Masters in Business Administration-MBA Semester III

MF0006 – International Financial Management – 2 Credits

Assignment Set-1

Q.1 Give possible reasons by which the companies are encouraged to be an MNC?

A multinational corporation (MNC) trans national co-operation.(TNC), also called multinational

enterprise (MNE),[1] is a corporation or an enterprise that manages production or delivers services
in more than one country. It can also be referred to as an international corporation. The
International Labour Organization (ILO) has defined[citation needed] an MNC as a corporation that
has its management headquarters in one country, known as the home country, and operates in
several other countries, known as host countries.
International power:
Tax competition
Multinational corporations have played an important role in globalization. Countries and sometimes
subnationa regions must compete against one another for the establishment of MNC facilities, and
the subsequent tax revenue, employment, and economic activity. To compete, countries and
regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of
governmental assistance or improved infrastructure, or lax environmental and labor standards
enforcement. This process of becoming more attractive to foreign investment can be characterized
as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.
Market withdrawal
Because of their size, multinationals can have a significant impact on government policy, primarily
through the threat of market withdrawal.[11] For example, in an effort to reduce health care costs,
some countries have tried to force pharmaceutical companies to license their patented drugs to
local competitors for a very low fee, thereby artificially lowering the price. When faced with that
threat, multinational pharmaceutical firms have simply withdrawn from the market, which often
leads to limited availability of advanced drugs. In these cases, governments have been forced to back
down from their efforts.
Patents
Many multinational corporations hold patents to prevent competitors from arising. For example,
Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and
infrastructure and Microsoft benefits from software patents.[13] The pharmaceutical companies
lobby international agreements to enforce patent laws on others.
Government power
In addition to efforts by multinational corporations to affect governments, there is much
government action intended to affect corporate behavior. The threat of nationalization (forcing a
company to sell its local assets to the government or to other local nationals) or changes in local
business laws and regulations can limit a multinational's power. These issues become of increasing
importance because of the emergence of MNCs in developing countries.

The list of multinational companies in India is ever-growing as a number of MNCs are coming down
to this country now and then. Following are some of the major multinational companies operating
their businesses in India:
British Petroleum
Vodafone
Ford Motors
LG
Samsung
Hyundai
Accenture
Reebok
Skoda Motors
ABN Amro Bank

Q.2 What do you mean by International Trade Flows? Also explain various factors
affecting international trade flows.

Trade refers to the exchange of goods and services for money. Sen argues that exchange is a human
right, “the freedom to exchange words, goods, or gifts does not need defensive justification...they
are part of the way human beings in society live and interact with one another" (1999: 8).
International trade refers to "sales which cross juridical borders" (Sutcliffe 2001: 71). The control of
trade has been, and continues to be, an important focus of state policy, and a determinant of
international inequality.
One way to understand the effect of international trade on a country's economy is to examine its
trade as a percent of Gross Domestic Product.
The structure of world trade
With the rise of a global trading system at the time of European colonial expansion, a 'colonial
division of labor' emerged in which developing countries exported primary products, agriculture and
minerals, while Europe and North America exported manufactured goods. The structure of world
trade has begun to change since World War II and particularly in the last three decades. Important
characteristics of current global trade patterns now include:
* 75 % of the world's exports are from developed countries, while only 25% are from developing
ones;
* developed countries export mainly manufactured goods: 83% of their total, 62% of all world
exports;
* developing countries also export more manufactured goods than primary products: 56% of their
total, 14% of world exports;
* more primary products are exported by developed countries than by developing countries: 14% of
world exports, compared with 11% (Sutcliffe 2001: 71-75; UNCTAD 1999a).

Changing fortunes of developed and developing countries

A country's share in the world export market represents one measure of its participation in the
world economy and its purchasing power of imports. Although most developing countries increased
their share of exports during the 1990s, the increase was highly uneven. The following describes
major changes in trade patterns:
* from 1950 to 1970: developed countries gained in the share of total world exports, and developing
countries lost;
* in the 1980s and 1990s: a group of developing countries in East Asia significantly increased their
manufactured exports, and this increased their share of the world trade
* Latin America's share fell substantially from 1950 through 1990, and then began to increase slightly
* Exports from West Asia and North Africa fell since 1980, due to declining petroleum prices.
* There has been a historic decline in the exports of the Sub-Saharan continent. Its share of the
world total has dropped from over 3 per cent in 1950 to barely 1 per cent in 1996. This has been
largely due to the fact that Africa has not basically changed the products it exports, and that the
prices of these products have tended to fall. (Sutcliff 2001: 76).
One alternative to globalized free trade is the creation of trade blocs which can manage and
promote trade within geographic regions. Some developing countries that are skeptical of free trade
prefer to participate in regional trade blocs which offer some protection against larger and more
aggressive global trading partners.

Factors affecting international trade flows:

Inflation
A relative increase in a country’s inflation rate will decrease its current account, as imports increase
and exports decrease.
National Income
A relative increase in a country’s income level will decrease its current account, as imports increase.

Government Restrictions
A government may reduce its country’s imports by imposing tariffs on imported goods, or by
enforcing a quota. Note that other countries may retaliate by imposing their own trade restrictions.
Sometimes though, trade restrictions may be imposed on certain products for health and safety
reasons.

Exchange Rates
If a country’s currency begins to rise in value, its current account balance will decrease as imports
increase and exports decrease.
Note that the factors are interactive, such that their simultaneous influence on the balance of trade
is a complex one.

Q.3 (a) Define Swaps. Also explain various types of swaps.

In finance, a swap is a derivative in which counterparties exchange certain benefits of one party's
financial instrument for those of the other party's financial instrument. The benefits in question
depend on the type of financial instruments involved. For example, in the case of a swap involving
two bonds, the benefits in question can be the periodic interest (or coupon) payments associated
with the bonds. Specifically, the two counterparties agree to exchange one stream of cash flows
against another stream. These streams are called the legs of the swap. The swap agreement defines
the dates when the cash flows are to be paid and the way they are calculated.[1] Usually at the time
when the contract is initiated at least one of these series of cash flows is determined by a random or
uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price.
The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps,
currency swaps, credit swaps, commodity swaps and equity swaps. There are also many other types.
Interest rate swaps:
The most common type of swap is a “plain Vanilla” interest rate swap. It is the exchange of a fixed
rate loan to a floating rate loan. The life of the swap can range from 2 years to over 15 years. The
reason for this exchange is to take benefit from comparative advantage.
Currency swaps
Main article: Currency swap
A currency swap involves exchanging principal and fixed rate interest payments on a loan in one
currency for principal and fixed rate interest payments on an equal loan in another currency. Just
like interest rate swaps;the currency swaps also are motivated by comparative advantage.
Commodity swaps
Main article: Commodity swap
A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a
fixed price over a specified period. The vast majority of commodity swaps involve crude oil.
Equity Swap
Main article: equity swap
An equity swap is a special type of total return swap, where the underlying asset is a stock, a basket
of stocks, or a stock index. Compared to actually owning the stock, in this case you do not have to
pay anything up front, but you do not have any voting or other rights that stock holders do have.
Credit default swaps
Main article: Credit default swap
A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of
payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or
loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be
a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded.

(b) Define foreign bonds with their salient features .

A foreign bond (called Yankee bond in the US, Samurai bond in Japan, Bulldog bond in the UK) is a
bondissued in a country's national bond market by an issuer not domiciled in thatcountry where
those bonds are subsequently traded.
Regulatory authorities in the country where the bond is issued impose rules governing the issuance
of foreign bonds.
Issuers of foreign bonds include national governments and their subdivisions, corporations, and
supranationals (an entity that is formed by two or more central governments through international
treaties).
They can be denominated in any currency.
They can be publicly issued or privately placed.

Eurobonds have the following features:

* underwritten by an international syndicate.

* offered simultaneously to investors in a number of countries at issuance.
* issued outside the jurisdiction of any single country. Therefore, they are not registered through a
regulatory agency.
* in practice they are typically registered on a national stock exchange. Why? Some institutional
investors are prohibited from purchasing securities that are not registered on an exchange. The
registration is mainly intended to overcome such restrictions. However, most of the Eurobond
trading occurs in the over-the-counter market.
* Make coupon payments annually.