IBO–06
INTERNATIONAL BUSINESS FINANCE
Attempt all questions • Each question carries marks as indicated
Q1
What are Euro Bonds? Explain the features and process of issuing Euro Bonds. How are they different from foreign bonds and domestic bonds? (20 MARKS)
20 MARKS
Introduction: The Euro Bond is an international bond that's denominated in a currency other than that of the country where it was issued. The majority of these bonds are issued by corporations, governments and international organisations to raise capital from foreign investors. Euro Bonds originated in Europe during the 1960s, but are now available globally. Euro Bonds have a significant impact on the global financial system because of their ability to offer access to capital from around the world at low interest rates.
1. Euro Bonds: Euro Bonds represent debt instruments in a non-native currency. Euro Bonds include, for instance, a bond denominated in dollars issued in London.
2. Currency Denomination: These bonds are usually denominated using major international currencies like the US Dollar, Euro, or Japanese Yen.
3. Euro Bonds issuers: Euro Bonds issued by multinational companies, sovereign governments and international agencies such as the World Bank.
4. Investors are a magnet for global investors looking to diversify their portfolios and secure returns, particularly in currencies that are traded internationally.
5. Features of Euro Bonds:
• Bonds issued by bearer: Usually issued in the form of bonds, ownership is transferred upon delivery.
• Fixed interest rate: Display a fixed coupon payment amount payable annually.
• Long-Term Mature: In general, they have maturities between 5 and 15 Years.
• No withholding tax: The interest is paid without deduction.
• Listing is listed on major stock exchanges, such as London and Luxembourg.
• Currency flexibility: Issued using any freely convertible currencies.
6. Process of Issuing Euro Bonds:
• The issue is managed by an investment bank or consortium.
• Syndicate formation: A group is formed of underwriters and agents.
• Documentation: A prospectus (or offering circular) is prepared by investors.
• Pricing the Bond: Determines the bond's coupon rates and issue prices.
• Subscriptions and Distribution: bonds are offered to both institutional and private investors globally.
• Listing of Bonds and Trading: Following the issue, bonds are listed for trading on an international exchange.
7. Advantages of Euro Bonds:
• Increased investor base
• Low cost of borrowing due to global demand.
• Freedom from domestic regulations
8. Differences between Euro Bonds, Foreign Bonds, and Domestic Bonds:
Note of Critical Importance: Eurobonds allow issuers to reach a broader market and reduce capital costs. They also carry a risk associated with exchange rates and are affected by global interest rate fluctuations.
Conclusion: The Euro Bond has become an important component of global finance. It facilitates capital mobility globally and provides investment opportunities outside national borders. Their tax efficiency and appeal to a wide range of investors distinguish them from other bonds, both domestic and foreign.
Memory Aid: Features – GLOBAL. Gross interest, Listings, Offshore issues, Bearer forms, Access to wide investors, Long maturities.
1. Euro Bonds: Euro Bonds represent debt instruments in a non-native currency. Euro Bonds include, for instance, a bond denominated in dollars issued in London.
2. Currency Denomination: These bonds are usually denominated using major international currencies like the US Dollar, Euro, or Japanese Yen.
3. Euro Bonds issuers: Euro Bonds issued by multinational companies, sovereign governments and international agencies such as the World Bank.
4. Investors are a magnet for global investors looking to diversify their portfolios and secure returns, particularly in currencies that are traded internationally.
5. Features of Euro Bonds:
• Bonds issued by bearer: Usually issued in the form of bonds, ownership is transferred upon delivery.
• Fixed interest rate: Display a fixed coupon payment amount payable annually.
• Long-Term Mature: In general, they have maturities between 5 and 15 Years.
• No withholding tax: The interest is paid without deduction.
• Listing is listed on major stock exchanges, such as London and Luxembourg.
• Currency flexibility: Issued using any freely convertible currencies.
6. Process of Issuing Euro Bonds:
• The issue is managed by an investment bank or consortium.
• Syndicate formation: A group is formed of underwriters and agents.
• Documentation: A prospectus (or offering circular) is prepared by investors.
• Pricing the Bond: Determines the bond's coupon rates and issue prices.
• Subscriptions and Distribution: bonds are offered to both institutional and private investors globally.
• Listing of Bonds and Trading: Following the issue, bonds are listed for trading on an international exchange.
7. Advantages of Euro Bonds:
• Increased investor base
• Low cost of borrowing due to global demand.
• Freedom from domestic regulations
8. Differences between Euro Bonds, Foreign Bonds, and Domestic Bonds:
| Basis | Euro Bonds | Foreign Bonds | Domestic Bonds |
|---|---|---|---|
| Currency | Denominated in a foreign currency | In the currency of the issuing country | The currency is local currency |
| Market | Issued outside of the home country | Issued in another country | Issued and traded in the home country |
| Regulation | Fewer regulations | Subject to the host country's regulations | Subject to local regulations |
| Investors | Investors abroad | Local investors in the host country | Domestic Investors |
| Example | London issues dollar bonds | Yankee bond (US-market by a foreign firm). | An Indian rupee bond issued by an Indian company |
Note of Critical Importance: Eurobonds allow issuers to reach a broader market and reduce capital costs. They also carry a risk associated with exchange rates and are affected by global interest rate fluctuations.
Conclusion: The Euro Bond has become an important component of global finance. It facilitates capital mobility globally and provides investment opportunities outside national borders. Their tax efficiency and appeal to a wide range of investors distinguish them from other bonds, both domestic and foreign.
Memory Aid: Features – GLOBAL. Gross interest, Listings, Offshore issues, Bearer forms, Access to wide investors, Long maturities.
Q2
What is a Money Market? What are some of the different instruments used in international money markets? Explain three instruments in detail. (20 MARKS)
20 MARKS
Introduction: Money Markets are a segment of the financial markets where short-term money is borrowed and lent. The money market deals with instruments with maturities below one year. The international money market facilitates short-term lending and borrowing across borders. They ensure global liquidity and financial stability. The international money markets are crucial for multinational companies to manage their working capital and liquidity. They also help governments to understand the exchange rate risks.
1. Definition: The Money Market is a highly liquid market that deals in short-term debt like Treasury Bills and Commercial Papers.
2. Money Market Objectives
• Provide short-term funding.
• Maintaining liquidity within the financial system.
• Supporting central banks with the implementation of monetary policies.
3. Participants of the International Money Market: Commercial Banks, Central banks, multinational companies, governments and financial institutions.
4. International Money Market Instruments – Features
• High liquidity
• Low Risk
• Short-term maturity.
• Trading globally among institutional Investors.
5. Major International Money Market Instruments
• Treasury bills (T-Bills).
• Certificates of Deposit (CDs).
• Commercial Paper (CP)
• Bankers’ Acceptance (BA)
• Repurchase Agreements (Repo).
• Interbank Deposits
6. Treasury Bills (T-Bills) – Detailed Explanation
• Issued by governments to raise short-term funds.
• Sold at a discount and redeemed at face value.
• Backed by sovereign guarantee → safest instrument.
• Used as benchmark for short-term interest rates.
• Maturities: 91 days, 182 days, 364 days.
• Highly liquid and actively traded in secondary markets.
7. Certificates of Deposit (CDs) – Detailed Explanation
• Time deposits issued by banks that are negotiable.
• Fixed interest rate; maturities from 3 months to 1 year.
• Tradable in secondary market → provides liquidity.
• Issued in large denominations (usually $100,000+).
• Used by banks for short-term funding needs.
• Euro CDs are issued in foreign currencies outside the home country.
8. Commercial Paper (CP) – Detailed Explanation
• Unsecured promissory notes issued by financially strong corporations.
• Used to finance short-term liabilities (receivables, inventory).
• Maturities: 15 days to 1 year (commonly 30–270 days).
• Issued at discount from face value.
• No collateral → depends on issuer’s credit rating.
• Euro Commercial Paper (ECP) is issued in international markets.
9. Other Important Instruments (Brief)
• Bankers’ Acceptance (BA): Used in international trade; time draft guaranteed by bank.
• Repurchase Agreements (Repo): Short-term sale of securities with agreement to repurchase.
Note of Critical Importance: International money markets link national markets, ensure global liquidity, and influence international interest rates. They are dominated by institutional players and operate 24/7 across time zones.
Conclusion: The money market provides short-term investment and borrowing tools for managing liquidity. Instruments like Treasury Bills, Certificates of Deposit, and Commercial Paper offer flexibility and safety to both investors and borrowers in the global financial system.
Memory Aid: Instruments (TCCBR):
T → Treasury Bill
C → Certificate of Deposit
C → Commercial Paper
B → Bankers’ Acceptance
R → Repo
1. Definition: The Money Market is a highly liquid market that deals in short-term debt like Treasury Bills and Commercial Papers.
2. Money Market Objectives
• Provide short-term funding.
• Maintaining liquidity within the financial system.
• Supporting central banks with the implementation of monetary policies.
3. Participants of the International Money Market: Commercial Banks, Central banks, multinational companies, governments and financial institutions.
4. International Money Market Instruments – Features
• High liquidity
• Low Risk
• Short-term maturity.
• Trading globally among institutional Investors.
5. Major International Money Market Instruments
• Treasury bills (T-Bills).
• Certificates of Deposit (CDs).
• Commercial Paper (CP)
• Bankers’ Acceptance (BA)
• Repurchase Agreements (Repo).
• Interbank Deposits
6. Treasury Bills (T-Bills) – Detailed Explanation
• Issued by governments to raise short-term funds.
• Sold at a discount and redeemed at face value.
• Backed by sovereign guarantee → safest instrument.
• Used as benchmark for short-term interest rates.
• Maturities: 91 days, 182 days, 364 days.
• Highly liquid and actively traded in secondary markets.
7. Certificates of Deposit (CDs) – Detailed Explanation
• Time deposits issued by banks that are negotiable.
• Fixed interest rate; maturities from 3 months to 1 year.
• Tradable in secondary market → provides liquidity.
• Issued in large denominations (usually $100,000+).
• Used by banks for short-term funding needs.
• Euro CDs are issued in foreign currencies outside the home country.
8. Commercial Paper (CP) – Detailed Explanation
• Unsecured promissory notes issued by financially strong corporations.
• Used to finance short-term liabilities (receivables, inventory).
• Maturities: 15 days to 1 year (commonly 30–270 days).
• Issued at discount from face value.
• No collateral → depends on issuer’s credit rating.
• Euro Commercial Paper (ECP) is issued in international markets.
9. Other Important Instruments (Brief)
• Bankers’ Acceptance (BA): Used in international trade; time draft guaranteed by bank.
• Repurchase Agreements (Repo): Short-term sale of securities with agreement to repurchase.
Note of Critical Importance: International money markets link national markets, ensure global liquidity, and influence international interest rates. They are dominated by institutional players and operate 24/7 across time zones.
Conclusion: The money market provides short-term investment and borrowing tools for managing liquidity. Instruments like Treasury Bills, Certificates of Deposit, and Commercial Paper offer flexibility and safety to both investors and borrowers in the global financial system.
Memory Aid: Instruments (TCCBR):
T → Treasury Bill
C → Certificate of Deposit
C → Commercial Paper
B → Bankers’ Acceptance
R → Repo
3(a)
Explain and illustrate the inter-relationship between the current account, the capital account and the official reserve account. (10 MARKS)
10 MARKS
Introduction: The balance of payments (BoP) records all economic transactions between residents of a country and the rest of the world over a period. It consists of three main accounts — Current Account, Capital Account, and Official Reserves Account. These three are inter-linked and together always balance (BoP identity).
1. Current Account: Records trade in goods & services, primary income (investment income), and secondary income (transfers).
• Surplus → Exports > Imports + net income inflows
• Deficit → Imports > Exports + net income outflows
2. Capital Account: Records capital transfers and acquisition/disposal of non-produced, non-financial assets + net lending/borrowing (FDI, portfolio investment, loans, etc.).
• Surplus → Net capital inflow
• Deficit → Net capital outflow
3. Official Reserves Account: Records changes in central bank holdings of foreign currency, gold, SDRs, and reserve position in IMF.
• Increase → Central bank buys foreign currency (reserve accumulation)
• Decrease → Central bank sells foreign currency (reserve depletion)
Inter-relationship & Illustration:
BoP Identity: Current Account + Capital Account + Official Reserves = 0
Case 1: Current Account Deficit
→ Must be financed either by capital inflow (Capital Account surplus) or by running down reserves.
Example: India imports more → Current Account Deficit → Financed by FDI/FII inflows (Capital surplus) or RBI sells dollars (reserve loss).
Case 2: Current Account Surplus
→ Leads to capital outflow or reserve accumulation.
Example: China exports more → Current Account Surplus → Invests in US Treasury bonds (Capital outflow) or adds to forex reserves.
Case 3: Both Current & Capital Deficit
→ Only possible if reserves are depleted (BoP crisis).
Case 4: Both Current & Capital Surplus
→ Reserves increase (e.g., oil-exporting countries).
Conclusion: Current account, capital account and official reserve account are interdependent. A deficit in one is automatically offset by a surplus in the other two, maintaining overall BoP equilibrium.
Memory Help: Current + Capital + Reserves = Zero → “Trade ↔ Capital ↔ Reserves”
1. Current Account: Records trade in goods & services, primary income (investment income), and secondary income (transfers).
• Surplus → Exports > Imports + net income inflows
• Deficit → Imports > Exports + net income outflows
2. Capital Account: Records capital transfers and acquisition/disposal of non-produced, non-financial assets + net lending/borrowing (FDI, portfolio investment, loans, etc.).
• Surplus → Net capital inflow
• Deficit → Net capital outflow
3. Official Reserves Account: Records changes in central bank holdings of foreign currency, gold, SDRs, and reserve position in IMF.
• Increase → Central bank buys foreign currency (reserve accumulation)
• Decrease → Central bank sells foreign currency (reserve depletion)
Inter-relationship & Illustration:
BoP Identity: Current Account + Capital Account + Official Reserves = 0
Case 1: Current Account Deficit
→ Must be financed either by capital inflow (Capital Account surplus) or by running down reserves.
Example: India imports more → Current Account Deficit → Financed by FDI/FII inflows (Capital surplus) or RBI sells dollars (reserve loss).
Case 2: Current Account Surplus
→ Leads to capital outflow or reserve accumulation.
Example: China exports more → Current Account Surplus → Invests in US Treasury bonds (Capital outflow) or adds to forex reserves.
Case 3: Both Current & Capital Deficit
→ Only possible if reserves are depleted (BoP crisis).
Case 4: Both Current & Capital Surplus
→ Reserves increase (e.g., oil-exporting countries).
Conclusion: Current account, capital account and official reserve account are interdependent. A deficit in one is automatically offset by a surplus in the other two, maintaining overall BoP equilibrium.
Memory Help: Current + Capital + Reserves = Zero → “Trade ↔ Capital ↔ Reserves”
3(b)
Discuss the different adjustment policies required when a country is faced with a balance of payments surplus. (10 MARKS)
10 MARKS
Introduction: A persistent BoP surplus means a country is earning more foreign exchange than it spends, leading to reserve accumulation, currency appreciation pressure, and possible inflation. Adjustment policies aim to restore equilibrium without harming growth.
Adjustment Policies for BoP Surplus:
1. Revaluation/Appreciation: Allow domestic currency to appreciate → Exports become costlier, imports cheaper → Reduces surplus.
2. Expenditure-Switching Policies: Reduce export subsidies, impose export taxes, or liberalise imports.
3. Expenditure-Reducing Policies: Tight monetary & fiscal policy to reduce domestic demand and import growth.
4. Sterilized Intervention: Central bank sells domestic currency & buys foreign assets while sterilizing (offsetting) the impact on money supply.
5. Capital Outflow Liberalisation: Encourage outward FDI, portfolio investment abroad, or ease restrictions on citizens investing overseas.
6. Import Liberalisation: Reduce tariffs and non-tariff barriers to encourage imports.
7. Build Sovereign Wealth Funds: Invest surplus reserves abroad (e.g., Norway, Singapore, China).
8. Structural Policies: Improve productivity in non-tradable sectors to reduce export competitiveness naturally.
Examples:
• China: Allowed gradual yuan appreciation + massive reserve accumulation + outward FDI.
• Germany (within Eurozone): Relied on wage restraint and structural competitiveness.
Conclusion: BoP surplus adjustment requires a mix of exchange rate, trade, monetary, and capital account policies. The aim is to prevent overheating, currency overvaluation, and loss of export competitiveness while utilising the surplus productively.
Memory Help: Surplus Adjustment → “R-E-S-C-I-L-S”
Revaluation – Expenditure policy – Sterilization – Capital outflow – Import liberalisation – Liberalise – Sovereign funds
Adjustment Policies for BoP Surplus:
1. Revaluation/Appreciation: Allow domestic currency to appreciate → Exports become costlier, imports cheaper → Reduces surplus.
2. Expenditure-Switching Policies: Reduce export subsidies, impose export taxes, or liberalise imports.
3. Expenditure-Reducing Policies: Tight monetary & fiscal policy to reduce domestic demand and import growth.
4. Sterilized Intervention: Central bank sells domestic currency & buys foreign assets while sterilizing (offsetting) the impact on money supply.
5. Capital Outflow Liberalisation: Encourage outward FDI, portfolio investment abroad, or ease restrictions on citizens investing overseas.
6. Import Liberalisation: Reduce tariffs and non-tariff barriers to encourage imports.
7. Build Sovereign Wealth Funds: Invest surplus reserves abroad (e.g., Norway, Singapore, China).
8. Structural Policies: Improve productivity in non-tradable sectors to reduce export competitiveness naturally.
Examples:
• China: Allowed gradual yuan appreciation + massive reserve accumulation + outward FDI.
• Germany (within Eurozone): Relied on wage restraint and structural competitiveness.
Conclusion: BoP surplus adjustment requires a mix of exchange rate, trade, monetary, and capital account policies. The aim is to prevent overheating, currency overvaluation, and loss of export competitiveness while utilising the surplus productively.
Memory Help: Surplus Adjustment → “R-E-S-C-I-L-S”
Revaluation – Expenditure policy – Sterilization – Capital outflow – Import liberalisation – Liberalise – Sovereign funds
4(a)
What is the Foreign Exchange Market? Who are the major participants in a foreign exchange market? Discuss the various types of foreign exchange transactions. (10 MARKS)
10 MARKS
Introduction: The Foreign Exchange Market (Forex or FX Market) is the largest and most liquid financial market in the world where currencies are bought, sold and exchanged. It operates 24 hours a day, 5.5 days a week across major financial centres (London, New York, Tokyo, Singapore, etc.). Daily turnover exceeds $7.5 trillion (BIS 2022).
1. Definition & Functions:
• Facilitates conversion of one currency into another.
• Enables international trade and investment.
• Provides hedging against currency risk.
• Allows speculation and arbitrage.
• Helps in transfer of purchasing power across countries.
2. Major Participants:
• Commercial & Investment Banks: Act as market makers, provide quotes, and handle bulk of transactions.
• Central Banks: Intervene to manage exchange rates and maintain reserves.
• Foreign Exchange Brokers: Match buyers and sellers, earn commission.
• Multinational Corporations: Convert currencies for trade, investment, dividend repatriation.
• Speculators & Hedge Funds: Take positions to profit from currency movements.
• Retail Traders & Individuals: Growing segment via online platforms.
• Governments & International Institutions: IMF, World Bank, etc.
3. Types of Foreign Exchange Transactions:
• Spot Transactions: Immediate exchange (settlement within T+2 days). Most common (≈90% of turnover).
• Forward Transactions: Agreement today to exchange currencies at a future date at a fixed rate. Used for hedging.
• Swap Transactions: Simultaneous spot purchase and forward sale (or vice-versa). Most widely used (≈50% of market).
• Currency Futures: Standardized forward contracts traded on exchanges (e.g., CME).
• Currency Options: Right (not obligation) to buy/sell currency at a predetermined rate.
• Non-Deliverable Forwards (NDFs): Cash-settled forwards for restricted currencies (e.g., INR, KRW).
Conclusion: The foreign exchange market is the backbone of international finance. It enables smooth cross-border payments, risk management, and price discovery of currencies. Its decentralized, over-the-counter nature and huge liquidity make it unique.<背景
Memory Aid: Types → “S-F-S-F-O-N”
Spot – Forward – Swap – Futures – Options – NDF
1. Definition & Functions:
• Facilitates conversion of one currency into another.
• Enables international trade and investment.
• Provides hedging against currency risk.
• Allows speculation and arbitrage.
• Helps in transfer of purchasing power across countries.
2. Major Participants:
• Commercial & Investment Banks: Act as market makers, provide quotes, and handle bulk of transactions.
• Central Banks: Intervene to manage exchange rates and maintain reserves.
• Foreign Exchange Brokers: Match buyers and sellers, earn commission.
• Multinational Corporations: Convert currencies for trade, investment, dividend repatriation.
• Speculators & Hedge Funds: Take positions to profit from currency movements.
• Retail Traders & Individuals: Growing segment via online platforms.
• Governments & International Institutions: IMF, World Bank, etc.
3. Types of Foreign Exchange Transactions:
• Spot Transactions: Immediate exchange (settlement within T+2 days). Most common (≈90% of turnover).
• Forward Transactions: Agreement today to exchange currencies at a future date at a fixed rate. Used for hedging.
• Swap Transactions: Simultaneous spot purchase and forward sale (or vice-versa). Most widely used (≈50% of market).
• Currency Futures: Standardized forward contracts traded on exchanges (e.g., CME).
• Currency Options: Right (not obligation) to buy/sell currency at a predetermined rate.
• Non-Deliverable Forwards (NDFs): Cash-settled forwards for restricted currencies (e.g., INR, KRW).
Conclusion: The foreign exchange market is the backbone of international finance. It enables smooth cross-border payments, risk management, and price discovery of currencies. Its decentralized, over-the-counter nature and huge liquidity make it unique.<背景
Memory Aid: Types → “S-F-S-F-O-N”
Spot – Forward – Swap – Futures – Options – NDF
5(a)
Differentiate between a Forward Contract and a Future Contract. (10 MARKS)
10 MARKS
Introduction: Forward and Future contracts are derivative instruments used to hedge or speculate on currency, commodity or interest-rate movements. Both lock in a price today for settlement in the future, but they differ significantly in structure, trading, and risk profile.
Difference between Forward Contract and Future Contract
Conclusion: Forwards offer flexibility and no daily cash flow, suitable for genuine hedgers. Futures provide transparency, liquidity and negligible counterparty risk, ideal for both hedging and speculation.
Memory Help: FORWARD → Flexible, OTC, Risky counterparty
FUTURE → Formalized, Exchange, Safe (clearing house)
Difference between Forward Contract and Future Contract
| Basis | Forward Contract | Future Contract |
|---|---|---|
| Nature | Customized private agreement between two parties | Standardized contract traded on organized exchanges |
| Trading Place | Over-the-counter (OTC) – directly between parties/banks | Exchanges (e.g., CME, NSE, EUREX) |
| Contract Size & Terms | Fully customizable (amount, maturity, currency pair) | Fixed standard sizes and maturity dates |
| Settlement | Only at maturity (physical or cash) | Daily mark-to-market settlement |
| Counterparty Risk | Exists – depends on counterparty credit | Almost eliminated – clearing house guarantee |
| Margin Requirement | No formal margin (credit line with bank) | Initial + variation margin required daily |
| Liquidity | Low – difficult to exit before maturity | High – can be closed anytime on exchange |
| Regulation | Less regulated | Highly regulated by exchange & authorities |
| Cost | No brokerage; only bank spread | Brokerage + exchange fees |
| Example | Company locks USD/INR at 83.50 for 3 months with bank | NSE USDINR futures contract of $1,000, expiry last Wednesday |
Conclusion: Forwards offer flexibility and no daily cash flow, suitable for genuine hedgers. Futures provide transparency, liquidity and negligible counterparty risk, ideal for both hedging and speculation.
Memory Help: FORWARD → Flexible, OTC, Risky counterparty
FUTURE → Formalized, Exchange, Safe (clearing house)
5(b)
Discuss various currency translation methods. (10 MARKS)
10 MARKS
Introduction: Currency translation is the process of converting the financial statements of foreign subsidiaries into the parent company’s reporting currency for consolidation. Different methods are used depending on the nature of the subsidiary’s operations and accounting standards (IAS 21, AS 11, US GAAP).
Various Currency Translation Methods:
1. Current Rate Method
• All assets & liabilities → Closing rate
• Equity (except retained earnings) → Historical rate
• Income & expenses → Average rate
• Translation gain/loss → Other Comprehensive Income (OCI)
• Used when subsidiary is independent (non-integral).
2. Temporal Method (Monetary-Non-monetary)
• Monetary items (cash, receivables, payables) → Closing rate
• Non-monetary items (inventory, fixed assets) → Historical rate
• Income/expenses → Rate at transaction date or average
• Translation gain/loss → Profit & Loss A/c
• Used when subsidiary is integrated with parent.
3. Closing Rate Method → Same as Current Rate Method (common name).
4. Current/Non-current Method (older method)
• Current assets/liabilities → Closing rate
• Non-current → Historical rate
• Largely replaced by current & temporal methods.
5. Integral vs Non-integral Operations (Ind AS 21)
• Integral (extension of parent) → Temporal method
• Non-integral (independent) → Current rate method
Conclusion: Choice of method significantly affects reported profits, equity and ratios. Current rate method defers exchange differences in OCI, while temporal method impacts P&L immediately. Selection depends on functional currency and economic dependence on parent.
Memory Help: Translation Methods → “C-T-C-M-I”
Current rate – Temporal – Closing rate – Monetary/Non-monetary – Integral/Non-integral
Various Currency Translation Methods:
1. Current Rate Method
• All assets & liabilities → Closing rate
• Equity (except retained earnings) → Historical rate
• Income & expenses → Average rate
• Translation gain/loss → Other Comprehensive Income (OCI)
• Used when subsidiary is independent (non-integral).
2. Temporal Method (Monetary-Non-monetary)
• Monetary items (cash, receivables, payables) → Closing rate
• Non-monetary items (inventory, fixed assets) → Historical rate
• Income/expenses → Rate at transaction date or average
• Translation gain/loss → Profit & Loss A/c
• Used when subsidiary is integrated with parent.
3. Closing Rate Method → Same as Current Rate Method (common name).
4. Current/Non-current Method (older method)
• Current assets/liabilities → Closing rate
• Non-current → Historical rate
• Largely replaced by current & temporal methods.
5. Integral vs Non-integral Operations (Ind AS 21)
• Integral (extension of parent) → Temporal method
• Non-integral (independent) → Current rate method
Conclusion: Choice of method significantly affects reported profits, equity and ratios. Current rate method defers exchange differences in OCI, while temporal method impacts P&L immediately. Selection depends on functional currency and economic dependence on parent.
Memory Help: Translation Methods → “C-T-C-M-I”
Current rate – Temporal – Closing rate – Monetary/Non-monetary – Integral/Non-integral
6(a)
Identify different stages of development of Multinational Corporations. Also, enumerate five criteria for a truly multinational company. (12 MARKS)
12 MARKS
Introduction: Multinational Corporations (MNCs) evolve through distinct stages as they increase their international involvement. The progression reflects growing commitment, decentralisation, and finally global integration of operations.
Stages of Development of MNCs:
1. Domestic Stage: Focus entirely on home market; exports may exist but no foreign production.
2. International Stage: Begins exporting actively; establishes export department or agents abroad.
3. Multinational Stage: Sets up subsidiaries/joint ventures in multiple countries; decision-making decentralised to adapt to local markets.
4. Global Stage: Treats the world as a single market; centralised strategy with coordinated production, R&D, and marketing across countries.
5. Transnational Stage (Highest): Combines global integration with local responsiveness; knowledge and resources flow in all directions (not just from headquarters).
Five Criteria for a Truly Multinational (Transnational) Company:
1. Significant foreign operations: Substantial assets, sales, and employment in many countries.
2. Global strategic orientation: Decisions based on worldwide opportunities, not just home-country interests.
3. Geographically dispersed & integrated value chain: R&D, production, marketing spread globally and coordinated.
4. Multinational ownership & top management: Shareholders and senior executives from several nationalities.
5. Free flow of resources: Capital, technology, people, and knowledge move freely across borders without national bias.
Conclusion: Evolution from domestic → transnational reflects increasing globalisation. A truly multinational company operates as a borderless entity maximising global efficiency while remaining locally responsive.
Memory Help: LiberStages → D-I-M-G-T (Domestic → International → Multinational → Global → Transnational)
Criteria → “GLOBE” → Global mindset, Location spread, Ownership diversity, Borderless resource flow, Efficiency worldwide
Stages of Development of MNCs:
1. Domestic Stage: Focus entirely on home market; exports may exist but no foreign production.
2. International Stage: Begins exporting actively; establishes export department or agents abroad.
3. Multinational Stage: Sets up subsidiaries/joint ventures in multiple countries; decision-making decentralised to adapt to local markets.
4. Global Stage: Treats the world as a single market; centralised strategy with coordinated production, R&D, and marketing across countries.
5. Transnational Stage (Highest): Combines global integration with local responsiveness; knowledge and resources flow in all directions (not just from headquarters).
Five Criteria for a Truly Multinational (Transnational) Company:
1. Significant foreign operations: Substantial assets, sales, and employment in many countries.
2. Global strategic orientation: Decisions based on worldwide opportunities, not just home-country interests.
3. Geographically dispersed & integrated value chain: R&D, production, marketing spread globally and coordinated.
4. Multinational ownership & top management: Shareholders and senior executives from several nationalities.
5. Free flow of resources: Capital, technology, people, and knowledge move freely across borders without national bias.
Conclusion: Evolution from domestic → transnational reflects increasing globalisation. A truly multinational company operates as a borderless entity maximising global efficiency while remaining locally responsive.
Memory Help: LiberStages → D-I-M-G-T (Domestic → International → Multinational → Global → Transnational)
Criteria → “GLOBE” → Global mindset, Location spread, Ownership diversity, Borderless resource flow, Efficiency worldwide
6(b)
Differentiate between Foreign Direct Investment and Portfolio Investment. (8 MARKS)
8 MARKS
Introduction: Foreign investment is classified into FDI and FPI based on the degree of control and long-term interest.
Difference between FDI and FPI
Conclusion: FDI brings stable capital, technology and employment; FPI provides market liquidity but can cause sudden outflows. Most countries welcome FDI while regulating FPI to reduce volatility.
Memory Aid: FDI → CONTROL & COMMITMENT FPI → CAPITAL only
Difference between FDI and FPI
| Basis | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|---|
| Objective | Establish lasting interest & management control | Earn financial returns only |
| Control | Significant influence (usually ≥10% ownership) | No management control (passive investor) |
| Duration | Long-term commitment | Short to medium-term; easily reversible |
| Assets | Real assets (plant, machinery, technology) | Financial assets (stocks, bonds) |
| Risk & Return | Higher risk, higher potential return | Lower risk, market-linked return |
| Impact on Economy | Technology transfer, jobs, exports | Capital market liquidity, volatility risk |
| Examples | Suzuki in Maruti, Walmart in India | FII buying shares on NSE |
Conclusion: FDI brings stable capital, technology and employment; FPI provides market liquidity but can cause sudden outflows. Most countries welcome FDI while regulating FPI to reduce volatility.
Memory Aid: FDI → CONTROL & COMMITMENT FPI → CAPITAL only
7(a)
Describe various issues that are unique to international project appraisal. (10 MARKS)
10 MARKS
Introduction: International project appraisal involves evaluating cross-border investment proposals. Apart from normal domestic project risks, it faces additional unique complexities arising from multiple currencies, countries, and regulations.
Unique Issues in International Project Appraisal:
1. Exchange Rate Risk: Fluctuations in exchange rates affect project cash flows, cost of imported equipment, repatriated profits, and debt servicing.
2. Predicting Cash Flows: Greater uncertainty due to political instability, demand volatility, and blocked funds.
3. Differential Taxation & Fiscal Laws: Different corporate tax rates, withholding taxes, tax holidays, depreciation rules, and double taxation treaties.
4. Inflation Differentials: Host country may have higher inflation, distorting real returns and relative costs.
5. Financing Structure & Cost of Funds: Availability and cost of local vs. international debt/equity, subsidised export credit, and parent guarantees.
6. Restrictions on Repatriation: Limits on dividend, royalty, interest, and capital repatriation reduce effective returns.
7. Transfer Pricing Regulations: Host governments scrutinise intra-group pricing, affecting reported profitability.
8. Accounting & Reporting Standards: Differences between IFRS, US GAAP, and local GAAP complicate consolidation and performance evaluation.
9. Legal & Regulatory Environment: Foreign investment laws, labour regulations, environmental norms, and expropriation risk.
10. Socio-Cultural Factors: Local business practices, management style, and ethical standards influence project execution and acceptance.
Important Note: International projects must be evaluated not only on financial NPV but also on strategic fit, risk-adjusted returns, and adaptability to host-country conditions.
Conclusion: International project appraisal requires a multidimensional approach integrating financial, economic, political, and cultural factors. Proper quantification and mitigation of cross-border risks are essential for sustainable success.
Memory Help: Issues → E-P-F-I-F-R-T-A-L-S
Exchange – Political – Fiscal – Inflation – Financing – Repatriation – Transfer pricing – Accounting – Legal – Social
Unique Issues in International Project Appraisal:
1. Exchange Rate Risk: Fluctuations in exchange rates affect project cash flows, cost of imported equipment, repatriated profits, and debt servicing.
2. Predicting Cash Flows: Greater uncertainty due to political instability, demand volatility, and blocked funds.
3. Differential Taxation & Fiscal Laws: Different corporate tax rates, withholding taxes, tax holidays, depreciation rules, and double taxation treaties.
4. Inflation Differentials: Host country may have higher inflation, distorting real returns and relative costs.
5. Financing Structure & Cost of Funds: Availability and cost of local vs. international debt/equity, subsidised export credit, and parent guarantees.
6. Restrictions on Repatriation: Limits on dividend, royalty, interest, and capital repatriation reduce effective returns.
7. Transfer Pricing Regulations: Host governments scrutinise intra-group pricing, affecting reported profitability.
8. Accounting & Reporting Standards: Differences between IFRS, US GAAP, and local GAAP complicate consolidation and performance evaluation.
9. Legal & Regulatory Environment: Foreign investment laws, labour regulations, environmental norms, and expropriation risk.
10. Socio-Cultural Factors: Local business practices, management style, and ethical standards influence project execution and acceptance.
Important Note: International projects must be evaluated not only on financial NPV but also on strategic fit, risk-adjusted returns, and adaptability to host-country conditions.
Conclusion: International project appraisal requires a multidimensional approach integrating financial, economic, political, and cultural factors. Proper quantification and mitigation of cross-border risks are essential for sustainable success.
Memory Help: Issues → E-P-F-I-F-R-T-A-L-S
Exchange – Political – Fiscal – Inflation – Financing – Repatriation – Transfer pricing – Accounting – Legal – Social
7(b)
Explain the Capital Asset Pricing Model (CAPM) in relation to cost of capital. (10 MARKS)
10 MARKS
Introduction: The Capital Asset Pricing Model (CAPM) is a financial model that calculates the expected return on equity based on its systematic risk relative to the market. In international finance, it is widely used to estimate the cost of equity capital for project appraisal and valuation.
CAPM Formula:
Ke = Rf + β (Rm − Rf)
Where:
• Ke = Cost of equity (required return)
• Rf = Risk-free rate
• β (Beta) = Measure of systematic risk of the stock/project
• Rm = Expected market return
• (Rm − Rf) = Market risk premium
Components Explained:
1. Risk-Free Rate (Rf): Return on government securities (e.g., 10-year US Treasury or Indian G-Sec).
2. Market Risk Premium (Rm − Rf): Extra return investors demand for taking equity market risk (historically 5–8%).
3. Beta (β): Sensitivity of the investment’s returns to market movements.
• β = 1 → Same risk as market
• β > 1 → Higher risk
• β < 1 → Lower risk
Application in Cost of Capital:
• CAPM-derived Ke is used to calculate Weighted Average Cost of Capital (WACC).
• WACC = (E/V × Ke) + (D/V × Kd × (1−T))
• Used as discount rate in international NPV calculations.
• Country Risk Premium (CRP) is often added in emerging markets: Ke = Rf + β(Rm − Rf) + CRP
Advantages:
• Simple and objective
• Focuses only on non-diversifiable (systematic) risk
• Widely accepted for global investors
Limitations:
• Assumes perfect markets and single-period
• Beta may be unstable for international projects
• Difficult to estimate true market premium in emerging economies
Conclusion: CAPM provides a systematic way to determine the cost of equity by linking return to risk. In international finance, it is adjusted with country risk premium and used as a key input in WACC for cross-border project appraisal and valuation.
Memory Help: CAPM → “Risk-free + Beta × Market Premium (+ Country Premium)”
CAPM Formula:
Ke = Rf + β (Rm − Rf)
Where:
• Ke = Cost of equity (required return)
• Rf = Risk-free rate
• β (Beta) = Measure of systematic risk of the stock/project
• Rm = Expected market return
• (Rm − Rf) = Market risk premium
Components Explained:
1. Risk-Free Rate (Rf): Return on government securities (e.g., 10-year US Treasury or Indian G-Sec).
2. Market Risk Premium (Rm − Rf): Extra return investors demand for taking equity market risk (historically 5–8%).
3. Beta (β): Sensitivity of the investment’s returns to market movements.
• β = 1 → Same risk as market
• β > 1 → Higher risk
• β < 1 → Lower risk
Application in Cost of Capital:
• CAPM-derived Ke is used to calculate Weighted Average Cost of Capital (WACC).
• WACC = (E/V × Ke) + (D/V × Kd × (1−T))
• Used as discount rate in international NPV calculations.
• Country Risk Premium (CRP) is often added in emerging markets: Ke = Rf + β(Rm − Rf) + CRP
Advantages:
• Simple and objective
• Focuses only on non-diversifiable (systematic) risk
• Widely accepted for global investors
Limitations:
• Assumes perfect markets and single-period
• Beta may be unstable for international projects
• Difficult to estimate true market premium in emerging economies
Conclusion: CAPM provides a systematic way to determine the cost of equity by linking return to risk. In international finance, it is adjusted with country risk premium and used as a key input in WACC for cross-border project appraisal and valuation.
Memory Help: CAPM → “Risk-free + Beta × Market Premium (+ Country Premium)”
8(a)
Discuss the role of transfer pricing in cash management. (10 MARKS)
10 MARKS
Introduction: Transfer pricing is the pricing of goods, services, intangibles and loans transferred between related entities of the same multinational group. It is a powerful tool in international cash management because it directly influences the quantum and timing of cash flows across borders.
Role of Transfer Pricing in Cash Management:
1. Internal Fund Flow Control: High transfer price → cash moves from subsidiary to parent; Low transfer price → cash retained in subsidiary.
2. Tax Optimization: Shifting profits to low-tax jurisdictions reduces overall tax liability → more cash retained in the group.
3. Repatriation without Restrictions: In countries with dividend/repatriation controls, royalties, management fees, or high-priced imports act as alternative channels to bring cash home.
4. Foreign Exchange Exposure Management: Adjusting invoice currency and timing of inter-company payments hedges FX risk.
5. Liquidity Balancing: Surplus cash in one subsidiary can be quickly moved to a cash-deficit unit via transfer pricing.
6. Avoiding External Borrowing: Internal “loans” via high transfer prices replace costly external debt.
7. Performance Evaluation & Motivation: Fair transfer pricing ensures subsidiaries are judged correctly, encouraging efficient cash generation.
8. Compliance with Arm’s Length Principle: OECD guidelines and local tax laws require documentation to avoid penalties and double taxation.
Important Note: Aggressive transfer pricing invites tax audits, adjustment of profits, penalties and reputational damage. Hence it must balance cash management benefits with full regulatory compliance.
Conclusion: Transfer pricing is one of the most effective tools in the treasury toolkit of a multinational for global cash mobilisation, tax efficiency and risk management when used responsibly within legal bounds.
Memory Aid: Transfer Pricing Cash Roles → “C-A-S-H-F-L-O-W”
Control – Allocation – Savings (tax) – Hedging FX – Flow balancing – Loan substitute – Optimal performance – With compliance
Role of Transfer Pricing in Cash Management:
1. Internal Fund Flow Control: High transfer price → cash moves from subsidiary to parent; Low transfer price → cash retained in subsidiary.
2. Tax Optimization: Shifting profits to low-tax jurisdictions reduces overall tax liability → more cash retained in the group.
3. Repatriation without Restrictions: In countries with dividend/repatriation controls, royalties, management fees, or high-priced imports act as alternative channels to bring cash home.
4. Foreign Exchange Exposure Management: Adjusting invoice currency and timing of inter-company payments hedges FX risk.
5. Liquidity Balancing: Surplus cash in one subsidiary can be quickly moved to a cash-deficit unit via transfer pricing.
6. Avoiding External Borrowing: Internal “loans” via high transfer prices replace costly external debt.
7. Performance Evaluation & Motivation: Fair transfer pricing ensures subsidiaries are judged correctly, encouraging efficient cash generation.
8. Compliance with Arm’s Length Principle: OECD guidelines and local tax laws require documentation to avoid penalties and double taxation.
Important Note: Aggressive transfer pricing invites tax audits, adjustment of profits, penalties and reputational damage. Hence it must balance cash management benefits with full regulatory compliance.
Conclusion: Transfer pricing is one of the most effective tools in the treasury toolkit of a multinational for global cash mobilisation, tax efficiency and risk management when used responsibly within legal bounds.
Memory Aid: Transfer Pricing Cash Roles → “C-A-S-H-F-L-O-W”
Control – Allocation – Savings (tax) – Hedging FX – Flow balancing – Loan substitute – Optimal performance – With compliance
8(b)
Describe various types of guarantees/bonds used in international trade. (10 MARKS)
10 MARKS
Introduction: Guarantees and bonds are independent undertakings issued by banks to secure performance or payment in international trade contracts. They protect parties against non-performance and are governed by ICC rules (URDG 758, UCP 600, ISP98).
Various Types of Guarantees/Bonds Used in International Trade:
1. Bid Bond / Tender Bond: Ensures bidder will sign contract if awarded.
2. Performance Bond: Guarantees exporter will fulfil contract as per terms (usually 5–10% of contract value).
3. Advance Payment Guarantee: Protects buyer if advance paid is not utilised (repayable if supplier fails).
4. Retention Money Guarantee: Allows contractor to receive full payment; bank guarantees withheld amount.
5. Payment Guarantee: Bank guarantees payment to exporter if importer defaults.
6. Shipping Guarantee: Enables importer to take delivery of goods when original B/L is missing.
7. Customs Bond / Transit Guarantee: Ensures payment of duties/taxes if goods are lost in transit.
8. Export Credit Guarantee: Protects exporter against political/commercial risks of non-payment.
9. Warranty / Maintenance Bond: Covers defects liability period after project completion.
10. Counter Guarantee: Local bank issues guarantee on behalf of foreign bank (indirect guarantee).
Important Note: These are “on-demand” or “conditional” instruments. On-demand bonds (most common) are payable on first written demand without proof of default → high risk for applicant.
Conclusion: Guarantees/bonds are essential risk-mitigation tools in international trade. They build trust between unknown parties, facilitate large contracts, and ensure smooth execution of cross-border transactions.
Memory Help: Types → “B-P-A-R-P-S-C-E-W-C”
Bid – Performance – Advance – Retention – Payment – Shipping – Customs – Export credit – Warranty – Counter
Various Types of Guarantees/Bonds Used in International Trade:
1. Bid Bond / Tender Bond: Ensures bidder will sign contract if awarded.
2. Performance Bond: Guarantees exporter will fulfil contract as per terms (usually 5–10% of contract value).
3. Advance Payment Guarantee: Protects buyer if advance paid is not utilised (repayable if supplier fails).
4. Retention Money Guarantee: Allows contractor to receive full payment; bank guarantees withheld amount.
5. Payment Guarantee: Bank guarantees payment to exporter if importer defaults.
6. Shipping Guarantee: Enables importer to take delivery of goods when original B/L is missing.
7. Customs Bond / Transit Guarantee: Ensures payment of duties/taxes if goods are lost in transit.
8. Export Credit Guarantee: Protects exporter against political/commercial risks of non-payment.
9. Warranty / Maintenance Bond: Covers defects liability period after project completion.
10. Counter Guarantee: Local bank issues guarantee on behalf of foreign bank (indirect guarantee).
Important Note: These are “on-demand” or “conditional” instruments. On-demand bonds (most common) are payable on first written demand without proof of default → high risk for applicant.
Conclusion: Guarantees/bonds are essential risk-mitigation tools in international trade. They build trust between unknown parties, facilitate large contracts, and ensure smooth execution of cross-border transactions.
Memory Help: Types → “B-P-A-R-P-S-C-E-W-C”
Bid – Performance – Advance – Retention – Payment – Shipping – Customs – Export credit – Warranty – Counter