CMA Final · Strategic Financial Management

The International Financial Environment: formula sheet

Full chapter guide

Key formulas

Goal of IFM: Maximise value of the parent's shareholders' wealth, after cross-border risk; Use this as the test for any decision: does it raise group value for the parent's shareholders?
Four decision areas: Investment + Financing + Working capital/treasury + Dividend/repatriation; A ready structure for any scope question.
Main risk groups: Exchange rate + Political/country + Interest rate + Credit + Tax/legal; Name each risk, then link it to a hedge or control.
Gold standard parity (mint parity): Price of 1 unit of currency A in units of currency B (B per A) = Gold content of A ÷ Gold content of B; Used to find the implied rate between two currencies on the gold standard. The quote is units of B per unit of A, so the currency whose gold content is in the numerator is the one being priced. Example: if £1 = 113 grains of gold and US$1 = 23.22 grains, then US$ per £ = 113 ÷ 23.22 = 4.87 approx. Real rates varied slightly within the gold points because of shipping costs.
Gold points: Upper gold point = mint parity + cost of shipping gold; lower gold point = mint parity − cost of shipping gold; Rates stayed within these limits because arbitrageurs shipped gold if the rate went outside.
Bretton Woods rule: Dollar = fixed gold price (US$35 per ounce); other currencies pegged to dollar within a narrow band around par value; The band was ±1% around par under the original Bretton Woods system. The Smithsonian Agreement of 1971 widened it to ±2.25%. Par changes needed IMF approval for fundamental disequilibrium.
Percentage change in a currency: % change = (New rate − Old rate) ÷ Old rate × 100; Applied to a quote in ₹ per unit of foreign currency, this formula gives the change in the price of the foreign currency in rupees, not the rupee's own change. A rise in ₹ per US$ means the dollar has appreciated and the rupee has depreciated. To get the rupee's own change, apply the formula to the inverse quote (US$ per ₹).
Devaluation vs depreciation: Devaluation/revaluation = official change in a fixed rate; depreciation/appreciation = market-driven change in a floating rate; Terminology depends on regime, and examiners test it.
Direct and indirect quote: Indirect quote = 1 ÷ Direct quote; With two-way quotes, the reciprocal flips bid and ask: Indirect bid = 1 ÷ Direct ask, and Indirect ask = 1 ÷ Direct bid.
Spread: Spread = Ask − Bid; Percentage spread = (Ask − Bid) ÷ Ask × 100. Say which base you use if the question is unclear.
Dealer rule: Dealer buys base currency at bid; dealer sells base currency at ask; The customer gets the opposite: customer sells at the bank's bid and buys at the bank's ask.
Cross rate (both quoted with USD as base): Price of one A in B: bid = (B per USD bid) ÷ (A per USD ask); ask = (B per USD ask) ÷ (A per USD bid); Used when both currencies are quoted as units per USD, that is USD/A and USD/B. The first currency in a pair is the base. Example: EUR/INR (rupees per euro) bid = USD/INR bid ÷ USD/EUR ask.
Cross rate (USD is the quote of one pair and the base of the other): A/B bid = (A/USD bid) × (USD/B bid); A/B ask = (A/USD ask) × (USD/B ask); A/USD gives US$ per one A and USD/B gives B per US$. Multiply bids together and asks together. Example: EUR/INR = (EUR/USD) × (USD/INR).
Conversion ratio (FCCB): Conversion ratio = Face value of bond ÷ Conversion price; Gives shares received per bond. Convert both to the same currency first.
Conversion value: Conversion value = Conversion ratio × Current market price per share; Compare with the bond's market price to see whether conversion is attractive.
Conversion premium: Premium (%) = (Conversion price − Current share price) ÷ Current share price × 100; Positive when the conversion price is above the current market price.
Rupee cost of foreign borrowing: (1 + rupee cost) = (1 + foreign interest rate) × (1 + % depreciation of rupee) − 1; Use when the rupee is expected to fall against the borrowing currency. Rupee cost = r + d + r×d.
Eurobond vs foreign bond rule: Eurobond: currency ≠ currency of the market of sale. Foreign bond: foreign issuer, single national market, that market's currency; Use this test to classify any bond in a question.
IMF in one line: IMF = monetary stability + balance of payments support + surveillance + SDRs; Short-term and macro in focus. It does not fund individual projects.
World Bank Group arms: IBRD + IDA + IFC + MIGA + ICSID; Match each: IBRD loans, IDA concessional credit, IFC private sector, MIGA political risk guarantees, ICSID disputes.
ADB and BIS in one line: ADB = Asia-Pacific development finance; BIS = central banks' bank, Basel standards; ADB is regional. BIS does not lend to businesses or fund projects.
FEMA objective: FEMA 1999 = facilitate external trade and payments + orderly forex market development; Contrast with FERA, which was regulatory and restrictive.
FEMA transaction classes: Current account: generally free (with limited restrictions); Capital account: only as permitted; Classify the transaction first. It decides whether permission is needed.
Nature of FEMA: FEMA = civil law; contravention → monetary penalty; Do not call it a criminal statute.

Quick revision

A multinational faces extra risks: exchange rate, political, and transfer of funds across borders.
The balance of payments records all economic transactions between residents and the rest of the world over a period.
The main BoP components are the current account, capital account and financial account.
In a direct quote, the home currency is the price of one unit of foreign currency.
In an indirect quote, foreign currency is the price of one unit of home currency.
The bid rate is what the dealer pays; the ask rate is what the dealer charges. The ask is higher.
Spread = ask − bid, and a wider spread means a higher cost of dealing.
A direct quote and an indirect quote for the same pair are reciprocals of each other.
A fixed regime holds the rate near a set value; a floating regime lets demand and supply decide.
Always identify the base currency before computing appreciation or depreciation.
Know what each international institution does, and match it to its purpose in MCQs.
Know each instrument's purpose and the currency in which it is issued.

Common mistakes

Saying IFM is just domestic finance with currency conversion. Fix: Add political risk, differing tax and law, market access and multiple currencies of cash flow.
Stating the goal as profit maximisation or subsidiary-level value. Fix: Write that the goal is maximising the wealth of the parent's shareholders across the whole group.
Saying that Bretton Woods fixed currencies to gold directly Fix: Only the dollar was tied to gold. Other currencies were pegged to the dollar.
Calling India's rupee a freely floating currency Fix: Write that the rate is market-determined with RBI intervention to curb excess volatility, so it is a managed float.
Using the bid rate when the customer buys foreign currency. Fix: Always ask what the bank is doing. The bank sells foreign currency to a buyer, so it uses the ask rate.
Taking the reciprocal without swapping bid and ask. Fix: Indirect bid is 1 ÷ direct ask and indirect ask is 1 ÷ direct bid. Check that the ask comes out higher.
Treating Eurobond and foreign bond as the same thing Fix: Remember the test: a foreign bond is sold in one national market in that market's currency. A Eurobond is sold across markets in a currency outside its home market.
Thinking 'Euro' means European or the euro currency Fix: Read Euro as 'held or issued outside the currency's home country'. A dollar Eurobond can be sold in Singapore.
Saying the IMF finances development projects. Fix: Remember the IMF supports balance of payments and monetary stability. Project and poverty finance is the World Bank's role.
Calling FEMA a penal law like FERA. Fix: Write that FEMA is a civil, facilitative law and contraventions mainly attract monetary penalties.

Exam tips

Structure scope answers as four decisions and add one cross-border point to each.
In case-based MCQs, the correct option usually favours group wealth and recognises exchange or political risk.
Always write the goal as maximising parent shareholders' wealth.
Pair each risk with a hedging or control tool to earn application marks.
For difference questions, give points in a short comparison with at least five distinct bases.
Expect 2-mark MCQs on facts: which system created the IMF, what the dollar was tied to, and which regime India follows.
In written answers use a short table-like comparison in bullets with fixed criteria, so the examiner can award a mark per point.
Always link theory to a business effect, such as hedging need under floating rates.