market. Instead, computers and telephones are used to buy, sell, and trade bonds . The international bond market structure is continuously evolving and growing, and the number of bonds being traded is on the rise. This market is a good opportunity for investors to diversify their portfolio and invest in foreign markets at the same time.

32. BOND MARKET ASSOCIATION The Bond Market Association was considered as the association for international trade and bond market industry. Its headquarters were situated in London, New York and in Washington and nearly 20% of the total percentage of membership were placed outside America. The Bond Market Association had worked like the global representative for those who issue bonds and trade with them Played a big role in co- ordinating with governments, corporations and with the investors as well.  Bond Market association in the International Bond Market also had a code of conduct which the market participants had to follow very strictly. In the year 2006, the Bond Market Association was merged with Securities Industry Association which formed a new institution called the Securities Industry and Financial Markets Association.

33. INTERNATIONAL BOND IS FURTHER CLASSIFIED IN THREE TYPES 1) Domestic Bond 2) Euro Bond 3) Foreign Bond Domestic Bonds Domestic bonds trade is a part of the international bond market. Domestic bonds are dealt in local basis and domestic borrowers issue the local bonds. Domestic bonds are bought and sold in local currency. Foreign Bonds In foreign bond market, bonds are issued by foreign borrowers. Foreign bonds normally use the local currency. The concerned local market authorities supervise the issuance and sale of foreign bonds. Eurobonds Eurobonds are not sold in any specific national bond market. A group of multinational banks issue Eurobonds. A Eurobond of any currency is sold outside the nation that has the currency. A Eurobond in the US dollar would not be sold in the United States.

34. FEATURES OF INTERNATIONAL BOND 1) It is a debt market 2) It is a fund raising market 3) Fixed income instrument 4) Issued in foreign currency 5) It channelizing savings

35. INSTRUMENTS OF INTERNATIONAL BOND MARKET 1) Straight Fixed-Rate 2) Floating-Rate Note 3) Convertible Bond 4) Zero coupon bond 5) Dual-Currency bond 6)Composite currency bonds

36. THE COMMON PROCESS OF ISSUING BOND Step 1:-A borrower will contact an investment banker. Step 2:- The lead manager will invite other banks. Step 3:-The managing group and banks will serve as underwriters for the underwriter issues. Step 4:-The various members of the underwriting syndicate receive a portion of the spread. Step 5:-The lead manager receives the full spread.

37. RISK OF INVESTING IN BOND Interest Rate Risk Reinvestment Risk Inflation Risk Credit or Default Risk Rating Downgrades Liquidity Risk

38. WHAT IS BENCHMARKING? Benchmarking is the process of improving performance by continuously identifying, understanding, and adapting outstanding practices found inside and outside the organization

39. Benchmarking is the process of comparing ones business processes and performance metrics to industry bests and/or best practices from other industries. Why are others better ? How are others better ? What can we learn ? How can we catch up ? How can we become the best in our industry

40. BENCHMARKING FEATURES Benchmarking has three main features: Continuous method of measuring and comparing a firm process against those of another firm Discover performance gap between ones own process and those leading firms Incorporate leading firms processes into own strategy to fill the gaps and improve performance

41. Types of Benchmarking There are two types of Benchmarking, discussed as under:

42. Benchmarking Process Determining benchmark focus Planning and research Gathering data Analysis : Recommendations Implementation

43. Importance of Benchmarking: Benchmarking is a widely used global management process, which is very helpful for organization development and success. But still, most of the industries do not use the benchmarking process as an efficient tool to boost their performance and productivity.

44. Advantages of Benchmarking: Implements creative ideas Increased competitions Developing improvement Identifies essential activities Quality of work Increased performance

45. Disadvantages of Benchmarking Stabilized standards Insufficient information Decreased results Lack of customer satisfaction Lack of understanding Increased dependency

46. Eurocurrency market  A Eurocurrency market is a currency market that runs banking services by using foreign currencies set outside of the national market.

47. WHAT IS EURO CURRENCY? Euro Currency- Any currency banked outside its country of origin. Currency deposited by national governments or corporations in banks outside their home market. This applies to any currency and to banks in any country. Example - US dollar banked in England is know as euro currency. Euro bank- Banks that accepts deposits and make loans in foreign countries Example - Euro Currency Bank at Frankfurt franc.

48. Definition of 'Eurocurrency „ Currency deposited by national governments or corporations in banks outside their home market. This applies to any currency and to banks in any country. For example, South Korean won deposited at a bank in South Africa, is considered Eurocurrency. Also known as "euro money."

49. EURO CURRENCY MARKETS The international currency markets, also known as offshore markets where currencies are borrowed and lent . Dollar deposits outside USA or sterling deposits outside UK are called offshore funds and have a market, so long as they are convertible and readily usable in international transactions.

50. Eurocurrency Market' The money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent by banks in Europe. The Eurocurrency market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, tax laws and interest rate caps that are often present in domestic banking, particularly in the United States.

51.   Eurocurrency Market Eurocurrency Market—is the deposit and loan market for foreign currencies. Banks that accept deposits and make loans in the Eurocurrency market are called Euro banks. The term Eurocurrency or Euro bank is a misnomer since it refers to offshore banking and is not limited to Europe

52. The following factors led to its growth 1. Flow of US Aid 2. Cold War 3. Decline in the Importance of Sterling 4.Regulation-Q 5. Other US Measures 6. BOP Deficits in US 7. Petro-dollars 8. Innovative Banking

53. Features of Euro-Currency Market International Market Independent Market Wholesale Market Competitive Market Short-Term Market Inter-Bank Market:

54. Functioning of Euro Currency Market: The Euro-currency market is very extensive and complex. It is a means of transferring short-term and medium-term funds from one country to another. Euro-currency deposits and loans expand whenever funds flow into the Euro-banks as deposits from ( i ) commercial banks or residents of the United States (ii) transfers by commercial banks or residents of other countries (iii) central banks, either directly or through the Bank for International Settlements.

55. Role of Euro Currency Market in International Financial System: Investing and borrowing US dollars is the core function of the Euro-currency market. It transfers short and medium terms funds throughout the world, thereby increasing international capital mobility. The Euro-currency market attracts funds because it offers higher interest rates, greater flexibility of maturities, and a wider range of investment qualities than other short-term capital markets. It is competitive in the interest rates it charges and receives, both because of the economies of scale afforded by concentrating on wholesale transactions, and because the Euro-banks are not subject to the regulations which tend to raise costs in domestic banking. Commercial banks, central banks, government treasuries, international banks like the Bank of International Settlement, and multinational corporations are the borrowers and lenders in the Euro-currency market.

56. Euro-Dollar Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins. The term was originally coined for U.S. dollars in European banks, but it expanded over the years. Definition :US currency or funds held in banks outside the US in Europe or anywhere else. Eurodollars are used commonly for settling international transactions.

57. Euro-Dollar Market: Euro-dollar market is the creation of the international bankers. It is simply a short-term money market facilitating banks’ borrowings and lendings of U.S. dollars. In short, the term Euro-dollar is used as a common term to include the external markets in all the major convertible currencies. Euro-dollar operations are unique in character, since the transactions in each currency are made outside the country where that currency originates. The Euro-dollar market attracts funds by offering high rates of interest, greater flexibility of maturities and a wider range of investment qualities

58. Euro-dollar market has the following characteristics 1.It has emerged as a truly international short­-term money market. 2. It is unofficial but profound. 3. It is free. 4. It is competitive. 5. It is a more flexible capital market.

59. The Euro-dollar market has two facts: ( i ) It is a market which accepts dollar deposits from the non-banking public and gives credit in dollars to the needy non-banking public. (ii) It is an inter-bank market in which the commercial banks can adjust their foreign currency position through inter-bank lending and borrowing.

60. Benefits of the Euro-Dollar Market: . It has provided a truly international short-term capital market, owing to a high degree of mobility of the Euro-dollars. 2. Euro-dollars are useful for the financing of foreign trade. 3. It has enabled the financial institutions to have greater flexibility in adjusting their cash and liquidity positions. 4. It has enabled importers and exporters to borrow dollars for financing trade, at cheaper rates than otherwise obtainable. 5. It has helped in reducing the profit margins between deposit rates and lending rates. 6. It has enhanced the quantum of funds available for arbitrage. 7. It has enabled monetary authorities with inadequate reserves to increase their reserves by borrowing Euro-dollar deposits. 8. It has enlarged the facilities available for short-­term investment. 9. It has caused the levels of national interest rates more akin to international influences.

61. Shortcomings of the Euro-Dollar Market 1. It may lead banks and business firms to over­trade. 2. It may weaken discipline within the banking communities. 3. It involves a grave danger of sudden large- scale withdrawal of credits to a country. 4. It has rendered official monetary policies less effective for the countries involved.

62. Euro Deposit A euro deposit is a deposit of foreign funds into a bank that operates within the European banking system. These banks function on the consolidated European currency—the euro. When an external investor deposits foreign currency into one of these banks, they are effectively depositing in Euro Key Points: Euro deposits are funds deposited in a European account. These deposits allow foreign citizens to invest in euro, collecting on the interest rate set by the European Central Bank (ECB). Rates offered by the ECB for reserves have been negative since 2014. Big banks have started charging customers for euro deposits as a way to pass along the cost

63. Euro credit Euro credit refers to a loan whose denominated currency is not the lending bank's national currency. The concept is closely linked to that of euro currency, which is any currency held or traded outside its country of issue Key points: Euro credit refers generally to a loan that is denominated in a currency different from the lender's national money. The most common type of euro credit is the euro dollar, dollar-denominated deposits or loans held by non-U.S. banks. Euro credit refers not only to European banks, but also to any situation where the lending currency differs from the home currency