INTERNATIONAL

FINANCE
UNIT – I & II
International Finance Management IFM
• International financial management is also known as international finance‘.
• International finance is the set of relations for the creation and using of
funds (assets), needed for foreign economic activity of international
companies and countries. Assets in the financial aspect are considered not
just as money, but money as the capital, i.e. the value that brings added
value (profit).
• Capital is the movement, the constant change of forms in the cycle that
passes through three stages: the monetary, the productive, and the
commodity. So, finance is the monetary capital, money flow, serving the
circulation of capital. If money is the universal equivalent, whereby
primarily labor costs are measured, finance is the economic tool
 Definition – International Finance
• The definition of international finance is the combination of monetary
relations that develop in process of economic agreements - trade,
foreign exchange, investment - between residents of the country and
residents of foreign countries.
• Financial management is mainly concerned with how to optimally
make various corporate financial decisions, such as those pertaining to
investment, capital structure, dividend policy, and working capital
management, with a view to achieving a set of given corporate
objectives
 Reason for growth in international
business
• Opportunities in Foreign Markets
• Saturation of Domestic Markets
• Availability of Low Cost Labor
• Competitive Reasons
• Increased Demands
• Diversification
• Reduction of Trade Barriers
• Development of communications and Technology
• Consumer Pressure
• Global Competition
 DISTINGUISHING FEATURES OF
INTERNATIONAL FINANCE
• 1. Foreign exchange risk
• 2. Political risk
• 3. Expanded opportunity sets
• 4. Market imperfections
 DOMESTIC VS INTERNATIONAL
FINANCIAL MANAGEMENT
• Define
• Foreign Exchange Risk
• Exposure to Foreign Exchange
• Use of Derivatives Instrument
• Legal and Tax Environment
• Macro Business Environment
• Different Standards of Reporting
 DOMESTIC VS INTERNATIONAL
FINANCIAL MANAGEMENT
• Capital Management
• Banking Regulations
• Cultural Differences
• The Different Group of Stakeholder
 International Monetary system
The term, international monetary system,
refers to the institutions, norms and the entire
environment that facilitate the settlement of
international payments.
 History of the International Monetary
System
• Gold Standard (1875-1914)
• Inter-war period (1915-1944)
• Bretton Woods system (1945-1972)
• Present International Monetary system
(1972-onwards)
 History of the International Monetary System
•Gold Standard (1875-1914)
The gold standard is a monetary system in which each country fixed the value of
its currency in terms of gold. The exchange rate is determined accordingly.
Let’s say- 1 ounce of gold = 20 pounds (fixed by the UK) and 1 ounce of gold = 10
dollars (fixed by the US).
Hence, the dollar-pound exchange rate will be 20 pounds = 10 dollars or 1 pound
= 0.5 dollars
The Gold standard created a fixed exchange rate system.
There was free convertibility between gold and national currencies.
Also, all national currencies had to be backed by gold. Therefore, the countries
had to keep enough gold reserves to issue currency.
One advantage of the gold standard was that the Balance of payments (BOP)
imbalances were corrected automatically.
 History of the International Monetary System
•Gold Standard (1875-1914)
Let’s say- there are only two countries in the world – The India and France. The India
runs a BOP deficit as it has imported more goods from France. France runs a BOP
surplus.
This will obviously result in the transfer of money (gold) from the India to France as
payment for more imports.
The India will have to reduce its money supply due to a decline in gold reserves. The
reduction in the money supply will bring down prices in the India .
The opposite will happen in France. Its prices will increase.
Now, the India will be able to export cheaper goods to France. On the other hand, the
imports from France will slow down. This will correct the BOP imbalances of both
countries.
Another advantage was that the gold standard created a stable exchange rate system
that was conducive to international trade.
 History of the International Monetary System

2) Inter-war period
After the world war started in 1914, the gold
standard was abandoned.
Countries began to depreciate their currencies
to be able to export more. It was a period of
fluctuating exchange rates and competitive
devaluation.
 History of the International Monetary System
3) Bretton woods system
In the early 1940s, the United States and the United Kingdom began discussions to
rebuild the world economy after the destruction of II world wars. Their goal was to
create a fixed exchange rate system without the gold standard
The new international monetary system was established in 1944 in a conference
organised by the United Nations in a town named Bretton Woods in New Hampshire
(USA).
The conference is officially known as the United Nations Monetary and Financial
Conference. It was attended by 44 countries.
India was represented in the Bretton-woods conference by Sir C.D. Deshmukh, the
first Indian Governor of RBI.
[The conference also led to the creation of the International Monetary Fund (IMF),
World Bank, and General Agreements and Tariffs and Trade GATT. GATT is the
predecessor/replaced of WTO.
 History of the International Monetary System
3) Bretton woods system
The Bretton-woods created a dollar-based fixed exchange rate system.
In the Bretton-woods system, only the US fixed the value of its currency to gold.
(The initial peg was 35 dollars = 1 ounce of gold). All the other currencies were
pegged to the US dollar instead. They were allowed to have a 1 % band around
which their currencies could fluctuate.
The countries were also given the flexibility to devalue their currencies in case of an
emergency.
It was similar to the gold standard and was described as a gold-exchange standard.
There were some differences. Only the US dollar was backed by gold. Other
currencies did not have to maintain gold convertibility.
Also, this convertibility was limited. Only governments (not anyone who demanded
it) could convert their US dollars into gold.
INTERNATIONAL MONETARY FUND
United Nations (UN) specialized agency,
founded at the Bretton Woods Conference in
1944 to secure international monetary
cooperation, to stabilize currency exchange
rates, and to expand international liquidity.
INTERNATIONAL MONETARY FUND
• The International Monetary Fund (IMF) is an
organization of 190 countries
• Missions of IMF:
• working to foster International monetary cooperation
• Secure financial stability and growth
• Facilitate international trade
• Promote high employment and sustainable economic
growth, and reduce poverty around the world.
 IMF…. Founding and mission
The IMF was conceived in July 1944 at the United Nations Bretton Woods
Conference in New Hampshire, United States.
The 44 countries in attendance sought to build a framework for international
economic cooperation and avoid repeating the competitive currency
devaluations that contributed to the Great Depression of the 1930s.
The IMF's primary mission is to ensure the stability of the international
monetary system, the system of exchange rates and international payments
that enables countries and their citizens to transact with each other.
 IMF…. Organizational structure
At the top of its organizational structure is the Board of Governors.
The day-to-day work of the IMF is overseen by its 24-member
Executive Board, which represents the entire membership and
supported by IMF staff.
The Managing Director is the head of the IMF staff and Chair of
the Executive Board. S/he is assisted by four Deputy Managing
Directors.
 IMF…
The Board of Governors, the highest decision-making body of the IMF,
consists of one governor and one alternate governor for each member
country.
The governor is appointed by the member country and is usually the
minister of finance or the governor of the central bank.
All powers of the IMF are vested in the Board of Governors. The Board
of Governors may delegate to the Executive Board all except certain
reserved powers. The Board of Governors normally meets once a year.
 Quota and voting shares for IMF
members
• Following the entry into force of the Board
Reform Amendment on January 26, 2016,
members who have consented to their quota
increases can pay their quota increases under
the 14th General Review of Quotas.
• Quota and voting shares will change as
members pay their quota increases
 MILLIONS PERCENT  GOVERNOR PERCENT 
MEMBER OF SDRS OF TOTAL ALTERNATE NUMBER OF TOTAL

China  30,482.9 6.40 Gang Yi 306,288 6.08

Yulu Chen

Canada  11,023.9 2.31 Chrystia Freeland 111,698 2.22

Tiff Macklem

France  20,155.1 4.23 Bruno Le Maire 203,010 4.03

François Villeroy de

Germany  26,634.4 5.59 Jens 267,803 5.31

Weidmann
India  13,114.4 2.75 Christian
Nirmala 132,603 2.63
Lindner
Sitharaman
Shaktikanta
Das
Italy  15,070 3.16 Daniele 152,159 3.02
Franco
 MILLIONS PERCENT  GOVERNOR PERCENT 
MEMBER OF SDRS OF TOTAL ALTERNATE NUMBER OF TOTAL

Japan 3 30,820.5 6.47 Shunichi Suzuki 309,664 6.14

Haruhiko Kuroda

United Kingdom 3 20,155.1 4.23 Rishi Sunak MP 203,010 4.03

Andrew Bailey

United States 3 82,994.2 17.43 Andy Baukol 831,401 16.50

Vacant

Pakistan 3 2,031 0.43 Reza Baqir 21,769 0.43

Yusuf Khan
Spain 3 9,535.5 2.00 Nadia Calvino 96,814 1.92
Pablo Hernández
de Cos

Sri Lanka 3 578.8 0.12 Basil Rajapaksa 7,247 0.14

Ajith Nivard
Cabraal
 IMF…..FINANCE
The IMF's resources mainly come from the
money that countries pay as their capital
subscription (quotas) when they become
members.
Each member of the IMF is assigned a quota,
based broadly on its relative position in the world
economy. Countries can then borrow from this
pool when they fall into financial difficulty.
 IMF…Surveillance
The IMF monitors the international monetary system and global
economic developments to identify risks and recommend
policies for growth and financial stability.
The Fund also undertakes a regular health check of the
economic and financial policies of its 190 member countries.
In addition, the IMF identifies possible risks to the economic
stability of its member countries and advises their governments
on possible policy adjustments
 Lending
• The IMF provides loans, including emergency loans to
member countries experiencing actual or potential
balance of payments problems.
• The aim is to help them rebuild their international
reserves, stabilize their currencies, continue paying for
imports, and restore conditions for strong economic
growth, while correcting underlying problems.
 Capacity Development
•The IMF provides technical assistance and training to governments,
including central banks, finance ministries, revenue administrations,
and financial sector supervisory agencies.
•These capacity development efforts are centered on the IMF’s core
areas of expertise ranging from taxation through central bank
operations to the reporting of macroeconomic data.
•Such training also helps countries tackle cross-cutting issues, such as
income inequality, gender equality, corruption, and climate change.
IMF Facts
IMF Lending Facts
SDR - Special Drawing Rights (SDR)
The SDR is an international reserve asset, created by the IMF in 1969 to
supplement its member countries’ official reserves. To date, a total of SDR
660.7 billion (equivalent to about US$943 billion) have been allocated. This
includes the largest-ever allocation of about SDR 456 billion approved on
August 2, 2021 (effective on August 23, 2021). This most recent allocation
was to address the long-term global need for reserves, and help countries
cope with the impact of the COVID-19 pandemic. The value of the SDR is
based on a basket of five currencies—the U.S. dollar, the euro, the Chinese
renminbi, the Japanese yen, and the British pound sterling.
 The role of the SDR

•The SDR was created as a supplementary international reserve asset in the context
of the Bretton Woods fixed exchange rate system. The collapse of the Bretton
Woods system in 1973 and the shift of major currencies to floating exchange rate
regimes lessened the reliance on the SDR as a global reserve asset. Nonetheless,
SDR allocations can play a role in providing liquidity and supplementing member
countries’ official reserves, as was the case amid the global financial crisis.

•The SDR serves as the unit of account of the IMF and other international
organizations.

•The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential
claim on the freely usable currencies of IMF members. SDRs can be exchanged for
these currencies.
A basket of currencies determines the value of the SDR

• SDR VALUE
• The SDR value in terms of the U.S. dollar is
determined daily based on the spot exchange
rates observed at around noon London time,
and is posted on the IMF website.
 FOREX MARKET
• Control and information flow from
• FSA (Financial Services Authority)- USA
• FCA (Financial Conduct Authority)– EUROP
• The flow of Information will be provided from
tier I banks who is the Liquidity provider
• HSBC, CITY BANK, Barclayser will provide
information to the brokers
• Timing 24/7
• Global Investing
• A Book & B Book
European Monetary System (EMS)
History of the European Monetary System

•Beginning from the Second World War, the Bretton Woods System was used to
try and maintain stability among major currencies. However, it was dropped in
1971. European countries then launched the European Monetary System in 1979,
and leaders sought to achieve monetary stability through a stable exchange rate.

•The EMS launched the European Currency Unit and the European Exchange
Rate Mechanism in order to achieve the overarching goal of monetary stability
and work towards the idea of a single market in Europe. It stayed in place until
1999 and was then succeeded by the European Monetary Union (EMU) and the
Euro.
 European Monetary System (EMS)
•The European Monetary System (EMS) refers to an arrangement established
in 1979, whereby members of the European Economic Community (now the
European Union) agreed to link their currencies to encourage monetary
stability in Europe.
•The EMS aimed to create a stable exchange rate for easier trade and
cooperation among European countries through an Exchange Rate
Mechanism (ERM).
•The ERM was based on the European Currency Unit (ECU) – a currency unit
composed of a basket of 12 European currencies weighted by gross domestic
product (GDP). 19
 How Did It Work?
• The European Monetary System mainly relied upon the
European currency unit (ECU) and the existing exchange rate
mechanism then. Exchange rates were only allowed to deviate
within a certain range from the fixed central point, which was
determined by the ECU.
• In the EMS, exchange rate fluctuations of member countries’
currencies were limited to 2.25% from the fixed central point,
which was determined by the European Economic Community.
 Goals of the European Monetary System

The European Monetary System aimed to

achieve various macroeconomic goals:
• Encouraging trade within Europe
• Exchange rate stability among trading
members
• Controlled inflation within Europe
 The 1992 Crisis
•The EMS established a common monetary policy among member states
and fixed the exchange rates. In 1992, Germany raised its interest rates to
combat inflation – it placed upward pressure on the exchange rates of
member countries at a time when they needed low interest rates and
higher exports, resulting in a crisis.

•Each country demonstrated different economic characteristics – some

relied on cheap labor costs, while others were export-oriented economies –
the increase in interest rates resulted in a different impact on each
economy.

•With exchange rates fixed, many countries experienced turmoil and

ultimately eliminated their pegging system with the ECU, allowing
exchange rates to float. Over time, the EMS changed the bandwidth for
exchange rate volatility from +/- 2.25% to +/- 15%.
 The 1992 Crisis
Combat inflation – Governments can use wage
and price controls to fight inflation, but that
can cause recession and job losses.
Governments can also employ a contractionary
monetary policy to fight inflation by reducing
the money supply within an economy via
decreased bond prices and increased interest
rates.
 Benefits of the European Monetary System
1. Ensuring currency stability
The EMS ensured currency stability in Europe during times of
international market volatility.
2. Working towards a single market
The EMS was considered an important step towards the
establishment of the EU and the single market in Europe
3. Unity in Europe
The EMS promoted political and economic unity across Europe
at a pivotal time in European history.
Drawbacks of the European Monetary System

1.Fixed exchange rates

Fixed exchange rates affected different members of the EMS in
different ways, which were not beneficial to all economies. It
became evident in the 1992 crisis.
2. Common monetary policy
The EMS promoted a common monetary policy; therefore,
raising or decreasing interest rates affected all economies
differently – just like the exchange rate system.
The End of the European Monetary System

• Following events in 1988, the EMS was set to undergo a three-stage reform that
eased the transition to a common European monetary union. The first stage
introduced free capital movements across Europe and was a part of the 1992 crisis.
It continued functioning under the Maastricht Treaty, which was signed in 1992 and
laid the foundation for the European Union.

• The second and third stages came in 1998 and 1999 respectively, after the
introduction of the Euro. The EMS and its exchange rate system were replaced by
the adoption of the Euro and the formation of the European Central Bank, which
has authority over the EU’s monetary policy.
 EU - 19 Counties

Euro in 19 EU countries: Austria, Belgium, Cyprus,

Estonia, Finland, France, Germany, Greece,
Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia,
Slovenia and Spain. Discover more about the euro,
which countries use it and the exchange rates.
 Assets and Expenses

Opening balance
Increase Decrease

Closing balance

Liabilities and Income

Decrease Opening balance

Increase
Closing balance
UNIT - II
Introduction to Indian Foreign Exchange Market

The foreign exchange market is not limited by any

geographical boundaries. It does not have any regular
market timings, operates 24 hours 7 days week 365 days
a year, characterized by ever-growing trading volume,
exhibits great heterogeneity among market participants
with big institutional investor buying and selling million
of dollars at one go to individuals buying or selling less
than 100 dollar
 Forex Market in India
• Traditionally Indian forex market has been a
highly regulated one. Till about 1992-93,
government exercised absolute control on the
exchange rate, export-import policy, FDI
(Foreign Direct Investment) policy. The
Foreign Exchange Regulation Act(FERA)
enacted in 1973
FINANCIAL MARKET