DOMESTIC AND FOREIGN FINANCE

Presented by:

VIRENDRA KHARBALE(26)
MMS-1 YEAR
CKTIMSR,NEW PANVEL

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Financial Management
Management of funds is a critical aspect of financial
management. Management of funds act as the
foremost concern whether it is in a business
undertaking or in an educational institution. Financial
management, which is simply meant dealing with
management of money matters.

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Meaning of Financial Management
By Financial Management we mean efficient use of
economic resources namely capital funds. Financial
management is concerned with the managerial decisions
that result in the acquisition and financing of short term
and long term credits for the firm.

Here it deals with the situations that require selection of

specific assets, or a combination of assets and the
selection of specific problem of size and growth of an
enterprise.

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Objectives of Financial Management
Profit Maximization:
The objective of financial management is the same as the objective
of a company which is to earn profit. But profit maximization alone
cannot be the sole objective of a company. It is a limited objective. If
profits are given undue importance then problems may arise as
discussed below.

The term profit is vague and it involves much more contradictions.

Profit maximization must be attempted with a realization of risks
involved. A positive relationship exists between risk and profits. So
both risk and profit objectives should be balanced.

Profit Maximization fails to take into account the time pattern of

returns. Profit maximization does not take into account the social
considerations
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Contd..
Wealth Maximization
The value of a firm is represented by the market price of
the company's stock. The market price of a firm's stock
represents the assessment of all market participants as to
what the value of the particular firm is.

It takes in to account present and prospective future

earnings per share, the timing and risk of these earning,
the dividend policy of the firm and many other factors that
bear upon the market price of the stock. Market price acts
as the performance index or report card of the firm's
progress and potential.
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Domestic financial management
Although this represents the base operations of
the subject matter, it pays almost always to
address the different dimensions of standard day-
to-day business practices applied on regional or
single subsidiary/unit level. The pay-back of
related project costs is normally only months in
terms of resultant financial cost reductions and/or
improved returns [FCM].  At the same time we
prepare/enhance the grounds for any interrelated
risk management.  6
Scope / Approach of domestic finance
• Focus on activities within one country
• Internal Policies
• Guidelines & Procedures
• Practices
• In-depth review
• Cash Flow Cycle (from billing to funds
availability and position mgt.)
• Instruments used

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Emphasis / Highlights
Rationalisation of tasks
Improved performance
Process
Financial Results
Hidden Agenda / ”Leads”
Recommend Treasury and/or Financial
Management review

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• Financial Markets:
• Primary Market
I. Markets that involve the issue of new securities by the
borrower in return for cash from investors (Capital
formation occurs)
• Secondary Market
Markets that involve buyers and sellers of existing
securities. Funds flow from buyer to seller. Seller
becomes the new owner of the security. (No capital
formation occurs)
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 Contd..
Financial Decision Making
The primary aspects of financial decision making relate to
investment, financing and dividends:
 Investments must be financed in some way; however
there are always financing alternatives that can be
considered. For example it is possible to raise funds from
selling new shares, borrowing from banks or taking credit
from suppliers.
 A key financing decision is whether profits earned by the
business should be retained rather than distributed to
shareholders via dividends. If dividends are too high, the
business may be starved of funding to reinvest in growing
revenues and profits.
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• BANKING INSTITUTIONS:
 BANKING INSTITUTIONS In financial economics, a financial
institution is an institution that provides financial services for its
clients or members.
 Probably the most important financial service provided by financial
institutions is acting as financial intermediaries.
 Most financial institutions are highly regulated by government.
 Broadly speaking, there are three major types of financial institutions:
Deposit-taking institutions that accept and manage deposits and
make loans, including banks, building societies, credit unions, trust
companies, and mortgage loan companies Insurance companies and
pension funds; and Brokers, underwriters and investment funds.

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Utilization of Funds
Effective utilization of funds as an important aspect of
financial management avoids the situations where funds
are either kept idle or proper uses are not being made.
Funds procured involve a certain cost and risk.

If the funds are not used properly then running business
will be too difficult. In case of dividend decisions we also
consider this. So it is crucial to employ the funds properly
and profitably.

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• CAPITAL MARKET:
• CAPITAL MARKET capital market is a market for securities (debt or equity),
where business enterprises and governments can raise long-term funds . It is
defined as a market in which money is provided for periods longer than a
year ..
 
• MONEY MARKET :
• MONEY MARKET The money market is a component of the financial
markets for assets involved in short-term borrowing and lending with original
maturities of one year or shorter time frames. Trading in the money markets
involves Treasury bills, commercial paper, bankers' acceptances, certificates of
deposit, federal funds, and short-lived mortgage-and asset-backed
securities. It provides liquidity funding for the global financial system.
•  

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• What Does Financial Instrument Mean?:
• A real or virtual document representing a legal agreement
involving some sort of monetary value.
• In today's financial marketplace, financial instruments can
be classified generally as equity based, representing
ownership of the asset, or debt based, representing a loan
made by an investor to the owner of the asset.
• Foreign exchange instruments comprise a third, unique type
of instrument.
• Different subcategories of each instrument type exist, such
as preferred share equity and common share equity
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INTERNATIONAL FINANCIAL
MARKETS
 International finance is the branch of economics that studies the
dynamics of exchange rates, foreign investment, and how these affect
international trade. It also studies international projects, international
investments and capital flows, and trade deficits. It includes the study
of futures, options and currency swaps. International finance is a
branch of international economic.
CORPORATE SOURCES AND USES OF FUNDS
NATIONAL CAPITAL MARKETS INTERNATIONAL
FINANCIAL CENTERS
THE EUROMARKETS
DEVELOPMENT BANKS

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 Foreign direct investment (FDI) or foreign investment refers to long term
participation by country A into country B. It usually involves participation in
management, joint-venture, transfer of technology and expertise. There are
two types of FDI: inward foreign direct investment and outward foreign direct
investment, resulting in a net FDI inflow (positive or negative) and "stock of
foreign direct investment", which is the cumulative number for a given period.
Direct investment excludes investment through purchase of shares.
 foreign investment
 foreign direct investor may be classified in any sector of the economy
and could be any one of the following :
 an individual;
 a group of related individuals;
 an incorporated or unincorporated entity;
 a public company or private company;
 a government body;
 an estate (law), trust or other social institution; or
 any combination of the above.
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international investments:
International investment theory explains the flow of
investment capital into and out of a country by investors
who want to maximize the return on their investments.
One of the major factors that influences international
investment is the potential return on alternative
investments in the home country or other foreign markets.

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 Opportunity Cost
 International investment theory is largely determined by the opportunity cost
of investment. International investors compare various investment alternatives
and select the opportunity that is likely to maximize returns.
 Foreign Portfolio Investment
 Foreign portfolio investment (FPI) is passive foreign investment where
investors do not directly participate in the investment in the foreign country.
Instead, investors put their money into foreign securities and other
investments to earn interest or dividends.
 Foreign Direct Investment
 Foreign direct investment (FDI) is the other part of international investment
theory, and is an active investment in a foreign country. Instead of investing in
securities, investors directly build factories or gain controlling interest in
foreign businesses to earn profits.
 Theories of FDI
 In general, it is helpful to look at FDI theories as an attempt to answer the
"who, what, when, where, why, and how" of a particular investment, and to
determine whether the economic factors involved justify making foreign
investment.
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 NATIONAL CAPITAL MARKETS AS
INTERNATIONAL CENTERS
A. Principal Functions of Financial Centers between savers and
borrowers
1. To transfer purchasing power
2. To allocate funds
B. International Financial Market
1. Development of most important:
a. London
b. New York
c. Tokyo
C. Prerequisites to be a financial center
a. political stability
b. minimal government interventions
c. legal infrastructure
d. financial infrastructure
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Foreign Access to Domestic Markets
1. The Foreign Bond Market
a. Extension of domestic market
b. Issues floated by foreign cos. Or governments
2.The Foreign Bank Market
a. Extension of domestic markets
b. Important funding source: Japanese banks for U.S. 3.
The Foreign Equity Market Cross listing internationally can
1.) diversify risk
2.) increase potential demand
3.) build base of global owners.

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THE EUROMARKETS
THE EUROMARKETS : The most important international financial
markets today.
A.The Eurocurrency Market
1. Composed of euro banks who accept/maintain deposits of foreign
currency
2. Dominant currency: US$
B. Growth of Eurodollar Market caused by restrictive US government
policies.1. Reserve requirements on deposits
2. Special charges and taxes
3. Required concessionary loan rates
4. Interest rate ceilings
5. Rules which restrict bank competition.

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Eurobond vs. Eurocurrency Loans
1. Five Differences
a. Eurocurrency loans use variable rates
b. Loans have shorter maturities
c. Bonds have greater volume
d. Loans have greater flexibility
e. Loans obtained faster
Note Issuance Facility (NIF)
1. Low-cost substitute for loan
2. Allows borrowers to issue own notes
3. Placed/distributed by banks

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NIFs vs. Eurobonds
1. Differences:
a. Notes draw down credit as needed
b. Notes let owners determine timing
c. Notes must be held to maturity

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DEVELOPMENT BANKS
General Purpose founded by governments to help finance
very large infrastructure projects.
Types of Development Banks
1. World Bank Group includes
a. International Bank for Reconstruction & Development
b. International Development Association
c. International Finance Corporation
Types of Development Banks (can't)
2. Regional Development Banks finance industry,
agricultural, and infrastructure projects
3. National Development Banks concentrate on a particular
industry or region.

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Scope of Financial Management
Sound financial management is essential in all types of
organizations whether it be profit or non-profit. Financial
management is essential in a planned Economy as well as
in a capitalist set-up as it involves efficient use of the
resources.

From time to time it is observed that many firms have

been liquidated not because their technology was obsolete
or because their products were not in demand or their
labour was not skilled and motivated, but that there was a
mismanagement of financial affairs. Even in a boom
period, when a company make high profits there is also a
fear of liquidation because of bad financial management.
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 Contd..
Financial management optimizes the output from the given
input of funds. In a country like India where resources are scarce
and the demand for funds are many, the need of proper financial
management is required. In case of newly started companies with
a high growth rate it is more important to have sound financial
management since finance alone guarantees their survival.

Financial management is very important in case of non-profit

organizations, which do not pay adequate attentions to financial
management.

How ever a sound system of financial management has to be

cultivated among bureaucrats, administrators, engineers,
educationalists and public at a large.
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Types of Business Finance

Long term finance

Medium term finance

Short term finance

 

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Functions of Financial Management
Financial Planning
Management need to ensure that sufficient funding is
available to meet the needs of the business. In the short
term, funding may be needed to invest in equipment and
stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be needed for
significant additions to the productive capacity of the
business or to facilitate acquisitions.

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Contd..
Financial Control

Financial control is a critically important activity to

help the business ensure that said business is meeting
its goals.

In other words, the firm decides how much to invest in

short - term assets and how to raised the required
funds.

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Difference between domestic and foreign
finance
Finance is the process of transferring fund from surplus
economic unit to deficit economic unit. Domestic finance is
the process of transferring fund from surplus economic unit
to deficit economic...
Finance is the process of transferring fund from surplus
economic unit to deficit economic unit. Domestic finance is
the process of transferring fund from surplus economic unit
to deficit economic unit within a country. And foreign
(International) finance is the process of transferring fund
from surplus economic unit to deficit economic unit when any
of these units is located outside a national country.

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Thank You

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