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FINANCIAL MANAGEMENT

IN INTERNATIONAL

ENVIRONMENT

FOREIGN EXCHANGE

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FINANCIAL MANAGEMENT IN

INTERNATIONAL ENVIRONMENT

Introduction to foreign exchange

Foreign currency finance

Financing for exports

Documents in international trade

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FOREIGN EXCHANGE ???

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FOREIGN EXCHANGE MARKET

Decentralized world wide Market

Connectivity 24 hours

Major Centers- London-Paris-New York- Hong kong-

Singapore-Tokyo

Participants- Central Banks-Commercial Banks-Brokers-

Corporates -Individuals

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FUNCTIONS OF FOREIGN

EXCHANGE

Transfer of Purchasing Power acrosscountries.

Mechanism to Set Currency Prices.Provides tools to manage exposures.

Provides opportunity to Invest cross

border.

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EXCHANGE RATE

The Price of Foreign Currency expressed interms of Local Currency.

Convertibility- the degree that one currencycan be exchanged for another one withoutdifficulty.

Hard Currency is a currency that isconvertible and is supported by a strongeconomy

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EXCHANGE RATE-

QUOTE

Direct The number of units of homecurrency to deal in one unit of foreign

currency.$ 1 = Rs. 45.00

Indirect The number of units of foreign

currency to deal one unit of homecurrency.

Rs. 1 = $ 1/ Rs.45.00 = 0.0222

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FIXED- FLOATING EXCHANGE

RATE

Fixed-Government or Central Bank Fixthe exchange rate for its own currency.

Official Rate of currency.

Floating- Government or Central Bank

does not interfere in the value ofcurrency. Currency is freely floating with

market.

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FOREIGN EXCHANGE TERMS

Bid Price- The price at which dealer is buyingForeign Currency.

Offer Price- The price at which dealer is selling

Foreign Currency. Spread-The difference between Bid Price &

Offer Price is called Spread.

Spot Rate- Exchange rate quoted for immediate

delivery or within two working days. Forward Rate- Exchange rate quoted today for

delivery at some future specified date.

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TRANSACTION EXPOSURE

Transaction exposure arises from:

A. Purchasing or selling on credit goods orservices whose prices are stated in

foreign currencies.B. Borrowing or lending funds when repayment is

to be made in a foreign currency.

C. Being a party to an unperformed foreignexchange forward contract.D. Otherwise acquiring assets or incurringliabilities denominated in foreign currencies.

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TRANSLATION EXPOSURE

Monetary assets and liabilities are translatedat current exchange rates.

Non-monetary assets and liabilities aretranslated at historical rates.

Income statement items are translated at theaverage exchange rate for the period.

Dividends (distributions) are translated at theexchange rate on the date of payment.

Equity items are translated at historical rates.

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ECONOMIC EXPOSURE

Also known as Operative exposure, CompetitiveExposure.

Any change in the present value of a firm

resulting from changes in future operating cashflows caused by an unexpected change inexchange rates.

Planning for operating exposure is a total

management responsibility because it dependson the interaction of strategies in finance,marketing, purchasing, and production.

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FOREIGN CURRENCY FINANCE

FOREIGN DIRECT INVESTMENT- FDI

FOREIGN CURRENCY CONVERTIBLE BONDS-FCCB

AMERICAN DEPOSITORY RECEIPTS- ADR GLOBAL DEPOSITORY RECEIPTS- GDR

EXTERNAL COMMERCIAL BORROWINGS ECB

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FINANCING EXPORT

PRE SHIPMENT FINANCE

POST SHIPMENT FINANCE

ADVANCE AGAINST DRAFTS

CREDIT INSURANCE

FORFAITING

PACKING CREDIT GUARANTEES

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INTERNATIONAL TRADE

DOCUMENTS

Air Way Bill

Shipment Document Invoice for Freight

Certificate for Insurance

Guideline for Delivery, Handling etc.

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INTERNATIONAL TRADE

DOCUMENTS

B/L- Bill of Lading

Document of Shipping Company

Freight Payment Conditions- Payment byBuyer or Seller

Clean or Notification for Damage of Goods

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INTERNATIONAL TRADE

DOCUMENTS

Certificate of Origin

Required by Custom Authority of Importer

Used for Calculation of Custom Duty

Issued by Organizations like Chamber ofCommerce of exporter

Details of Exporter, Goods Description etc

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INTERNATIONAL TRADE

DOCUMENTS

Commercial Invoice

Bill of Exchange

Insurance Certificate Packing List along with Inspection

Certificate