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.

Is there an Optimal Exchange Rate Regime?

Starting from the gold standard regime of fixed rates, passing through the adjustable peg system after the Second World War, it has finally ended up with a system of managed floats after 1973. Since 1985, the pendulum has started swinging, though very slowly and erratically, in the direction of introducing some amount of fixity and rule based management of exchange rates.

Despite these empirical facts, there is a school of thought within the professional which argues that in the years to come there will be only two types of exchange rate regimes: truly fixed rate arrangements like currency unions or currency boards, or truly market determined, independently floating exchange rates.… Read the rest

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The Current Scenario of Exchange Rate Regimes

Now the IMF classifies member countries into eight categories according to the Exchange rate regime they have adopted. A brief summary of IMF’s classification is given below:

1. No Separate Legal Tender Arrangement

This group includes
a) Countries which are members of a currency union and share a common currency like the twelve members of the European Currency Union (ECU), who have adopted Euro as their common currency or
b) Countries which have adopted the currency of another country as their currency. IMF’s 1999 Annual Report on Exchange Arrangements and Exchange Restrictions indicates that 37 countries belong to this category.

2.… Read the rest

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Exchange Rate Regimes: The Bretton Woods System

Bretton Woods is the name of the town in the state of New Hampshire, USA, where the delegations from over forty five countries met in 1944 to deliberate on proposals for a post-war international monetary system. The two main contending proposals were “the White plan” named after Harry Dexter White of the US Treasury and the “Keynes plan” whose architect was Lord Keynes of the UK. Following the Second World War, policy makers from victorious allied powers, principally the US and UK, took up the task of thoroughly revamping the world monetary system for the non-communist world. The outcome was the so called “Bretton Woods System” and the birth of new supra-national institutions, the International Monetary Fund (the IMF or simply the “Fund”) and the World Bank.… Read the rest

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Exchange Rate Regimes: International Gold Standard (1875- 1914)

Though in Great Britain currency notes from the Bank of England were made fully redeemable for gold during 1821, the first full-fledged gold standard was adopted by France   in 1878. Later on United States adopted it in 1879 and Russia and Japan in 1897, Switzerland, and many Scandinavian countries by 1928.

An international Gold Standard is said to exist when;

  • Gold alone is assured of unrestricted coinage
  • There is a   two way convertibility between gold and national currencies at a stable ratio
  • And gold may be freely imported and exported.

In order to support unrestricted convertibility into gold, bank notes need to be backed by gold reserve of a minimum stated ratio.… Read the rest

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Foreign Exchange Risk or FOREX Risk

Foreign Exchange dealing is a business that one get involved in, primarily to obtain protection against adverse rate movements on their core international business. Foreign Exchange dealing is essentially a risk-reward business where profit potential is substantial but it is extremely risky too.

Foreign exchange business has the certain peculiarities that make it a very risky business. These would include:

  • Forex deals are across country borders and therefore, often foreign currency prices are subject to controls and restrictions imposed by foreign authorities. Needless to say, these controls and restrictions are invariably dictated by their own domestic factors and economy.
  • Forex deals involve two currencies and therefore, rates are influenced by domestic as well as international factors.
… Read the rest
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