Global Financial Management

Dr Rajendra P. Maheshwari University of Delhi Delhi

Functions of FM
1. Acquisition of funds - Financing 2. Investment of those funds Wealth maximisation

International Fin. Environment

Basic factors affecting currency values International monetary system Issues- inflation, interest and exchange rates Balance of payments Country risk analysis

Factors affecting Equilibrium Exchange Rate

Relative Inflation rates Relative Interest rates Relative Economic Growth Rates Political & Economic Risk Central Bank Reputation & Currency values/ Currency Boards (Estonia, Hong Kong, Lithuania, Argentina dropped in 2002)

Strong Dollar
Advantages Consumers benefitting due to lower import prices Lower domestic inflation Cost to Us firms & individuals lower Foreign capital attracted to a strong currency leads to lower US interest rates Disadvantages 1. US exports non-competitive 2. US firms face competition domestically from low-priced imports 3. Loses jobs in traded-goods sector 4. Higher cost of operating in the US reduces FDI slowing job creation by foreign firms

Weak Dollar
Advantages Disadvantages

1. US exports more competitive 2. Domestic firms more competitive to imports 3. Gain in jobs in tradedgoods sector 4. Lower cost of operating in the US increases FDI, boosting job creation by foreign firms

1. Dollar prices of imported goods/services/raw materials higher 2. Reduced prices to imports lead to higher prices, increasing US inflation 3. Cost to US firms & individuals of F Inv is higher 4. Foreign capital fleecing weak currency area

Exchange Rate Systems

Free Float Interaction of supplies & demands Managed Float Central Bank Intervention. Types Smoothing out daily fluctuations, Crawling Peg: currency depreciation on controlled & regular basis - Leaning against the wind to moderate abrupt short- & Medium term fluctuations brought by temporary factors - Unofficial Pegging resisting exchange market forces

Exchange Rates Contd

Target-Zone Arrangement To maintain rates within a specific margin Fixed Rate System -Currency Boards -Exchange rate with no separate legal tender -Other conventional fixed Peg: Fixed rate to a major currency with +- 1%.

Currency Control Measures

Reduction of certain remittances dividends/royl. Ceilings on FDI Controls on overseas Portfolio investments Import Restrictions Surrender of export receipts to central bank Limitations on prepayments for imports Deposits by importers in interest-free a/c Ceilings on granting credit to foreign firms Imposition of taxes on foreign-owned bank deposits Multiple Exchange Rates

Global Capital Structure

sForex Market

Convertibility of Rupee & its implications

FIIS

GDRs

Capital Expenditure Analysis

International Risk Management