International Financial Management

Question 1

Complexities involved in International Capital Budgeting

Answer 1

Factors which affect a foreign project and are complex in nature than domestic projects are:

 Cash flows from foreign projects have to be converted into currency of parent organization.

 Parent cash flows are quite different from project cash flows.

 Profits remitted are subject to tax in both home and host country.

 Foreign exchange risk in cash flow.

 Changes in rates of inflation.

 Restrictions on cash flow distribution.

 Political risk.

 Estimation of terminal value in multinational capital budgeting is difficult.

Question 2

Instruments of International Finance
Or
International sources of finance

Answer 2

Foreign Currency Convertible Bonds (FCCBs)

American Depository Receipts (ADRs)

Global Depository Receipts (GDRs)

Euro-Convertible Bonds (ECBs)

 Other Sources
a. Euro Bonds
b. Euro-bonds with Equity Warrants
c. Syndicated bank loans
d. Foreign Bonds
e. Euro Commercial Papers
f. Credit Instruments

Question 3

Foreign Currency Convertible Bonds (FCCBs)

Answer 3

A type of convertible bond issued in currency different than issuer’s domestic currency

Question 4

American Depository Receipts (ADRs) vs
Global Depository Receipts (GDRs)

Answer 4

1)American Depository Receipts (ADRs)

 Depository receipts (DRs) issued by company in USA is known as ADRs.

 ADR is created by depositing securities of non-United States company with a custodian bank. Custodian bank informs the depository in US that ADRs can be issued.

 ADRs are US$ denominated and traded in same way as securities of US companies.

2) Global Depository Receipts (GDRs)

 Most GDRs are denominated in USD, Euro and Pound Sterling.

 Depository Receipts issued in US are called ADRs and outside of USA, these are called GDRs.

 DRs are created when local currency shares of Indian company are delivered to custodian bank against which Depository bank issues depository receipts in foreign currency.

Question 5

Euro-Convertible Bonds (ECBs)

Answer 5

 A convertible bond denominated in Euro which gives holders of bond an option to convert into a fix number of equity shares of the company.

Question 6

Impact of GDRs on Indian Capital Market

Answer 6

 Indian stock market is shifting from Bombay to Luxemburg.

 There is arbitrage possibility in GDR.

 Indian stock market is no longer independent from rest of the world.

 Indian retail investors are completely sidelined.

 Due to GDRs, foreign investment has flown into India

Question 7

Main objective of international cash management

Answer 7

The main objectives of an effective system of international cash management are:

(1) To minimize currency exposure risk

(2) To minimize overall cash requirements of the company as a whole without disturbing smooth operations of the subsidiary or its affiliate

(3) To minimize transaction costs

(4) To minimize country’s political risk

Question 8

Instrument of international finance

Answer 8

Euro bond

Foreign bond

Fully hedge bond

Euro commerical bond