international fin mgt
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S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
International Fin Mgt
A Brief Introduction
Sep 2009
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IFM - framework
A. Fin environment
Overview
International Monetary system
International FIs and Dev Banks
BOPs
B. Forex Markets
Derivatives
Forex Currency futures and options
Forex markets
Forex Rate theories
C. Forex exposure mgt
Mgt of Forex risk
Translation exposure and
Transaction exposure
D. Fin mgt of MNC firm
FDI
WACC and Cap structure of an MNC MNC Capital budgeting / Cash Mgt / Taxation
Country Risk Mgt
E. Financing foreign operations
Eurocurrency markets
Interest rate and currency swaps
Depository receipts
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Why IFM
1. Why IFM
a. World is inter-dependent (Resources are scattered Goods, labour and Capital)b. Globe is getting more inter-connected thru Tech improvements (Telecom, Web)
c. Finance flows @ the speed of nanoseconds now.
2. Empirically Global barriers are shrinking and global trade is growing
a. In 2002 - 6.4 Trillion
b. In 2008 - 15 Trillion
1. Emerging economies are growing ther GDP and trade faster than Developed ones
2. For eg
1. 2007 - Emerging - GDP gr - 7.5% : Trade Gr : 10.5%
2. - Developed - GDP Gr - 2.5% : Trade Gr : 5.3%
3. 1991 : Watershed yr For India. Liberalization and Globalizationa. Easing of Quantitative Restrictions (Trade, labour and Capital)
b. Lowering of Import Duties
c. Foreign Investments on the rise controls lowered
d. Current A/c convertibility
e. Trend towards gradual lowering of Cap a/c convertibility provisos
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Global trade Stats (figs in Bil $)
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$ Billion
Particulars 1999 2004 2006
Total Debt 96.88 125.18
L/T Debt 92.61 116.39
S/T Debt 4.27 8.79
Cumulative FII investment in Stock Mkts 30.3
Total Mkt Cap 383.6
FII Invt as a % of Mkt Cap 7.9%
Cumul Mkt T/O Apr-Dec 04 83.13
Purch by FII Apr - Dec 04 31.17
FII purch/Mkt T/O 37.5%
Sales by FII's 24.02
FII Sales as a % of Mkt TO 28.9%
FII ownership in Indian co 50.0%
Capital flow Some stats - India (Billion $)
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Capital Flows some more info
1. Since 1992, no of GDR issues > 50 with Value of > $ 50 billion are listed overseas
2. Over 10 convertible bonds totalling to more than $ 1 billion listed overseas
3. Many IT companies have gone in for ADR issues.
4. Many Investment banks from OECD countries have become active in India
5. Many IT companies have invested over $ 5 billion abroad.
6. The above amounts are insignificant by global standards. But are bound to grow
7. The IFM course will deal with the Treasurers more than the controllers function
8. Treasury Function Acquisition and allocation of Fin resources
To maximize rewards and
Minimize costs
Consistent with the level of fin risk acceptable to the firm
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Setbacks
East Asian crisis 97-98
Doubts about capital a/c convertibility started surfacing
Benefits of unfettered capital flows were overestimated and
The damage an enormous outflow of S/T money can cause has beenunderestimated
Consensus on addl safeguards and checks but not much on the form it needs totake
By 99 some semblance of recovery started and al forgotten soon
Financial meltdown 2008
Sub prime the ostensible cause.
Toxic assets (CDS s etc.) were the other manifestation
Real causes were consumption and savings imbalances between the advancedeconomies and the Asian tigers
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International flows Status now
Still, With growth in trade, labour movements, capital also has started flowing freely
Hence, the emergence of Multinational corporations
Some studies predict the possibility of 500 of them owning 2/3rd of world FA in 10 yrs
FDI flows, for eg. have grown in India
Following factors have made IFM an indispensable tool esp for Global corps A. Growth in internationals savings and reserves
B. An ever expanding and an elaborate network of global banks and FIs
C. Various forms of Fin instruments, guarantees and insurance products
D. Innovative Risk mgt products and processes
E. Emergence of sophisticated payments systems
F. Efficient mechanisms for dealing with S/Term imbalances
For an IF Manager the following are the variety of choices before them Funding techniques
Investment Vehicles
Risk Mgt products
Speculative opportunities based on risk-reward profiles
Hence, for those willing to learn the complexities, there are opportunities
for others, there is a minefield
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Inflows
A. 2 categories
1. FDI : Invt in real assets or in cos in the host country
2. Portfolio flows : Invt in financial assets of a host country
B. Economic benefits of FDI
1. Prod of goods/serv in locations of comp advantage
2. Enhancement of labour productivity in the host country
3. Adoption of new technology & Mgt techniques to optimally utilize resources
4. Helps raise the level of competition, provides new/improved products
C. International biz methods
Licensing : Typically to use IPR-related
Franchisee : To Permit the use of brands /Logo etc.
JV : P/sip jointly owned/operated by 2 or more firms
Subsidiaries: New operation in the host country by parent corp. Mgt contract: one firm owning and another Managing (eg. Magunta Oberoi)
D. Tactical Issues
1. Licensing involves lower risks but inflexible and host dependent
2. Subsidiary is preferred to JV. JVs over Licensing
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Role of MNC firm
A. To maximize shareholder wealth / satisfice stakeholder interests
B. Whichever of the above 2 win eventually, the MNC still has to grapple with theenvironment it operates in. Environment consists of
1. International Fin system. Official
and others MNC banks and OTC deals/ cap markets
2. Forex market : MNC banks, Forex dealers. 24 hr operation
3. Host country environment : Political, social, cultural and other systems
C. MNC faces myriad of Complexities and challenges wrt ;
Multiple Taxation laws
Multiple currencies
Multiple and differential policy frameworks
Multiple political Systems
Agency problem. : Stands for conflict of goals between MNC shareholders and managers of the subsidiaries.
D. But an MNC can make the same diversity & complexity work in its favor
eg. Geo Diversification
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as
as
Objectives
Sales Expansion
Supply source acquisition
DiversificationInvestment Optimization
Influences : Ext enviornment
Geograhic
Historical
PoliticalLegal
Economic
Cultural
Operational
Import & Export
Transport
LicensingFranchising
Mgt Contact
Turnkey
FDI
Portfolio Invt
Means
Functional
Production
MarketingAccounting
Finance
Personnel
Competitive environment
Speed of Product Changes
Optimum Production site
No of customersAmount bought by each customer
Homogeneity of customers
Local Vs International competitors
Cost of moving products
Unique capabilities of competitors
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MNC Vs Local Firm Cost Benefit matrix
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
1 2 3 4 5 6 7 8
M NC Ret
Loca l Re t
M NC W A CLoc al W A
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IFM as a Discipline
A.
1. Till early 90s, IFM as a separate discipline was not much in demand as a specialization
2. Things have changed since then.
3. Indias share of Total Global trade may not be significant and is in fact declining
4. While tariff barriers and quotas are being dismantled. Still they are high
B. Yet, it is nave to conclude from above that the Developments in Intt. Fin are of littleinterest to us
1. To maintain tempo of eco growth, India needs substantial FDI to augumentdomestic savings
2. Tech up gradation needs continuing import of technology3. Indian export initiatives need L/T financing to buyers abroad
4. Indian IT sector is beginning to venture abroad. For both organic/ Inorganic gr.Needs Finance
5. Policy stance is in favor of more openness and greater competition
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Emerging Challenges For IF Managers
1. The 80/s 90s were marked by unprecedented pace of environ changes as below
Political uncertainties at Home and abroad
Economic Liberalization at home
Greater Exposure to international markets
Increase in volatility of key economic & financial variables like Exchange /Interest rates
Increased competition with increased threats of take over
Globalisation has increased the frustrations for Emerging economies due to the challenges
But have also offered many opportunities to benefit from. Look at china for eg
2. 21st century is marked by even greater changes in the environment
WTO deadlines wrt removal of trade barriers likely to lead to even greater competition
Capital A/C convertibility of the rupee leading to even greater capital flows and challenges
Ceilings on FII and FDI Investments being revised upwards
Indian Rupee Appreciated from 2004 till 2007, squeezing the margins of exporters
To sum up, integration of India with the global economy is likely to accelerate
Hence, exposure for Indian Corporates to global Financial Markets is likely to increase
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Fin Mgrs to do
1. To Be updated with environmental changes
Exch / Intt rates,
fiscal,monetary developments,
Industrial, tax, Exim policies,
Fin mkt trends
New fin instruments, their Risk-reward implications
2. To understand and analyze the complex r/ships between environ variables and corp Fin Ext
Eg Stock market crash on credit conditions in intl markets
Implications on our global funding prospects of default by a debtor country
3. Adoption of Fin function to Changes in firms own strategic postures - Internal
Changes in product market mix
New M&A opportunity
4. To address the consequences of past decisions
A major take over decision that has gone awry
5. To leverage opportunities offered by the environment
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IFB - framework
A. Fin environment
Overview
International Monetary system
International FIs and Dev Banks
BOPs
B. Forex Markets
Derivatives
Forex Currency futures and options
Forex markets
Forex Rate theories
C. Forex exposure mgt
Mgt of Forex risk
Translation exposure and
Transaction exposure
D. Fin mgt of MNC firm
FDI
WACC and Cap structure of an MNC MNC Capital budgeting / Cash Mgt / Taxation
Country Risk Mgt
E. Financing foreign operations
Eurocurrency markets
Interest rate and currency swaps
Depository receipts
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International Monetary System
A. Gold standard (1875 1914) Each country to peg currency to an ounce of gold.
Free import and export of Gold
Two way convertibility between currencies and gold
B. Example for US $ and $ 20.67 / ounce of gold and 4.247 / ounce of Gold
(20.67 / 4.247) = $ 4.866 / unit of
C. Gold Import / export Points (a Hypothetical example) Assumptions
1 ounce of gold = 20 $ / 4 (ie 5$ / ) Shipping Cost = 0.20 $/ounce US importer imports worth 4 / US exporter exports worth 4 US importer cam pay 1 ounce Gold or 4 : US exporter ok to accept 4 / 1 ounce gold
Workings : If Exchange Rate has moved to (say) 5.1 $ / unit of Either the US importer can pay 4 paying $ 20.40 to get the same (rate 5.1/ ) or Ship 1 ounce gold : Cost of Gold + shipping cost = $ (20 +0.20) = $ 20.20 This is Called the Gold Export Point
Thus, If the Rate exceeds $ 5.05 / , the US importer would rather export Gold than pay
Workings : If Exchange Rate is (say) 4.90 $ / unit of Either the US exporter can get 4 or $ 19.60 (since Rate is 4.9) now or Accept 1 ounce gold : Cost of Gold - shipping cost = $ (20 - 0.20) = $ 19.80 This is called the Gold Import Point
Thus, if the Exch rate moves < 4.95$ , US Exporter would rather accept Gold into US than 4
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A. Gold Standard Equilibrium maintained thru Price-Specie Flow mechanism
B. Price Specie Flow Mechanism
Assume a country experiences Trade deficit (Imports more thane exports)
Currency loses competitiveness
Exchange rate reaches Gold Export Point. Thus, Gold gets exported
Results in loss of Gold reserves
Thus money supply to be downsized
Accompanied by high intt rates, lower Prod /employment, lower demand for Cons/ Import
With reduced imports, Trade balance improves / with high intt rates, Fund inflows improve
Hence, Exchange rate appreciates
C.
Assume a country experiences Trade Surplus (Exports more than Imports)
Currency gains competitiveness
Exchange rate reaches Gold import Point. Thus, Gold flows into the country
Results in increase in Gold reserves Thus money supply increases
Accompanied by Low intt rates, higher prod, employment, higher demand for Cons/ Import
With higher imports, trade balance suffers / with lower intt rates, Fund outflows increase
Hence, Exchange rate depreciates
International Monetary System
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Gold standard : Why abandoned
1. The 3 Golden rules of Gold Standard were highly restrictive
(A) Rate peg (B) Free Export / Import of Gold (C) Currency stock = F (Gold reserves)
2. Gold being scarce, Gold volume could not grow fast enough to cope with Eco Gr
3. Gold reserves were with countries politically sensitive (eg. Russia, South Africa)
4. Nations had to subordinate their National Eco goals to the dictates of Global trade.
5. This proved to be unrealistic, given the political costs of such a presumption
Many developing countries faced External trade imbalances during this time
Instead of having the courage to face unemployment at home, countries resorted to Tariffs
This affected the international trade
6. Hence, the system was eventually abandoned
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Bretton woods.
1. Creation of 2 new institutions IMF and world bank
2. IMF for addressing balance of payments problems.
3. World bank to address for post war reconstruction and General Eco Development
4. US $ and became the reserve currencies
5. Each member would establish a par value with the reserve currency
6. And maintain it within 1% of the par value. intervene else. Ie Fixed peg with
7. US $ was pegged to 35 $/ oz Gold. US agreed to exchange $ for gold/ vice versa
8. Member could change par value with Fund approval /fundamental disequilibrium
9. Currencies became freely convertible.
10. To defend, countries had to keep a lot of dollar reserves and US, Gold reserves
11. Member countries to make subscription to the fund
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Break down of Bretton woods
1. 1947 71 ; Stable. World Trade expanded faster than world output
2. There was imbalance. Countries with deficits had to undergo conditionalities
3. Countries with surplus treated favorably, though persistent surplus was inflationary
(Contrast with approach to Chinese surplus now)
4. Esp rigid was the approach to BOP disequilibria .
5. Conditionalities were stringent
6. Low levels of conditionalies where member needs funds only for a short period
7. Higher levels, where member wants a larger access to funds resources
8. Involved stabilization programs to achieve IMF objectives .
9. Led to interference in their independent Monetary and fiscal policy pursuits
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Smithsonian Agreement
1. 1971 : Post Vietnam war, Dollar started weakening and
2. Various countries started becoming more protectionist
3. Hence, Worlds leading 10 countries, produced smithsonian agreement
4. US $ was still defined in terms of Gold and all other currencies in terms of $/gold
5. Band around $/gold was 2.25% on either direction (4.5% total)
6. Band across currencies could be as high as 9%
7. This band was more than permitted under earlier dispensation (1%)
8. Had the flexibility of a floating system while retaining the discipline of fixed rates
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Flexible rates 1973 to now
1. Since 1973, it is the flexible Each rate system that is being practized
2. Variations thereof are being practiced as below
3. Crawling Peg
Infrequent adjustment of IMF par value needed larger devaluation of larger rate
Crawling peg tried to change incrementally by small amounts, continuously
As little as 0.5% pm. To reduce speculative profits vide massive delay Countries had to maintain ample reserves for prolonged incremental
adjustments
4. Wider Band : over and above the 1% band permitted by IMF
Snake in the Tunnel by European countries
Their currencies values were fixed to one another with a band of 2.25% With $, an important currency not in the loop, the system faultered
Under inflationary conditions, the rate slipped faster, hit the floor
Thereafter, had to suffer the consequences of a fixed rate system.
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Fixed Vs flexible : An evaluation
Fixed Rates :
Certainty & rigidity promote Eco efficiency, public confidence and Inflation control Downsides : Work well in periods of stability. Massive O/F during crises. FM closes
Floating rates
System causes uncertainty. Promotes speculation instead of trade
Fixed rate system also encourages speculation, once upper band was reached. The bets were one-way with no loss since parity was to be restored
Conclusion : Fixed rate system suffered from all that flexible systems had &more
Systems in vogue now :
Flexible ones : like US $, Japanese Yen. But Interventions are a reality Pegged Systems : To a base like US $. : Countries need to defend with Res
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EMU and Euro
A. There are two categories of limited Flexibility
Gulf countries whose currencies are pegged to the $
European countries whose values were arranged around Europeancurrency unit (now Euro)
Mechanism (Initial) : Snake in the tunnel
Snake : 1.125% band for EEC countries Exch. rates
Tunnel : 2.25% for other countries rates
B. EMU
To form a zone of monetary stability in Europe
To coordinate Exchange rate policies vis--vis non-EMS currencies To develop a European Common currency unit (ECU Euro)
European Monetary cooperation fund (EMCF)
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EMU and Euro
C. Exchange rate Mechanism
Managed thru a Parity grid mechanism
Bilateral exch rates amongst membercurrencies
Float allowed around 2.25% of the parvalue
Each ER has a par value a max & a minrate
Divergence invites action
Bilateral Resp foe ER maintenance
Reserves needed to maintain ER
For irretrievable divergence, realignment
The responsibility with both
countries as against one under IMF EMCF (Com fund) : ST and M/T cr to
member countries and
SGL banker to bilateral assistance
FF BF SF SK DM DG
FF X 1.0 2.0 3.0 4.0 5.0
BF 1.0 X 1.5 2.5 3.5 4.5
SF 0.5 0.7 X 1.3 2.3 3.3
SK 0.3 0.4 0.8 X 1.8 2.8
DM 0.3 0.3 0.4 0.6 X 1.8
DG 0.2 0.2 0.3 0.4 0.6 X
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Global financial Institutions
Sl no Particulars IBRD IDA IFC
1 Purpose To Help war ravagedeconomies thru Tech and
Fin help
Same as for IBRD(Aid instead of
loan)
To promote eco dev inDeveloping nations by
assisting pvt sector
2 Target Customers Govt / Govt agencies / Pvtsector that can get a
Govt guarantee
Governments Pvt sector / Govtorganizations that help
Pvt enterprises
3 Nature of Assistance Loan Concessional Aid Loan
4 Type of countries All Developing other than thePoorest Poor countires All developing countries fromthe poorest to the moreadvanced
5 Tenor 15 - 20 yrs 50 yrs 7 - 12 yrs
6 Grace period 3 - 5 yrs 10 yrs 3 yrs
7 Pricing @ 10% 0% Mkt linked
8 Govt Guarantee Yes Yes No
9 Method of raisingFinance
Borrowings, Capital Markets Grants from worldGovt's
Borrowings and Capital,subscribed by members
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World Bank
1. Objectives
Assist the rehabilitation of economies disrupted by war Promote flow of Foreign pvt capital thru guarantees, provide Own funds
Promote L/T Balanced growth of Global trade and
BOP equilibrium thru LT Invt (FDI) flows
To make the transition to peacetime from war time smoother
3. Composition Membership is a function of countrys eco might
G7 have nearly 45% share and voting rights (USA 17%)
Change in Capital base/AOA need 85% votes (USA veto)
All other matters incl loan approvals need simple majority
Exec Board is in Washington DC
By and large Coop in spirit. Voting has been rare.
2. Affiliates IBRD, IDA, MIGA
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World Bank
4. How Does it assist Bank uses its Fin resources, Knowledge Base and Network
Emphasizes on
Social (People) development (Health, Education etc.) and inclusion
Environment protection
Encouraging Private sector Invts/ initiatives
Goading Govts towards reform and efficient delivery of public services
Institution building and Governance
5. Affiliates IBRD, IDA, MIGA (for Country-risk mitigation)
6. Borrowings thru AAA-rated bonds issued in global cap mkts To Banks, Pension funds, Insurance cos, other Corporations
Very conservatively managed. No defaults of either IBRD / IDA loans so far
7. Reforms Program The tougher part of IBRD assistance. Calls for politically harsh decisions
Poor donot suffer. Eg. Conditions include safety nets. L/T-Reforms Help poor
Covenants for Adv countries too : Eg. Efforts to reduce US deficits
IBRD
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IBRD
1. Loans are to Govt for Infra projects generally (multiplier effect)
2. Members : 151
3. Sources : Subscription, Cap mkt borrowings, Retained earnings
4. Focus : Emerging economies
5. Tenors : Longer (15 = 5 +10)
6. Nature of Assistance : Loans / Guarantees for Pvt sector loans
7. Obligations of assisted Governments Development of Industrial zones that facilitate free trade
Polices that Promote of exports and Forex earnings
Provision of Backward Linkages
Improving institutions that promote trade facilitative zones
Emphasis on Environmental / Womens empowerment / child labor issues
IDA
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IDA
1. Aids to Developing countries (LDCs) for Infra, typically
2. Members : 137
3. Sources : Subscription by Rich members, Retained earnings
4. Focus : Poorer nations amongst LDCs (Per apita < $ 480)
5. Tenors : Extremely Long ( 50 = 10 + 40)
6. Nature of Assistance : Cheaper Loans
7. Admin : Same staff as IBRD. Focus Countries - different
7. Obligations of assisted Governments Inclusive growth
Emphasis on Environmental / Womens empowerment / child labor issues
Conditionalities (Structural )
IFC
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IFC
1. Target :Private sector in developing countries
2. Members : 133
3. Sources : Member subscription, Retained earnings
4. Tenors : Long ( 15 = 5 + 10)
5. Nature of Assistance
Providing Risk capital to Tgts : Equity and LT loans
Encouraging local Cap mkts : Eg U/writing
Providing Tech and Fin assistance
6. Assistance covers a spectrum of industries
IMF
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IMF
1. Commences operations in 1947
2. Membership is 182 countries (Initial m/ship 39)
3. Total Member quotas - $ 300 Billion (Member shares are a constant)
4. Participation voluntary
5. Currency unit - SDR ( = $ 1.3703)
6. Members came together to enjoy the advantages of a stable system of exch rates
7. Lends to Support Exchange rate stabilization, s/to members u/taking Structural adj
8. Has withstood the test of time & facilitated increased volumes of Global Trade/Invt
IMF
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IMF
1. Roles Exchange rate stability, Global trade promotion, Payment facilitation
2. Activity ER Surveillance (Bilateral and multilateral), Tech assistance, Fin assistance
3. Nature of Fin assistance 3 major ones A. Standby Arrangements
For S/T BOP deficits of a cyclical nature
Tenor upto 18 mths. Drawings periodic and conditional cascade of tranche release Purchase of member country currency/sale of another to support its parity Repurchase after 4-5 yrs
B. Extended Arrangements For Medium Term Structural BOP problems Purchase based support. Repurchase max 10 yrs
C. Structural Adjustment facility Loans not purchases for typically LDCs. Drawals semi annual Designed to address L/T structural imbalances in BOP situation Easier terms. 0.5% Intt. 10 yr Tenor. 1st Semi-annual repayment 5.5 yrs
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Asian Development Bank
1. Strategic Objectives Assist Small and less developed countries of the region
Economic Growth across sectors
Poverty reduction
Human development
Gender Development
Environmental Development
2. Composition Membership open to Countries in the Asia Pacific Region
Two largest share holders US and Japan with 16% each
3. Evaluations
Country and project evaluation Project effectiveness (Viability, Impact, implementability, sustainability)
operational evaluation (project completion evaluation etc)
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Balance of Payment Accounting
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No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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No Transaction Normal A/ctng BOP A/ctng Books of country A
Debit Credit
1 Res Exports worth $1,000 agt Bills
2 Exporter discountsbill with ResBank
3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50
4 A Imports of $ 800from B. Paidthru loan fromAs Bank
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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No Transaction Normal A/ctng BOP A/ctng Books of country A
Debit Credit
1 Res Exports worth $1,000 agt Bills
B/ Recbl Dr 1,000
Sales - exports Cr 1,000
2 Exporter discountsbill with ResBank
3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50
4 A Imports of $ 800from B. Paidthru loan fromAs Bank
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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No Transaction Normal A/ctng BOP A/ctng Books of country A
Debit Credit
1 Res Exports worth $1,000 agt Bills
B/ Recbl Dr 1,000 S/T foreignAssets- BR
1,000
Sales - exports Cr 1,000 Export 1,000
2 Exporter discountsbill with ResBank
3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50
4 A Imports of $ 800from B. Paidthru loan fromAs Bank
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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No Transaction Normal A/ctng BOP A/ctng Books of country A
Debit Credit
1 Res Exports worth $1,000 agt Bills
B/ Recbl Dr 1,000 S/T foreignAssets- BR
1,000
Sales - exports Cr 1,000 Export 1,000
2 Exporter discountsbill with ResBank
Cash Dr 1,000
B/ Recbl Cr 1,000
3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50
4 A Imports of $ 800from B. Paidthru loan fromAs Bank
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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No Transaction Normal A/ctng BOP A/ctng Books of country A
Debit Credit
1 Res Exports worth $1,000 agt Bills
B/ Recbl Dr 1,000 S/T foreignAssets- BR
1,000
Sales - exports Cr 1,000 Export 1,000
2 Exporter discountsbill with ResBank
Cash Dr 1,000
B/ Recbl Cr 1,000
3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50
Cash Dr 50 S/T Forn Asst(Cash)
1,050
ST ForeignAsset (BR)
1,000
Intt Income Cr 50 Interest Income 50
4 A Imports of $ 800from B. Paid
thru loan fromAs Bank
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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No Transaction Normal A/ctng BOP A/ctng Books of country A
Debit Credit
1 Res Exports worth $1,000 agt Bills
B/ Recbl Dr 1,000 S/T foreignAssets- BR
1,000
Sales - exports Cr 1,000 Export 1,000
2 Exporter discountsbill with ResBank
Cash Dr 1,000
B/ Recbl Cr 1,000
3 On due Date, Bankgets funds FromCiti NY andkeeps fundstherein. Int $ 50
Cash Dr 50 S/T Forn Asst(Cash)
1,050
ST ForeignAsset (BR)
1,000
Intt Income Cr 50 Interest Income 50
4 A Imports of $ 800from B. Paid
thru loan fromAs Bank
Imports Dr 800 Imports 800
A Bank loan Cr 800 ST ForeignAsset 800
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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g g y
Debit Credit
1 Res Exports worth $1,000 agt Bills
B/ Recbl Dr 1,000 S/T foreignAssets- BR
1,000
Sales - exports Cr 1,000 Export 1,000
2 Exporter discountsbill with Res Bank
Cash Dr 1,000
B/ Recbl Cr 1,000
3 On due Date, Bankgets funds FromB bank & keepsfunds therein. Intt$ 50
Cash Dr 50 S/T Forn Asst(Cash)
1,050
ST ForeignAsset (BR)
1,000
Intt Income Cr 50 Interest Income 50
4 A Imports of $ 800from B. Paid thruloan from As
Bank
Imports Dr 800 Imports 800
A Bank loan Cr 800 ST Foreign
Asset
800
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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g g y
Debit Credit
5 Res (x) spends $ 5000during foreign travel,by buying equivalent
Bs currency in B
6 X finds $ 100 by chance
on the Road
7 Expat sends $ 100 to hisfamily in B TheFamily buys a $bond from A
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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g g y
Debit Credit
5 Res (x) spends $ 5000during foreign travel,by buying equivalent
Bs currency in B
Travel Dr 5,000 Travel 5,000
Cash Cr 5,000 ST Foreign Liab 5,000
6 X finds $ 100 by chanceon the Road
7 Expat sends $ 100 to hisfamily in B TheFamily buys a $bond from A
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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Debit Credit
5 Res (x) spends $ 5000during foreign travel,by buying equivalent
Bs currency in B
Travel Dr 5,000 Travel 5,000
Cash Cr 5,000 ST Foreign Liab 5,000
6 X finds $ 100 by chanceon the Road
Cash Dr 100 ST foreignassets
100
Misc Income 100 Transfers 100
7 Expat sends $ 100 to hisfamily in B TheFamily buys a $bond from A
No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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Debit Credit
5 Res (x) spends $ 5000during foreign travel,by buying equivalent
Bs currency in B
Travel Dr 5,000 Travel 5,000
Cash Cr 5,000 ST Foreign Liab 5,000
6 X finds $ 100 by chanceon the Road
Cash Dr 100 ST foreignassets
100
Misc Income 100 Transfers 100
7 Expat sends $ 100 to hisfamily in B TheFamily buys a $bond from A
Trfr Dr 100 Transfers 100
Bond Cr 100 LT Forn Liab 100
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Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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g g y
8 Biz man ships Eqptabroad to build
factory $ 50,000
F Assets Dr 50,000 LT Investments 50,000
Sales - exports 50,000 Exports 50,000
9 Addl Invt of $ 20,000paid thru bonds
10 Y makes a profit of $10,000 and uses itto Buy Back Bsbonds
11 A buys B's bondsback (50%)
Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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g g y
8 Biz man ships Eqptabroad to build
factory $ 50,000
F Assets Dr 50,000 LT Investments 50,000
Sales - exports 50,000 Exports 50,000
9 Addl Invt of $ 20,000paid thru bonds
F Assets Dr 20,000 LT Investments 20,000
Bonds payable 20,000 LT foreignLiabilities
20,000
10 Y makes a profit of $10,000 and uses itto Buy Back Bsbonds
11 A buys B's bondsback (50%)
Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
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g g y
8 Biz man ships Eqptabroad to build
factory $ 50,000
F Assets Dr 50,000 LT Investments 50,000
Sales - exports 50,000 Exports 50,000
9 Addl Invt of $ 20,000paid thru bonds
F Assets Dr 20,000 LT Investments 20,000
Bonds payable 20,000 LT foreignLiabilities
20,000
10 Y makes a profit of $10,000 and uses itto Buy Back Bsbonds
Bonds Dr 10,000 LT Foreign liab 10,000
Cash 10,000 ST Liabilities 10,000
11 A buys B's bondsback (50%)
Sl No Transaction Normal A/ctng BOP A/ctng Books of country
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g g y'A'
12 Z from B migrates tocountry A with
Property worth $
9000
13 Of the above, house
worth $ 8,000 soldfor 8000 (4000
now : 4000 Defd)
14 Gives $ 1000 back tothe church
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Sl No Transaction Normal A/ctng BOP A/ctng Books of country
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'A'
12 Z from B migrates tocountry A with
Property worth $
9000
ST For Assets 1,000
Assets 9,000 LT Investments 8,000
Misc receipts(trfr)
9,000 Transfers 9,000
13 Of the above, house
worth $ 8,000 soldfor 8000 (4000
now : 4000 Defd)
Cash 4,000 ST Foreign
Assets
4,000
A/Recbls 4,000 LT foreign Assets 4,000
F Assets 8,000 LT Investments 8,000
14 Gives $ 1000 back tothe church
Sl No Transaction Normal A/ctng BOP A/ctng Books of country
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'A'
12 Z from B migrates tocountry A with
Property worth $
9000
ST For Assets 1,000
Assets 9,000 LT Investments 8,000
Misc receipts(trfr)
9,000 Transfers 9,000
13 Of the above, house
worth $ 8,000 soldfor 8000 (4000
now : 4000 Defd)
Cash 4,000 ST Foreign
Assets
4,000
A/Recbls 4,000 LT foreign Assets 4,000
F Assets 8,000 LT Investments 8,000
14 Gives $ 1000 back tothe church
Gift Expense 1,000 Trfr Exps 1,000
Cash 1,000 ST Foreignassets
1,000
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,.Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
15 Gold imports into
'A' - $ 300000
16 Migrant inheritswealth of $
3,000
17 Gift of dressworth $ 200
sent to A
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,.Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
15 Gold imports into
'A' - $ 300000
Gold 200,000
Imports 300,000 Imports 100,000
Bank (Deposit) 300,000 ST Liab to forn 300,000
16 Migrant inheritswealth of $
3,000
17 Gift of dressworth $ 200
sent to A
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,.Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
15 Gold imports into
'A' - $ 300000
Gold 200,000
Imports 300,000 Imports 100,000
Bank (Deposit) 300,000 ST Liab to forn 300,000
16 Migrant inheritswealth of $
3,000
F Assets 2,000 LT Investments 2,000
Bank 1,000 ST Foreign Finassets
1,000
Misc Income Transfers 3,000
17 Gift of dress
worth $ 200sent to A
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,.Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
15 Gold imports into
'A' - $ 300000
Gold 200,000
Imports 300,000 Imports 100,000
Bank (Deposit) 300,000 ST Liab to forn 300,000
16 Migrant inheritswealth of $
3,000
F Assets 2,000 LT Investments 2,000
Bank 1,000 ST Foreign Finassets
1,000
Misc Income Transfers 3,000
17 Gift of dress
worth $ 200sent to A
Exports 200 Transfer gift 200
Cash 200 Export 200
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,.
Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
18 Farm sold for $ 2000.
This + 1000invested in Bonds
in 'B'
19 Gift to 'B' $ 600 in A'scurrency
,.
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,.
Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
18 Farm sold for $ 2000.
This + 1000invested in Bonds
in 'B'
Bonds Dr 3,000 ST FA 2,000
Assets Cr 2,000 LT Invst 2,000
Bank Cr 1,000
LT FA 3,000
STFA 3,000
19 Gift to 'B' $ 600 in A'scurrency
,.
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,.
Sl No Transaction Normal A/ctng BOP A/ctng Books of country 'A'
18 Farm sold for $ 2000.
This + 1000invested in Bonds
in 'B'
Bonds Dr 3,000 ST FA 2,000
Assets Cr 2,000 LT Invst 2,000
Bank Cr 1,000
LT FA 3,000
STFA 3,000
19 Gift ($600) to 'B' - $100 note + $ 500
of watch
Gift Exp Dr 600 Transfers 600
Cash Cr 100 ST Fin Liab. 100
Sales Cr 500 Exports 500
ST Foreign Assets Exports
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Exports (1) 1,000 ST Fin Asst(1)
1,000
Interest Income(3)
50 Trfr (14) 1,000 LT Invt (8) 50,000
Trfrs (6) 100 Trfrs (17) 200
ST For Ass(19)
500
LT FA (18 a) 3,000 Bal 51,700 51,700
LT Invt (13) 4,000
Transfers (12) 1,000 Imports (4) 800 Imports
Transfer (19) 0
LT Invst (18) 2,000
Trfr (16) 1,000 ST ForAssets(4)
800
9,150 4,800 ST For Liab(15)
100,000
100,800 Bal 100,800
LT Foreign Assets Trfrs
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LT Invt (13) 4,000 ST For Ass(14)
1,000
ST FA (18 a) 3,000 Exports (17) 200 STF Asset(6)
100
7,000 0 LT Forn Liab(7)
100
Gold ST FA + Exp(19)
600 ST + LT Invts(12)
9,000
ST For Liab(15)
200,000 LT Inv / ST As(16)
3,000
200,000 0 ST For Ass(19)
0
LT Direct Investment 1,900 12,100
Exports (8) 50,000 Services
LT For Liab (9) 20,000 ST/LTF Asset(13)
8,000 ST Forn Liab(5)
5,000 ST Foreign(3)
50
Transfers (12) 8,000 ST FA (18) 2,000 5,000 50
Transfers (16) 2,000
80,000 10,000
LT Liabilities
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ST forn Liab(11)
10,000 LT Dir Invt (9) 20,000
Transfers (7) 100 Cash
Notes Recbl(2)
1,000
10,000 20,100
ST Liabilities
Travel (5) 5,000 Notes Receivable
Imports (15) 100,000 Cash (2) 1,000
Gold (15) 200,000
LT Forn Liab(11)
10,000
Exp + Trfr (19) 100
0 315,100 1,000 1,000
BOP A/cs
Debit Credit
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Debit Credit
Exports 51,700
Imports 100,800
Net Trfs 10,200
Services 4,950
Cur Ac Balance 105,750 61,900 43,850
LT FA 7,000
LT Dir Invs 70,000
LT For Liab 10,100
LT Cap ac 77,000 10,100 66,900
ST For Liab 315,100Gold 200,000
ST Fin Assets 4,350
ST Cap Ac 204,350 315,100 (110,750)
Net Fin flows
0
Current AC Inflow Outflow
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Exports Merchandize Inflow
Services Inflow
Factor Income Inflow
Import Merchandize Outflow
Services Outflow
Factor Income Outflow
Nett UnilateralTrfr
Pvt Trfr Recevie Give
Official Trfr Recevie Give
Balance on Cur Ac
Capital Ac Receive Payment from
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Foreigner, Sell ForeignAssets / DomesticAssets to foreigners
Net Direct Investment Make Payment toforeigner, Sell
foreign Assets /domestic Assets to
foreigners
Portfolio Investment
Other Capital
Balance on Cap Ac
Statistical Discrepency
Overall balance
Official reserveAc
Indian official Reserve + Balance - Balance
Foreign Official Reserve + Balance - Balance Balance of Reserve + Balance - Balance
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Derivatives
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1. Value is derived from another underlying contract, reference or index
2. Recent developments have transformed them into a cheap & efficient means of
Hedging : Neutralizes risk by fixing the price in Adv. For eg. Price of $ = 47 Rs on 1.Dec 09 Arbitraging : Take adv of discrepancy in prices across markets.
Speculating : Take a directional bet. Thus contribute liquidity
3. Arrival of Floating Intt rate regime post 73, heralded the need for Risk mitigation mechanisms
4. Led to the development of Exchange traded Forex futures in Chicago
5. Computers expedited growth, since fast computing of complex derivative pricing became feasible
6. Three risks
Market : The Value of derivative changing, esp as expiry approaches
Basis : Hedge may not be a perfect match to the Risk one is exposed to
Counter Party risk : CP not paying up. Less than for Loans, for only diff is at stake
7. 4 products Forwards : Two-way negotiated agreement. OTC. Gen, when Exact date unknown
Futures : Exchange traded. Standard Contracts wrt Price, settlement date, contracts no.
Options : Right but not obligation to buy/sale. Option to Buy - call. Option to sell - Put
Swaps : 2-way Contr. to exchange 2 streams of payment for a period. Fix to float
Spot 45.000 Assumptions
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C a l l o p t i o
( 3 . 0 0 0 )
( 2 . 0 0 0 )
( 1 . 0 0 0 )
0 . 0 0 0
1 . 0 0 0
2 . 0 0 0
3 . 0 0 0
4 . 0 0 0
4 2 . 0 0 04 4 . 0 0 04 6 . 0 0 04 8 . 0 0 05 0 . 0 0 05 2 . 0 0 0
C a l l o p t i o
Re / $ ExchRate
Call optionpay-off
43.000 (2.500)
44.000 (2.500)
45.000 (2.500)
46.000 (1.500)
47.000 (0.500)
48.000 0.500
49.000 1.500
50.000 2.500
51.000 3.500
Strike 45.000 Put Strike 48.000
Call option price 2.500 Put option price 1.700
Spot 45.000 Assumptions
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( 2 . 0 0 0 )
( 1 . 0 0 0 )
0 . 0 0 0
1 . 0 0 0
2 . 0 0 0
3 . 0 0 0
4 . 0 0 0
4 2 . 0 0 04 4 . 0 0 04 6 . 0 0 04 8 . 0 0 05 0 . 0 0 05 2 . 0 0 0
P u t o p t i o n
Re / $ ExchRate
Put optionPay off
43.000 3.300
44.000 2.300
45.000 1.300
46.000 0.300
47.000 (0.700)
48.000 (1.700)
49.000 (1.700)
50.000 (1.700)
51.000 (1.700)
Strike 45.000 Put Strike 48.000
Call option price 2.500 Put option price 1.700
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Can change text around
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Mature
process
Ne
w
process
NewVendor
MatureVendor
New
Clie
nt
Mature
Clie
nt
R1
R4
R1
BSP
Scaling up:Smooth, fast, easier
Training / higher riskFocus on integration / migration
Long time / high risk
Training / high risk Building on ExistingRelationship
R2R3
R3
Level
high
low
R4
R3R2
R1
g
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Flexible system
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1. Dollar started losing its value due to Vietnam War .
US allowed free float of $ from 15 Aug 1971.
2. Smithsonian agreement - Devaluation of $ by 10.35%
3. 1973 Renewed $ crisis. Watergate, OPEC, Inflation
another 10% devaluation. Helped US trade
4. 1978 : Another crisis. OPEC, Inflation, Stock mkt plunge and $ suffered
5. Some drastic measures like Gold sale, $ buy and Hike in disc rates ensued
6. Thus alternately, major currencies suffered as below
Surplus - Appreciation, Mass reserves and loss of competitiveness
Deficit - Depreciation, Reserve Depletion and Lower consumption
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Decision Variables
Biz StakeholdersBiz Stakeholders
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Society
ShareHolders
Decision
Variable
Global /NationalPolity /
Global /NationalEconomy
Customers
Employeessuppliers
Regulators
Lenders
lysis
lysis
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Enviro & strat.analysis
Eco /Industryanalysis
Strategyanalysis
A/ctnganalysis
Prosp.Analysis
ProfitabilityAnalysis
Financialanalysis
RiskAnalysis
Cash flowanalysis
WACC Est. Intrinsic
value
BizAna
lys
BizAna
lys
com
pone
nts
com
pone
nts
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Timeline with movable breaks
For process flows etc.
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Circular flow
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Low
High
Low High
Take away text comes here
World Map
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high
R4
R3
Can change text around
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Mature
process
New
process
NewVendor
MatureVendor
New
Clie
nt
Mature
C
lient
R1
R4
R1
BSP
Scaling up:Smooth, fast, easier
Training / higher riskFocus on integration / migration
Long time / high risk
Training / high risk Building on ExistingRelationship
R2R3
R3
Level
low
R3
R2
R1
Can change text around
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Bumps inthe initialstages oftheengagemen
t
Lack ofexpertise due toattrition
Unsalvag-ableengage-ment
Contingency Plan/Roadmap
Vendor indemnity
SLAs geared towardspeople
Dry runs of engagement/ Time series evaluation of risk
Can change text around
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Contract
signing
Re-validate
ReviseObjective
Document
Fin Products
Life cycle Needs & Products (Farmer)
Target
CoverageZone/ State Location
Product Market size for the product(Rs in Cr)
Total Agri Market size (Rsin Cr)
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Land
PloughingTilling
Seed, FertIrrigation
Weeding
Harvesting
Transportation
Storage
Sales
PriceRealization
KCC - TL
FM
KCC
GCC
SL
Savings/Re Invst.
KCC : Working Capital/Term loan
FM : Farm Mechanization LoanGCC : General Credit Card
SL : Storage Loan
Fin Products
CASA : Current A/c , Savings A/c
Billdisc
g
Target
Target
TL : Term loan
AP Kakinad TL,FM, PAy 20513
MP Chind PL, Card, Payment 11133
Paymnt
gate
way
Target
Wealth
Mgt
Model 1- Ind - Non HNI-Rural- LinkedModel 1- Ind - Non HNI-Rural- Linked
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RIL Solar Bank Cooperative Society
Customer walks in
Meets RIL Solar executive
Customer Interaction
Places order for PVLS
Customer meets Bank personnel
Document check list
Documents delivered by customer
Approval ( Sanction/rejection)
Verification by Bank
Pays Margin Money
Farmer delivers Jetrophato Coop, in due course
Cooperative deposits revenuein Bank account
Bank deducts EMI from
Farmers account
System installed
thru cooperative
http://images.google.co.in/imgres?imgurl=http://thefraserdomain.typepad.com/photos/uncategorized/jetropha_curcus.jpg&imgrefurl=http://thefraserdomain.typepad.com/energy/2007/02/jetropha_europe.html&h=231&w=200&sz=10&hl=en&start=4&um=1&tbnid=d7zQ-c42ibThxM:&tbnh=108&tbnw=94&prev=/images%3Fq%3Djetropha%26um%3D1%26hl%3Denhttp://www.rics.org/NR/rdonlyres/24D71D5C-2AAF-42F1-A675-983958C32A39/0/solar_panel.jpg
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