Description
he MNCs make financial decisions across varying institutional environments, tax regimes, and governmental regulations and to learn how to finance and invest across borders within a firm
International Corporate Finance
Growing Importance of Foreign Participation
Growing Importance of Foreign Participation
Export
350000
Import
Invisibles
Invesment Flows
300000
250000
200000
US $ Million
150000
100000
50000
0
-50000
19 70 -7 1 19 72 -7 3 19 74 -7 5 19 76 -7 7 19 78 -7 9 19 80 -8 1 19 82 -8 3 19 84 -8 5 19 86 -8 7 19 88 -8 9 19 90 -9 1 19 92 -9 3 19 94 -9 5 19 96 -9 7 19 98 -9 9 20 00 -0 1 20 02 -0 3 20 04 -0 5 20 06 -0 7 20 08 -0 9
Year
The Changing Structure of MNCs
Final Goods & Services
Indian MNC
Capital Capital Capital
U.S. Subsidiary
Final Goods & Services
U.K. Subsidiary
Final Goods & Services
South African Subsidiary
Horizontal Foreign Direct Investments
The Changing Structure of MNCs
Indian MNC
Intellectual Property
U.S. Sub
Intermediate G & S
African Sub
Worldwide Customers
Vertical Foreign Direct Investment
The Traditional Finance Setting
Indian MNC
Questions • How should firms finance themselves? •How should firms analyze investment opportunities? • How should information be communicated to capital Providers? • How do ownership/shareholding patterns arise?
U.S. Sub
Capital Markets
African Sub
MNCs Finance Setting
Sub 1A Sub 1A
Firm 1
Questions • How should subsidiaries be financed? • How should repatriation policies be designed? • How should investment opportunities in different countries be analyzed? • How should financial information be communicated inside the firm? • When should ownership be shared? With whom?
Sub 1A
Sub 1A Sub 1A
Firm 2
Sub 1A
Capital Markets
Sub 1A Sub 1A Sub 1A
Firm 3
Objectives of the Course
• To study how the MNCs make financial decisions across varying institutional environments, tax regimes, and governmental regulations • To learn how to finance and invest across borders within a firm
Framework for Financial Decision Making
Multinational Financial Management
Traditional Finance Functions of a Firm
• • • • • Cost Control Operating budgets Internal auditing Capital structure Dividend decisions
Finance Functions of a Global Firm
• Financing in the internal capital market
– Institutional decisions allow scope for creating value through wise financing decisions – Interest deduction and tax bills – Repatriation of profit and tax rates – Borrowing and lending with subsidiaries – Financing subsidiaries during crisis
Finance Functions of a Global Firm
• Managing Risk Globally
– Natural currency exposure/risk management – GM hedging policy
• Global Capital Budgeting
– Capital investment decisions, hurdle rates and country risks – Country specific discount rates based on risks
International Monetary System
India?s Balance of Payments
Net Capital Flows
International Investment Position of India
Evolution of the International Monetary System
• • • • • Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973Present
Bimetallism: Before 1875
• A “double standard” in the sense that both gold and silver were used as money. • Some countries were on the gold standard, some on the silver standard, some on both. • Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. • Gresham’s Law implied that it would be the least valuable metal that would tend to circulate.
Classical Gold Standard: 1875-1914
• During this period in most major countries:
– Gold alone was assured of unrestricted coinage – There was two-way convertibility between gold and national currencies at a stable ratio. – Gold could be freely exported or imported.
• The exchange rate between two country?s currencies would be determined by their relative gold contents.
Classical Gold Standard: 1875-1914
For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: $30 = £6
$5 = £1
Interwar Period: 1915-1944
• Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market. • Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”. • The result for international trade and investment was profoundly detrimental.
Bretton Woods System: 1945-1972
• Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. • The purpose was to design a postwar international monetary system. • The goal was exchange rate stability without the gold standard. • The result was the creation of the IMF and the World Bank.
Bretton Woods System: 1945-1972
• Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar. • Each country was responsible for maintaining its exchange rate within ±1% of the adopted par value by buying or selling foreign reserves as necessary. • The Bretton Woods system was a dollar-based gold exchange standard.
Bretton Woods System: 1945-1972
Indian rupee
British pound
French franc
Par Value
U.S. dollar
Gold
Pegged at $35/oz.
The Flexible Exchange Rate Regime: 1973-Present.
• Flexible exchange rates were declared acceptable to the IMF members.
– Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities.
• Gold was abandoned as an international reserve asset. • Non-oil-exporting countries and less-developed countries were given greater access to IMF funds.
Current Exchange Rate Arrangements
• Free Float
– The largest number of countries, about 48, allow market forces to determine their currency?s value.
• Managed Float
– About 25 countries combine government intervention with market forces to set exchange rates.
• Pegged to another currency
– Such as the U.S. dollar or euro (through franc or mark).
• No national currency
– Some countries do not bother printing their own, they just use the U.S. dollar. For example, Ecuador, Panama, and El Salvador have dollarized.
Indian Foreign Exchange Market
• Early stages: 1947-1977 • Formative period: 1978-1992 • Post-Reform period: 1992 onwards
Early Stages: 1947-1977
• Par value system of exchange rate • External par value was fixed at 4.15 grains of fine gold • RBI maintained the par value within ±1% using pound sterling as intervention currency • Devaluation happened twice in Sept 1949 and June 1966 to par value to 2.88 and 1.83 grains of fine gold. • 1971 after BW, it was linked to pound sterling.
Formative Period: 1978-1992
• Rupee was pegged to a basket of currencies • RBI allowed banks to trade in FX by maintaining „square? and „near square? position at the close of the business hour • The spread between buying and selling had been fixed as 0.5% • ER during this period was managed mainly for facilitating India?s imports.
Post-Reform Period: 1992 onwards
• Two step devaluation by 9% and 11% between July 1-3, 1991 • Post devaluation with recommendation from Dr. Rangarajan committee, India moved towards floating exchange rate system from Mar 1, 1993. • Current account convertibility was adopted in 1994 • S.S. Tarapore recommended for partial capital account convertibility in 1997.
Thank you!!!
doc_845653705.pptx
he MNCs make financial decisions across varying institutional environments, tax regimes, and governmental regulations and to learn how to finance and invest across borders within a firm
International Corporate Finance
Growing Importance of Foreign Participation
Growing Importance of Foreign Participation
Export
350000
Import
Invisibles
Invesment Flows
300000
250000
200000
US $ Million
150000
100000
50000
0
-50000
19 70 -7 1 19 72 -7 3 19 74 -7 5 19 76 -7 7 19 78 -7 9 19 80 -8 1 19 82 -8 3 19 84 -8 5 19 86 -8 7 19 88 -8 9 19 90 -9 1 19 92 -9 3 19 94 -9 5 19 96 -9 7 19 98 -9 9 20 00 -0 1 20 02 -0 3 20 04 -0 5 20 06 -0 7 20 08 -0 9
Year
The Changing Structure of MNCs
Final Goods & Services
Indian MNC
Capital Capital Capital
U.S. Subsidiary
Final Goods & Services
U.K. Subsidiary
Final Goods & Services
South African Subsidiary
Horizontal Foreign Direct Investments
The Changing Structure of MNCs
Indian MNC
Intellectual Property
U.S. Sub
Intermediate G & S
African Sub
Worldwide Customers
Vertical Foreign Direct Investment
The Traditional Finance Setting
Indian MNC
Questions • How should firms finance themselves? •How should firms analyze investment opportunities? • How should information be communicated to capital Providers? • How do ownership/shareholding patterns arise?
U.S. Sub
Capital Markets
African Sub
MNCs Finance Setting
Sub 1A Sub 1A
Firm 1
Questions • How should subsidiaries be financed? • How should repatriation policies be designed? • How should investment opportunities in different countries be analyzed? • How should financial information be communicated inside the firm? • When should ownership be shared? With whom?
Sub 1A
Sub 1A Sub 1A
Firm 2
Sub 1A
Capital Markets
Sub 1A Sub 1A Sub 1A
Firm 3
Objectives of the Course
• To study how the MNCs make financial decisions across varying institutional environments, tax regimes, and governmental regulations • To learn how to finance and invest across borders within a firm
Framework for Financial Decision Making
Multinational Financial Management
Traditional Finance Functions of a Firm
• • • • • Cost Control Operating budgets Internal auditing Capital structure Dividend decisions
Finance Functions of a Global Firm
• Financing in the internal capital market
– Institutional decisions allow scope for creating value through wise financing decisions – Interest deduction and tax bills – Repatriation of profit and tax rates – Borrowing and lending with subsidiaries – Financing subsidiaries during crisis
Finance Functions of a Global Firm
• Managing Risk Globally
– Natural currency exposure/risk management – GM hedging policy
• Global Capital Budgeting
– Capital investment decisions, hurdle rates and country risks – Country specific discount rates based on risks
International Monetary System
India?s Balance of Payments
Net Capital Flows
International Investment Position of India
Evolution of the International Monetary System
• • • • • Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973Present
Bimetallism: Before 1875
• A “double standard” in the sense that both gold and silver were used as money. • Some countries were on the gold standard, some on the silver standard, some on both. • Both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. • Gresham’s Law implied that it would be the least valuable metal that would tend to circulate.
Classical Gold Standard: 1875-1914
• During this period in most major countries:
– Gold alone was assured of unrestricted coinage – There was two-way convertibility between gold and national currencies at a stable ratio. – Gold could be freely exported or imported.
• The exchange rate between two country?s currencies would be determined by their relative gold contents.
Classical Gold Standard: 1875-1914
For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents: $30 = £6
$5 = £1
Interwar Period: 1915-1944
• Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market. • Attempts were made to restore the gold standard, but participants lacked the political will to “follow the rules of the game”. • The result for international trade and investment was profoundly detrimental.
Bretton Woods System: 1945-1972
• Named for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire. • The purpose was to design a postwar international monetary system. • The goal was exchange rate stability without the gold standard. • The result was the creation of the IMF and the World Bank.
Bretton Woods System: 1945-1972
• Under the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged to the U.S. dollar. • Each country was responsible for maintaining its exchange rate within ±1% of the adopted par value by buying or selling foreign reserves as necessary. • The Bretton Woods system was a dollar-based gold exchange standard.
Bretton Woods System: 1945-1972
Indian rupee
British pound
French franc
Par Value
U.S. dollar
Gold
Pegged at $35/oz.
The Flexible Exchange Rate Regime: 1973-Present.
• Flexible exchange rates were declared acceptable to the IMF members.
– Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities.
• Gold was abandoned as an international reserve asset. • Non-oil-exporting countries and less-developed countries were given greater access to IMF funds.
Current Exchange Rate Arrangements
• Free Float
– The largest number of countries, about 48, allow market forces to determine their currency?s value.
• Managed Float
– About 25 countries combine government intervention with market forces to set exchange rates.
• Pegged to another currency
– Such as the U.S. dollar or euro (through franc or mark).
• No national currency
– Some countries do not bother printing their own, they just use the U.S. dollar. For example, Ecuador, Panama, and El Salvador have dollarized.
Indian Foreign Exchange Market
• Early stages: 1947-1977 • Formative period: 1978-1992 • Post-Reform period: 1992 onwards
Early Stages: 1947-1977
• Par value system of exchange rate • External par value was fixed at 4.15 grains of fine gold • RBI maintained the par value within ±1% using pound sterling as intervention currency • Devaluation happened twice in Sept 1949 and June 1966 to par value to 2.88 and 1.83 grains of fine gold. • 1971 after BW, it was linked to pound sterling.
Formative Period: 1978-1992
• Rupee was pegged to a basket of currencies • RBI allowed banks to trade in FX by maintaining „square? and „near square? position at the close of the business hour • The spread between buying and selling had been fixed as 0.5% • ER during this period was managed mainly for facilitating India?s imports.
Post-Reform Period: 1992 onwards
• Two step devaluation by 9% and 11% between July 1-3, 1991 • Post devaluation with recommendation from Dr. Rangarajan committee, India moved towards floating exchange rate system from Mar 1, 1993. • Current account convertibility was adopted in 1994 • S.S. Tarapore recommended for partial capital account convertibility in 1997.
Thank you!!!
doc_845653705.pptx