1. Multinational Corporations:- The essential nature of
multinational enterprise lies in the fact that its managerial
headquarters are located in one country (home country)while
enterprise carries out operations in a number of other countries
as well(host countries) “ a corporation that controls production
facilities having been acquired through the process of foreign
direct investment—ILO report observes
MNC meets five criteria :-1.It operates in many countries at
different levels of economic development
2.Its local subsidiaries are managed by nationals
3it maintains complete industrial organizations which include
R&D, manufacturing facilities in several countries
4.It has multinational central management
5.It has multinational stock ownership

2. A transnational corporation is a multinational in which both
ownership and control are dispersed ,internationally .There is
no principle domicile and no one central source of power Eg.
Royal Dutch,Shell,Unilever
A global corporation is one which views the entire world as a
single market which should be catered to by globally
standardized products
Characteristics of MNCs:- 1 .Giant size-Asset & sales of MNC
2.International Operation – It runs its operations through
network of branches &subsidiaries
3Oligopolistic Power-Process of merger & takeover of other firm
4.Centralized control- Headquarters in the home country
5.Collective Transfer of resources – Technical know –how ,raw
materials, management expertise, machinery,etc
6.International Market

3. Reasons for growth of MNCs :-Benefits to them &their home
Countries –1. MNC can exploit the foreign markets. Export from
home country increase.
2.MNC get income from abroad like dividends, royalties etc
3.MNC can acquire raw materials at cheaper rate
4.Export spare parts for assembling & selling in the foreign
market
5.MNC-integratingnational economies into universal system
The inflow of capital from abroad -1.FDI includes investment by
braches, subsidiaries, affiliates of foreign companies
2.Portfolio investment- comprise equity holdings by nonresident
In Indian companies debt capital from foreign sources in Indian
companies

4. Benefits Achieved by host countries
1.Transfer of Technology
2.HR Development
3Health competition
4Foreign Capital 5.R&D
6.Employment opportunities
Benefits to Home countries 1.Huge revenue 2.cheaper raw
materials 3.utillize talents 4 Generate employment

5. Foreign Exchange Market:-Foreign exchange arises out of
international trade .Foreign exchange is the system or process of
converting one national currency into another, &of transferring
money from one country to another” Paul Einzing
The foreign exchange market is the market in which individuals
firms & banks buy & sell foreign currencies or foreign exchange.
Four levels of transactors or participants can be identified in
foreign exchange markets. First levels are tourists, importers,
exporters, investors etc, second level are the commercial banks
which act as clearing houses between users &earners of foreign
exchange .Third level are foreign exchange brokers. The final
level is central bank ,acts as seller or buyer of last resort

6. Segments of foreign exchange Market:-1.Over the Counter(OTC)
market &2.Exchange traded market
1.Over the counter market –OTC It is an informal arrangement
among the banks &brokers operating in a financial centre buying
&selling currencies connected to each other by telex, telephone,
satellite communication net work Eg. RBI, it comprises both
Commercial banks & investment banks, financial institutions
2.Exchange Traded Market – comprises of securities exchange,
future &options are traded
Functions of Exchange Market:- 1. Currency conversion
2.Provision of credit: Exporters &Importers get pre -shipment &
Post -shipment credit, ECGC gives loan(Expo. Credit Guaran corp.
3.Insurance against foreign exchange risk:-Foreign Exchange Market
provides insurance to protect against the possible adverse
Consequences of unpredictable changes in exchange rates

7. Instruments of foreign Exchange-:1.Spot rate: -It is the exchange
Rate quoted for transactions that require ether immediate
delivery or delivery with in two days
2.Forward rate :-The transaction which involves the exchange of
Currencies beyond three days at a fixed exchange rate. It can be
for one month or three months etc. A forward contract for
delivery one month means the exchange currencies will take
place after one month from the date of contract
3.At par- If the forward exchange rate quoted is exactly
equivalent to the spot rate at the time of making the contract.
4.Arbitrage :-The exchange rate between any two currencies is
kept the same in different monetary centers by arbitrage. This
refers to the purchase of currency in the monetary centre where
it is cheaper ,for immediate resale in the monetary centre
where it is more expensive in order to make profit

8. 5.Currency swap:-A currency swap refers to a spot sale of
currency combined with a forward repurchase of the same
currency – as a part of single transaction.
6.Hedging:-A transaction strategy used by traders and investors
In foreign exchange to protect an investment or portfolio against
currency price fluctuations. A current sale by or purchase is
offset by contracting to purchase or sell at specified future date
in order to defer a profit or loss on the current sale or purchase.
In this way risk due to currency price fluctuations is reduced
Factors influence the rate of exchange :1.Trend in foreign trade
2.Capital Movements. 3.Speculative activities 4.Bank rate
5.Govt control . 6.Miscellaneous factors

9. 1.Trend in foreign trade:- Exports &other services rendered to
another country will bring foreign exchange for the country. If
exports exceed the imports exchange rate will change to be
favourable to the country while excess of imports over the
exports will make the rate of exchange unfavorable to the
country .The changes in foreign trade of the country lead to the
fluctuations in the rate of exchange.
2.Capital Movements:-Capital movements in the form loans of &
investment between the countries also influence the exchange
rates. Sometimes large scale capital movements take place
through stock exchange transactions. If home investors
purchase securities ,the demand for foreign currencies will go
up & exchange rate will become unfavourable. If foreigners buy
securities floated in the country ,the rate of exchange will
become favourable

10. Speculative activities:- Speculators in exchange markets who
buy a currency from centres where it is cheap ,with a view to
sell it where it is high and thereby make profits Similarly people
expect the price of currency will go up so they buy the currency
to make profit in future
4.Bank rate:-High bank rate will attract fund from foreign
countries, then rate exchange will be favourable &vice versa
5Currency &Credit condition;-These are influenced by the
monetary policy of the country. If the supply of currency & bank
credit increases over number of years it will affect export and
increase the import
6.Government control:-Govt . should control all the foreign
exchange transaction in the country – Need stability of Govt
7.Miscellaneous factors:-stability ,prestige, respect of currency
will play a big role in the world market

11. Balance of Payment:-Balance of payment is a systematic
record of all transactions between the residents of country &the
rest of the world during a given period .Credit side shows
Receipts of foreign exchange from abroad and the debit side
shows payments in foreign exchange to foreign residents.
Receipts and payments are in two heads – one being the current
account and the other being the capital account.
The current account represents transfer of real income and the
capital account is only transfer of funds without effecting a
shift in real income.
Current Account
Transactions are those relating to export and import of services,
income on investments and unilateral payments (gifts,
remittances for family maintenance, etc).

12. Current Account records the receipts & payments of foreign
exchange in the following ways:-
1. Current account receipts -> (i) Export of goods
(ii) Invisible (services, unilateral transfers, investment
income)
(iii) Non – monetary movement of gold
2. Current Account Payments -> (i) Import of goods
(ii) Invisible (services, unilateral transfers, investment
income)
(iii) Non – monetary movement of gold
Export of goods will bring foreign exchange in the country & the
import of goods causes outflow of foreign exchange from the
country. The difference between these two is known as
balance of trade.

13. If the credit side is greater than debit side, the difference shows
current account surplus. Thus, representing net foreign
investment (If).
If > 0 (Nation is investing part of its savings (S) abroad instead of
in domestic capital formation (Id))
Current account surplus = X-M (Export - Import)
On the contrary, if the debit side >credit side, which indicates
current account deficit.
Thus, nation is disinvesting abroad.
Current account deficit = import > export
Invisibles & Current Account
The key drivers of invisible receipts were travel earnings,
software exports and workers’ remittances.

14. Capital Account Transaction:-The capital account transactions take the
following ways :-1.Capital Account receipts >1.Long term
Inflow funds (2) Short term inflow funds
11. Capital account payments :-1.Long term outflow fund
(2) Short term outflow of funds
Capital account receipts :The long term maturity is over one
year, while in the short term flows are effected one year or less
The credit side records the official &private borrowing from
abroad net of repayments, direct and portfolio investment &
short term investments into the country. It records the bank
balances of the non residents held in the country.
The debit side includes disinvestments of capital,
country’s investment abroad, loans given to foreign government or
a foreign party and bank balances of the non-residents held in the
country.

15. Movement of gold may be monetary or non monetary. Monetary movement
is the sale or purchase that influences the international monetary
reserves.
Non monetary sale and purchase of gold is done for industrial purposes that
is shown in the current account either separately or along with the trade
in merchandise
When credit side of the current account along with the credit side of the
long term capital account transactions is compared with the transactions
on the debit side of the current account Plus the long term capital account,
the difference is known as the basic balance which may be negative or
positive
The debit and credit sides of short term capital transactions are added
to their respective sides and then capital account is balanced. After
balancing the capital account errors and omissions are mentioned .Finally
two sides are compared. The difference is known as overall balanced

16. Balance of trade =Export of goods - Import of goods
Balance current a/c =Balance trade +net earning on invisibles
Balance of Capital a/c =Foreign exchange inflow – foreign
exchange outflow, (on account of foreign investment, foreign
loans, banking transactions & other capital flows)
Overall balance of payments = Balance of current + balance of
capital account +statistical discrepancy
Statistical discrepancy is known as errors and omissions
Official Reserve Account :- Official reserves are held by the
monetary authorities of a country .It consists of monetary gold,
SDR allocations by IMF &foreign currency assets. If overall BOP
is surplus, the surplus amount adds to the official reserve
account. If BOP is deficit & if accommodating capital is not
available the ,official reserve account is debited by the
amount of deficit.

17. Country A :-Balance of payments1998-99 (Rupees)
Credit Debit Balance
A . Current Account
Merchandise import - ------- -------------- 120
Merchandise export ------------- 100
Balance of trade (120-100) --------- -------------------------- -20
Invisibles
Services (net ) -------------------------- 4
Unilateral transfers (net)-------------------- 2
Invest income (net) - ----- ---------------- ------------ 1
Non monetary movement of gold(net) --- ------------
Balance of current account --(4 +2) -1=5 –(-20 ) ………. -15
B.Capital Account -- Long –term
Direct investment abroad ---------------------------- 11
Direct foreign investment inflow -- ------ 18
Portfolio investment(net)------------------ 9
Loans-official & private net repayment 12
Basic balance (100+4+2+18+12 =(136)
(120 + 11 +9 +1 ) =(141 ) >136-141 ---------------------- -5

18. Capital Account ---Short term Credit - Debit - Balance
Holdings with banks --------------- 4
Other short term transactions --------------------- 3
Balance of capital account (foreign
exchange inflow – outflow)
(18+12+4) =34 -23 (11+9+3) ------------------------ 11
C. Errors& Omissions -1
Overall Balance (Balance of current
account + Balance of capital a/c +
statistical discrepancy )(errors omission)
(-15) + (11)= - 4 +(-1) --------------------------------- -5
D. Official Reserves
SDR (other short term transactions)-- 3
Net official reserves -------------------- 2
Overall balance ----- ----------------------------------- -5
Office Reserves Movement ………….. 5

19. International Bond Market :-The international bond market(IBM)
encompasses two basic markets segments :foreign bonds and
Eurobonds. A foreign bond issue is one offered by a foreign borrower
to the investors in a national capital market and denominated in that
nation’s currency. Eg A German MNC is issuing dollar denominated
bonds to US investors
A Euro bond issue is one denominated in a particular currency
but sold to investors in national capital market other than the
country that issued the denominating currencies A Dutch
borrower issuing dollar denominated bonds to investors in UK or
Netherlands..Roughly 80% of new international bonds are likely to be
Eurobonds rather than foreign bonds.
Euro bonds are known by currency in which they are denominated
Eg.Yen Euro bond, Us.$ Eurobonds. Yankee bonds are dollar
denominated foreign bonds originally sold to US

20. Euro bonds are usually bearer bonds. With bearer bond possession is
evidence of ownership. With registered bond the owner’s name is on
the bond & it is also recorded by issuer. When registered bond is sold
a new bond certificate is issued.
National Security regulation
Foreign bonds must meet the security regulations of the country
in which they are sold. But Eurobond in the USA may not be sold to US
citizens. After 90 days US investor can buy from the secondary market
Withholding taxes
Prior to 1984 ,the USA required on interest 30%withholding
tax on interest paid to nonresidents who held US Govt or corporate
tax .Moreover, US. firms issuing Eurodollar bonds from the US were
required to withhold the tax on interest paid to foreigners

21. Other Recent regulatory changes:-Two other recent changes in
US security regulations have had an effect on the international
bond market.
One is Rule 415,which the SEC (Securities & Exchange
Commission) instituted in1982 to allow shelf registration. Shelf
Registration allows an issuer to pre-register a securities issue,&
then shelve the securities for later sale when financing is actually
needed. In 1990 the SEC instituted Rule 144,which allows
qualified institutional investors in the Us that do not trade in
private Placement issues that do not have to meet the strict
Information disclosure requirements of publicly traded issues
Global bond Global bond issues were first offered in 1989.A
Global bond issue is very large international bond offering by a
single borrower that is simultaneously sold in North America,
Europe ,&Asia

22. Types of Instruments: IBM has been much more innovative than the
domestic bond market in the types of instruments offered to investors
1. Straight fixed –rate bond issues:-These have a designated maturity
date at which the principal of the bond is promised to be repaid. During the
life of the bond fixed coupon payments are Paid as interest to the bond -
holders. The Us $,UK sterling pounds Japanese Yen have been denominating
straight fixed rate bond.
2. Euro-Medium –Term Notes(Euro MTNs) :-These are fixed rate notes
issued by corporation with maturities ranging from less than a year to about
10yrs.Euro-MTNs have a fixed maturity and Pay coupon interest on periodic
dates.
3. Floating-rate Notes(FRN). It was introduced in 1970.Floating rate notes are
medium –term bonds with coupon payments indexed to Some reference
rate. Common reference rates are either three month or six month Us dollar
LIBOR(London inter bank Offered Rate, used as the basis for setting euro
currency loan rates )Coupon payments on FRNs are usually quarterly or
semiannual with reference rate

23. 4.Equity –Related Bonds:-There are two types of equity-related
bonds. They are Convertible bonds &bonds with equity warrants.
A convertible bond issue allows the investor to exchange the bond for
a predetermined number of equity shares of the issuer. The floor-
value of a convertible bond is its straight fixed rate bond value.
5.Bonds with equity warrants can be viewed as straight fixed rate with
the addition of a call option (or warrant ) feature. The warrant entitles
bondholder to purchase a certain number of equity shares in the
issuer at a pre stated price over a Predetermined period of time.
6.Zero coupon bonds:-The bonds are sold at a discount from face
Value & do not pay any coupon interest over their life. At maturity the
investor receives the full face value. The zero coupon bonds have been
denominated primarily in the US$ &Swiss franc. Japanese investors
are attracted to Zero coupon bonds because of tax free capital gain

24. 7.Another form of zero coupon bonds are stripped bonds. A
stripped bond is a zero coupon bond that results from stripping
the coupons and principal from coupon bond. The result is a
series of zero coupon bonds represented by individual coupon
principal and payments. The stripped bonds are actually receipts
representing a portion of the Treasury security held in trust .In
1985 the US Treasury introduced its own product called STRIPS.
8.Dual –Currency:-A dual currency bond is a straight fixed rate
bond issued in one currency ,Eg Swiss francs that pays coupon
Interest in that same currency. At maturity the principal is repaid
in another currency,ie Us$. If the dollar appreciates over the life
of the bond, the principal repayment will be worth more than a
return of principal in Swiss francs

25. International portfolio Investment:-The rapid growth in
international portfolio investments in recent yrs reflects the
globalization of financial markets. The investors can reduce the
risk when they diverse their portfolio holdings internationally
than domestically. Security returns are much less correlated
across countries than within a country. So international
diversification can sharply reduce risk.
Rational investors would select modes of portfolios by
Considering returns as well as risk. 1.International mutual
funds 2.Country fund & 3.internationally cross-listed stocks,
which allow investors to achieve international diversification
without incurring excessive costs. The Uk market performed
well ranking fourth, owing to the respectable mean return
combined with relatively low risk.

26. International Bond investment:-In the optimal international portfolio,
the US bond receives the largest positive weight, followed
by French &Japanese bonds. The investors may be able to
increase their gains from international bond diversification if
they can properly control the exchange risk. The euro currency is
likely to alter the risk return characteristics of the affected markets.
The British bonds would play an enhanced role in international
diversification strategies to retain their risk return role.
International Mutual Funds:-By investing IMF, investors can
1.Save any extra transaction and or information costs they may
have to incur when they attempt to invest directly in foreign
markets. 2.Potentially benefit from the expertise of professional
fund manages 3.Many legal & institutional barriers to direct portfolio
investments

27. In addition to International mutual funds, investors may achieve
International portfolio diversification by investing in 1.Country
Funds,2.American depository receipts(ADRs) , 3.world equity
benchmark shares (WEBS),without having to invest directly in
foreign markets.
Using country funds, investors can -1.Speculate in a single
foreign market with minimum costs. 2.Construct their own
Personal international portfolios using country funds as
building blocks
. 3.Diversify into emerging markets that are otherwise
practically inaccessible
Many emerging markets, country funds provide international
investors with the most practical, if not the only, way of
diversifying into these largely in accessible foreign markets.

28. The majority of country funds available ,however, have a closed
end status, A closed –end country fund (CECF) issues a given
number of shares that trade on the stock exchange of the host Country
2.International Diversification with ADRs :-US investors can achieve
international diversification at home using American
Depository Receipts (ADRs) and country funds. ADRs represent
receipts for foreign shares held in the US depository banks in
foreign branches or custodians. ADRs are traded on US exchange
like American securities
3.International Diversification with WEBS:In April 1990 American
Stock Exchange introduced World Equity Benchmark Shares
(WEBS).Before this US introduced Standard &Poor’s Depository
Receipts(SPDRs) known as Spiders. WEBS&Spiders are exchange
traded open funds so investors can trade stock market index

29. The investors allocate a disproportionate share of their funds to
domestic securities, displaying so called home bias . Home bias is
likely to reflect imperfections in the international financial
markets like excessive transactions.
The portfolio combining equity shares & bonds is preferable to
investment in equity alone or in bonds alone because the combination of
equity & bonds raises the risk- adjusted return.
Cross –Boarder Listings of Stocks:- Cross boarder listings of stocks have
become quite popular among major corporations.
Novo Industry-Danish Multinational corporation –produces health care
products like insulin listed its stock in Newyork Stock Exchange-they
directly raise equitycapital in USA.In1970 they decided to enter into
international capital market from the Danish stock market.Then they faced
higher cost of capital than competitors. Again they decided to low its capital
For that they issued euro bond ,listed in London stock exchange in
1978.Followed This they sponsored ADR.US investors could invest.The
Sharp increse in Novs price indicated stock became fully priced internationally

30. Foreign Exchange Exposure:-The value of currency
changes frequently in the exchange rate system. This change
will affect the firm’s assets &liabilities and also cash flow ie
they face foreign exchange exposure Eg. Us$ depreciates
against Japanese yen This will affect both US & Japanese firms
Ie it can affect adversely the Japanese car makers in the US car
market & thereby they are forced to raise more price than Us
car. Three types of Exposure.They are Economic,Tansaction
and Translation ---1-Economic Exposure can be defined as
the extent to which the value of the firm would be affected by
unanticipated changes in exchange rates
2.Transation Exposure:-Transaction exposure is concerned with
the changes in the present cash flows(ie foreign exchange loss /
Gain as a result of changes in the exchange rate) But real
operating exposure is related to changes in future cash flows

31. 3.Translation exposure :-refers to the potential that the firm’s
Consolidated financial statements can be affected by changes in
exchange rates. Consolidation involves translation of
subsidiaries ‘ financial statements from local currencies to the
home currency.(Ie UK company has subsidiaries in many
countries ,all the statements of local currency will be converted
to sterling pounds .
Economic Exposure:-
Value of the firm would be affected by unanticipated changes
in exchange rates. It measures “what is at risk". Normally a firm
will not face any exposure even if the exchange rates change
Randomly.(Eg A company maintains a vacation home for
employees in the British country side. Whenever pound
depreciate local price of the property goes up .So the dollar
price of the asset insensitive to exchange rate changes

32. The impact of inflation &changes in exchange rate on the future
cash flow may vary under different market conditions. As far
as revenue is concerned ,impact may vary if the firm produces
1.For the export market 2.for the domestic market but competit-
ion from import is present 3.For domestic market &there is no
competition from abroad
Similarly the impact of inflation &exchange rate changes on the
cost structure shall be different if the firm –1 imports inputs
2.Procures inputs from domestic sources, but competition from
foreign supplier is present .3. Gets inputs from domestic sources
and there is no competition from foreign suppliers
Managing operating Exposure:- The objective of managing
operating exposure is to stabilize cash flows in the face of
fluctuating exchange rates

33. Sometimes local price of currency changes ie appreciate, the
Dollar value of the asset will be sensitive to exchange rate.Then
the company expose currency risk.
Currency risk is properly measured by the sensitivities of 1.the
future home currency values of the firm’s assets&liabilities
2.The firm’s operating cash flows to random changes in exchange rates
Operating Exposure ;- It can be defined as theextent to which the
firm’s operating cash flows would be affected by random changes in
exchange rates .
Determinants of operating Exposure --:-
A firm’s operating exposure is determined by(1)the structure of the markets
in which the firm sources its inputs like labour &materials and sells its
products( 2’)the firm’s ability to mitigate the effect of exchange rate changes
by adjusting its markets,Product mix and sourcing
Real operating measure arises when changes in exchange rate,together
with rates of inflation

34. The firm can use the following strategies for managing operating
Exposure –1.Selecting low cost production sites 2. Flexible
sourcing policy .3.Diversification of the market.4.Product
differentiation and R&D efforts. 5.Financial Hedging
Operating cash flow is governed not only by inter firm
transactions but also by intra firm transaction. A larger number
Of currencies are involved there than in the case of a domestic
firm. some currencies may appreciate while others may
depreciate. So it is only the net effect that determines the size
of real operating exposure.
Financial Swap :-Borrower may not have an easy access to a
Particular segment of financial market of its own choice.Eg.a firmneeds
fixed rate funds but has easy access to floating rate funds.A firm needs
borrowing from the US$ market,but has an access to Euro market.So it
Can borrow funds from the easily available sources &can exchange its
liability into another form of liabilityof its own choice.This exchange
is swap ie it can swap the euro loan for Us $loan in the swap market.

35. Corporate governance can be defined as the
economic ,legal and institutional frame work in which corporate
control and cash flow rights are distributed among shareholders ,
managers, and other stake holders of the company. Other stake
holders may include workers, creditors, banks, institutional
Investors and even government
Governance of the public corporation :-jointly owned by many
Shareholders with limited liability
Collect large amounts of capitals with limited liability & under –
take many investment projects. Public corporation has weakness
ie conflicts of interests between managers and shareholders
The central problem of Public corporation how to protect
outside investors by expropriation by the controlling insiders.

36. The following are issues : Agency problem 2.Remedies for the
agency problem 3.Law &corporate governance
4.Consequences of law .5.Corporate governance Reform
Agency problem :-If the two sides (mangers & investors) write
Complete contract there will be no agency problem. It is the
fiduciary duty of mangers to return free cash flows to
shareholders as dividends
Remedies for agency problem
1.Share holders have right to elect the board of directors
2.Incentive contracts -Mangers do not own equity share &do not
have cash flow rights .3.concentrated Ownership.-Investors own
51%shares .4.Debt.ail -If managers fail to pay interest to
creditors the managers should be dismissed.5.overseas
stock listings.-protect better investors 6.Market for corporate
controll :-take over week the company

37. 7.Law &corporate governance. Commercial legal systems are
necessary especially English common law &French Civil law
Ownership &control pattern:-Dominant investors may acquire
Control through various schemes viz-Shares with superior voting
rights 2.Pyramidal ownership structure-(founders and their
families 3.Interfirm cross holding (equities among group of
companies)4.Private benefits of control-Large shareholders
acquire control right and cash flow right .5.Capital Markets &
Valuation—Investors promotes the development of external
capital markets
Corporate Governance Reform:1-Germany &Japan introduced
bank centered governance system (long term performance)in
financial distress.US introduced market centered governance
System(short term). 2.Political Dynamics-Many parties have
vested interest

38. International Tax Environment :-Two basic objectives -1.Tax
Neutrality .2.Tax equity. ----Tax neutrality is determined by three
Criteria. They are 1.capital export criteria, 2.national neutrality
3.Capital import neutrality….1.The capital export criteria is
that an ideal tax should be effective in raising revenue for the
Government and not have any negative effects on the economic
decision –making process of the tax payer. It is based on
worldwide economic efficiency.
2.National neutrality IT is taxable income, taxed in the same
Manner by the tax payer’s national tax authority regardless of
where in the world it is earned.
3.The capital –import neutrality implies that tax burden a host
Country imposes on the foreign subsidiary of MNC should be
the same regardless of which country the MNC is incorporated &
same as that placed on domestic firms

39. Types of Taxation:.Income tax ,withholding tax, value added tax
1.An income tax is direct tax. The tax is levied on active income
2.A withholding tax, levied on passive income earned by an
Individual or corporation of one country within the tax Jurisdiction
Of another country .Passive income includes dividends &interest
income,& income from royalties, patents or copy -
rights paid to the tax payer. Many countries have tax treaties
with one another specifying the withholding tax rate applied to
various types of passive income.
3.Value –Added Tax is an indirect national tax levied on the value
added in the production of goods or services as it moves through
the various stages of production. There are several ways to
Implement a VAT. The subtraction method is used in practice to
collect the tax
Equity means that everyone should pay taxes according to his ability to
pay

40. National Tax Environment:-International Investor is a function of
the tax jurisdictions established individual countries in which the
MNC does business or in which the investor owns financial
assets There are two fundamental types of tax jurisdiction ie
1.worldwide &2. territorial :-
1.The worldwide or residential method of declaring a national tax
jurisdiction is to tax national residents of the Country on their
worldwide income no matter in which country it is earned .The
national tax authority is declaring Its tax jurisdiction over people
&business. Thus MNC would be taxed in its home country & host
countries. So there is possibility of double taxation exists.
Territorial Taxation:- The territorial or source method of
declaring a tax jurisdiction is to tax all income earned within the
country by any taxpayer, domestic or foreign. Hence regardless of the
nationality of a tax payer,if the income is earned within the territorial
boundary of a country , it is taxed by that country.

41. Foreign Tax Credits:-It means to eliminate double taxation.
Foreign tax credits are categorized as direct or indirect .A direct
tax credit is computed for direct taxes paid on active foreign
source income of foreign branch of of a US.MNC or on the
indirect withholding taxes withheld from passive income
distributed by the foreign subsidiary to the US.parentS. For
Foreign subsidiary of US.MNC,s,an indirect foreign tax credit is
computed for income taxes deemed paid by the subsidiary.
The deemed-paid tax corresponds to the portion of the
distribution of earnings available for distribution that were
distributed. Eg.if wholly owned foreign subsidiary pays out
dividends equal to 50% of the earnings available for
distribution,the deemed paid tax credit is 50% of the foreign
Income taxes paid by the foreign subsidiary.

42. A tax haven country is one that has a low corporate income tax
rate &low withholding tax on passive income.
In Ireland & Netherlands, special tax incentives or tax holidays are
granted for business that will earn hard currency or
develop export markets.
A controlled foreign corporation (CFC) is a foreign subsidiary that has
more than 50% of its voting equity owned by US share holders .A
US shareholder is any US. citizen, resident, partnership
corporation, trust, or estate that owns(or indirectly controls) 10% or
more of the voting equity of the controlled foreign corporation
Modes of Double taxation relief:-Double taxation relief is
normally granted by the country in which parent company has its
Legal residence. They are:-1.credit system without deferral
2.Credit system with deferral.3.Exemption.4.Deduction of tax
Paid abroad 5.Investment credit.

43. Credit system without Deferral:-Taxes as credit paid in the host
as country are allowed as a credit against the tax liability in the
home country. It is based on the principle of capital –export
neutrality. Eg The tax rate in India is 35% & a foreign subsidiary of an
Indian company pays taxes on its profit at the rate of 40% in the host
country. The Indian Government will allow the excess tax paid in the
foreign tax jurisdiction as an offset against the amount of tax paid
within its own jurisdiction.
2.Tax credit with Deferral:-Taxation in the home country is deferred
until earnings are of repatriated by the subsidiary to the Parent
company. Profits of the subsidiary are taxed at the rate
Prevalent in the host country.
3.Tax Exemption:-If profits of the subsidiary are taxed in the host
country, they are exempted from any taxation in the home country

44. 4.Deduction of tax paid abroad as expenditure:-The amount of
tax paid in a foreign country is treated as expenditure and so it
Is deducted from the total income arising in the country.
5.Investment credit:- In this method ,the amount of capital
Invested abroad is deducted from the income arising in the
country of residence .The purpose is to encourage capital export
through reducing the burden of taxes
International Tax Management Strategy:-ITMS aims at
maximising profit & minimising overall tax burden and involves
1.Trade off between retention & repatriation of profits by
Subsidiaries. 2.Cost allocation among subsidiaries facing varying
tax rates .3.Decision to operate through either branches or
subsidiaries

45. Transfer pricing Transfer pricing is intra-corporate transaction pricing
where the prices are above/below the arm’s length
Price. Arm’s length prices are uncontrolled market price found
In case of unrelated firms
Money transfer prices aim at shifting pre-tax profits from a high
tax counturry to a low tax one. Efficient transfer prices aim at
maxmising output. The price of intermediate goods is designed
to boost up the production multiplier so as to facilitate
production in different units. Such designing of prices quite
different from the arm’s length prices is known as efficient transfer
prices . But shadow price aimed optimum allocation of resources
among various units of firm. It shows maximum liquidity than
Profitability. Funds are transferred from cash surplus into cash
deficient Units of a firm through transfer pricing devices

46. Arm’s length prices are those prevailing in transactions between
unrelated parties engaged in similar or the same trade under
similar conditions in the open market or it is uncontrolled market
Price found in case of unrelated firms.
WORKING CAPITAL
Working capital refers to investment in current assets. The
current assets are :-1Cash, 2.Near cash assets, such as short -
term marketable securities, 3. Bill receivables, 4.Inventory
Including raw materials, semi –finished goods, & finished goods
The firm’s current assets are known as circulating assets
because the value represented by these assets circulates among
themselves. Eg. cash is used for buying raw materials which is
processed into finish goods. These are sold usually on credit &
that creates bill receivables & converted into cash

47. Working c apital is often denoted in two ways. One is the gross
working capital which is the sum of different current assets.
The other is the net working capital which means current assets
minus current liabilities
Objectives:-1.Potimaisation of cash holdings in different units
through Smoothening of the cross-boarder cash flows as well
as in the firm as a whole
2.Minimisation of finance transaction cost
3.Avoidance of foreign exchange losses
4.Minimisation of the tax burden of the firm

48. Exchange rate quotation :-The ratio between two currencies is
known as an exchange rate.
The methods of quoting exchange rates are both direct and
indirect .A direct quote gives home currency price of a certain
amount of foreign currency ,usually one or 100 units. Eg.
Rs.35/us$ . In the case indirect quoting ,the value of one unit
of home currency is presented in terms of foreign currency. If
India adopts indirect quotation, the banks in India will quote the
exchange rate as US$ 0.022857 /Rs
If the quotation is published in a third country (Eg.London) to
which neither of two currencies belongs ,the usual practice is put
the stronger currency on the numerator
Direct quote places home currency on the numerator &indirect
quote is just the opposite ie strong currency on the numerator

49. Problem :- If direct quote is Rs.45/US$, how can this exchange rate be
Presented under indirect quote?
US $ 1 /Rs. 45 = US$ 0.0222 /Rs
Buying &selling rate :-Buying rate is bid rate &selling rate is ask
rate or offer rate. The bid rate is always given first ,followed by
the ask rate. ie Rupee- US$ rate is Rs.54 -54.30 /US$
Rs.54 is buying rate(bid price) & Rs.54.30 is selling rate (ask
price) The difference between these two quotes forms the bank’s
profit & is known as the spread .It is stated in the percentage
terms Spread = (Ask price - Bid price ) / ask price X 100
Problem:-Consider the following bid-ask prices.Rs.40-40.50/US$
Spread = (40.50 – 40.00 ) / 40.50 =0.0123 or 1.23 %
The change in forward rates may be upwards or downwards. There is a
disparity arises between spot and forward rates .This is known as
the swap or forward rate differential. If the forward rate is higher
than the spot rate it would be known as forward premium
If the forward rate is lower than the spot rate is known as forward
discount

50. Forward rate differential represents the difference of forward &
Spot rates divided by spot rate
Forward Premium (discount) =
n-day forward rate –spot rate /spot rate x 360 /n
Where n is the length of forward contract expressed in number
of days
Problem:-Find out the forward rate differential if spot rate of US$
is Rs.45.00 and one month forward rate is Rs.45.80
Ans ------360/30{ (45.80- 45.00) /45.00} x 100 =