International Financial Management P G Apte

1. CHAPTER - 1 Financial Management in a Global Context International Financial Management P G Apte

2. 1.1 Why Study International Finance • In today's world finance cannot be anything but international • Enormous growth in the volume of international trade • Cross border capital flows and, in particular, direct investment have also grown enormously

3. 1.1 Why Study International Finance (contd.) • Veritable revolution has been taking place in the money and capital markets around the world • Liberalization, integration and innovation have created a giant international financial market which is extremely dynamic and complex

4. 1.1 Why Study International Finance (contd.) • Multilateral negotiations regarding phased removal of trade barriers have made considerable progress and WTO had emerged as a meaningful platform • Post war, World trade has grown faster than World GDP • Almost all countries getting integrated with the global economy

5. 1.1 Why Study International Finance (contd.) • Indian economy needs substantial amounts of foreign capital to augment domestic savings • Technology up-gradation in India will require continuing import of foreign technology, hardware and software • India’s increasing recourse to commercial borrowings and direct and portfolio investments by nonresidents

6. 1.1 Why Study International Finance (contd.) • The efforts of Indian companies to diversify into exports of engineering equipment and turnkey projects will have to be supported by the ability to offer long term financing to buyers • A number of companies particularly in the Indian IT sector have begun venturing abroad for strategic reasons either as partners in joint ventures or by establishing foreign subsidiaries

7. 1.1 Why Study International Finance (contd.) • India's growing dependence on international financial markets • Debt • Equity • FII investment • Indian companies have also been venturing abroad for setting up joint ventures and wholly owned subsidiaries

8. 1.1 Why Study International Finance (contd.) • For those who are willing to master its complexities the global financial market provides endless opportunities for creative financial management; for the unwary, it is a minefield • Finance managers must come to grips with with the conceptual foundations and practical issues of instruments and markets

9. The Finance Function • The finance function in a firm can be conveniently divided into two sub-functions viz.accounting and controlandtreasury management • Decisions taken by the treasurer have implications for the controller and vice versa

10. The Finance Function

11. The Emerging Challenges • To keep up-to-date with significant environmental changes and analyze their implications for the firm. • To understand and analyze the complex interrelationships between relevant environmental variables and corporate responses - own and competitive - to the changes in them. • To be able to adapt the finance function to significant changes in the firm's own strategic posture. • To take in stride past failures and mistakes to minimize their adverse impact. • To design and implement effective solutions to take advantage of the opportunities offered by the markets and advances in financial theory.

12. GLOBALIZATION – On or Off? Economic "globalization" refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders. The term sometimes also refers to the movement of people (labor) and knowledge (technology) across international borders. The term "globalization" began to be used more commonly in the 1980s, reflecting technological advances that made it easier and quicker to complete international transactions—both trade and financial flows.

13. There are countless indicators that illustrate how goods, capital, and people, have become more globalized. • The value of trade (goods and services) as a percentage of world GDP increased from 42.1 percent in 1980 to 62.1 percent in 2007. Foreign direct investment increased from 6.5 percent of world GDP in 1980 to 31.8 percent in 2006. The stock of international claims (primarily bank loans), as a percentage of world GDP, increased from roughly 10 percent in 1980 to 48 percent in 2006. All these trends have continued beyond 2006 but some reversal is predicted after the current crisis and economic slowdown • The number of foreign workers has increased from 78 million people (2.4 percent of the world population) in 1965 to 191 million people (3.0 percent of the world population) in 2005.

18. FOREX MARKET TURNOVER (NET) DAILY AVERAGE, APRIL 2007 (US$ BILLION) TOTAL 3988 SPOT 1305 OUTRIGHT FORWARDS 433 SWAPS 2250 US$ vs. OTHERS 2660.262 EURO vs. OTHERS 1139.406 JPY vs. OTHERS 509.731 GBP vs. OTHERS 460.779 CHF vs. OTHERS 208.790

19. FOREX MARKET DAILY TURNOVER

20. According to David Krutz from the Financial Times website : "The foreign exchange market will have doubled in size in just three years next year, thanks to increased participation by fund managers and pension funds". TowerGroup, a financial services research consultancy, said it expected total global average daily volumes on the FX market to exceed $3,000bn in 2007. It has happened. FX volumes, which rose from $1,770bn in 2004 to $2,000bn in 2005, were set to rise to $2,600bn in 2006 and $3,600bn for 2007 and $5000 billion by 2010.

21. experienced the sharpest percentage falls.

22. per cent over the year.

23. * India’s net international liabilities increased by US $8.06 billion between end-March 2008 and end-March 2009, as the decline in international assets (US $ 35.64 billion) exceeded the decrease in international liabilities (US $27.58 billion). * The decline in international assets was mainly on account of decrease in portfolio investments, both equity (about 0.7 billion), debt securities (about $67 million) and loans (a little over $5 billion). * On the other hand, the decrease in international liabilities was mainly on account of the decrease in portfolio investment (equity securities) amounting to over US $35 billion

24. Gramm-Leach-Bliley Act • Summary of Provisions • TITLE I -- FACILITATING AFFILIATION AMONG BANKS, SECURITIES FIRMS, AND INSURANCE COMPANIES • ·Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act. • Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities. Activities that are "complementary" to financial activities also are authorized. The nonfinancial activities of firms predominantly engaged in financial activities (at least 85% financial) are grandfathered for at least 10 years, with a possibility for a five year extension.