Financial Management
in Global Context
BMT 6131 – UNIT 1 – INTRODUCTION TO INTERNATIONAL FINANCE
Global Economy
The world economy is experiencing an exceptionally strong but highly uneven recovery.
Global growth is set to reach 5.6 percent in 2021—its strongest post-recession pace in
80 years—in part underpinned by steady but highly unequal vaccine access.
Growth is concentrated in a few major economies, with most emerging market and
developing economies (EMDEs) lagging behind: while about 90 percent of advanced
economies are expected to regain their pre-pandemic per capita income levels by 2022,
only about one-third of EMDEs are expected to do so.
In low-income countries, the effects of the pandemic are reversing earlier gains in
poverty reduction and compounding food insecurity and other long-standing challenges.
The global outlook remains highly uncertain, with major risks around the path of the
pandemic and the possibility of financial stress amid large debt loads.
Global Economy – Challenges
Controlling the pandemic at the global level will require more equitable
vaccine distribution, especially for low-income countries.
In addition to the necessary efforts to pursue widespread vaccination,
policy makers face a difficult balancing act as they seek to nurture the
recovery through efficiently allocated fiscal support while safeguarding
price stability and fiscal sustainability.
Policy makers can also help entrench a lasting recovery by undertaking
growth enhancing reforms and steering their economies onto a green,
resilient, and inclusive development path.
Prominently among the necessary policies are efforts to lower trade costs
so that trade can once again become a robust engine of growth.
Global Financial Markets
Major Developments1960s – Emergence of Euromarkets, which were a sort of parallel money markets, virtually
free from any regulation – Result was the internationalization of the banking business
1970s – Vigorous Growth in Euromarkets resulting in a number of newer funding
techniques
1980s – Unprecedented changes in financial markets around the world
Financial Integration
Geographical boundaries became blurred leading to the emergence of a global
unified financial market.
Lenders and borrowers across countries had wide choices around the globe
In addition to the geographical integration across markets, functional unification
across the various types of financial institutions within individual markets also was
witnessed
Traditional segmentation between commercial banking, investment banking,
consumer finance and so on disappeared – Universal banking institutions and Bank
holding companies
Conflict of interest began to be addressed post financial turmoil in US and UK
Financial Liberalization and Deregulation
Liberalization – With regard to cross border transactions – Domestic markets
opened up to non-resident investors and resident borrowers allowed to tap
foreign markets
Deregulation – Elimination of segmentation of the markets for financial
services with specialized institutions catering exclusively to a particular
segment and measures designed to foster greater competition
Other was permitting foreign financial institutions to enter the national
markets and compete on an equal footing with the domestic institutions, in
offering financial services to borrowers and investors
Result of liberalization and deregulation….
Significant increase in competition within the financial services
industry
Spread on loans, underwriting commissions, and fees of various
kinds became rather thin
Another factor responsible for this was the tendency on the part of
the prime borrowers to approach the investors directly by issuing
their own primary securities thus depriving the banks of their role
and profits as intermediaries
Emergence of SECURITIZATION and DISINTERMEDIATION
Birth of Euro (Currency)
The formation of European Monetary Union (EMU) and the birth of
Euro, in the last part of 1990s, led to the emergence of a very large
capital market within the potential to rival the US financial markets
as provider of capital to firms and governments around the world
Post 2000 witnessed substantial increases in currency reserves,
financial account balances, foreign direct investments, portfolio
investments across all developed and emerging economies
Financial Innovations
1973 – Floating exchange rate system witnessed – exchange rate volatility and
substantially higher interest rate volatility
Demand for newer kinds of risk management products – Emergence of
products like options, swaps, futures and their innumerable permutations and
combinations
As the traditional sources of income for banks and investment banks were
subjected to a squeeze, they started offering complex, innovative deals and
products, often tailored to the specific needs of a borrower or an investor
(“Structured Products”) (Selling them to the clients without adequately
explaining the risks associated with them)
Major events….
LDC – Less developed country debt crisis
1987 stock market crash & domino effect
East Asian Currency Crisis
Russian debacle followed by fall of LTCM ( a giant hedge fund ) (1990)
Fall of Lehman Brothers (A giant investment banking firm)
Problems of AIG (an insurance firm) in 2008-09
- Need to redesign the regulatory and control apparatus
Indian Economy as it stands…
RBI - Annual Report 2020-21 - Macro economic and policy indicators.pdf
Finance Function
Importance of International Financial
Management….
For a finance manager, arises from the
- Emerging country’s dependence of FDI (Need to be conversant with relevant regulations)
-Need for structured financial products (Need to be knowledgeable about financial engineering)
-Opportunities for growth of companies through cross border M & A (Need to have a good
understanding of assessment of risks in such investments and hence carry out evaluation of
desirability of investment accordingly )
-Country risk and currency risk influencing all business entities more than ever before (Need to
study concepts related to country credit rating and acquire a good working knowledge of currency
risk management tools & techniques)
- Need to deal with globally widespread investors, stakeholders and regulators (Need to have a
good understanding of operations in international capital markets and related regulations of
reporting and disclosure)
Key concepts to be looked at…
- What is “risk” and what are the various risk management strategies?
-Exchange rate theories (What causes exchange rates to move?)
-International monetary system : Exchange rate regime & related
developments
-International banking system
-Specific issues in international or cross border investments –
International CAPM – Distinct factors to be considered in computation of
cost of capital – International Taxation issues – Transfer pricing
regulations – Profit repatrition – Expropriation risk
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