II JAI SRIGURUDEV II

Sri Adichunchanagiri Shikshana Trust

SJB INSTITUTE OF TECHNOLOGY

INTERNATIONAL FINANCIAL MANAGEMENT

20MBAFM406
Prepared by

Mrs. Lakshmi Priya M C

Assistant Professor
MBA Department
SJBIT

Department of MBA
BGS Health & Education City
Dr. Vishnuvardhana Road, Kengeri, Bengaluru - 560 060.
Tel.: 080 - 2861 2445 / 46 Fax : 080 - 2861 2651
Web.: www.sjbit.edu.in
Module: IV
INTERNATIONAL FINANCIAL MARKETS AND
INSTRUMENTS
Topics to be covered

 Foreign Portfolio Investment.

 International Bond & Equity market-GDR, ADR
 International Financial Instruments:
 Foreign Bonds & Eurobonds, Global Bonds. Floating rate Notes, Zero
coupon Bonds
 International Money Markets
 International Banking services –Correspondent Bank, Representative
offices, Foreign Branches.
 Forward Rate Agreements. (Only Theory)
Introduction

 International financial management is a well-known term in today’s world and it is also

known as international finance.
 It means financial management in an international business environment.
 International finance is the branch of economics that studies the dynamics of exchange rates,
foreign investments, and how these affect international trade. Fundamentals of International
Finance deal with the study of foreign investments, the changes in the foreign exchange rates,
and how international trade is influenced by them. International finance also follows techniques for
allocation of funds and resource in international trade. However, it faces certain hindrances
regarding mobility of capital and foreign currencies, also tries to solve the problem of human
resource exploitation carried out by MNC in the poor and developing countries by applying its own
principles, three conceptually distinct but interrelated parts are identifiable in international finance.
 International Financial Markets: Concerned With International Financial/Investments Instruments,
Foreign Exchange Markets, International Banking, International Securities Markets Financial
Derivatives Etc.,
International Financial Markets

 The International Financial Market are financial markets where individuals buy and
sell foreign assets such as stock, Bonds, currencies.
 It is also a place where institutions lay down rules.
 Brigham and Eugene defined the financial market as a place where people and
organizations wanting to borrow money are brought together with those having surplus
funds.
 Financial market does not refer to a physical location.
 Market participants are linked by formal trading rules and communication networks for
originating and trading financial securities.
 Transferring of funds from the surplus sector to the deficit sector is the main function of
the financial market.
Introduction to forex market:

 Foreign exchange market is the most largest and liquid financial market in
the world.
 It is referred to foreign currency market, where a party of a country
purchase some quantity of a currency in exchange of paying some
quantity of another currency.
 International money market is technically the “Euro - Currency market.
 Basically large banks, speculator of currency, central banks, government
and other financial institutes are involved in trading in foreign exchange
market.
FOREX TRANSACTION

 Inter bank market deals are conducted mainly over the telephone.

 If the price quoted is acceptable, the deal between traders will move
further in terms of amount bought/sold, price identity of the party etc. in
the respective banks will settle the transactions with both the sides.
Classification of rates in terms of
settlement

 Cash
 Tom
 Spot
 Forward
Factors affecting exchange rates

 Balance of Payments
 Economic growth rates
 Fiscal / Monetary Policies
 Interest Rates
 Political Issues
Determinants of Exchange Rates

 Demand for and supply of foreign currencies

 Interest Rates
 Inflation
 Current Accooutn deficit
NEED TO FOREIGN EXCHANGE MARKET

 Protection of Currency
 Job Opportunities
 Hedging facility
 International Trade Facilities
 Currency Liquidity
 Trade Provision
Characteristics of Foreign Exchange
Market

 Superior Liquidity
 Strong Marketing rands
 Purchasing Power
 Lower Trading Costs
 Intermediary Function
 Electronic Market
 Credit provision
 Best Transparency
Functions of Foreign Exchange Market

 Transfer of purchasing power

 Provision of credit
 Minimizing foreign exchange risk
Participants of Foreign Exchange
Market

 Retailers
 Commercial Banks
 Foreign Exchange Brokers
 Central Banks
 Investors and Speculators
 Authorised Dealers
 Market Maker
 Money Changer
Structure of Foreign Exchange Market

 Retail Market
 Wholesale Market
 Interbank Market
 Central Bank
Types of Forex Market

 Spot Market
 Forward Market
International Financial Instruments

 Euro Bond: When the Bonds are sold principally in countries other than the
country of the currency in which the issue is denominated, it is called as Euro
Bond issue for example, a Dollar Bond issued in Europe is a Euro (Dollar) Bond in
the Euro – Bond market.
 Foreign Bonds: A foreign bond is an international bond sold by a foreign
borrower, but denominated in the currency of the country in which it is placed.
It is under written and sold by a national underwriting syndicate in the lending
country. For example, an Indian company might float a Bond Issue in the U.S.
Capital market, where it will be quoted and traded. Many foreign bonds were
issued in the domestic markets of U.S. U.K., Germany, Japan, Netherlands,
Switzerland etc., The foreign bonds are referred to as “Yankee Bonds” (these
issued in domestic markets of U.S). “Bull dog Bonds” (in U.K.), Samurai bonds (in
Japan) etc.,
VARIOUS INSTRUMENTS OF CREDIT
TRADED IN FOREIGN EXCHANGE

 The Major Instruments used for making International payments are:

 1. Foreign Bills of Exchange
 2 Bank Drafts and Telegraphic Transfers
 3. Telegraphic Transfer
 4. Letter of Credit.
International Bond and Equity market

 Depository Receipt (DR) is a negotiable instrument evidencing a fixed

number of equity shares of the issuing company being an Indian
company, denominated in foreign currency and is being traded in foreign
exchanges.
Why do Companies Issue Depository
Receipts ?

 Company issues DRs as a tool to access Global capital markets.

 Following are the some reason for issuing DRs by a company
 To raise capital;
 Diversify Shareholder base into extended geographies;
 Increase visibility & recognition in international market;
 Global Image;
 Set Up Employee Stock Option Plans;
 Facilitate Merger & Acquisition activity by creating a desirable acquisition
currency.
Purpose of Investors to Invest in
Depository Receipts

 Diversify Portfolio
 Convenience of holding foreign securities in their markets
 Simplification of trading and settlements(DRs trade and settle just like US or
EURO securities)
 No restrictions on dealing: DRs are recognized as domestic securities
 Avoid Currency risk.
INTERNATIONAL BOND
AND
EQUITY MARKET
International Bond Market

 The international bond market is composed of three separate types of bond

markets: Domestic Bonds, Foreign Bonds, and Eurobonds.
 Foreign bonds are traded in the foreign bond markets.
 Some special characteristics of the foreign bond markets are −
• Issuers of bonds are usually governments and private sector utilities.
• It is a standard practice to underwrite and organize underwriting the risks.
• Issues are generally pledged by the retail and the institutional investors.
• The Euro market is the trading place of Euro bonds, Euro currency, Euro notes, Euro
commercial Papers, and Euro equity.
• It is commonly an offshore market.
International Bond market participants

 Bond market participants are either buyers (debt issuer) or sellers (institution) of
funds and often both of these. Participants include −
• Institutional investors
• Governments
• Traders
• Individuals
International Equity Market

 International equity market has developed through cross listing of shares in

different stock exchanges.
 Cross listing indicates that a company lists its shares in foreign stock
exchanges besides listing its shares in domestic exchanges.
 For example, investors from US can invest in Infosys equity shares as Infosys
shares are listed in NASDAQ.
 Cross listing of shares normally happens through depository receipts (DRs)
or registered shares.
 Depository receipts can be ADRs (American Depository Receipts) or GDRs
(Global Depository Receipts) or for that matter any country specific
depository receipts can be issued.
American Depository Receipt (ADR)

 American Depository Receipt (ADR) is a stock that trades in the United

States but represents a specified number of shares in a foreign corporation
ADRs are bought and sold on American markets just like regular stocks,
and are issued / sponsored in the U.S. by a bank or brokerage.
Global Depository Receipts(GDR)

 GDR is a security issued abroad and is listed and traded on a foreign stock exchange.

 GDR holder can at any time convert it into shares represented by it.

 Till conversion, GDRs do not carry any voting right. Depository receipts facilitate cross border
trading and settlement, minimise transaction cost and broaden the potential investor base.

 The shares are issued by a company to an intermediary called the depository in whose name,
the shares are registered. This depository subsequently issues the GDRs.

 The physical possession of equity shares is entrusted to another intermediary called the
custodian who acts as an agent of depository .

 The advantage in GDR issue is that company does not assume any exchange risk.
External Commercial Borrowings(ECBs)

 ECB refer to commercial loans [in the form of bank loans, buyers’ credit,
suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed
rate bonds)] availed from non-resident lenders with minimum average
maturity of 3 years.
 ECB is basically a loan availed by an Indian entity from a non-resident
lender.
 Most of these loans are provided by foreign commercial banks and other
institutions. It is a loan availed of from non-resident lenders with a minimum
average maturity of 3 years.
 The significance of ECBs their size in India’s balance of payment account.
Money and Capital Market

 Like their domestic counterpart, international financial markets may be

divided into money and capital markets.

 Money markets deal with assets created or traded with relatively short
maturity, say less than a year.

 Capital markets deal with instruments whose maturity exceeds one year or
which lack definite maturity.
International Money Market
Instruments

 Treasury Bills
 Euro – Dollars
 Certificates of deposits
 Bankers Acceptance
 Commercial paper and
 Letter of Credit
THANK YOU