Commerce ePathshala
Join the Group
& Get
all SEM Assignments – FREE
& UNIT
wise Q & A - FREE
GET EXAM NOTES @
300/PAPER
@ 250/- for GROUP MEMBERS
Commerce ePathshala
SUBSCRIBE
(Youtube) – Commerce
ePathshala
Commerce ePathshala NOTES (IGNOU)
Ignouunoffiial – All IGNOU Subjects
CALL/WA -
8101065300
SOLVED ASSIGNMENTS FOR JUNE - DEC TEE 2026
MCOM 4TH
SEMESTER
TUTOR
MARKED ASSIGNMENT
COURSE
CODE : IBO-06
COURSE
TITLE : International Business Finance
ASSIGNMENT
CODE : IBO-06/TMA/2025-2026
1. “A
System of Floating exchange rate fails when government ignores the verdict of
the exchange markets on their policies and resort to direct controls over trade
and capital flows”. Justify the statement.
A floating exchange rate system is a type of
foreign exchange arrangement in which the value of a country’s currency is
determined primarily by the market forces of demand and supply rather
than by government intervention. In such a system, exchange rates fluctuate
freely in response to factors such as trade balances, capital flows,
interest rate differentials, inflation rates, and investor expectations.
Countries like the United States, Japan, and the UK primarily operate under
floating exchange rate systems. The central idea is that the market sets the
currency’s value, allowing automatic adjustment to economic shocks and
promoting global economic stability.
The statement is justified because the functioning
of a floating exchange rate relies on market signals to correct imbalances.
For example, when a country has a trade deficit, demand for foreign currency
rises relative to its own currency, leading to depreciation. This depreciation
makes exports cheaper and imports expensive, automatically correcting the
deficit. Similarly, capital inflows and outflows influence currency demand,
helping maintain equilibrium in the foreign exchange market.
However, when governments ignore these market
signals and impose direct controls over trade and capital flows, the
system’s natural adjustment mechanism is disrupted. Direct controls may include
capital controls (restrictions on foreign investments), trade barriers
(tariffs, quotas), and artificially fixed exchange rates. These
interventions prevent the currency from adjusting to actual market conditions.
For instance, if a government artificially supports its currency despite a
trade deficit, the currency remains overvalued. This discourages exports,
encourages imports, and ultimately leads to foreign exchange shortages.
Speculators may exploit the misalignment, creating black-market rates or
sudden capital flight, as observed in several emerging economies during the
1990s.
Historical examples reinforce this argument. In the
early 1990s, countries like India, Thailand, and Mexico attempted to
manage their currencies through capital controls while maintaining a floating
rate. The result was often currency crises, as market pressures
overpowered government restrictions. In India, excessive controls on capital
and rigid monetary policies led to foreign exchange shortages and a severe
balance of payments crisis in 1991. Similarly, Thailand’s failure to allow
the Baht to adjust freely contributed to the Asian Financial Crisis in 1997,
showing that ignoring market signals undermines the benefits of a floating
system.
Moreover, direct government intervention can distort
investor expectations and reduce confidence in the economy. Investors rely
on market-determined exchange rates to gauge the risk and return of
cross-border investments. When governments intervene excessively, uncertainty
rises, leading to reduced foreign investment, increased volatility, and
inefficiency in resource allocation.
Conclusion:
A floating exchange rate system cannot function properly when government
actions contradict market signals. While governments can use monetary and
fiscal policies to influence the economy, excessive trade and capital
controls disrupt the natural adjustment mechanism of currency values. The
system thrives when market forces are allowed to determine exchange rates,
ensuring automatic correction of imbalances, efficient allocation of resources,
and long-term economic stability. Ignoring the verdict of the exchange markets
leads to currency misalignment, reduced investor confidence, speculative
attacks, and potential financial crises. Therefore, the effectiveness of
floating exchange rates depends on a careful balance between market autonomy
and prudent macroeconomic policy
2. What
are the various purposes of different money market instruments? Explain
international monetary transfer mechanism citing suitable examples.
The money market is a
segment of the financial market where short-term
funds with maturities of one year or less are borrowed and
lent. It provides liquidity
to governments, financial institutions, and corporations and
plays a critical role in managing short-term financing needs. Various money market instruments
serve specific purposes, catering to different participants and objectives in
the economy.
1. Treasury Bills
(T-Bills):
Issued by the government,
T-Bills are short-term debt instruments with maturities ranging from 91 to 364
days. They are highly
liquid and low-risk, making them ideal for investors seeking
safe investment and for governments to meet temporary fiscal deficits. For
example, the Reserve
Bank of India (RBI) regularly auctions T-Bills to manage
liquidity in the banking system.
2. Commercial
Papers (CPs):
CPs are unsecured
promissory notes issued by corporations to meet short-term
funding requirements such as working capital. They are usually issued at a
discount and redeemed at face value. CPs provide firms with flexibility, lower interest rates
than bank loans, and quick access to funds. For instance, large
Indian companies like Tata
Steel or Reliance Industries issue CPs to finance their
operational needs.
3. Certificates of
Deposit (CDs):
CDs are time deposits
issued by banks with a fixed maturity and interest rate. They
are tradable in the money market and provide banks with liquidity while
offering investors a safe, short-term investment.
4. Repurchase
Agreements (Repos):
Repos involve selling
securities with an agreement to repurchase them later at a higher price.
They are widely used by banks and financial institutions to manage short-term
liquidity and to earn interest on surplus funds.
5. Call Money
Market:
The call money market is where banks
lend and borrow funds for very short periods (usually overnight).
It facilitates interbank liquidity management and helps maintain statutory reserve ratios.
International
Monetary Transfer Mechanism:
The international monetary transfer
mechanism refers to the methods by which money flows across
borders to facilitate trade, investment, and financial obligations. These
transfers are essential in a globalized economy, ensuring settlement of cross-border
transactions and capital
mobility.
1. Bank Wire
Transfers (SWIFT):
The Society for
Worldwide Interbank Financial Telecommunication (SWIFT) network
allows banks to send secure messages to execute payments across countries. For
example, an Indian importer paying a supplier in Germany for machinery uses
SWIFT to transfer funds in euros, which the German bank credits to the
supplier.
2. Foreign Currency
Demand Drafts (FCDD):
FCDDs are issued by banks for international payments. They are prepaid instruments
drawn in a foreign currency and can be encashed by the recipient abroad.
3. Letters of
Credit (LCs):
LCs are widely used in international trade. A bank guarantees payment to the
exporter once specified
documents and conditions are met. For instance, an Indian
textile exporter shipping goods to the USA receives payment from the American
buyer’s bank under a confirmed LC, minimizing default risk.
4. Online Payment
Systems and Forex Platforms:
Modern international transfers also use platforms like PayPal, TransferWise, or Revolut
for small businesses and individuals, facilitating real-time settlement with
minimal cost.
5. Central Bank
Mechanisms:
Countries also use central bank arrangements such as swap lines to
transfer funds in case of liquidity crises. For example, the Federal Reserve’s swap lines
with other central banks during the 2008 financial crisis allowed foreign banks
to access US dollars.
Conclusion:
Money market instruments
serve multiple purposes: providing liquidity,
funding, risk management, and short-term investment opportunities.
Treasury bills, commercial papers, certificates of deposit, repos, and call
money each cater to specific
funding needs of governments, banks, and corporations. On the
international front, monetary
transfer mechanisms like SWIFT, letters of credit, foreign
drafts, online payment systems, and central bank arrangements ensure efficient, secure, and timely
settlement of cross-border transactions. Together, these
systems form the backbone of domestic
and international financial stability, supporting trade,
investment, and economic growth in a globalized economy.
3. a)
What do you mean by Transaction exposure? Describe various techniques available
to manage transaction exposure both in the short term as well as in the long
term.
Transaction
Exposure
refers to the risk
that a company faces due to fluctuations in foreign exchange rates on its
contractual cash flows denominated in foreign currencies. It
arises when a firm has payables
or receivables in foreign currencies, such as export sales,
import purchases, or short-term loans. The value of these future cash flows
changes as exchange rates fluctuate, potentially affecting the profitability and liquidity of the
firm.
For example, an Indian
exporter selling goods to the US for USD 100,000 faces transaction exposure if
the exchange rate between USD and INR changes before the payment is received.
If the rupee appreciates, the exporter receives fewer rupees, leading to a
financial loss.
Transaction exposure is short-term in nature,
usually lasting until the transaction is settled, and is a subset of overall foreign exchange risk.
Managing this exposure is critical for firms engaged in international business.
Techniques
to Manage Transaction Exposure:
1.
Short-Term Techniques:
a) Forward
Contracts:
A forward contract locks in the exchange rate for a future date, ensuring that
the firm knows exactly how much it will receive or pay. For example, the
exporter can enter a forward contract to sell USD 100,000 at a predetermined rate,
eliminating the risk of rupee appreciation.
b) Money Market
Hedging:
This involves borrowing or lending in domestic and foreign currencies to offset
exposure. For instance, to hedge a foreign receivable, the firm can borrow the present value of the receivable
in foreign currency and convert it to domestic currency
immediately. Upon receipt of the foreign payment, it repays the loan,
neutralizing currency risk.
c) Options
Contracts:
Currency options provide the right
but not the obligation to buy or sell a currency at a
predetermined rate. They protect against adverse movements while allowing the
firm to benefit from favorable exchange rate changes.
d) Leading and
Lagging:
Companies can accelerate
(lead) or delay (lag) payments or receipts depending on expected
currency movements. For example, if the domestic currency is expected to
depreciate, the firm may delay payments to benefit from a weaker currency.
2.
Long-Term Techniques:
a) Natural Hedging
(Operational Hedging):
Firms can structure their operations so that revenues and costs are in the same currency,
reducing net exposure. For example, an Indian firm exporting to the US may
source raw materials from the US to naturally offset currency fluctuations.
b) Currency Diversification:
Spreading transactions across multiple
currencies reduces reliance on a single currency and mitigates
risk.
c) Strategic
Pricing and Contracts:
Including currency
clauses in contracts, such as pricing adjustments or payments
in stable currencies (like USD or EUR), helps manage long-term exposure.
d) Matching Assets
and Liabilities:
A company can match
foreign currency receivables with payables in the same
currency, reducing the net exposure.
Conclusion:
Transaction exposure is a
significant risk for firms involved in international trade, as exchange rate fluctuations directly
affect cash flows and profitability. Short-term techniques like
forwards, money market
hedges, and options provide immediate protection, while
long-term strategies like natural
hedging, diversification, and strategic contract planning
ensure sustainable risk management. By effectively managing transaction
exposure, companies can stabilize
earnings, protect profit margins, and make informed financial decisions in a
volatile global currency market.
b) What
factors determine centralization/decentralization of exchange risk management?
Which policy would you advocate for Indian Multinationals? Why?
Exchange risk
management
involves identifying, measuring, and mitigating the risks arising from fluctuations in foreign exchange
rates that affect multinational firms’ cash flows,
profitability, and overall financial stability. A key strategic decision for
multinational corporations (MNCs) is whether to centralize or decentralize foreign
exchange risk management.
1. Factors
Determining Centralization or Decentralization:
Several factors influence
whether an MNC adopts a centralized
or decentralized
approach:
a) Size and
Complexity of Operations:
Larger firms with multiple subsidiaries in different countries tend to centralize risk
management at the headquarters to ensure uniform policies, efficiency, and
oversight. Smaller firms with simpler operations may prefer decentralization, allowing
local managers to respond quickly to market conditions.
b) Nature of
Exposures:
If exposures are complex,
large, and involve multiple currencies, centralization is
preferable, as it enables consolidated risk assessment and hedging strategies.
Firms with straightforward, single-currency exposures may allow subsidiaries to
manage risks independently.
c) Expertise and
Resources:
Centralized management requires skilled treasury staff and sophisticated risk
management systems at the headquarters. Firms lacking these resources may
decentralize to rely on local expertise.
d) Speed and
Flexibility Requirements:
Decentralization provides local managers with flexibility to respond quickly to
market movements, while centralization may involve bureaucratic delays.
e) Cost
Considerations:
Centralization can achieve economies
of scale in hedging instruments, reduce transaction costs, and
avoid duplication. Decentralization may increase costs if each subsidiary
enters separate hedging contracts.
f) Corporate Strategy
and Control:
Firms pursuing tight
control over cash flows and risk policies often prefer
centralization. Decentralization may be adopted when subsidiaries are given strategic autonomy
to tailor decisions to local market conditions.
Policy
Recommendation for Indian Multinationals:
For Indian MNCs, a centralized exchange risk management
policy is generally advisable. The reasons are:
a) Multiple
Currency Exposures:
Indian MNCs operating in global markets deal with USD, EUR, GBP, and other currencies,
often simultaneously. Centralization allows consolidation of exposures, enabling
netting off payables and receivables, reducing the overall hedge requirement.
b) Professional
Expertise:
Headquarter-based treasury departments can leverage expertise, advanced forecasting
tools, and institutional arrangements to manage risk more efficiently than
dispersed subsidiaries.
c) Cost Efficiency:
By centralizing, Indian MNCs can negotiate
better terms for forwards, swaps, and options, achieving cost
savings and better liquidity management.
d) Strategic
Alignment:
Centralized management ensures that all subsidiaries follow uniform policies consistent with
corporate objectives, reducing risk of misaligned hedging
strategies and financial inconsistencies.
e) Regulatory Compliance:
Centralized control helps ensure that hedging
and risk management comply with RBI regulations and
international accounting standards, minimizing legal or compliance risks.
However, selective decentralization for operational
flexibility at subsidiaries can be adopted for routine day-to-day exposures,
while strategic and large-value exposures are managed centrally.
Conclusion:
The choice between
centralization and decentralization of exchange risk management depends on firm size, complexity, expertise,
cost considerations, and strategic control requirements. For
Indian multinationals, a centralized
policy supported by local flexibility at subsidiaries is
optimal. This approach ensures efficient
resource utilization, cost-effective hedging, compliance with regulations, and
alignment with corporate financial objectives, ultimately
strengthening the firm’s ability to manage global currency risks effectively.
4. a)
Explain the technique of Transfer Pricing with the help of a suitable
illustration.
Transfer pricing refers to
the pricing of goods, services, or intangible assets transferred between
different divisions, subsidiaries, or units of the same multinational
corporation (MNC) operating in different countries. It is a critical tool
for internal resource allocation, performance evaluation, tax planning, and
profit repatriation within multinational firms.
The main purpose of transfer pricing is to set
prices for intra-firm transactions that are fair, comply with legal
regulations, and achieve strategic objectives. It ensures that each division’s
performance can be measured realistically, and profits are allocated
appropriately across different jurisdictions.
Techniques
of Transfer Pricing:
There are several methods used to determine
transfer prices, broadly categorized into market-based, cost-based, and
negotiated pricing methods:
1. Market-Based Method (Comparable Uncontrolled
Price Method):
This method sets transfer prices based on prices charged in the open market
for similar goods or services. It is considered the most transparent and is
preferred for compliance with tax authorities.
2. Cost-Based Method:
Prices are determined based on production or total costs plus a standard
markup for profit. This is useful when no market price exists for the internal
transaction.
3. Negotiated Method:
Divisions within the firm may negotiate prices based on internal
policies, market conditions, or performance objectives.
4. Resale Price Method:
Used when one division sells to an independent party after acquiring goods from
another division. The transfer price is calculated by subtracting an
appropriate gross margin from the resale price.
5. Profit Split Method:
Profits from the transaction are split between divisions based on their
contribution, particularly for intangible assets or complex services.
Illustration
of Transfer Pricing:
Suppose XYZ Ltd., an Indian multinational,
has two divisions:
- Division A (India)
manufactures electronic components at a cost of ₹5,000 per unit.
- Division B (USA)
assembles these components into finished products for sale in the American
market.
If the market price of each component in
India is ₹6,000, Division A can sell to Division B at ₹6,000 per unit (market-based transfer price).
- If using the cost-based method with a 10% markup, the
transfer price would be:
Transfer Price=5,000+(10%×5,000)=₹5,500\text{Transfer
Price} = 5,000 + (10\% \times 5,000) = ₹5,500Transfer Price=5,000+(10%×5,000)=₹5,500
- If the resale price method is used, and the final product
sells in the USA for $10,000, with a standard gross margin of 20% for
Division B:
\text{Transfer
Price} = 10,000 - (20\% \times 10,000) = $8,000
Each method allocates profits differently,
affecting tax liabilities in India and the USA. Tax authorities closely monitor
transfer pricing to prevent profit shifting and tax avoidance.
Conclusion:
Transfer pricing is a strategic and regulatory
tool in multinational operations. It allows firms to allocate costs and
profits, evaluate performance, and optimize tax obligations while complying
with international and domestic tax laws. Choosing an appropriate transfer
pricing method depends on market conditions, availability of comparable
prices, cost structures, and regulatory compliance. Properly implemented,
transfer pricing enhances transparency, ensures fairness among divisions,
and supports global business strategies.
b) How
does Adjusted Present Value technique differ from other techniques f financial
appraisal of Projects? Why is it more suitable for international project
appraisal?
The Adjusted Present Value (APV) technique
is a method of project evaluation that separates the value of a project as
if it were all-equity financed from the effects of financing, such
as debt tax shields, subsidies, or other financing side-effects. Developed by
Stewart Myers, the APV approach provides a clearer picture of a project’s value
by distinctly considering the operational and financial components.
Difference
from Other Financial Appraisal Techniques:
- Net Present Value (NPV):
- NPV calculates the present value of a project’s
expected cash flows, discounted at the weighted average cost of
capital (WACC).
- Limitation: WACC
assumes a constant debt-equity ratio over the project’s life,
which is often unrealistic, especially for projects with changing capital
structures or international operations.
- APV Difference: APV
separates base-case NPV (as if all-equity financed) and financing
effects (like interest tax shields), making it adaptable to changing
leverage.
- Internal Rate of Return (IRR):
- IRR computes the discount rate that equates the
present value of inflows and outflows.
- Limitation: IRR
assumes reinvestment at the same rate and may provide multiple or misleading
rates for projects with unconventional cash flows.
- APV Difference: APV
avoids reinvestment assumptions and focuses on explicit valuation of
financing effects, providing a more accurate assessment of project
profitability.
- Payback Period / Discounted Payback:
- Measures the time to recover initial investment.
- Limitation:
Ignores total project profitability and cash flows beyond payback.
- APV Difference: APV
considers entire future cash flows and their present value,
including financial side effects.
Components
of APV:
APV =
NPV of project as if all-equity financed +
NPV of financing effects (tax shields, subsidies)
- Base-case NPV:
Reflects operational cash flows discounted at the cost of equity.
- Financing Effects:
Include tax savings from debt interest, project-specific subsidies, or
international financing benefits.
Suitability
for International Project Appraisal:
APV is particularly useful for international
projects due to several reasons:
- Variable Capital Structures:
International projects often involve changing debt-equity ratios, foreign loans, or project-specific financing. APV explicitly separates financing effects, making it flexible. - Currency and Country Risk:
Cash flows in international projects are subject to exchange rate fluctuations, political risk, and differing tax regimes. APV allows separate adjustment for these risks, improving accuracy. - Tax Considerations:
International projects may enjoy tax holidays, treaties, or local incentives. APV incorporates these benefits explicitly in the financing effect, unlike WACC-based NPV. - Project-Specific Financing:
Projects in emerging markets or joint ventures often rely on specific external financing, which APV can value separately without affecting base-case operational evaluation. - Scenario Analysis:
APV facilitates sensitivity analysis by changing assumptions about debt levels, tax rates, or political risk without recomputing the entire cash flow NPV using WACC.
Conclusion:
The Adjusted Present Value technique provides
a more transparent, flexible, and accurate method for project evaluation
compared to traditional NPV or IRR methods. By separating operational and
financing effects, it allows managers to explicitly value tax shields,
subsidies, and financing risks, which is especially critical in
international project appraisal where exchange rate fluctuations, variable
capital structures, and regulatory differences are prevalent. For Indian
firms or multinational corporations undertaking overseas investments, APV offers
a realistic and comprehensive framework to assess project viability,
profitability, and financial sustainability.
5. a)
“Degree of development of financial markets in any country affect the capital
structure pattern of domestic companies” Explain with suitable examples.
The capital structure of a company refers to
the proportion of debt and equity financing used to fund its operations
and growth. It is influenced by multiple factors, including business risk,
taxation, asset structure, and importantly, the development of financial
markets in the country where the firm operates.
Financial markets—comprising capital markets
(equity and bond markets) and money markets—serve as intermediaries between
investors and firms, providing mechanisms to raise long-term and short-term
funds efficiently. The degree of development of these markets
significantly shapes corporate financing behavior.
Impact of
Financial Market Development on Capital Structure:
- Availability of Debt Instruments:
In countries with well-developed debt markets, companies can access a variety of debt instruments like corporate bonds, debentures, commercial papers, and syndicated loans. This makes debt financing more attractive, often leading to a higher debt-to-equity ratio. For example, US and UK firms can easily issue bonds to raise capital, leading to a relatively higher leverage compared to firms in developing countries. - Access to Equity Markets:
Equity financing depends on the depth and liquidity of stock exchanges. In countries with mature equity markets, firms can raise capital by issuing shares to a large investor base at lower transaction costs. Conversely, in less developed markets, equity issuance is difficult due to limited investor participation, high regulatory compliance, or weak investor protection, pushing firms to rely more on internal accruals or bank loans. For instance, many Indian SMEs find equity issuance challenging, hence rely heavily on bank financing. - Cost of Capital and Market Efficiency:
Developed financial markets often provide transparent pricing, competitive rates, and efficient information flow, reducing the cost of both debt and equity. Firms are able to optimize their capital structure by balancing debt and equity efficiently. In contrast, underdeveloped markets may have high borrowing costs, low liquidity, and informational asymmetries, making firms cautious about using debt. - Institutional Support:
Advanced financial markets usually have supporting institutions like credit rating agencies, investment banks, and regulatory bodies, which facilitate risk assessment and financing decisions. This encourages firms to take calculated risks in using debt. For example, rating of corporate bonds in the US or Japan helps firms access debt at lower interest rates. - Risk Perception:
In underdeveloped markets, lenders may demand high interest rates or collateral, and investors may be reluctant to invest in equity due to perceived higher risk. This directly affects capital structure by increasing reliance on internal financing and reducing leverage.
Examples:
- United States: Firms
like Apple or Microsoft enjoy highly developed financial markets,
allowing them to use a mix of debt and equity efficiently. They issue
corporate bonds, commercial papers, and public shares as per strategic
needs.
- India: While India’s financial markets have
developed over time, SMEs and mid-sized firms still face limited
access to equity markets and higher borrowing costs, resulting in more
conservative capital structures with lower debt ratios.
- Emerging Economies: In
countries like Nigeria or Bangladesh, weak capital markets and high
transaction costs make bank loans the primary source of finance,
leading to low leverage and limited growth flexibility.
Conclusion:
The development level of financial markets
significantly influences a firm’s capital structure decisions. In
developed markets, firms can leverage both debt and equity efficiently,
optimizing costs and growth potential. In underdeveloped markets, limited
financial instruments, high costs, and weak institutional support force
companies to adopt conservative capital structures, relying on internal
accruals or short-term bank loans. Thus, financial market development is a
key determinant of corporate financing patterns, shaping long-term
investment and growth strategies.
b) What
do you understand by positioning and unbundling of funds? What are the
constraints on positioning of funds? How blocked funds can be moved out of a
country?
Positioning of Funds refers to the strategic allocation and transfer of a company’s
foreign exchange resources across different countries or business units. It
is primarily aimed at optimizing liquidity, meeting obligations, and earning
returns on idle funds. In international business, funds can be positioned
in countries where they are needed for operational, investment, or debt
servicing purposes. For example, a multinational corporation (MNC) may transfer
funds from its US subsidiary to its Indian unit to finance a capital project.
Unbundling of Funds refers to the process of breaking down or separating large
aggregated sums of money into smaller, distinct portions for specific
purposes. This is done to meet local regulatory requirements, manage
exchange controls, or optimize financing costs. Unbundling ensures
compliance with international banking regulations and helps in efficient
deployment of funds without violating local currency laws.
Constraints
on Positioning of Funds:
Positioning of funds in international operations
faces several constraints:
- Exchange Control Regulations:
Many countries, especially developing ones, impose restrictions on foreign currency movements to conserve reserves. Firms must comply with central bank approvals before transferring funds abroad. - Taxation and Withholding Taxes:
Transfers may attract withholding taxes, transaction taxes, or repatriation taxes, making cross-border fund positioning expensive. - Political and Regulatory Risks:
Funds cannot always be positioned freely due to capital controls, political instability, or government-imposed restrictions on repatriation. - Banking Infrastructure and Settlement Delays:
Limited or inefficient banking networks in some countries can delay fund transfers, increasing transaction costs and operational risk. - Market and Currency Risk:
Positioning funds involves exposure to foreign exchange fluctuations, which may result in losses if currency values change adversely during transfer.
Moving
Blocked Funds Out of a Country:
Blocked funds are foreign exchange earnings or
profits that cannot be repatriated due to local currency restrictions or
regulatory controls. Several methods are used to unlock or move such
funds:
- Approval from Regulatory Authorities:
Companies can approach the central bank or foreign exchange authority of the country for permission to repatriate blocked funds. For example, Indian companies repatriating funds from countries with exchange controls need RBI approval. - Use of Letter of Credit (LC) or Advance Payment Mechanisms:
Blocked funds can sometimes be utilized for imports, local investments, or clearing dues within the country, thus indirectly freeing up resources for repatriation. - Compensation or Set-off Arrangements:
Firms may engage in offset agreements, such as using blocked funds to pay for imports from the same country, effectively moving value without actual cash transfers. - Currency Swap Agreements:
MNCs may use currency swaps or offshore hedging instruments to convert blocked funds into usable currency through foreign financial intermediaries. - Investment in Local Subsidiaries or Projects:
Blocked funds can be invested locally in subsidiaries, joint ventures, or projects, generating returns that can later be repatriated legally under specific regulations.
Conclusion:
Positioning and unbundling of funds are essential techniques for efficient international financial
management, allowing MNCs to meet operational needs, optimize liquidity,
and comply with regulations. However, constraints such as exchange controls,
taxation, political risk, and currency fluctuations limit free fund
movement. Blocked funds, common in countries with stringent currency controls,
can be repatriated through regulatory approvals, compensation arrangements,
currency swaps, or local investments, enabling firms to strategically
manage global cash flows while adhering to legal frameworks. Effective fund
positioning and unbundling are thus critical for maintaining financial
flexibility and operational efficiency in international business.
No comments:
Post a Comment