MA. ELEANOR T.

FERNANDEZ
What Is Finance?
Finance describes activities associated
with banking, leverage or debt, credit,
capital markets, money, and investments.
Basically, finance represents money
management and the process of acquiring
needed funds. Finance also
encompasses the oversight, creation, and
study of money, banking, credit,
investments, assets, and liabilities that
make up financial systems.
What Is International Finance?
International finance, sometimes
known as international macroeconomics, is
the study of monetary interactions between
two or more countries, focusing on areas
such as foreign direct investment and
currency exchange rates.
International finance deals with the
economic interactions between multiple
countries, rather than narrowly focusing on
individual markets
International Finance refers to
financial activities consisting of the
transfer of funds from the lending
institutions in one country to the
borrowing entities in other countries. It
also enables under developed countries
to share the benefits of economic
progress through (1) entry and infusion
of capital and (2) transfer and use of
western technologies.
International finance analyzes the following
specific areas of study:
The Mundell-Fleming Model, which studies
the interaction between the goods market and
the money market, is based on the assumption
that price levels of said goods are fixed.
International Fisher Effect is an
international finance theory that assumes
nominal interest rates mirror fluctuations in the
spot exchange rate between nations.
The optimum currency area theory states
that certain geographical regions would
maximize economic efficiency if the entire area
adopted a single currency.
Purchasing power parity is the
measurement of prices in different areas
using a specific good or a specific set of
goods to compare the absolute
purchasing power between different
currencies.
Interest rate parity describes an
equilibrium state in which investors are
indifferent to interest rates attached to
bank deposits in two separate countries.
How relevant is finance to development?
1.The shortage of money/finance is not a
constraint on overall development.
2.Mere creation of money cannot accelerate
economic development unless the
preconditions for it are lacking.
3.It is only man and environment which
together determine the growth and
development.
Importance of International Finance
1.International finance is an important tool to
find the exchange rates, compare inflation rates,
get an idea about investing in international debt
securities, ascertain the economic status of
other countries and judge the foreign markets.
2.Exchange rates are very important in
international finance, as they let us determine
the relative values of currencies. International
finance helps in calculating these rates.
3. Various economic factors help in making
international investment decisions. Economic
factors of economies help in determining
whether or not investors’ money is safe with
foreign debt securities.
4. Utilizing IFRS is an important factor for
many stages of international finance. Financial
statements made by the countries that have
adopted IFRS are similar. It helps many
countries to follow similar reporting systems.
5. IFRS system, which is a part of
international finance, also helps in
saving money by following the rules
of reporting on a single accounting
standard.
6. International finance has grown in
stature due to globalization. It helps
understand the basics of all
international organizations and keeps
the balance intact among them.
7. An international finance system
maintains peace among the nations.
Without a solid finance measure, all
nations would work for their self-
interest. International finance helps in
keeping that issue at bay.
8. International finance organizations,
such as IMF, the World Bank, etc.,
provide a mediators’ role in managing
international finance disputes.
ROLE OF FINANCIAL MEDIATION
Through financial intermediation, the
types and forms of assets desired by savers
and investors are matched in terms of
yield, safety, liquidity, and convenience
with the forms of financing desired by
business enterprises and institutions –
thereby facilitating the accumulation of
capital and economic development.
FUNCTION OF A SOUND FINANCIAL
STRUCTURE
The function of a sound financial
structure is to move financial resources
efficiently from surplus to deficit non-financial
units, and from activities yielding low social
returns to those yielding high social returns.
Savings in developing countries are very low,
both in absolute terms and in relation to the
rates of real economic growth needed by these
if their incomes are to keep pace with their
fast-expanding populations.