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.

Features of forward exchange contract

The following are the features of a forward exchange contract. FEDAI has also laid down certain guidelines defining certain aspects of forward exchange contract.

a) Parties: There are two parties in a forward exchange contract. They can be,

  • A bank and a customer.
  • Two banks in the same country.
  • Two banks in different countries.

b) Amount: forward exchange contracts are entered into for a definite sum expressed in foreign currency.

c) Rate: the rate at which the conversation of foreign exchange is to take place at a future date is agreed upon at the time of signing the forward contract which is known as the contracted rate and is to be mentioned in the contract.… Read the rest

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Rate of Exchange under different Monetary Standards

The term ‘rate of exchange’ expresses the price of one currency in terms of another. Thus, it indicates the exchange ratio between the currencies of two countries. Suppose for example, one Indian Rupee is equal to 13 USA Cents. This implies that in the exchange market, one Indian Rupee will fetch 13 Cents. Just as the price of a commodity is determined by its demand and supply conditions, the price of a foreign currency (i.e., the rate of an exchange) is also determined on the basis of demand and supply of the currency. In fact, the rate of exchange of a currency will keep on changing in the foreign exchange market, due to changes in demand and supply conditions of the currency.… Read the rest

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Fixed and Option Forward Exchange Contracts

Under the fixed forward contract the delivery of foreign exchange should take place on a specified future date. Then it is known as ‘fixed forward contract’. Suppose a customer enters into a three months forward contract on 5th January with his bank to sell Euro 15,000, then the customer would be presenting a bill or any other instrument on 7th April to the bank for Euro 15,000. The delivery of foreign exchange cannot take place prior to or later than the determined date.

Though forward exchange is a mechanism wherein the customer tries to overcome the exchange risk, the purpose will be defeated if the delivery of foreign exchange does not take place exactly on the due date.… Read the rest

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Forward Exchange Contracts

A forward exchange contract is a mechanism by which one can ensure the value of one currency against another by fixing the rate of exchange in advance for a transaction expected to take place at a future date. It is a tool to protect the exporters and importers against exchange risks. The uncertainty about the rate which would prevail on a future date is known as exchange risk. From the point of an exporter the exchange risk is that the foreign currency in which the transaction takes place may depreciate in future and thus the expected realization will be less in terms of local currency.… Read the rest

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Exchange Rate Pass-Through

According to Bhagawati (1991) the phrase “pass-through” was first used in economics literature by Steve Magee (1973) in his paper while explaining the impact of currency depreciation.   Since then the concept has been widely used in the literature.   In the case of international trade the suppliers of commodities deal with two currencies, the domestic currency against which commodities are procured, and the destination currency, the currencies of the importing country.   Similarly, the importers of the commodities also face two currencies.   With the breakdown of the Bretton Woods System in 1973, the international financial system opted largely for the flexible exchange rate system.  … Read the rest

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Floating Exchange Rate Systems Era

The Floating Rate Exchange Systems Era: 1973-onwards

This period of floating rates experienced a relatively high volatility of the exchange rates.   The US dollar surged ahead against all major currencies till 1984 and then the intervention of G-10 countries helped the sliding down of the dollar.   The period also witnessed two quick shocks due to the excessive hike of the petroleum prices in 1973 and 1977 and that induced inflation in the world and changed the terms of trade of the petroleum importing countries.   The major characteristics of this period can be put in order.

  • The USA experienced a large current deficit, which touched $ 100 billion in 1990 with a very low saving-income ratio at the domestic level.  
… Read the rest
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