global portfolio mgt-ok

7/21/2019 Global Portfolio Mgt-ok

1/46

International

Financial

Management


2/46

Plan:


3/46

The essence ofinternational nancial

management IFM- is a popular concept which means

management of nance in an international businessenvironment, it implies, doing of trade and making

mone through the e!change of foreign currenc"

The international nancial activities help theorgani#ations to connect with international dealingswith overseas business partners- customers,suppliers, lenders" It is also used b governmentorgani#ation and non-prot institutions"

h f


4/46

The main ob$ective of international nancial

management is to maximise shareholderwealth"

%dam &mith wrote in his famous title, 'Wealth ofNations( that if a foreign countr can suppl us

with a commodit )heaper than we ourselves canmake it, better bu it of them with some part ofthe produce of our own in which we have someadvantage"

The essence ofinternational nancial

management


5/46

*asic Functions


6/46

*asic Functions


7/46

Nature & Scope


8/46

Environment at

International LevelInternational fnancial management practitioners are

required the knowledge in the ollowing felds:


9/46

oreign exchange risk

In a domestic econom this risk is generall ignored becausea single national currenc serves as the main medium of

e!change within a countr" +hen dierent national currencies are e!changed for each

other, there is a denite risk of volatilit in foreign e!changerates"

The present International Monetar &stem set up is

characteri#ed b a mi! of oating and managed e!changerate policies adopted b each nation keeping in view itsinterests"

In fact, this variabilit of e!change rates is widel regardedas the most serious international nancial problem facing

corporate managers and polic makers


10/46

!olitical risk

Political risk ranges from the risk of loss .or gain/ from

unforeseen government actions or other events of a

political character such as acts of terrorism to outright

e!propriation of assets held b foreigners"

For e!ample, in 0112, 3nron 4evelopment )orporation, a

subsidiar of a 5ouston based 3nerg )ompan, signed a

contract to build India6s longest power plant"

7nfortunatel, the pro$ect got cancelled in 0118 b the

politicians in Maharashtra who argued that India did not

re9uire the power plant" The compan had spent nearl

;


11/46

Expanded "pportunit#

Sets

+hen rms go global, the also tend to benet

from e!panded opportunities which are availablenow"

The can raise funds in capital markets where costof capital is the lowest"

The rms can also gain from greater economies ofscale when the operate on a global basis


12/46

International $rade

$heories


13/46

$heor# o %ercantilism

This theor is during the si!teenth to the three-

fourths of the eighteenth centuries"

It beliefs in nationalism and the welfare of the

nation alone, planning and regulation of

economic activities for achieving the national

goals, restriction imports and promoting e!ports"

It believed that the power of a nation lied in its

wealth, which grew b ac9uiring gold from

abroad"


14/46

$heor# o %ercantilism

Mercantilists failed to reali#e that simultaneouse!port promotion and import regulation are notpossible in all countries, and the mere control ofgold does not enhance the welfare of a people"

=eeping the resources in the form of gold reducesthe production of goods and services and, thereb,

lowers welfare" It was re$ected b %dam &mith and >icardo b

stressing the importance of individuals, and pointingout that their welfare was the welfare of the nation"


15/46

$heor# o 'solute

(ost dvantage This theor was propounded b %dam &mith .0??@/,

arguing that the countries gain from trading, if the

specialise according to their production advantages"

The pre-trade e!change ratio in )ountr I would be)*+, and in )ountr II I*),"


16/46

$heor# o 'solute

(ost dvantage

If it is nearer to )ountr I domestic e!change ratio

then trade would be more benecial to )ountr II andvice versa"

%ssuming the international e!change ratio isestablished I*I,-

The terms of trade between the trading partners woulddepend upon their economic strength and thebargaining power"


17/46

$heor# o (omparative

(ost dvantage

>icardo .0A0?/, though adhering to the

absolute cost advantage principle of %dam&mith, pointed out that cost advantage to

both the trade partners was not a necessar

condition for trade to occur"

%ccording to >icardo, so long as the other

countr is not e9uall less productive in alllines of production, measurable in terms

of opportunit cost of each commodit in

the two countries, it will still be mutuall

gainful for them if the enter into trade"


18/46


(ost dvantage

In the e!ample given, the opportunit cost of one

unit of % in countr I is


19/46


(ost dvantage

The opportunit cost of the two goods are dierent in

both the countries and as long as this is the case, thewill have comparative advantage in the production ofeither, good % or good *, and will gain from traderegardless of the fact that one of the trade partnersma be possessing absolute cost advantage in both

lines of production" Thus, countr I has comparative advantage in good %

as the opportunit cost of its production is lower in thiscountr as compared to its opportunit cost in countrII which has comparative advantage in the production

of good * on the same reasoning"


20/46

International ,usiness

%ethods

Dicensing

Franchising

&ubsidiaries and %c9uisitions

&trategic %lliances

3!porting


21/46

Dicensing

License-means to give permission" % license ma be

granted b a part .ElicensorE/ to another part.ElicenseeE/ as an element of an agreement betweenthose parties"

% license ma be issued b authorities, to allow anactivit that would otherwise be forbidden" It mare9uire paing a fee andBor proving a capabilit" There9uirement ma also serve to keep the authoritiesinformed on a tpe of activit, and to give them theopportunit to set conditions and limitations"


22/46

Franchising

ranchisingis the practice of selling the right to use arms successful business model" For the franchisor,

the franchise is an alternative to building chain storesto distribute goods that avoids the investments andliabilit of a chain" The franchisors success dependson the success of the franchisees" The franchisee issaid to have a greater incentive than a directemploee because he or she has a direct stake in the

business" The franchisor is a supplier who allows an operator, or

a franchisee, to use the suppliers trademark anddistribute the suppliers goods" In return, the operatorpas the supplier a fee"


23/46

&ubsidiaries and%c9uisitions

% su'sidiar# is a compan that is completel or partl owned

b another corporation that owns more than half of thesubsidiars stock, and which normall acts as a holdingcorporation which at least partl or a parent corporation, whollcontrols the activities and policies of the daughter corporation"

%ergers and acquisitionsare both aspects of corporate

strateg, corporate nance and management dealing with thebuing, selling, dividing and combining of dierent companiesand similar entities that can help an enterprise grow rapidl inits sector or location of origin, or a new eld or new location,without creating a subsidiar, other child entit or using a $ointventure"


24/46

&trategic %lliances

% strategic allianceis an agreement between two or

more parties to pursue a set of agreed upon ob$ectivesneeded while remaining independent organi#ations" Thisform of cooperation lies between Mergers G %c9uisitionMG% and organic growth"

Partners ma provide the strategic alliance with resourcessuch as products, distribution channels, manufacturingcapabilit, pro$ect funding, capital e9uipment, knowledge,e!pertise, or intellectual propert" The alliance is acooperation or collaboration which aims for a snergwhere each partner hopes that the benets from the

alliance will be greater than those from individual eorts"


25/46

&ection II


26/46

)apital *udgeting

It is the planning process used to determine whether an

organi#ations long term investments such as newmachiner, replacement machiner, new plants, newproducts, and research development pro$ects are worththe funding of cash through the rms capitali#ationstructure"

It is the process of allocating resources for ma$orcapital, or investment, e!penditures"

Cne of the primar goals of capital budgetinginvestments is to increase the value of the rm to the

shareholders"


27/46

Methods of capital*udgeting

These methods use theincremental cash ows fromeach potential investment, orpro$ect


28/46

Factors inuencing )apital*udgeting


29/46

Foreign PortfolioInvestment

oreign portolio investmentis the entr of funds into acountr where foreigners make purchases in the countr6s

stock and bond markets, sometimes for speculation"

It is a usuall short term investment, as opposed to the

longer term Foreign 4irect Investment partnership, involvingtransfer of technolog and Eknow-howE"

Foreign Portfolio Investment .!I/: passive holdings ofsecurities and other nancial assets, which do HCT entailactive management or control of the securities issuer" FPI ispositivel inuenced b high rates of return and reduction ofrisk through geographic diversication" The return on FPI isnormall in the form of interest paments or non-voting

dividends"


30/46

+orking )apitalManagement

+orking capital management is concerned with the problemsthat arise in attempting to manage the current assets, thecurrent liabilities and the interrelations that e!ist between them"

)urrent assets refer to those assets which in the ordinarcourse of business can be, or will be, converted into cash withinone ear without undergoing a diminution in value and withoutdisrupting the operations of the rm"

3!amples- cash, marketable securities, accounts receivable and

inventor" )urrent liabilities are those liabilities which are intended, at

their inception, to be paid in the ordinar course of business,within a ear, out of the current assets or the earnings of theconcern"

3!amples- accounts paable, bills paable, bank overdraft and

outstanding e!penses


31/46

oal of +orking )apitalManagement

To manage the rm6s current assetsand liabilities in such a wa that a

satisfactor level of working capital ismaintained"


32/46

)oncepts and 4enitionsof +orking )apital

There are two concepts of working capital:

0ross and Net

ross working capital- means the total current assets"

Het working capital- can be dened in two was-

o The dierence between current assets and currentliabilities"

o The portion of current assets which is nanced withlong term funds


33/46

4eterminants of +orkingcapital >e9uirement


34/46

+orking capital: Policand Management

The working capital management includes and refers to the

procedures and policies re9uired to manage the workingcapital"

There are three tpes of working capital policies which arm ma adopt :

Moderate working capital polic

)onservative working capital polic

%ggressive working capital polic"

These policies describe the relationship between the sales

level and the level of current assets"


35/46

Tpes of working capitalneeds

The working capital need can be bifurcated into permanent

working capital and temporar working capital"

!ermanent working capital1 There is alwas aminimum level of working capital which is continuouslre9uired b a rm in order to maintain its activities like cash,stock and other current assets in order to meet its businessre9uirements irrespective of the level of operations"

$emporar# working capital1 Cver and above thepermanent working capital, the rm ma also re9uire additionalworking capital in order to meet the re9uirements arising out ofuctuations in sales volume" This e!tra working capital neededto support the increased volume of sales is known as temporar

or uctuating working capital"


36/46

Trade Finance

For a trade transaction there should be a &eller to sell

the goods or services and a *uer who will bu thegoods or use the services" Jarious intermediaries suchas .banks , Financial Institutions/ can facilitate thistrade transaction b nancing the trade"

+hile a seller .the e!porter/ can re9uire the purchaser.an importer/ to prepa for goods shipped, thepurchaser .importer/ ma wish to reduce risk bre9uiring the seller to document the goods that havebeen shipped" *anks ma assist b providing variousforms of support"

The following are the most famous


37/46

The following are the most famousproducts2servicesoered b various

*anks and Financial Institutions in Trade

Finance &egment:


38/46

Letter o (redit

It is an undertaking promise given b a

*ankBFinancial Institute on behalf of the*uerBImporter to the &ellerB3!porter, that, if the&ellerB3!porter presents the compling documentsto the *uers designated *ankBFinancial Instituteas specied b the *uerBImporter in the Purchase%greement then the *uers *ankBFinancialInstitute will make pament to the &ellerB3!porter


39/46

,ank 0uarantee

It is an undertaking promise given b a *ank on

behalf of the %pplicant and in favour of the*eneciar" +hereas, the *ank has agreed andundertakes that, if the %pplicant failed to fulll hisobligations either Financial or Performance as per the%greement made between the %pplicant and the

*eneciar, then the uarantor *ank on behalf of the%pplicant will make pament of the guaranteeamount to the *eneciar upon receipt of a demandor claim from the *eneciar"


40/46

(ollection and3iscounting o ,ills

It is a ma$or trade service oered b the *anks"

The &ellers *ank collects the pament proceedson behalf of the &eller, from the *uer or *uers*ank, for the goods sold b the &eller to the *ueras per the agreement made between the &ellerand the *uer"


41/46

4ividend Polic

3ividend polic# is concerned with nancial policies

regarding paing cash dividend in the present or paing anincreased dividend at a later stage" +hether to issuedividends, and what amount, is determined mainl on the

basis of the compans unappropriated prot andinuenced b the compans long-term earning power"+hen cash surplus e!ists and is not needed b the rm,

then management is e!pected to pa out some or all ofthose surplus earnings in the form of cash dividends or torepurchase the compans stock through a share buback

program"


42/46

>isk Management

4isk management is the identication, assessment,

and prioriti#ation of risks followed b coordinated andeconomical application of resources to minimi#e,monitor, and control the probabilit andBor impact ofunfortunate events or to ma!imi#e the reali#ation ofopportunities"

>isks can come from uncertaint in nancial markets,threats from pro$ect failures .at an phase in design,development, production, or sustainment life-ccles/,legal liabilities, credit risk, accidents, natural causesand disasters as well as deliberate attack from anadversar, or events of uncertain or unpredictable root-

cause"


43/46

Methods of riskmanagement

Identif, characteri#e threats

%ssess the vulnerabilit of critical assets to specic threats

4etermine the risk .the e!pected likelihood andconse9uences of specic tpes of attacks on specicassets/

Identif was to reduce those risks

Prioriti#e risk reduction measures based on a strateg

i i l i k


44/46

!rinciples o riskmanagement


45/46

)onclusions

)ompared to national nancial markets international markets have a

dierent shape and analtics" Proper management of internationalnances can help the organi#ation in achieving same eKcienc andeectiveness in all markets, hence without IFM sustaining in the marketcan be diKcult"

)ompanies are motivated to invest capital in abroad for the followingreasons:

-3Kcientl produce products in foreign markets than that domesticall"

-Cbtain the essential raw materials needed for production

-*roaden markets and diversif

-3arn higher returns


46/46

Thank Lou for %ttention

global portfolio mgt-ok

Documents