The Foreign Exchange Market
Exchange Rates
Cash, Tom, Spot and Forward Rates
Bid-Ask Spreads
Arbitrage
Corporate Response to Exchange Rate Fluctuations
Forecasting Exchange Rates
Interest Rate-Inflation Rate Differentials
Interest Rate Parity (IRP)
Purchasing Power Parity (PPP)
Internal Forecasting
Current Account and FDI Anticipation
Risk Management
Risk Identification
Risk Evaluation
Risk Attitude
Risk Control
Risk in International Business
Meaning of Currency Risk
Exposure-Meaning and Types
Economic Exposure
Transaction Exposures
Translation Exposure
Currency Risk Management Alternatives
Derivative Instruments and their Uses
Forward Money Cover Hedge
Money Market Hedge
Operational Hedges
Currency Used for Borrowing and Pricing
Currency Diversification
Borrowing Alternatives
Borrow Local in Local Currency
Borrow Local in Foreign Currency
Borrow Abroad in Local Currency
Borrow Abroad in Foreign Currency
Borrow Internally in Any Currency
International Text Planning
Double Taxation Relief
Provisions of Indian Income Act for Double Taxation
Transfer Pricing
International Cash Management.
The objective of corporate financial management is to
maximise shareholder wealth. With the integration of world markets, the amount
of foreign exchange transactions and the consequent risk for the international
business community has increased. Exchange rates are determined by the forces of
demand and supply.
Though forecasting is no simple task, the law of demand and supply provide a
base to forecast exchange rates and prove how interest rates and inflation have
a direct impact on the exchange rates. The interest rate parity theorem,
purchasing power parity theorem and the international Fischer effect theorem
help us understand and predict short-term and long-term exchange rate
fluctuations.
The integration of world capital markets have opened up new avenues for funding
and have developed innovative methods for pricing of financial instruments.
Various financial and technological innovations have helped managers build
suitable risk management systems. The use of derivatives in risk management has
substantially increased in many parts of the world.
The geographical diversification attained by MNCs help hedge themselves against
adverse economic conditions in any one part of the world. The advent and growth
of Eurocurrency and international bond markets in funding have enabled
corporations to borrow and invest across national borders without the hassles of
currency conversion. Innovation in technology has made international cash
management easier.
The development of highly liquid short money markets has enabled companies to
earn money on their idle cash. To enable free flow of trade and capital,
countries are entering into double taxation avoidance treaties with other
countries. While countries provide tax incentives for promoting investments,
they also have stringent transfer pricing regulations to check any implicit tax
evasion through differential pricing for associate and unrelated companies.
Short Case Studies / Caselets
