INTERNATIONAL FINANCE

Overview
International finance is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries.[1][2] International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.

Globalisation
Globalization is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture. Globalization describes the interplay across cultures of macro-social forces. These forces include religion, politics, and economics The broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations. Globalisation leads to improvements in transportation and communication, international business grew rapidly after the beginning of the 20th century. International business includes all commercial transactions (private sales,

investments, logistics, and transportation) that take place between two or more regions, countries and nations beyond their political boundary. Usually, private companies undertake such transactions for profit. Such business transactions involve economic resources such as capital, natural and human resources used for international production of physical goods and services such as finance, banking, insurance, construction and other productive activities. International business arrangements have led to the formation of multinational enterprises (MNE), companies that have a worldwide approach to markets and production or one with operations in more than one country.

 International Monetary System

International monetary systems are sets of internationally agreed rules, conventions and supporting institutions, that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. International monetary system

refers to the set of policies, institutions, practices, regulations, and mechanisms that determine the rate at which one currency is exchanged for another.

Balance of Payment
A Balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world These transactions include payments for the country's exports and imports of goods, services and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country

The balance of Payment is divided into the 2 principal divisions: (A) Current account, It is the record of all purchases and sales of goods and services with respect to the rest of the world. (B) Capital account, It represents the flows of financial assets either bought & sold.

 The Market for Foreign Exchanges

The foreign exchange market is the market where the currency of one country is exchanged for the currency of another country. Most currency transactions are channeled through the world-wide Interbank market. Interbank market is the wholesale market in which major banks trade with each other. Foreign exchange (Forex) market is a world-wide market of an informal network of telephone, telex, satellite, facsimile, and

computer communications between the FOREX market participants which include banks, foreign exchange dealers, arbitrageurs, and speculators.

International Parity Relationship

There are the following four international parity relationships: (A) Interest rate parity (IRP) It states that the exchange rate of two countries will be affected by their interest rate differential. In other words, the currency of a high-interest-rate-country will be at a forward discount relative to the currency of a low-interest-rate-country, and vice versa. This implies that the exchange rate (forward and spot) differential will be equal to the interest rate differential between the two countries. (B) Purchasing power parity (PPP) In absolute terms, purchasing power parity states that the exchange rate between the currencies of two countries equals the ratio between the prices of goods in these countries. Further, the exchange rate must change to adjust to the change in the prices of goods in the two countries. In relative terms, purchasing power states that the exchange rate between the currencies of the two countries will adjust to reflect changes in the inflation rates of the two countries. (C) Forward rates and future spot rates parity The expectation theory of forward exchange rates states that the forward rate provides the best and unbiased forecast of the expected future spot rate. In formal terms, it means that the forward rate and the current rate differential must be equal to the expected spot rate and the current spot rate differential.
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(D) International Fisher effect (IFE). In formal terms, the international Fisher effect states that the nominal interest rate differential must equal to the expected inflation rate differential in two countries

Foreign Exchange Rates

A foreign exchange rate is the price of one currency quoted in terms of another currency. When the rate is quoted per unit of the domestic currency, it is referred to as direct quote. Thus, the US$ and INR exchange rate would be written as US$ 0.02538/INR. When the rate is quoted as units of domestic currency per unit of the foreign currency, it is referred to as indirect quote. A cross rate is an exchange rate between the currencies of two countries that are not quoted against each other, but are quoted against one common currency. The spot exchange rate is the rate at which a currency can be bought or sold for immediate delivery which is within two business days after the day of the trade. Bidask spread are the difference between the bid and ask rates of a currency. The forward exchange rate is the rate that is currently paid for the delivery of a currency at some future date.

Forward Exchange Contracts

Forward contracts are not traded on exchanges, and standard amounts of currency are not traded in these agreements. They cannot be canceled except by the mutual agreement of both parties involved. The parties involved in the contract are generally interested in hedging a foreign exchange position or taking a speculative position. Forward contracts are agreements between two parties to exchan ge two designated currencies at a specific time in the future. These contracts always take place on a date after the date that the spot contract settles, and are used to protect the buyer from fluctuations in currency prices.

 Forward Exchange Rates

The forward exchange rate is the rate that is currently paid for the delivery of a currency at some future date. In terms of the volume of currency transactions, the spot exchange market is much larger than the forward exchange market. The forward rate may be at a premium or at a discount. Forward rate premium or discount may be shown as an annualized percentage deviation from the spot rate. For example, if forward dollars are more expensive than spot dollars, the dollar is said to be trading at a premium relative to the Indian rupee.

Inter Bank Deals

The interbank market is the top-level foreign exchange market where banks exchange different currencies.[1] The banks can either deal with one another directly, or through electronic brokering platforms. The currencies of most developed countries have floating exchange rates. These currencies do not have fixed values but, rather, values that fluctuate relative to other currencies. The interbank market is an important segment of the foreign exchange market. It is a wholesale market through which most currency transactions are channeled. It is mainly used for trading among bankers. The main constituents of the interbank market are

the spot market the forward market

The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place. However, foreign currency options are regulated in the United States and trade on the Philadelphia Stock Exchange. Further, in the U.S., the Federal Reserve Bank publishes closing spot prices on a daily basis.

 International Financial Markets & Cash Management International financial markets are international in scope of monetary fund trading activities. International Finance market refers to the international financing and loan transactions; generalized international financial market includes. International financial assets transaction and its supply demand relations, including both the international monetary market, the international capital market
International Financial Market

International Banking & Money Market International Equity Market LIBOR

International Banking & Money Market International Bond Market

(A) International Banking & Money Market

A Short term market in which currencies can be borrowed and lent and converted into other currencies for short term period is called International Money Market.

(B) International Bond Market

International bonds include Eurobonds, foreign bonds and global bonds. A different type of international bond is the Brady bond, which is issued in U.S. currency. Brady bonds are issued in order to help developing countries better manage their international debt. International bonds are also private corporate bonds issued by companies in foreign countries, and many mutual funds in the United States hold these bonds. A foreign bond is one sold outside the country of the borrower but denominated in the currency of the country of issue. A Eurobond, also called a global bond, is a bond issue sold in a currency other than that of the country of issue

(C) International Equity Market

Foreign firms often issue new shares in foreign markets and list their stock on major stock exchanges, such as those in New York, Tokyo, or London. The purpose of foreign issues and listings is to expand the investor base in the hope of gaining
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access to capital markets in which the demand for shares of equity ownership is strong. Euro equities are shares listed on stock exchanges in countries other than the home country of the issuing company. An indirect method of raising equity capital from foreign markets is to issue depository receipts. A depository receipt represents number of foreign shares that are deposited in a bank in the foreign country. (1) American Depository Receipts (ADRs) A company issues its shares to a reputed international financial institution in the USA that acts as a depository or the transfer agent. The depository bundles a specified number of shares as a depository receipt and issues them to investors in the USA. ADRs can be listed and traded on the USA stock exchanges. The depository receives dividends from the issuing Indian firm and then pays it to the depository receipt holders in the USA. ADRs are denominated in US dollars and ADR investors receive dollar equivalent dividends. (2) Global Depository Receipts (GDRs) GDRs allow an Indian firm (or any other foreign firm) to raise funds from the UK, and list and trade GDRs on the London Stock Exchange. A number of foreign countries also list their GDRs on the Luxembourg Stock Exchange. Reliance and Grasim were the first companies to issue GDRs in May and November 1992, respectively.

(D) London Interbank Offer Rate (LIBOR)

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market, The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year. The LIBOR is the world's most widely used benchmark for short-term interest rates. LIBOR rates were first used in financial markets in 1986 after test runs were conducted in the previous two years. EURO: The official currency of the European Union's (EU) member states, the euro was introduced by the EU in to the financial community in 1999 and physical euro coins and paper notes were introduced in 2002. Euros are printed and managed by the European System of Central Banks (ESCB).