International financial environment is totally different from domestic financial environment. International financial management is subject to several external forces, like foreign exchange market, currency convertibility, international monitory system, balance of payments, and international financial markets. 1. Foreign Exchange Market Foreign exchange market is the market in which money denominated in one currency is bought and sold with money denominated in another currency. It is an overthe counter market, because there is no single physical or electronic market place or an organized exchange with a central trade clearing mechanism where traders meet and exchange currencies. It spans the globe, with prices moving and currencies trading somewhere every hour of every business day. World’s major trading starts each morning in Sydney and Tokyo, and ends up in the San Francisco and Los-Angeles. The foreign exchange market consists of two tiers: the inter bank market or wholesale market, and retail market or client Continue reading
International Business Finance
Types of Foreign Bonds
Yankee Bonds Yankee Bonds are US dollar denominated issues by foreign borrowers (usually foreign governments or entities, supranationals and highly rated corporate borrowers) in the US bond markets. Yankee bond has certain peculiar features associated with the US domestic market. SEC regulates the international bond issues and requires complete disclosure documents in detail than the prospectus used in Eurobond issues. Foreign borrower will have to adopt the US accounting practices and the US credit rating agencies will have to provide rating for these bonds. These bonds are sponsored by a US domestic underwriting syndicate and require SEBI (Securities and Exchange Board of India) registration prior to selling them in the domestic US market. Reliance Industries Ltd. has been the most successful corporate to tap this instrument with a 50-year, $50 million Yankee Bond issue. Samurai Bonds These are bonds issued by non-Japanese borrowers in the domestic Japanese markets. Borrowers are Continue reading
Important Perspectives on Asset Securitization
Asset securitization is the transformation of a mix of illiquid individual loans that are combined into relatively similar pools and transformed into highly liquid bonds traded in securities markets and usually, when securities are backed by non-mortgage loans, they are referred to as asset-backed securities (ABS). Securities issued exclusively against credit and loans with mortgage guarantees are referred to as mortgage-backed securities (MBS). Assets like ABS, MBS and it likes are now widely spread in fixed income portfolios at both the institutional and individual investor level. Although the largest and most well known example of asset securitization is the residential mortgage market. The dealings of asset securitization transactions vary, the typical transaction involves the sale by a bank or financial institution (who are called originator) of certain assets on its balance sheet to a trust, corporation or a separate entity, called special purpose vehicle (SPV). Thus, through the asset securitization Continue reading
Centralized Cash Management Operations of Multinational Corporations
International money managers attempt to attain on a worldwide basis the traditional domestic objectives of cash management: (1) bringing the company’s cash resources within control as quickly and efficiently as possible and (2) achieving the optimum conservation and utilization of these funds. Accomplishing the first goal requires establishing accurate, timely forecasting and reporting systems, improving cash collections and disbursements, and decreasing the cost of moving funds among affiliates. The second objective is achieved by minimizing the required level of cash balances, making money available when and where it is needed, and increasing the risk-adjusted return on those funds that can be invested. Restrictions and typical currency controls imposed by governments inhibit cash movements across national boundaries. These restrictions are different from one country to other. Managers require lot of foresight, planning, and anticipation. Other complicating factors in international money management include multiple tax jurisdictions, multiple currencies, and relative absence of Continue reading
The Role of Derivatives in the Financial Crisis
Derivative contracts are probabilistic bets on future events, they are securities with a price that are dependent upon or derived from one or more underlying assets. Many people argue that derivatives reduce systemic problems, in that participants who cannot bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. We have now reached the stage where those who work in finance, and many who work outside finance, need to understand how derivatives work, how they are used, and how they are priced. For this reason, derivatives are at the center of everything. However, in 2008 the world witnessed a financial and economic hurricane that left massive financial and economic damages. It was universally recognized as the worst economic crash since the Great Depression. The old saying has it that success has Continue reading
Understanding Inflation-Linked Bonds (ILBs)
The recent Monetary Policy released by Reserve Bank of India (RBI) laid its thrust on controlling the spiraling inflation, especially the food price inflation. One of the reasons behind the Cash Reserve Ratio (CRR) hike was to “curtail the rising inflationary expectations (higher expected price trends)” In the past RBI has been concerned about the fact that a common man does not have any protection against rising prices, vis No Inflation Hedge. The common man has to rely on traditional but inefficient methods to hedge the real inflation risks, such as Gold and real assets such as commodities or real estate or even excessive stocking of goods In developed markets like US, the government has issues “Treasury Inflation Protected Securities” known as TIPS. Globally more than USD 1 trillion worth inflation linked bonds must be outstanding. Inflation-linked bonds (ILB) securities give an opportunity to market participants and investors to hedge Continue reading