PLAN

I. INTRODUCTION:
• The Global inflation and its significant in the context of
international financial management.

II. Literature Review:

• The different causes of the global inflation
• The potential effect of global inflation on economies and financial
systems worldwide

III. Global Inflation Analysis

• Analyse recent trends and patterns in global inflation rates
• The factors contributing to the current state of global inflation

IV. The impact of Inflation on Financial Management Decisions

• How the observed Inflation rates impact various aspects of

financial management:

-Exchange rate management

-Risk management strategies
-Capital budgeting decisions
-Working capital management

V. Case Study Analysis:

• The GLOBAL TECH INC. financial strategy in an Inflation Prone
Environment and it’s impact on the financial decision-making.

VI. Conclusion
INTRODUCTION
In the realm of international financial management, the surge in global
inflation has emerged as a formidable challenge. The sharp escalation of
consumer prices, propelled by diverse factors such as supply chain disruptions
and geopolitical events like the Ukraine war, has resulted in inflation rates
soaring to levels not witnessed in decades across various markets worldwide.
This inflationary environment introduces complexities into the strategic
landscape for international financial managers, necessitating a nuanced
approach to navigate the intricate web of economic variables.

The heightened inflationary pressures wield a profound impact on

macroeconomic policies, compelling financial managers to reassess and adapt
their strategies in response to rapidly changing economic conditions. The
implications ripple across key domains of corporate finance, influencing critical
decisions related to capital investments, currency hedging, and cross-border
investments. As inflation erodes the purchasing power of money, the
evaluation and execution of capital projects become more intricate, demanding
a meticulous analysis of cost structures and potential returns.

Cross-border investments, a cornerstone of global business operations, are also

profoundly influenced by the prevailing inflationary environment. As inflation
rates diverge across nations, the relative attractiveness of investment
opportunities fluctuates. Financial managers must exhibit agility in identifying
and capitalizing on favorable investment climates while safeguarding against
the risks associated with inflation-induced uncertainties.

Furthermore, the current landscape is characterized by heightened financial

market volatility stemming from unpredictable shifts in inflation expectations.
Fluctuating inflationary sentiments amplify market uncertainties, prompting
financial managers to adopt adaptive risk management strategies. A deep
understanding of inflation dynamics in different countries and regions becomes
paramount for navigating the intricate terrain of international financial
markets.

.
Literature Review:
 The different causes of the global inflation :

Global inflation results from various factors including:

1. Increase in demand and consumption: When there is a significant rise in

demand for goods and services without a corresponding increase in supply, it
puts upward pressure on prices.

2. Rising costs of production: Factors such as increasing labor costs, higher

energy prices, and raw material costs can contribute to inflation as businesses
pass on these expenses to consumers.

3. Government policies and regulations: Monetary policies, such as the

expansion of money supply or changes in interest rates, and government
regulations can impact inflation rates.

4. Currency fluctuations and exchange rates: Changes in exchange rates

between countries can affect the cost of imported goods and impact inflation
levels.

5. Impact of global events and crises: Global events like natural disasters,
political instability, or economic crises can disrupt supply chains, leading to
shortages and price increases.

 The potential effect of global inflation on economies and

financial systems worldwide:
 When we talk about global inflation, we are referring to a situation where
there is a general increase in prices across different countries. This can have
both short-term and long-term impacts on the economy and financial systems:

1. Economic Growth: Inflation can hamper economic growth as rising prices

reduce consumers' purchasing power. When people have to spend more on
necessities, they have less money available for discretionary spending, which
can lead to a decrease in overall consumer demand and economic activity.

2. Cost of Production: Inflation can increase the cost of production for firms
and businesses. When the prices of raw materials, labor, and other inputs rise,
it can squeeze profit margins and potentially lead to reduced investments and
hinder business expansion plans.

3. Interest Rates: Central banks often respond to inflation by raising interest

rates to control it. This can impact borrowing costs for individuals and
businesses, making it more expensive to access credit. Higher interest rates can
also discourage borrowing and investment, which may dampen economic
activity.

4. Financial Markets: Inflation can have a significant impact on financial

markets. For instance, it can affect bond yields and stock prices. In high-
inflation environments, investors may demand higher yields on bonds to
compensate for the loss of purchasing power over time. Similarly, stock prices
can be influenced by inflationary expectations and the overall economic
outlook.

5. Exchange Rates: Inflation disparities between countries can affect exchange

rates. Higher inflation in one country may lead to a depreciation of its currency
relative to others. This can impact trade balances, export competitiveness, and
international investments.
Global Inflation Analysis
Recent trends and patterns in global inflation rates:

According to recent reports, inflation rates have been high and rising in many
countries around the world, including the US. It has been increasing since the
start of the COVID-19 pandemic in 2020. In 37 of these 44 nations, the average
annual inflation rate in the first quarter of 2022 was at least twice what it was
in the first quarter of 2020, as COVID-19 was beginning its deadly spread.
Among the countries studied, Turkey had by far the highest inflation rate in the
first quarter of 2022, but it shot up in late 2021 as the government pursued
unorthodox economic policies, such as cutting interest rates rather
than raising them.

 The factors contributing to the current state of global

inflation:
The current state of global inflation is influenced by several factors, as
evidenced by recent trends and patterns. These factors include:

-Overheated Economy

-Food and Energy Prices

-Monetary Policy

-Cost-Push Inflation.

-Exchange Rate Movements

These factors, among others, have contributed to the current state of global
inflation, leading to challenges for policymakers and central banks as they seek
to maintain low and stable inflation rates

 The impact of Inflation on Financial Management Decisions

-How the observed Inflation rates impact various aspects of financial
management:
-Exchange rate management:
Inflation rates can have a notable impact on exchange rate management.
Here's how observed inflation rates influence various aspects of exchange rate
management:

1. Interest Rates and Currency Values:

- Central banks often adjust interest rates in response to inflation. Higher

inflation may lead to higher interest rates to curb inflationary pressures.

- Changes in interest rates influence currency values. Higher interest rates can
attract foreign capital seeking better returns, leading to an appreciation of the
currency. Conversely, lower interest rates may result in depreciation.

2.Relative Purchasing Power Parity (PPP):

- Inflation differentials between countries affect the relative purchasing power

of their currencies. According to the theory of PPP, in the long run, exchange
rates should move in the direction of equalizing the prices of identical baskets
of goods in different countries.

- If one country experiences higher inflation than another, its currency is

expected to depreciate to maintain parity in the long term.

3.Trade Balances:

- Inflation can impact a country's trade balance. High inflation may lead to
increased costs of production, potentially making exports more expensive and
less competitive. A country with lower inflation rates may experience an
improvement in its trade balance as its goods and services become relatively
cheaper in the global market.

4. Currency Hedging Strategies:

- Companies engaged in international trade and investment often use currency

hedging to manage exchange rate risk. Inflation differentials between countries
can affect the effectiveness of these hedging strategies.
- Financial managers need to consider the potential impact of inflation on
exchange rates when implementing currency hedging strategies to protect
against adverse currency movements.

5. Investment Decisions:

- Inflation rates influence real interest rates, which, in turn, affect investment
decisions. Investors seek returns that not only compensate for nominal interest
rates but also for the expected inflation rate.

- Changes in inflation expectations can impact the attractiveness of a country's

assets, influencing foreign direct investment and portfolio investment.

6. Central Bank Policies:

- Central banks use monetary policy tools to control inflation. The decisions
made by central banks, such as adjusting interest rates or implementing
quantitative easing measures, can impact exchange rates.

- Financial managers need to closely monitor central bank policies and their
implications for inflation and exchange rates to make informed decisions.

7.Debt Management:

- Inflation affects the real value of debt, and this has implications for countries
with international debt denominated in foreign currencies. Higher inflation in a
country can erode the real burden of its debt, potentially making it more
manageable. However, it may also lead to higher interest rates on new debt
issuances.

-Observed inflation rates are a critical factor in exchange rate management.

Financial managers, investors, and policymakers must consider inflation
differentials between countries when making decisions related to interest
rates, trade, investment, and debt management to navigate the complexities of
the global economy.

-Risk management strategies

The impact of Inflation on Financial Management Decisions
  How the observed Inflation rates impact various aspects of
financial management:

- Risk management strategies

Global inflation can have a profound impact on international financial

management decisions, and one crucial aspect to consider is risk management
strategies. Inflation erodes the real value of money over time, and this can
introduce significant risks into various financial operations of multinational
corporations and institutions. It is imperative to understand the strategies that
can help mitigate these risks effectively.

One essential risk management aspect is currency risk or exchange rate

management. As inflation rates vary across countries, exchange rates can
experience fluctuations. These fluctuations can affect the competitiveness of
exports and imports, thereby influencing the cash flows and profitability of
international businesses. According to a study by the International Monetary
Fund (IMF), a 1% increase in a country's inflation rate tends to lead to an
approximately 1% depreciation in its currency's exchange rate. This
depreciation can impact a company's revenues and expenses when trading
internationally.

IMF Working Paper, "Exchange Rates and Prices: Evidence from Advanced and
Emerging Market Economies," 2018.

In addition to exchange rate management, effective risk management

strategies should also address commodity price risk. Inflation often drives up
the prices of raw materials and commodities, which can be particularly relevant
for companies that rely on these resources for their production. Companies
should consider employing hedging strategies to mitigate the risk associated
with volatile commodity prices. For instance, a study by the Commodity
Futures Trading Commission (CFTC) shows that commodity futures and options
contracts can be used to hedge against rising commodity prices, reducing the
impact on profit margins.

CFTC Report, "Commodity Futures and Options Market Activity," 2020.

Moreover, companies need to evaluate their interest rate risk management in

an inflationary environment. Rising inflation tends to lead central banks to
increase interest rates to maintain price stability. This can have implications for
the cost of borrowing and the value of existing debt. Therefore, businesses
should consider using interest rate derivatives such as interest rate swaps or
options to manage the impact of rising interest rates on their financial
obligations.

Deloitte Insights, "Interest Rate Risk Management," 2019.

 Capital budgeting decisions :

Capital budgeting involves assessing and selecting long-term investment

projects. It typically includes analyzing cash flows, estimating risks, and using
tools like Net Present Value (NPV) or Internal Rate of Return (IRR) to make
informed decisions on allocating financial resources to various projects.

Certainly! Capital budgeting is a strategic process that involves evaluating and

selecting long-term investment projects to allocate a company's capital
efficiently. Here's an overview of key aspects:

1. Project Identification:

Businesses identify potential projects that require significant capital

investment, such as acquiring new machinery, expanding facilities, or launching
a new product line.

2. Cash Flow Estimation:

Projected cash inflows and outflows are estimated over the project's lifespan.
This involves forecasting revenues, expenses, and capital expenditures.

3. Risk Assessment:

Managers assess the risks associated with each project, considering factors
like market conditions, regulatory changes, and technological uncertainties.
 4. Time Value of Money:

Capital budgeting accounts for the time value of money, recognizing that a
dollar today is worth more than a dollar in the future. This is addressed
through discounting future cash flows to their present value.

5. Capital Budgeting Techniques:

- Net Present Value (NPV):

NPV calculates the present value of expected cash inflows minus the present
value of outflows. A positive NPV indicates a potentially profitable investment.

- Internal Rate of Return (IRR):

IRR represents the discount rate at which the project's NPV is zero. It reflects
the project's rate of return and is compared to the company's cost of capital.

- Payback Period:

This simple method calculates the time required for a project's cash inflows to
recover the initial investment. Shorter payback periods are generally preferred.

- Profitability Index (PI)

PI is the ratio of the present value of cash inflows to outflows. A PI greater than
1 suggests a potentially viable project.

5. Cost of Capital:

Businesses consider their cost of capital, representing the minimum return

required to justify an investment. Projects with returns exceeding this cost are
more likely to be approved.

6. Decision Making:
After evaluating various projects, management selects those that align with the
company's goals, have positive NPV, and meet internal criteria. Trade-offs may
be necessary due to budget constraints.

Effective capital budgeting is crucial for financial success, enabling businesses

to make informed investment decisions that contribute to long-term
profitability and sustainability.

Working capital management:

Inflation can have significant implications for working capital management.

Inflation can have significant implications for working capital management.

Increased Costs: Inflation typically leads to a rise in the cost of goods and
services. This means that a company may need more working capital to
maintain its operations at the same level. The increased costs can affect both
the raw materials needed for production and the day-to-day operational
expenses.

Cash Flow Challenges: Inflation can cause delays in receiving payments from
customers while expenses rise. This imbalance can create cash flow challenges
as companies need to ensure they have enough liquidity to cover their
immediate obligations.

Inventory Management: Rising prices can impact inventory levels. Companies

may need more working capital to purchase and maintain inventory at inflated
prices. Effective inventory management becomes crucial to prevent
overstocking or stockouts, both of which can negatively affect working capital.

Impact on Debt: If a company has borrowed money, inflation can affect the
real cost of debt. While the nominal amount of debt remains the same, the
purchasing power of money decreases. This may result in higher interest rates
in real terms, affecting the cost of servicing debt.
In summary, managing working capital effectively during inflation requires
careful monitoring of cash flow, adaptation of inventory and payment
strategies, and proactive communication with suppliers and customers. It also
underscores the importance of a flexible and dynamic approach to financial
management in response to changing economic conditions.

CASE STUDY ANALYSIS:

NETFLIX:

Introduction:
This case study focuses on the performance of Netflix and the challenges it
faces amid high inflation. In May, the U.S. reported multi-decade highs in
inflation, which had a significant impact on markets. Traders are concerned
that high inflation will lead consumers to optimize their subscriptions, causing
Netflix stock to underperform. Netflix trades at a forward price-to-earnings
(P/E) ratio of 15, which may not be considered cheap considering the expected
decline in earnings estimates. The Federal Reserve's aggressive rate hikes to
curb inflation and consumers cutting "unnecessary" subscriptions due to high
inflation pose challenges for Netflix.

Netflix's Decline in Subscriber Numbers:

Netflix experienced a small but unexpected decline in subscriber numbers in

the first quarter of 2022. The company anticipates further subscriber losses in
the current quarter. Increased competition from other streaming services,
inflation causing consumer belt-tightening, and geopolitical events contributed
to the decline. Price changes and macroeconomic weakness were cited as
reasons for the loss of paying customers in specific regions.
Implications of Inflation and Price Rises:

Increasing inflation and price hikes may continue to affect customer growth
negatively. Discretionary consumer spending may face challenges as inflation
persists for the next few years. Rising inflation led some households to
deprioritize entertainment services, and the proportion of consumers planning
to cancel streaming services due to wanting to save money increased.

Netflix's Financial Performance and Long-Term Prospects:

Despite the decline in subscriber numbers, Netflix remains profitable, with

significant operating and net profits in Q1 2022. Netflix expects subscriber
growth to continue as global broadband penetration improves and streaming-
friendly devices become more widespread. Netflix hints at introducing an
advertising component, offering a cut-price or free ad-supported service to
provide consumer choice. The company also acknowledges the challenge of
password sharing and plans to experiment with different approaches to
monetize sharing.

Lessons for Digital Service Providers:

This case study provides valuable lessons for other digital service providers
facing similar challenges. It highlights the importance of having alternative
business models in place to weather anticipated and unexpected challenges. By
diversifying revenue streams and exploring new options, companies can better
navigate economic fluctuations and changing consumer behaviors.
Furthermore, addressing challenges proactively, even during periods of
success, can prevent larger issues from arising and provide better long-term
outcomes.

CONCLUSION:
Netflix faces challenges due to high inflation, which impacts its stock
performance and subscriber numbers. The company aims to address these
challenges by considering an advertising-supported option and cracking down
on password sharing. The case study highlights the importance of proactive
problem-solving and alternative business models for digital service providers in
a changing economic landscape.
 P&G:

Inflation has been the relentless economic theme of the last two years. Even
with interest rates higher than before the pandemic, global supply chains no
longer paralyzed by virus-related bottlenecks, and the World Health
Organization declaring an end to the COVID-19 emergency, prices for goods
and services in many parts of the world continue to climb.

As the world’s largest consumer-goods company, Procter & Gamble provides

insight into what’s driving the pricing decisions at big brands. In the first three
months of 2023, P&G raised prices a whopping 10% year over year, following a
series of large price hikes implemented throughout 2022:
inflation for basic goods remains elevated, according to a recent Procter &
Gamble Company (P&G) financial report.

The global leader in branded basic consumer goods delivered another solid
quarter of financial results. Thanks to generous price hikes across all its product
groups. Grooming (9% increase), Beauty (8% increase), Health Care (6% increase),
Fabric & Home Care (6% increase), and Baby, Feminine & Family Care (8%
increase).

These price hikes are well above the recent headline and core inflation numbers.
For instance, the Consumer Price Index (CPI) rose at an annual rate of 3% in June
of 2023, while “core inflation,” which takes food and energy out of the consumer
budget, rose at an annual rate of 4.8%. P&G's price hikes may continue as the
company faces cost pressures on several fronts.

“The April-June quarter provided a very strong finish to fiscal year 2023 – topline
growth, bottom-line growth, and cash generation,” said Jon Moeller, Chairman of
the Board, President and Chief Executive Officer, in a statement following the
release of the financial results. “The team met or exceeded our going-in plans for
sales, earnings, and cash in a difficult operating environment and despite
significant cost headwinds.”
P&G reported net sales of $20.6 billion for the fourth quarter of the fiscal year
2023, a 5% annual increase. On an organic basis, which excludes the impacts of
foreign exchange and acquisitions and divestitures, sales rose at a more robust
rate of 8%. In addition, diluted EPS came at $5.90 – 11% higher than the prior
year when adjusted for currency fluctuations.

A strong EPS helped the company generate a solid operating cash flow of $16.8
billion and net earnings of $14.7 billion for the quarter. Adjusted free cash flow
productivity was 95%, allowing the company to return $16 billion of cash to
shareholders – $9 billion in dividend payouts and $7.4 billion in share purchases.

P&G’s solid financial results were music to traders and investors, who sent its
shares close to 3% higher on Friday’s regular trading session. But it was a
reminder to consumers on the main street that inflation for basic branded goods
is still a problem that must face anytime they visit the local supermarket.

Jeremy said that “P&Gnoted a solid finish to their fiscal year with top and
bottom-line growth, despite significant cost headwinds. We know that a
large part of P&G’s strategy is maintaining a portfolio that brings customer
value through innovation. This has enabled them to consistently use price to
help drive top line growth over the past ten years.”
Still, P&G’s price hikes led to lower sales volume for the consumer products giant, suggesting that
inflation continues to take its toll on consumers.