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. World’s major trading starts each morning in Sydney and Tokyo, and ends up in the San Francisco and Los-Angeles. The foreign exchange market consists of two tiers: the inter bank market or wholesale market, and retail market or clientContinue reading
International Trade Finance
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. The other aspect is the fact that domestic claims and liabilities are denominated in national currencies. These must be exchanged for anotherContinue reading
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. Read More: 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. Fixed exchange rates provide stability in international prices for the conduct of trade. Stable prices aid in the growth of international trade lessens risks for all businesses. Fixed exchange rate system reduces the possibility of competitive depreciation of currencies, as it happened during the 1930s. Also, deviation from the fixed rates is easily adjustable. Fixed exchange rate provides stability in theContinue reading
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. Eurobonds are bonds underwritten and sold in more than one country. A foreign bond may be defined as an international bond sold by a foreign borrower but denominated in the currency of the country in which it is placed. It isContinue reading
Eurocurrency Market Characteristics
The Euro-currency market has no geographical limits or a common market place. Business is done by telex, telephone and other communication systems. Internationally-reputed brokers put through the transactions for the banks. Deposits are secured for the banks operating in the market by the general guarantee of its parent or holding company and in some cases, by its central bank and /or the government of the concerned country. Similarly, loans to commercial parties are guaranteed by their respective governments. Deposits and loans to banks are, however, not guaranteed except by the banks parent companies or their exchange control authorities. The amounts of loans and the periods of maturity vary over a wide range from a few thousands to millions of dollars and from call loans to maturities extending up to 10-15 years. Some of the loans may be syndicated and jointly sponsored by a number of banks. There are also variedContinue reading
An Overview of Depositary Receipts
Equity investment by foreign investors into a country can occur in one or more of three ways. Foreign investors can directly purchase shares in the stock market of the country e.g. investment by Foreign Institutional Investors (FIIs) in the Indian stock market. Or, companies from that country can issue shares (or depositary receipts) in the stock markets of other countries. Finally, indirect purchases can be made through a mutual fund which may be a specific country fund or a multi-country regional fund. The Depositary Receipts Mechanism The volume of new equity issues in the international markets increased dramatically between 1983 and 1987 and again after 1989. The 90’s saw a growing interest in the emerging markets. From the side of the issuers, the driving force was the desire to tap low-cost sources of financing, broaden the shareholder base, acquire a spring board for international activities such as acquisitions and generallyContinue reading