International Finance

International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.

Progression / Transfer of FERA to FEMA

Foreign Exchange Regulation Act, 1973 (FERA) in its existing form became ineffective, therefore, increasingly incompatible with the change in economic policy in the early 1990s. While the need for sustained husbandry of foreign exchange was recognized, there was an outcry for a less aggressive and mellower enactment, couched in milder language. Thus, the Foreign Exchange Management Act, 1999 (FEMA) came into being.

The scheme of FERA provided for obtaining Reserve Bank’s permission either special or general, in respect of most of the regulations there under. The general permissions have been granted by Reserve bank under these provisions in respect of various matters by issuing a large number of notifications from time to time since the Act came into force from 1st January 1974.… Read the rest

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Various Forms of Exchange Control

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by non-residents.    The various forms that exchange control has taken are briefly discussed below:

1. Exchange Pegging

This device is usually adopted during war in order to minimize exchange fluctuations. The internal value of a currency may depreciate due to inflation but the government may seek to keep its external value at a higher level than warranted by the purchasing power parity in order to facilitate international transactions.

England during First World War and again in the Second World War adopted the method.… Read the rest

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Methods of Exchange Control

Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency). Dealings and transactions in foreign exchange are regulated by the exchange control authority.… Read the rest

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Foreign Exchange Control – Definition and Objectives

Exchange controls, like currency devaluations, form a part of expenditure-switching policy package. Because, they, too, like devaluation, aim at directing domestic spending away from foreign supplies and investment. Exchange controls try to divert domestic spending into consumption of domestically produced goods and services on the one hand and into domestic investment on the other.

Exchange controls represent the most drastic means of BOP adjustment. A full-fledged system of exchange controls establishes a complete government control over the foreign exchange market of the country. Foreign exchange earned from exports and other sources must be surrendered to the government authorities. The available supply of foreign exchange is then allocated among the various buyers (importers) according to the criterion of national needs and established priorities.… Read the rest

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Balance of Payments (BOP) and Exchange Rates

The International Monetary Fund (IMF) defines the BOP as a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. BOP data measures economic transactions include exports and imports of goods and services, income flows, capital flows, and gifts and similar €•one-sided transfer payments. The net of all these transactions is matched by a change in the country‘s international monetary reserves.

The significance of a deficit or surplus in the BOP has changed since the advent of floating exchange rates. Traditionally, BOP measures were used as evidence of pressure on a country‘s foreign exchange rate.… Read the rest

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Ideal currency and a sound currency system

Attributes of the Ideal Currency:

If the ideal currency existed in today‘s world, it would possess three attributes:

  • Fixed value. The value of the currency would be fixed in relationship to other major currencies so that trades and investors could be relatively certain of the foreign exchange value of each currency in the present and into the near future.
  • Convertibility. Complete freedom of monetary flows would be allowed, so that traders and investors could willingly and easily move funds from one country and currency to another in response to perceived economic opportunities or risks.
  • Independent monetary policy. Domestic monetary and interest rate policies would be set by each individual country so as to pursue desired national economic policies, especially as they might relate to limiting inflation, combating recessions, and fostering prosperity and full employment.
… Read the rest
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