INTERNATIONAL FINANCIAL

MANAGEMENT

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Topics to be covered…

• International Financial Management- Key

concepts, Features and Participants.

• Differentiation between Domestic and

International Financial Management

• Balance of Payment and Balance of Trade

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INTERNATIONAL FINANCIAL MANAGEMENT
• Financial management is mainly concerned with
how to optimally make various corporate financial
decisions, such as those pertaining to investment,
capital structure, dividend policy, and working
capital management, with a view to achieving a set
of given corporate objectives.
• Globalization of the financial markets results in
increased opportunities and risks on account of
overseas borrowing and investments by the firm.
• 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.

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INTERNATIONAL FINANCIAL MANAGEMENT-
NATURE AND SCOPE
Nature of International Financial Management:
• IFM is concerned with financial decisions taken in international business.
• IFM is an extension of corporate finance at international level.
• IFM set the standard for international tax planning and international accounting.
• IFM includes management of exchange rate risk.
Scope of International Financial Management:
• Foreign exchange markets, international accounting, exchange rate risk management etc.
• It also includes management of finance functions of international business.
• IFM sorts out the issues relating to FDI and foreign portfolio investment.
• It manages various risks such as inflation risk, interest rate risks, credit risk and exchange rate risk.
• Investment and financing across the nations widen the scope of IFM to international accounting standards.

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 IFM-FEATURES
• Foreign exchange risk: Variability of exchange rates is
widely regarded as the most serious international financial
problem facing corporate managers and policy makers.
• Political risk: It the risk of losing money due to changes
that occurs in a country’s government. Political actions and
instability may make it difficult for companies to operate.
Acts of war, terrorism, trade barriers and military coups are
all extreme examples of political risk.
• Expanded opportunity sets: Firms can raise funds in capital
markets where cost of capital is the lowest. Firms can also
gain from greater economies of scale when they operate
on a global basis.
• Market imperfections: There are profound differences
among nations’ laws, tax systems, business practices and
general cultural environments. At least one of the
assumptions for perfect competition is violated and out of
this is comes what we call an imperfect market
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IFM- SIGNIFICANCE
❑ International finance helps in calculating exchange rates of various currencies of nations and the relative
worth of each and every nation in terms thereof.
❑ It helps in comparing the inflation rates and getting an idea about investing in international debt securities.
❑ It helps in ascertaining the economic status of the various countries and in judging the foreign market.
❑ International Financial Reporting System (IFRS) facilitates comparison of financial statements made by
various countries.
❑ It helps in understanding the basics of international organizations and maintaining the balance among
them.
❑ International finance organizations such as IMF, World Bank etc. mediate and resolve financial disputes
among member nations.

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IFM- PARTICIPANTS
• Banks: It is wider than the Securities Market and embraces all forms of lending and borrowing, whether or
not evidenced by the creation of a negotiable financial instrument. Banks take an active part in bond
markets. They may invest in equity and mutual funds as a part of their fund management.
• Insurance Companies: The principal aims of the participants are to show the causes of institutional growth,
the nature of institutional investors and the implications of their activities and growth. The participants
draw on material from interviews with fund managers, econometric and statistical analysis, and studies of
the individual countries’ financial sectors.
• Primary Dealers (PDs): They are a firm that buys government securities directly from a government, with the
intention of reselling them to others, thus acting as a market maker of government securities. The
government may regulate the behavior and number of its primary dealers and impose conditions of entry.
• Stock Exchanges: They are a series of exchanges where successful corporations go to raise large amounts of
cash to expand. Stocks are shares of ownership of a public corporation that are sold to investors through
broker-dealers. The investors profit when companies increase their earnings.

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• Custodians: They are a specialized financial institution responsible for safeguarding a firm’s or
individual’s financial assets and is not engaged in “traditional” commercial or consumer/retail banking such
as a mortgage or personal lending, branch banking, personal accounts, and Automated Teller.
• Brokers: They usually arrange loans for a fee. They deal with the lenders for you and arranges a loan. They
help build up order book, price discovery and are responsible for a contract being honored. For their
services, brokers earn a fee known as brokerage.
• Financial Institutions: Organizations and institutions in the public and private sectors also often sell
securities on the capital markets in order to raise funds. FIs raise their resources through long-term bonds
from the financial system and borrowings from international financial institutions like International Finance
Corporation.
• Depositories: Deposits can also come in the form of securities such as stocks or bonds. On instructions of
stock exchange clearing house, supported by documentation, a depository transfers securities and
settlement from buyers to sellers’ accounts in electronic form.
• Merchant Banks: A financial institution that specializes in services such as issue management, international
trade financing, long term loans and management of investment portfolios.

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OBJECTIVES OF INTERNATIONAL FINANCIAL
MANAGEMENT
Basic Goals of IFM:
❖ Profit Maximisation
❖ Wealth Maximisation
Secondary Goals of IFM:
❖ Optimum Rate of Interest
❖ Foreign Exchange Risk Management
❖ Political Risk Management
❖ Effectively use expanded sets of opportunities
❖ Proper tax planning
❖ Effective Inflation Risk management

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BALANCE OF PAYMENT- MEANING
• Balance Of Payment (BOP) is a statement which records
all the monetary transactions made between residents
of a country and the rest of the world during any given
period. It accounts for transactions by businesses,
individuals, and the government.
• Definition of BOP- “The Balance of Payments of a country
is a systematic accounting record of all economic
transactions during a given period of time between the
residents of the country and residents of foreign
countries.”
• It represents an accounting of a country's international
transactions for a period, usually a quarter or a year.
When all the elements are correctly included in the BOP,
it should sum up to zero in a perfect scenario. This
means the inflows and outflows of funds should balance
out.
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The BOP is a standard double-entry accounting record ❑ Import of goods and services
and as such is subject to all the rules of double entry
❑ Unilateral transfers (or gifts) made to foreigners
book-keeping viz. for every transaction two entries must
be made, one credit (+) and one debit (-), the total of ❑ Capital outflows
credits must exactly match the total of debits i.e. the
balance of payments must always "balance".“ Capital Inflows can take either of the two forms:

The BOP's accounting principles regarding debits and a. An increase in foreign assets of the nation
credits can be summarised as follows. b. A reduction in the nation's assets abroad
• Credit Transactions (+) are those that involve theCapital Outflows can also take any of the following forms:
receipt of payment from foreigners. The following are
some of the important credit transactions: a. An increase in the nation's assets abroad

❑ Exports of goods or services b. A reduction in the foreign assets of the nation

❑ Unilateral transfers (gifts) received from foreigners

❑ Capital inflows

• Debit Transactions (-) are those that involve the

payment of foreign exchange i.e., transactions that
expend foreign exchange. The following are some of
the important debit transactions: ANJANA BASTIN - MCC 12
 CURRENT ACCOUNT OF BOP
Entries in this account are "current" in value as they do not give rise to future claims. A surplus in the current
account represents an inflow of funds while a deficit represents an outflow of funds. The main components of the
current account are :

❖ Payments for Goods and Services: Merchandise exports and imports represent tangible products, such as
computers and clothing, that are transported between countries. Service exports and imports represent
tourism and other services (such as legal, insurance, and consulting services) provided for customers based in
other countries. The difference between total exports and imports is referred to as the Balance of
Trade(BoT). A deficit in the Indian balance of trade means that the value of merchandise and services
exported by the India is less than the value of merchandise and services that it imports.

❖ Factor Income Payments: A second component of the current account is factor income, which represents
income (interest and dividend payments) received by investors on foreign investments in financial assets
(securities). Thus, factor income received by Indian investors reflects an inflow of funds into India. Factor
income paid by Indian securities reflects an outflow of funds from India.

❖ Unilateral transfers: These are gifts and grants by both private parties and governments. Private gifts and
grants include personal gifts of all kinds. Government transfers include money, goods and services sent as aid
to other countries.
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CAPITAL ACCOUNT OF BOP
The capital account includes the value of financial assets transferred across country borders by people who
move to a different country. This account consists of loans, investments, other transfers of financial assets
and the creation of liabilities. The capital account can be divided into three categories: direct investment,
portfolio investment.

❖ Direct investment - occurs when the investor acquires equity such as purchases of stocks, the acquisition of
entire firms, or the establishment of new subsidiaries.

❖ Portfolio investments - represent sales and purchases of foreign financial assets such as stocks and bonds
that do not involve a transfer of management control. Investors generally feel that they can reduce risk
more effectively if they diversity their portfolio holdings internationally rather than purely domestically.

❖ Capital flows - represent the third category of capital account and represent claims with a maturity of less
than one year. Such claims include bank deposits, short-term loans, short term securities, money market
investments and so forth. These investments are quite sensitive to both changes in relative interest rates
between countries and the anticipated change in the exchange rate.

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OFFICIAL RESERVE ACCOUNT OF BOP
• Official reserves are government owned assets. The official reserve account represents only purchases and
sales by the central bank of the country (e.g., the Reserve Bank of India). The changes in official reserves
are necessary to account for the deficit or surplus in the balance of payments.

• For example, if a country has a BOP deficit, the central bank will have to either run down its official reserve
assets such as gold, foreign exchange and SDRs or borrow fresh from foreign central banks. However, if a
country has a BOP surplus, its central bank will either acquire additional reserve assets from foreigners or
retire some of its foreign debts.

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BOP- FEATURES
• It is a systematic record of all economic transactions between one country and the rest of the world.
• It includes all transactions, visible as well as invisible.
• It relates to a period of time. Generally, it is an annual statement.
• It adopts a double-entry book-keeping system. It has two sides: credit side and debit side. Receipts are
recorded on the credit side and payments on the debit side.
• When receipts are equal to payments, the balance of payments is in equilibrium; when receipts are greater
than payments, there is surplus in the balance of payments; when payments are greater than receipts, there
is deficit in the balance of payments,
• In the accounting sense, total credits and debits in the balance of payments statement always balance each
other.

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BOP- SIGNIFICANCE
• It displays the financial or economic position of the country in the world.

• It helps in forming the nation’s monetary, fiscal and trade policies.

• As far as the national income is concerned, it tells the contribution of foreign trade and transaction to it.

• It is useful to the banking sector, industries, financial institutions and individuals who are directly or

indirectly engaged in international trade and financial activities.

• It is an economic barometer of a country’s growth vis-à-vis the rest of the world.

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