QUESTION BANK IFM

1. What are the factors to be considered in FDI. 2. What is balance of payment? 3. What are the techniques for hedging the exchange rate risk? 4. Explain Nastro and Vastro types of bank account. 5. What is the difference between FDI and FII? 6. What are the difference between capital account and current account? 7. What are the techniques to optimize cash flow for MNC? 8. Write short notes on: a. Factoring b. Forfeiting 9. Explain: a) External commercial borrowing, b) ADR, c) GDR. 10. What is multilateral netting? (7) (3) (10) (3) (10) (3) (3) (7) (3) (7)

11. A US MNC is planning to set up a subsidiary in India (where hitherto it was exporting) in view of the rising demand for its products and competition from others. The initial cost of the project is estimated to be $400 million. Working capital requirement is estimated to be $ 50 million. It follows straight line method of depreciation. At present it is exporting 2 million units every year at a unit price of $ 80. Variable cost per unit is $40. The finance manager of the firm has following estimates for the project: i. ii. iii. iv. v. Variable cost of production $20 per unit. Additional fixed cost per annum - $ 30 million. Capacity of plant in India to produce and sell 4 million units. Life of the plant with no salvage value 5yrs. Firms existing working capital investment in the production and sale of 2 million units $ 10 million. The manager mentions that the exports will fall to 1.5 million units, in case the firm does not set up subsidiary in India. Tax rate 35%. Required rate of return is 12%. Assume no change in exchange rate and no withholding tax. Advise the MNC. (10)

12. Exchange rate : Can $ 0.665 per DM (spot) Can $ 0.670 per DM (3 months) Interest rates : DM 7 % p.a. Can $ 9 % p.a. Calculate the arbitrage gain possible from the above data. (10)

13. An Indian importer has to pay 2 million to an UK firm in 4 months time. To guard against possible rise of pound, he buys an option by paying 2% premium on current price. Spot rate is Rs. 77.50 per pound. Strike price is Rs. 78.20 per pound. What will be his action if the pound rises to Rs. 80 and if it falls to Rs. 76? (7)

14. Money and foreign exchange markets in London and New York are very efficient. You have the following information: London Spot exchange rate One year treasury bill rate Expected inflation rate $1.6000/ 5.00% 2.00% New York 0.6250/$ 6.00% ? (7)

15. From the following show the possibility of Triangular arbitrage opportunity if you start with $ 10,000 Currency Quotes Value of in US Value of MYR (Ringgit) in US Value of in MYR Rate $ 1.600 $0.200 MYR 8.10 (10)

16. You are required to find out the overall balance in the BOP statement by recording the following information: i) A US corporation invests in India Rs. 3,00,000/- to modernize its Indian subsidiary. ii) A tourist from Egypt purchases articles worthRs. 3000 to carry with him. He also pays hotel bill of Rs. 5000 to the Delhi tourist agency.

iii) Indian subsidiary of a US corporation remits Rs. 5000 as dividend to its parent company. iv) Indian subsidiary of a UK corporation sells part of its produce to African countries for Rs. 1,00,000. v) Indian subsidiary borrows a sum of Rs. 2,00,000 (repayable within a year) from the German money markets. vi) Indian subsidiary of a French company borrows Rs. 50,000 from the Indian public repayable after 2 years to invest in its modernization program. vii) Indian company buys a machine costing Rs. 1,00,000 from Japan, 60% payment immediate and remaining amount of Rs. 40,000 payable after 3 years. (10)

17. Smart Banking Corporation can borrow $ 5 million at 6% pa. It can use the proceeds to invest in Canadian dollars at 9% pa over a six.day period. The Canadian dollar is worth $0.95 and is expected to be worth $0.94 in six days. Based on this information, should smart Banking Corporation borrow US dollars and invest in Canadian dollars? What would be the gain or loss in US dollars? (10)

1. An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made. Open economies with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies. Read more: http://www.investopedia.com/terms/f/fdi.asp#ixzz1wTaRrJKw
Factors Influencing FDI Foreign direct investment not only brings in capital, it also brings in latest technologies and modern management practices. Such investments are crucial to ensue that any countrys industries would be able to create products and services in future that can be sold in international markets. As such FDI is important not just for the developing countries, it is also equally important for developed nations. Industrialized nations are among the largest recipient of FDI. Factors that are important for a country to attract FDI are give in the following; Supply factors: Lower production costs for certain products / industries compared with other countries attract foreign investment in those industries Better logistics, warehousing and transportation infrastructure and systems (by air, sea or over land) also attract foreign direct investment Abundant availability of natural resources and other factors of production lead to cheaper prices of these resources and may attract foreign direct investment Firms also make foreign direct investment in foreign countries to access to key technologies Demand factors: Closer and good customer access also factors to bring in foreign direct investment Advantages in marketing, being closer to customers, may also bring in FDI Firms may need to establish operations in foreign markets for exploiting of competitive advantages Companies that have strong global brands may want to have full control over their brands in

world markets and my engage in FDI for preservation of brand names and trade marks Customers of firms are also often traveling / moving to foreign countries. Firms may also need to establish operations in foreign countries due to their customers mobility Political factors: Firms may also invest in foreign countries for avoidance of any trade barriers posed by the home of host countries Home country or foreign country government may provide economic development incentives for FDI, encouraging firms to invest overseas.

2.
A record of all transactions made between one particular country and all other countries during a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. Balance of payments may be used as an indicator of economic and political stability. For example, if a country has a consistently positive BOP, this could mean that there is significant foreign investment within that country. It may also mean that the country does not export much of its currency. This is just another economic indicator of a country's relative value and, along with all other indicators, should be used with caution. The BOP includes the trade balance, foreign investments and investments by foreigners.

3.
http://www.slideshare.net/cwhizkid420/exchange-rate-risk-hedging-by-indian-companies

4. International accounting procedures between Local banks and overseas banks often involve the use of nostro and vostro accounts. A nostro (means "ours" in Latin) account is an account maintained by a Local bank with a foreign bank that allows the Local bank to buy foreign currency. A vostro (means "yours" in Latin) account is an account maintained by an overseas bank with a Local bank that allows the overseas bank to purchase Local currency. The system of

nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between the Country's (Local)Bank and foreign banks. Example : When X (Buyer) a trader in Base Country wants to purchase $5000 worth of goods by paying cash. Mr.X deposits the cash in his local bank in the country's currency for the corresponding amount ($5000) then a swift message is sent to the corresponding bank in the foreign country where the local bank holds a NOSTRO account requesting the bank to make the payment to Y (Seller) in his local currency i.e. US Dollars. Thus facilitating the trade between X & Y. IF Y wanted to buy something from X then the foreign bank would complete the deal using their VOSTRO account in X's country. 5.

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDIs more than then FIIs. FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practises and better management skills and even technology transfer.

Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDIs are long term. Summary 1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation. 2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

6.
1. Current account shows current year current year transactions and capital account shows both current transactions relating to businessman and initial capital of businessman. 2. According to FEMA Act 2000 , " There is no restrictions on holding or exchanging of foreign currency under Current Account . But Any foreign currency is under capital account , then it must be controlled under the regulations of RBI ." 3. In partnership , partners can make current account separately from capital account in which they can show only their salary , interest on capital and interest on drawing etc. and in capital account , they can show only their capital invested in the business of partnership. 4. USA has divided export and import transactions into 2 accounts: One is the current account and other is the capital account. The current account includes in

international trade in goods and services and with earnings on investments. The capital account includes of capital transfers and the acquisition and disposal of nonproduced, non-financial assets. 5. In general Current account is used for receipt and payment cash and non capital items and capital account is used for sources and utilization of capital .

7.

Techniques to optimize Cash Flows Cash flows can be optimized through: Accelerating cash inflows Minimizing currency conversion costs Managing inter-subsidiary cash transfers

Accelerating Cash Inflows Cash inflows can be prompted through quick deposit of customer's cheques,establishing collection centers, lock-box method and other devices. Minimizing currency conversion costs Cash flow can also be optimized through Netting. Netting involves offsetting receivables against payables of the various entities so that only the net amounts are eventually transferred among affiliates. An MNC can also utilize multilateral netting with outside firms and agencies. This technique optimizes cash flow by reducing the administrative and transaction costs arising out of currency conversion. It also reduces unnecessary float, funds that are in the process of being transferred among affiliates instead of being invested by the centre. The process of netting forces tight control over information on transaction

between subsidiaries leading to greater coordination among all subsidiaries to accurately report and settle their various accounts. Netting also makes cash flows forecasting easier since only net cash transfers are made at the end of each period, rather than individual cash transfers throughout the period. There are two kinds of netting. A bilateral netting system involves transactions between two units: between the parent and a subsidiary or between two subsidiaries. A multilateral netting system usually involves a more complex interchange among the parent and several subsidiaries. Multilateral netting system is most useful to MNCs in reducing administrative and currency conversion costs. Such a system is highly centralized so that all necessary information is consolidated. With the help of the consolidated cash flow information net cash positions for each pair of units (subsidiaries or parent) can be determined and the actual reconciliation at the end of each period can be done. Managing Inter-subsidiary Cash Transfers Through techniques of leading and lagging, cash flows can be managed to the advantage of a subsidiary, If A purchases supplies from B and pays for its supplies earlier than necessary. This technique is called leading. Alternatively, if B sells supplies to A, it could provide financing by allowing A to lag its payments. The leading or lagging strategy can help in improving efficiency of cash utilization and thereby reducing debt. Some host governments prohibit this practice by requiring that a payment between subsidiaries occurs at the time at which goods are transferred. MNC management must, therefore, be aware of existence of such prohibitory laws.

9.
http://www.indialiaison.com/ECB.htm

10.

Multilateral netting is a treasury management technique used by large companies to manage their intercompany payment processes, usually involving many currencies. Correctly applied, netting can yield significant savings from reduced foreign exchange trading and improved intercompany settlement efficiency. A netting system collates batches of cashflows between a defined set of entities, or Netting Participants, and offsets them against each other such that just a single cashflow to or from each Participant takes place to settle the net result of all cashflows. The netting process takes place on a cycle basis, typically monthly, and is managed by a central entity called the Netting Center.

http://www.euronetting.com/overview/docs/What%20is%20Netting.pdf