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.

Balance of Payments (BoP) Accounting

Balance of payments (BoPs) is systematic statement that systematically  summarizes, for a specified period of time, the monetary transactions of an  economy with the rest of the world. Put in simple words, the balance of  payments of a country is a systematic record of all transactions between the  ‘residents’ of a country and the rest of the world.

Three main elements of actual process of measuring international  economic activity are:

  1. Identifying what is/is not an international economic transaction,
  2. Understanding how the flow of goods, services, assets, money create  debits and credits, and
  3. Understanding the bookkeeping procedures for BoP accounting.
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History of Exchange Rate System

The world exchange rate systems of the world have it own history shows that the world community has in fact change from the fixed exchange rates system to floating exchange rate system. There are different combinations of fixed exchange rate systems as well as floating exchange rates exist currently, the created for exchange rate regulating together with specific some economical instruments also.

Commodity money is a system that the most early existing in this world. This system happened when the development of production as well as a number of labor divisions. When appeared coins having an intrinsic value but not linked with commodity, until the 17th century there was no other monetary system exist.… Read the rest

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Components of International Financial Environment

International financial  environment is totally different from domestic financial environment. International financial management is subject to several external forces, like  foreign exchange market, currency convertibility, international monitory system,  balance of payments, and international financial markets.

1. Foreign Exchange Market

Foreign exchange market is the market in which money denominated in one  currency is bought and sold with money denominated in another currency. It is an overthe  counter market, because there is no single physical or electronic market place or an  organized exchange with a central trade clearing mechanism where traders meet and  exchange currencies. It spans the globe, with prices moving and currencies trading  somewhere every hour of every business day.… Read the rest

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Global Financial Markets

The financial markets of the world consist of sources of finance, and  uses for finance, in a number of different countries. Each of these is a capital  market on its own. On the other hand, national capital markets are partially  linked and partially segmented. National capital markets are of very different  stages of development and size and depth, they have very different prices and  availability of capital. Hence, the international financier has great opportunities  for arbitrage — finding the cheapest source of funds, and the highest return,  without adding to risk. It is because markets are imperfectly linked, the means  and channels by which foreigners enter domestic capital markets and domestic  sources or users of funds go abroad, are the essence of this aspect of  international financial management.… Read the rest

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Advantages of Fixed Exchange Rate System

A nation’s choice as to which currency regime to follow reflects national  priorities about all factors of the economy, including inflation, unemployment,  interest rate levels, trade balances, and economic growth. The choice between  fixed and flexible exchange rates may change over time as priorities change.

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  • Fixed Exchange  Rate System
  • Flexible Exchange  Rate System

At the risk of over-generalizing, the following points partly explain why  countries pursue certain exchange rate regimes. They are based on the premise  that, other things being equal, countries would prefer fixed exchanges rates.

  1. Fixed  exchange  rates provide stability in international prices for the conduct of  trade.
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Eurobond

Money may be raised internationally by bond issues and by bank loans.  This is done in domestic as well as international markets. The difference is that  in international markets the money may come in a currency which is different  from that normally used by the borrower. The characteristic feature of the  international bond market is that bonds are always sold outside the country of  the borrower. There are three types of bond, of which two are international  bonds. A domestic bond is a bond issued in a country by a resident of that  country. A foreign bond is a bond issued in a particular country by a foreign  borrower.… Read the rest

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