Unit-I - International Finance - Unit - I
Unit-I - International Finance - Unit - I
Unit-I - International Finance - Unit - I
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
•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
• 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
Opening balance
Increase Decrease
Closing balance