II JAI SRIGURUDEV II

Sri Adichunchanagiri Shikshana Trust

SJB INSTITUTE OF TECHNOLOGY

INTERNATIONAL FINANCIAL MANAGEMENT

20MBAFM406
Prepared by

Mrs. Lakshmi Priya M C

Assistant Professor
MBA Department
SJBIT

Department of MBA
BGS Health & Education City
Dr. Vishnuvardhana Road, Kengeri, Bengaluru - 560 060.
Tel.: 080 - 2861 2445 / 46 Fax : 080 - 2861 2651
Web.: www.sjbit.edu.in
MODULE 1
INTERNATIONAL FINANCIAL ENVIRONMENT
TOPICS TO BE COVERED
• Importance, rewards & risk of international finance
• Goals of MNC
• International Business methods.
• Balance of Payments (BoP)
• Fundamentals of BoP
• Accounting components of BOP
• Equilibrium & Disequilibrium,
• International Monetary System: Evolution
• Gold Standard
• Bretton Woods system
• The flexible exchange rate regime
• The current exchange rate arrangements
• The Economic and Monetary Union (EMU) (Only Theory).
INTRODUCTION

• International finance involves international financing and investing decisions that are
intended to maximize firm’s(MNC) value.

• International finance deals with management of finance in global business.

• Initially companies would attempt to export to foreign country or import from foreign
suppliers

• However, overtime they would recognize additional foreign opportunities eventually

establish subsidiaries in foreign countries.
IMPORTANCE OF INTERNATIONAL FINANCE

• Higher rates of profit

• Expansion of production capacity
• Severe competition in the home country
• Limited Home market
• Political Stability
• Availability of technology and skilled human resources
• High cost of transportation
• Nearness to raw materials
• Availability of quality human resources
IMPORTANCE OF INTERNATIONAL FINANCE

• Increased market share

• Higher rate of economic development
• Tariffs and import quotas
• Calculate Exchange rates
• Financial Safety
RISKS OF INTERNATIONAL FINANCE

• Varied Economic Systems

• Tariff and non-tariff trade barriers
• Political risks
• Environmental safeguard
• Dumping
• Cultural Differences
• Language Differences
• Intellectual Property rights
RISK OF INTERNATIONAL FINANCE

• International Taxation
• Economic and currency crisis
• Interest rate charging
• Foreign Exchange risk
REWARDS OF INTERNATIONAL FINANCE

• Promotion
• Better Banking System
• More Equality
• Effective capital allocation
• Capital in need
• Corrective measures
HOW FIRMS ENGAGE IN INTERNATIONAL BUSINESS

• International Trade
• Licensing
• Franchising
• Joint Ventures
• Acquisition Of Existing Operations
• Establishing New Foreign Subsidiaries
BALANCE OF PAYMENTS

• The Balance of Payment of a country is“ a systematic record of all economic

transactions between the residents of the reporting country and the residents of
foreign countries during a given period of time”.
• Like all double entry book keeping accounts it always balances i.e., sum of credit
entries & sum of debit entries.
• In other words the balance of payment statement is a device for recording all
economic transactions within a given period of time between the residents of a
country and the residents of other countries.
COMPONENTS OF BALANCE OF PAYMENTS

• Current A/c
• Capital A/c
• Reserve A/c
CURRENT A/C

• It can be broken down into two parts viz.,

• Balance of trade & Balance of Services.
• Balance of trade deals only with export & import ,merchandise(or invisible items);
• It is not necessary that balance of trade always balances; more often, it will either
show a surplus or a deficit. A surplus on trade balance may be matched with a
surplus or a deficit on service balance. If the surplus on service balance equals the
deficit on trade balance, the current A/c show a net balance.
(B)CAPITAL A/C

• Similarly, the capital a/c represents transfer of money and other capital
items & changes in the country’s foreign assets & liabilities resulting from the
transactions recorded in the current a/c.
• It includes loans, investments, issue of bonds, etc.
RESERVE ACCOUNT

• It is same as capital account as this also is related to assets and liabilities.

Only reserve assets are included here. These are the assets which the
monetary authority of the Country uses to settle the deficit that arise on the
other two categories taken together.
• The deficit on the current a/c or capital transactions can be financed by
external assistance, drawings from IMF & allocations of the SDR’s.
• Balance of Payment is a Double entry A/c. hence it always balances.
• There may be deficit or surplus in current account and capital a/c or any sub
account.
• But final adjustment is made by increasing or decreasing forex reserves.
• Hence BOP as a whole always balances.
EQUILIBRIUM AND DISEQUILIBRIUM

• When the demand and supply of any foreign currency in a country in a given time
period is equal, it is termed as equilibrium position in the balance of payment.
• While a disequilibrium condition is either surplus or deficit.
• The deficit in the balance of payment occurs when the total payments are
exceeded by the total receipts.
• Similarly, surplus occurs when the total receipts are exceeded by total
payments.
INTERNATIONAL MONETARY SYSTEM

• The international monetary system is the framework within which countries

borrow, lend, buy, sell and make payments across political frontiers.

• The framework determines how balance of payments disequilibrium is

resolved. Numerous frameworks are possible and most have been tried in one
forms or another.
EXCHANGE RATE REGIME

• An exchange rate is the value of one currency in terms of other.

• The term exchange rate regime refers to the mechanism, procedures and institutional
framework for determining exchange rate at a point in time and changes in them
over time, including factors which induce the changes.
• Theoretically a very large number of exchange rate regimes are possible.
• At the two extremes are the perfectly rigid of or fixed exchange rates and the
r]perfectly flexible or floating exchange rates.
• Between are hybrids with varying degrees or limited flexibility.
EVOLUTION

• The international monetary system can be broadly classified as below:

• PRE BWS PERIOD:
• GOLD STANDARD SYSTEM:
• Gold Standard System(1870-1914)
• Gold Exchange Standard(1925-1933)
• BRETTON WOODS SYSTEM
• FIXED EXCHANGE RATES
• FLUCTUATING EXCHANGE RATES
THE GOLD STANDARD
• It is the oldest system which was in operation till the beginning of the first World War.
• In the version called Gold Specie Standard, the actual currency in circulation consisted of
gold coins with a fixed gold content.
• In a version called gold bullion standard, the basis of money remains a fixed weight of
gold but the currency in circulation consists of paper notes.
• Under the gold exchange standard, the authorities stand ready to convert, at a fixed rate,
the paper currency issued by them into the paper currency of another country which is
operating a gold specie or gold bullion standard.
• If rupee are freely convertible into dollars and dollars into gold then rupee can be said to
be on a gold-standard exchange.
• The exchange rate of any currency can be determined by their respective exchange rates
against gold.
BRETTON WOODS SYSTEM

• After World War II, victorious allied powers, principally the US and UK, took up the task
of thoroughly revamping the world monetary system and the outcome was the Bretton-
woods system and the birth of two supra-national institutions, the International
Monetary fund and the World Bank.
• The exchange rate that was put in place can be characterised as he old Exchange Rate.
• The Us government undertook to convert the Us dollar freely into gold at a fixed parity of
$35 per ounce.
• Other member countries of the IMF agreed to fix the parities of their currencies vis-à-vis
the dollar with variation within 1% on either side of the central parity being permissible.
EXCHANGE RATE REGIMES- THE CURRENT
SCENARIO
• The IMF Classifies member countries into seven categories according to the exchange
rate regime they have adopted.
• Exchange Arrangements with no separate Legal Tender
• Currency Board Arrangements
• Conventional Fixed Peg Arrangement
• Pegged Exchange rates within horizontal bands
• Crawling Peg
• Managed Floating with no pre-announced path for the exchange rate
• Independently floating
THE ECONOMIC &MONETARY UNION

• Heading back to some form of fixed exchange rate system after managing floating rates for
more than a quarter century.
• The parities were re-defined and widened the band of variation to 2.25%, another
adjustable peg system born among the countries belonging to European Economic Community.
• This was the Snake, created in 1972, designed to keep the EEC countries’ exchange rates
within narrower bands of 1.125% around the central rates while they maintained the wider
bands of 2.25% against the currencies of other countries(hence the designation Snake in the
tunnel)
• In 1979, the snake became European Monetary System, with all EEC countries except Britain
joining the club.
Thank You