Q1.GoalofInternational Financialmanagement-:

Ans-:Effective financial management is not limited to the application of the latest business technique or functioning more efficiently but include maximization of wealth meaning that it aims to offerprofit to the shareholders, the owners of the businesses and to ensure that they gain benefitsfrom the business decisions that have been made. So, the goal of international financial management is to increase the wealth of shareholders just like in domestic financial management is to increase the wealth of shareholders just like in domestic financial management. The goals are not only limited tojust the shareholders, but also to the suppliers, customers and employees. It is also understoodthat any goal cannot be achieved without achieving the welfare of the shareholders. Though in many countries such as Canada, the United Kingdom, Australia and the United States, ithas been accepted that the primary goal of finance management isto maximize the wealth of the shareholders; in other countries it is not widely embraced. In countries such as Germany and France, the shareholders are generally viewed as apart of the Stakeholders along with the customers, banks, suppliers and so on. In European countries, themanagers consider the most important goal to be the overall welfare of the stakeholders of thefirm. On the other hand, in Japan,many companies come together to form a small number of business groups known as Keiretsu, including companies such as Mitsui, Sumitomo and Mitsubishi which were formed due to consolidation of family-owned business empires.The growth and the prosperity of their Keiretsu is the most critical goal for the Japanese managers. However, it doesnt mean that the maximization of shareholders wealth is just and alternative but itis a goal that a company seeks to fulfill along with other goals. The maximization of shareholders wealthis a long term goal.

Gold Standard 1876-1913-: From the ancient times, gold has been used as amedium of exchange as it is durable, portable and easily tradable. Increase in the trade activity during the freetrade period in the 19thcentury led to the need for amore formalized system for setting business transactions. This made gold desirable to be used the gold standard were thateach country would establish the rate at which its currency could be converted to the weight of gold. Each Countrys government agreed to buy or sell gold at its own fixed rate of demand. This served asa mechanism to preserve thevalue of each individual currency in terms of gold. Each country had to maintain adequate reserves of gold in order to back its currencys value. There was a limit to the rateat which any individual country could expand its supply of money. The growth in the money was limited to the rateat which additional gold could be acquired by official authorities.Advantage of Gold Standard-:1) Gold standard provides stable exchange rates, which were conducive for trade policy because this eliminates another source of price instability.2) An efficient operating gold standard exchange rate system ensures automatic adjustmentof balance payment problem through price changes.3) This system imposes orthodoxy on fiscal policies and restricts governments from resorting to indiscriminate spending.Disadvantage of Gold Standard-:1) The burden of BOP adjustment shifts to domestic variables which subordinate the domestic economy to external economic factors.2) There is always a problem of selecting an appropriate par value which reflects the external and internal equilibrium.3) Emergence of misaligned values might have encouraged speculations of sufficient magnitude to effect exchange rate realignment.4) The gold standard was dependent on an adequate supply and not excess supply and new gold.5) The mining process of gold involves huge cost and is used as areserve only.6) There is unequal geographic distribution of gold throughout the world.

Q3 Thousands of years back the concept of bartering between parties was prevalent, when the concept of money had not evolved. Explain on counter trade with examplesCounter tradeWhen the concept of money had not evolved, a person could give say 100 bags of wheat and get wood or coal, a certain quantity for cooking. These bartering contracts were between individuals or small kingdoms. Bartering exists today also but at different level. For example, Iran may give 100 million barrels of oil to France and get 5000 guns of certain type in exchange. We can say that bartering is exchange of goods between parties as per agreed terms without the use of money.

Today, most business is transacted with money as medium. Trading between countries is through respective currencies using international exchange rate. Countertrade means all types of foreign trade in which the sale of goods to another country is associated with parallel purchase of some other goods from that country.

Different forms of counter tradeThe different forms of countertrade are: Barter Buy-back Counter purchaseCountertrade takes many different forms as explained below:(i) Barter: It is exchange of goods without the use of money. Typical examples are:(a) Oman exchange oil for air conditions with Taiwan(b) Sri Lanka exchange fish for mobile handsets with Germany(ii) Buy back: In this part, the payment of the price of contract is through supply of related products. Typical examples are:(a) A firm in China purchases plant & technology for manufacture of high precision bearings from Germany, and the firm in Germany agrees to buy a part of bearings produced by the plant in China.(b) An Indian aerospace firm sets up production facility for manufacture of executive jets under technical collaboration from an American firm who in turn agrees to provide a part of worldwide business of overhauling of executive jets to the Indian firm.(c) A firm establishes gas pipeline for another firm to transport gas and produce electricity and in turn agrees to buy a portion of electric power for prolonged period at predetermined terms.(iii) Counter purchase: In such cases, there is direct purchase of items as exchange deals. Typical examples are:(a) A firm in US sold soft drinks to Russian counterpart and imported vodka in exchange.(b) Canada sold wheat to Indonesia in exchange for import of rubber.(c) A German firm sold machineExamplesExamples of countertrade are many and in a variety of forms. Though countertrade is existing to create win-win situation between parties involved, it has its own ills; typically following issues are existing:1. The exporting country sells high technology items at inflated prices and the items which they import are disposed off to other countries at a discount, using a part of high premium charged on their exports.2. The middlemen in the countertrade agreements are usually shrewd traders who exploit the political and social circumstances to obtain large gains for themselves.3. The goods that are offered in countertrade are not the required items, because the desirable items have already been exported. For example, if Switzerland sells high precision machines to Brazil, it may like Brazilian coffee beans in exchange, but what it may get is only leather goods.

Q4 There are different techniques of exposure management. One is the Managing Transaction Exposure and the other one is the managing operating exposure, So you have to explain on both Managing Transaction Exposure and Managing Operating Exposure.Managing transaction exposureTransaction exposure calculates gains or losses which occur after the current financial compulsions according to terms of reference are resolved. Taken that the deal would lead to a future inflow or outflow of foreign currency cash, any unprecedented alterations in rate of exchange amid the period in which transaction is entered and the time taken for it to settle in cash would guide to a change in worth of net flow of cash in terms of the home currency. For example a transaction exposure of an Indian company will be the account receivable which is associated with a sale denominated in US dollars or the compulsion of an account payable in Euro debt. Presume an Indian firm sells goods with an open account to a German buyer for 1,800,000 payment of which is to be done in 2 months. The current exchange rate is ` 50/, and the Indian seller expects to exchange the euros received for ` 90,000,000 when payment is received. If euro weakens to `45/ when payment is received, the Indian seller will receive only `81,000,000, or some `9,000,000 less than anticipated. Opposite will be the case should euro strengthen. Thus exposure is a chance of either gain or loss.Managing operating exposureOperating exposure is alternatively known as economic exposure. It evaluates the changes that occur in the current value of the firm. The change in the current value may be a result of the change that takes place in predicted operating cash flows on account of fluctuations in exchange rates. They are similar in that they both deal with future cash flows. They differ in terms of which cash flows management considers. Transaction exposure deals with the predicted cash flows for future that have already been contracted and hence accounted for. At the same time, the operating exposure focuses on the predicted-but not yet contracted-cash flows in future. These future cash flows may undergo changes in case of a major fluctuation in the exchange rate, resulting in changes in the overall competitiveness at international level. Some firms face operating exposure without even dealing in foreign exchange. Consider an Indian perfume manufacturer who sources and sells only in the domestic market. Since the firms product competes against imported perfumes (say from Paris) it is subject to foreign exchange exposure. It faces severe competition when rupee gains against other currencies (here, euro), lowering the prices of imported perfumes.

Q6 Write short note on:a) American Depository Receipts(ADR)b) PortfolioAmerican Depository Receipts(ADR)It represents ownership in the shares of a non-US company and trades in the American stock markets. ADRs enable American investors to buy shares in foreign company without any issue of cross-border and cross-currency transactions. ADRs carry price in American dollar, pay dividend in the same currency and can be traded like any other share of US-based companies. Each ADR is issued by a US depository bank and can represent one share. The owner of ADR has the right to obtain the foreign stock it represents, but US investors are more interested in owning ADR as they can diversify their investments across the globe. ADR falls within the regulatory framework of the US and requires registration of the ADRs and the underlying shares with the SEC.

Features of ADRsThe following are the features of ADR: ADR can be listed on American Stock Exchange. A single ADR can represent more than one share. One ADR can be two shares or any fraction also. The holder of the ADRs can get them converted into shares. The holders of ADR have no right to vote in the company.