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INTERNATIONAL ARBITRAGE | MULTINATIONAL CAPITAL BUDGETING FINANCIAL MANAGEMENT | LEC 18 |COMMERCE | UGC-NET PAPER 2 What is international arbitrage? International arbitrage is the act of buying and selling the same quantity of an asset in two different markets simultaneously. International arbitrage works on the principle of price differential created due to the inefficiencies of the market. International arbitrage entails a trader buying a security from a market at a lower price and selling a similar quantity of security in another market at a higher price to earn a riskless gain. If both the markets are in the same country, it would be called a simple arbitrage trade, but as per international arbitrage definition, both the markets should be in different countries. International arbitrage opportunities are not very common as price differentials reach an equilibrium as soon as they are spotted. If there is a price equilibrium in the market, there will be no space for international arbitrage. The most common types of international arbitrage trades are the buying and selling of International Depository Receipts (IDR), currencies and the same stock registered in two different countries. Example of international arbitrage Let us try to understand what is international arbitrage? Suppose the shares of company XYZ are listed on both the National Stock Exchange and the New York Stock Exchange. The shares of XYZ are trading at Rs 500 on the NSE. However, on the NYSE, the shares are trading at $10.5 per share. Let us assume the US$/INR exchange rate is Rs 50, which means 1US$ = Rs 50. At the prevailing exchange rate, the price of the shares on NYSE in INR will be equal to Rs 525. In such circumstances, an investor can simultaneously buy shares of XYZ on NSE and sell on NYSE to earn a profit of Rs 25 per share. However, in real life, the difference is very small and one has to ensure that a favourable exchange rate holds for some time. While opting for international arbitrage, one should take the transaction cost into consideration. High transaction costs can neutralise the gains from arbitrage. Multinational Capital Budgeting Multinational corporations (MNCs) evaluate international projects by using multinational capital budgeting, which compares the benefi ts and costs of these projects. Given that many MNCs spend more than $100 million per year on international projects, multinational capital budgeting is a critical function. Many international projects are irreversible and cannot be easily sold to other corporations at a reasonable price. Proper use of multinational capital budgeting can identify the international projects worthy of implementation. The most popular method of capital budgeting involves determining the project’s net present value by estimating the present value of the project’s future cash fl ows and subtracting the initial outlay required for the project. Multinational capital budgeting typically uses a similar process. However, special circumstances of international projects that affect the future cash fl ows or the discount rate used to discount cash fl ows make multinational capital budgeting more complex. Financial managers must understand how to apply capital budgeting to international projects, so that they can maximize the value of the MNC. The specific objectives of this chapter are to: ■ compare the capital budgeting analysis of an MNC’s subsidiary versus its parent, ■ demonstrate how multinational capital budgeting can be applied to determine whether an international project should be implemented, and ■ explain how the risk of international projects can be assessed. App Link.: https://play.google.com/store/apps/de... Website link.: https://swamivivekanandinstitute.com/ Facebook link.: / swamivivekanandinstitute1 Instagram Link.: / swami_vivekanandinstitute Registration Start for New Batch...... Hurry UP!!!!! We offer top-notch facilities for education:- *Highest Results in CSE 2022 *Genuine Students Review *Top Courses To Crack IAS Classes *Online | Offline Classes *Doubt Solving Session *Mock Test Series *Available PDF Notes *Recorded Classes Contact Us for more Details Phone No.- 9315200364 Address - C-105,Site-4, Budhela Vikaspuri, New Delhi 110018 #internationalfinancialmarket #internationalarbitrage #multinationalcapitalbudgeting #financemanagement #commerce #swamivivekanandinstitute #svi #ugcnet #students #ugcnet2023preparation #libraryandinformationscience #career #guidance #exam #preparation #ugcnet #upsc #librarysections #shaheenmaam