International Finance 1 & 2 Revised

7/28/2019 International Finance 1 & 2 Revised

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International Finance

Emerging trends in globalmarket

Session 1 & 2


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International Finance..

From Corporate perspective

IF

FUNDINGREQUIREMTNS

DOMESTIC

GLOBAL

MANAGINGRISKS


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Shortterm

Mediumterm

Longterm


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Short term

for foreign traderelated

operations

Export related

Import related

DomesticSimple workingcapital loan in

INR


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Long term

Debt

ECB

FCCB

equity ADR/GDR


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risks

Currencyexposure

Counter partydefault exposure

Countryexposure


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Emerging global environment

Trends to be taken note of

Removal of country barriers for Cross Border Trade & Capital flows

Significant shift towards

Open economy Liberalization of imports rationalization of import tariff

Concerted efforts for export promotion

Freedom for raising capital from global markets

Availing cheaper credit from Off-shore markets

Reduction of currency control

Global economy slow down

Recession .

Depression?

Revival.?


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Corporate today.

Fully conversant with

Euro dollars / offshore currencies

Reuter screen / Bloomberg

Currency movements

Interest rate movements / LIBOR

Arbitrage opportunities

Speaks more confidently on Joint Ventures / WOS /Cross border trade finance


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Libor explained

http://www.bbalibor.com/bbalibor-

explained/faqs

http://www.bbalibor.com/bbalibor-

explained/the-basics
http://www.bbalibor.com/bbalibor-explained/faqshttp://www.bbalibor.com/bbalibor-explained/faqshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/the-basicshttp://www.bbalibor.com/bbalibor-explained/faqshttp://www.bbalibor.com/bbalibor-explained/faqshttp://www.bbalibor.com/bbalibor-explained/faqs


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Present day scenario.

One set of transaction Bank / financial institution in Singapore

Organizing credit in USD/EUR

Borrower in Dubai / India

Project in Nigeria Joint venture in South African Pharma Industry

Parent company organizing guarantee from Europe

Funding through banks in London / Frankfurt

Arranger in London

Trading office in Dubai / Singapore Procurement from Korea

Direct dispatch to Europe / any third country


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Need for International finance

Counter party can be anywhere no barrier for either trade or financialservices

Country need not consume all the items produced by them Country may not produce whatever they need

Theory of comparative advantage Absolute advantage in production of certain goods

Sourcing of inputs from anywhere moving the manufacturing unit to acomfort zone

Raising Credit in foreign currency depending on the exposure Domestic savings may not be sufficient for major projects

Cost of funding may be cheaper from global markets at Internationalmarket rates . Offshore markets


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Development of Euro / offshoremarkets..


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Euro /offshore markets.

Originated with former Soviet Union and Soviet bloc

End of 1950s

wanted to keep USD deposits outside USA due toanti-soviet sentiments First transaction from Soviet Union with Banque

Commerciale de LEurope due Nord, Paris -

EURO BANK

Eurodollar market was born.

Further developments 1960 - 70s Ceiling on interest rate for deposits in US Banks

Regulation Q


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Euro /offshore markets

Interest rates offered to investors were lower dueto Regulation M - reserve requirements

Deposit insurance (FDIC) cost in US

Above restrictions impact on cost of funds forbranches operating in US but not applicable forbranches outside US Example..Citi Bank operating in London


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Euro /offshore markets.

BOP crisis in 60s due to which US govt. introduced credit restraint programme Voluntary Foreign Credit

Restraint Programme (VFCRP)

tax on interest earnings Interest Equalisation Tax (IET)

1963 In UK

Restrictions placed by UK authorities on use of GBP forfinancing third country trade

British banks turned to use USD for financing third

country trading


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cost of funds

In US interest rate for investments 6%

Statutory reserve in US 5%***

Deposit Insurance in US 0.05%

What will be the cost for mobilizing and maintaining USD

100?

net cost of funds will be (6% + 0.05% ) = 6.05% -

For lending USD 95

Actual cost of funds works out to be 6.05/95*100

Equivalent to 6.3684%

Adding cushion for profit, other expenses primerate will be arrived at..


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If the same funds are to be lent from a

country which is not subject to all the above

regulationsthat is from London

lending rate will be comparatively.


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How euro / off-shore market

operates


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Illustration. IBM USA has account with Citi Ny with balance

USD500 mn

IBM is looking for short term investment opportunities

got the best quote from

Standchart London. Invested USD400 mn for 91 days

How funds are transferred from Citi New York toSCB London..

From City NY to SCB New York for the accountof their London branch


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On maturity IBM wants to continue theirinvestment at the best possible interest rate IBM was able to get best quote from BHF Bank

Frankfurt

Investment shifted from London to Frankfurt How transfer will be effected

From SCB London to BHF Frankfurt

From SCBs account with their New York branch toBHFs account withJP Morgan New York


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In the meantime One of the leading construction company in Singapore,

under a joint venture with Italian collaborator is lookingfor a syndicated loan

Amount USD300 mn BHF Bank, Frankfurt quotes a competitive interest rate

This local company can use these funds for its overseasproject or for one of their local projects

How funds will be transferred,,,,,,?


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Whether global markets are really integrated.?.

Country specific legal provisions.

Non-residents either denied to invest in financial markets or

controlled access

Local tax law may discriminate between domestic and foreign

investors

Different accounting practices.disclosure norms market practices

effect

Creating Informational asymmetries


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Exchange risks.

FII Invested in Indian stock market when USD was

at Rs.52.45 (May 2012)

Presently USD is around Rs.54.60. Are they benefited by USD appreciation?

If your company forwards a proposal to pay your

salary in USD instead of INR Will it be a better offer.????


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Country specific guidelines

Depending on the countrys Balance of Trade /

BOP / Forex reserve

Country specific policy on full convertibility

Influence on external environments


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reserve

BOP surplus

Gold reserve

Balance with IMF Undrawn SDRs Special Drawing Rights


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Certain concepts balance of trade

/payment

reserves. Balance of Trade

Current account transactions

Merchandise trade /services / unilateral transfers / interest and

dividend remittances (Factor income) Investment income inflow / investment income outflow

Capital account transactions

In bound - FDI / FII / equities / ECBs / Non resident investments

Out bound

Balance of Payment Countrys reserve position

Impact of these data for a MNC or any corporate whointends to expand their activities globally


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Certain examples..

Outward remittance OF USD 130 Mn by TATA TELESERVICES.. for import ofequipments from KOREA

If the same company avails a foreign currency loan of USD 130 mn from HSBCHONGKONG to meet their import commitment loan component will betreated as

If the same company is raising a loan in USD with State Bank of India,Mumbai Branch

SINGTEL , SGP remits USD 80 mn for investment in India with one of theleading Telecom companies for 3G allotment

One of the Non Resident Indians, remitting INR 100,000 to his bank accountin India through SBI New York.

He remits USD 25000 to his family member towards family maintenance(remittance in the name of the family member)

Family member who receives this remittance wants to keep Resident Foreigncurrency account with this funds.

SUZUKI MOTORS wants to remit dividend earnings (160% dividend) fromtheir investment in Maruti Udyog Ltd in USD to their parent company in

Japan.


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Impact of BOT / BOP data

BOT surplus / deficit US economy how US economy ismanaging their trade deficit

around 3 Tn USD investments by differentcountries in US treasury instruments

Current account deficit / surplus Deficit pressure on servicing the debts


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ImpactsEncourage inflows through capital flow or borrowings

Preferably medium and long term flows

Pressure on trade payments

Comparative GDP growth

Interest ratesPressure on the domestic currency demand and supply forcurrency and its impact on the exchange rate

BOP surplus

components of inflows short term or long term

.South East Asian crisis


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Components of reserve

BOP surplus

Gold reserve

Undrawn SDRs Balance with IMF


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Full convertibility of a currency

Freedom to:

Posses foreign exchange without any limit either

in the form of currency notes or in the form of

assetsbank balances Permitted to use foreign exchange for any purpose

either for current or capital account transactions

without any limit

Convert Home currency (HC)to Foreign currency

(FC)or FC to HC at the market exchange rates


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Freedom

to

Possess forexwithout any

limit

Use forex forany purpose

Convert HCto FC and FCto HC at

market rates


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Convertibility and foreign

exchange market


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Purpose of publishing the data

International performance in trading

Maintaining record of inflow and outflow of capital

Provides data on currency supply and demand Balance of payment data

Export of goodsdemand for USD will ..

Invisibles services tourism consultancy -

Insurance

Income transfer of income to home country


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Unilateral transfers

Foreign aid, economic grants, private gifts ordonations Inflow increases the demand for that currency in

the global market

Accumulating foreign assets by selling homecurrency (by residents) local currencydepreciates

impact of inflation Sterilization operation

Building foreign assets in home country moreforeign investment flows local currencyappreciates


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Impact of full convertibility on

corporate

Free movement of capital

Both inbound and outbound

Inbound investments / borrowings atcomparatively cheaper cost Cost of funds and competitive production cost

Outbound investment resulting in Strategic acquisition of industries abroad

Moving the manufacturing activities at the best

location bringing down the cost of production Inflow of dividends and earnings from the Regulators

view respective govts advantage


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Certain cases ..

Mexican Peso Crisis

South East Asian Crisis

Origin of Asian Crisis

Lessons from this crisis

Argentine Peso Crisis


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Mexican Peso crisis

Left blank waiting for the group presentation


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Followed by Asian Crisis

blank


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When a country can have full

convertibility

Rate of Inflation under control

Volatility of exchange rates- stable

exchange rates NPA level in financial sector at the

minimum levels

Interest rates - low

Cash Reserve Ratio at minimum level

CAD 2% of GDP


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Global Forex marketAVERAGE DAILY TURNOVER

APRIL 1989 : USD 590 bn

APRIL 1992 : USD 820 bn

APRIL 1995 : USD 1.190 tn




APRIL 2007 : USD 3.2 tn APRIL 2010 : USD 4.0 Tn Source ..BIS data Sep 2010


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Market turnover by currency pair

USD/EUR 27%

USD/YEN 13%

USD/GBP 12%

USD/AUD 6%

USD/CHF 5%

USD/OTHERS 19%


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CURRENCY DISTRIBUTION

..TURNOVER

USD 86.3%

EUR 37%

YEN 16.5%

CHF 6.8%

Emerging market currencies 19.8%

(all currencies 200%)


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Components of forex transactions

Trade related transactions (1.5%)

Non-refundable remittances (0.5%)

Gifts / foreign aids / donations /freight related

remittances /invisible / services / interest anddividend payments

Capital transfers (8%)

Balance

(90%) - ?


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The London Interbank Bid Rate (LIBID) is a bid

rate the rate bid by banks on off - shore

deposits (i.e., the rate at which a bank is

willing to borrow from other banks). It is "theopposite" of the LIBOR (an offered, hence

"ask" rate).


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Whilst the British Bankers Association set

LIBOR rates, there is no correspondent official

LIBID fixing. Dictionary Libid is also known as

the antonym of livid or being progressivelymad.


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Conventional wisdom used to assert that a

LIBID rate could be calculated by subtracting a

fixed amount (often given as 1/8th of 1%)

from the prevailing BBA LIBOR rate, howeverthis is no longer the case as bid/offer spreads

have tightened in recent years..


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Additionally, it cannot be the case that the

LIBOR / LIBID spread is always 1/8th of 1% for

all maturities and all currencies all the time


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How to manage the above exposures

through various instruments & institutions?


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Topic for the next session

Different types of international exposures and

the relevant risk factors

Types of exposures

Short term / medium term / long term

Debt or equity

maturity

Types of risks

Commercial risk

Exchange rate risk


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Regulations in International exposures

Foreign Exchange Management Act (FEMA) 1999 On flow of foreign exchange payment or receipt of

foreign exchange

Foreign Trade Policy 2009-14 (FTP)

Movement of goods and export promotionalmeasures

International Chamber of Commerce (ICC Paris)

Trade related instruments (UCP 600/ ISBP 681/ URDG758 / Incoterms 2010)

FEDAI guidelines


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Authorised Persons

Authorised Dealer Category I

AD Category II- remittances of Current Account

Money Changer TC /FC issue or encash


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END OF SESSION

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International Finance 1 & 2 Revised

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