Module 1A – Introduction to International Finance
Capital sources increased due to Globalization. > Lead to International Finance
It includes Management of International Finance
International Finance is branch of economics and vital part of financial economics
International Finance is
- Monetary interaction between 2 or more countries
- Follow techniques of allocation of resources
- Studies - foreign exchange rates & How foreign trade influenced foreign exchange rate
- Tries to solve the problem of human resource exploited by MNC in poor & developing countries
International financial transactions gives rise to
- Foreign Currency Market
- International Capital/Bond Market
Features of international finance
- Multiple currencies – USD, Euro, Japanese YEN (JPY), Swiss Franc (CHF), British Pound (GBP).
USD contributes 52% of world trade
- Involvement of various players – Commercial Bank, Investment Bank, Brokers, Fund Managers,
Corporates, financial institutions
- Involves Foreign Exchange Rate
- Foreign Exchange Risk
- Expanded opportunity to business
- Imperfect Market
- Political Risk
Scope of International Finance
International Institutions –
World Bank – Washington DC (US) - Funds for development projects, Loans/Grants thru IBRD
IMF – Washington DC (US) Global Financial cooperation, Secure Financial stability, Solves problem
of BOP, Poverty eradication, Sustainable Growth.
WTO – Geneva, Switzerland – Global rule for international trade
IFC – Support sustainable investment in private sector. (Loan and equity finance)
International Financial Services –
Asset Fund Based Services – Bill Discounting, Factoring, Hire Purchase, Lease financing
Fee Based Services – Merchant Banking, M&A services, CRA, Custodian Services
International Monetary System – Like RBI Controls over inflation and fund management
International Financial System – Rules, facilities, market, instruments, organisations, customs, payment/receipts
International Exchange Market – Forex, ADR, GDR
Currency Convertibility – Conversion of money
International Financial Market – International Finance, FDI, International Banking, Security market, Derivatives
International Financial Economics – Cause and effects of financial flows among nations
International Financial Management – Sound business decision in MNC
Balance of Payment – Systematic record of all import/export and transfer
Domestic Trade International Trade
Exchange of goods and services within the Exchange of goods and services across the boundaries
domestic territory
Less complex Greater complexity
Involves Domestic Currency Multiple currencies
Same customers, culture language etc Different customers, culture language etc
Same in legal systems Differences in legal systems
Minimum Documentation More elaborate documentation
Minimum Restrictions Diverse restrictions in the form of taxes, regulations, duties,
tariffs, quotas, trade barriers, standards, restraints to movement
of specified goods and services
Not much issues related to shipping Issues related to shipping and transportation
Importance of International Trade
- Stimulus to economic efficiency and contributes to economic growth and rising incomes
- Quantitative and qualitative benefits of extended division of labour.
- Benefit from economies of large scale production.
- The gains from international trade
- Due to increased competition companies enhance efficiency and profitability by adoption of cost
reducing technology and business practices.
- Greater efficiency in the use of natural, human, industrial and financial resources ensures productivity
gains.
- Enables sourcing of inputs and components internationally at competitive prices.
- Innovative products at lower prices and wider choice in products and services for consumers.
- Consumers to have access to wider variety of goods and services
- Enables nations to acquire foreign exchange reserves necessary for imports
- Greater investment in research and development and productivity improvement in the economy.
- Employment generations, which could potentially reduce poverty, raising standards of living and increase
in overall demand for goods and services.
- Innovative services in banking, insurance, logistics, consultancy services etc.
- Greater investments, improvement in the quality of output of goods and services, enhance the value of
their products globally.
- New markets results in broadening of productive base and diversification
- Help in price control fall due to overproduction
- Maintain stability in prices and supply of goods during periods of natural calamities like famine, flood,
epidemic etc.
- contribute to human resource development, by facilitating fundamental and applied research
- Trade strengthens bonds between nations, promotes peace, harmony and cooperation among nations.
Negative side of International Trade?
- Labour-saving technological change that depress demand for unskilled workers, loss of labourers’
bargaining power, downward pressure on wages of semi skilled and unskilled workers and forced work
under unfair circumstances and unhealthy occupational environments.
- Often not equally beneficial to all nations, unequal market access.
- Economic exploitation by wealthy countries, and underprivileged countries become vulnerable.
- Substantial environmental damage and exhaustion of natural resources due to excessive stress on
exports and profit-driven exhaustion of natural resources which result in unsustainable production and
consumption.
- demand rises for foreign goods affects demand for domestic industries of less developed countries
- High completion from MNCs, threaten the survival of infant industries.
- Shift effect of economic crisis to other countries
- Risky dependence of underdeveloped countries on foreign nations impairs economic autonomy and
endangers their political sovereignty, widespread exploitation and loss of cultural identity.
- Substantial dependence may also have severe adverse consequences in times of wars
- Welfare of people may be ignored for the sake of profit.
- Excessive exports may cause shortages of commodities in the exporting countries and lead to high
inflation
- Import of harmful products may cause health hazards and environmental damage.
- actual investments away from the genuine investment needs of a country
- Instead of cooperation among nations, trade may breed rivalry on account of severe competition
- Often lack of transparency and predictability in respect of trade policies of trading partners.
- Many risks in trade which are associated with changes in governments’ policies of participating countries,
such as imposition of an import ban or trade embargoes.
GLOBALISATION OF WORLD ECONOMY
It means removing trade barrier between the countries.
Integration of Trade, Finance, People, Idea etc.
Started after 2nd worldwar, but increased after 1980 only.
- It changed picture of the world Economy,
- Increasing international trade,
- free flow of capital,
- transfer of technology,
- movement of people, and
- flow of information.
Financial Globalisation
Global linkage thru cross boarder financial flow
It is amalgamation/merger of domestic and international financial system
World Bank & IMF set up for integration of world finance sector, they plays role of mediator in case of disputes
Some Benefits are
- Enhance capital flow
- Financial assistance in crisis and emergency
- Well organized allocation of money
- Improve living of standard
- Safeguard against national shocks, emergency, calamity etc.
Effects of globalization
Positive Effects
- Growth of Global Market
- Establishment of international institutions, UN, World Bank, IMF, WTO, Trading Blocks
- Increase in world trade
- Change in world leadership, earlier it was only with USA, now China, India, Japan, Singapore etc
- Increase in FDI & FPI
- Increase in standard of living
- Increase in employment opportunity
- Cultural changes
- Increase in competition
- Resource allocation
- Technological shift
- Improvement in Political relations
Negative Effect
- Environmental Effects
- Loss of Jobs
- Western Culture
- Inequality
- Inflation
- Dominance of Power
GOALS of INTERNATIONAL FINANCIAL MANAGEMENT
- It helps financial managers to understand fundamental concepts, tools, causes and effects of
international tools
- It helps in understanding and managing foreign exchange risk, political risk, market imperfection
- It provides directions for dealing with exchange risk and market imperfections
- It helps to understand complex financial environment
- It focuses on sound business decisions
- It helps increase in utilization of IFRS, Standard practices across the globe.
EMERGING CHALLENGES in INTERNATIONAL FINANCE
1) To manage ever-increasing risk (Forex Risk, Political Risk, Interest Risk, Frauds etc.)
2) To monitor and manage international forex market
3) Stay updated with significant environment changes
4) To be inform with taxation, foreign trade policies, fiscal and monetary developments, new instruments etc.
5) To adapt changes in financial sector
6) To learn from past mistakes and failure, as new challenges
7) To design and implement effective strategic decision making system
8) To cope up with increasing volatility
9) To manage complex international laws and regulations
10) To deal with international accounting and compliance requirements
11) To deal with change in technology
