Financial management of a company is a complex process, involving its own methods and procedures. It is made even more complex because of the globalization taking place, which is making the world’s financial and commodity markets more and more integrated. The integration is both across countries as well as markets. Not only the markets, but even the companies are becoming international in their operations and approach. Managers of international firms have to understand the environment in which they function if they are to achieve their objective in maximizing the value of their firms, or the rate of return from foreign operations. The environment consists of: The international financial system, which consists of two segments: the official part represented by the accepted code of behavior by governments comprising the international monetary system, and the private part, which consists of international banks and other multinational financial institutions that participate in the international Continue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Capital Supply and International Financial Markets
Capital flows have traditionally focused on the ‘demand side’ of emerging market financing by examining current account balances, which are equal to the net external financing needs of countries, and then seeking to identify ways in which these financing needs could be met and on what terms. However, this approach ignores trends in capital flows into and out of the major advanced economies, which are the source of most cross-border capital and the main reason why gross flows have risen so dramatically relative to net flows. These flows are typically in a securitized form and, as such, are susceptible to trading in active secondary markets. By one estimate, investors in the mature markets of Europe, the United States and Japan have been accumulating securities issued outside their own countries at the rate of about US$1 trillion a year (Smith 2000). This means that international capital flows are increasingly determined by Continue reading
Currency Call Options and Put Options
Currency Call Options A currency call option is a contract that gives the buyer the right to buy a foreign currency at a specified price during the prescribed period. Firms buy call options because they anticipate that the spot rate of the underlying currency will appreciate. Currency option trading can take place for hedging or speculation. Hedging: Multinational companies with open positions in foreign currencies can utilize currency call options. For example, suppose that an American firm orders industrial equipment form a Indian company, and its payment is to be made in Indian Rupees upon delivery. An Indian rupee call option call option lacks in the rate at which the U.S company can purchase Rupees for Dollars. Such an exchange between the two currencies at the specified strike price can take place before the settlement date. Thus the call option specifies the maximum price which the U.S. company must pay Continue reading
Trading Blocks Concept in International Economics
The post-second World War period has seen a growing interest in integrating national economies at regional levels. The efforts to form regional groupings, trade blocks and treaties have often floundered due to political differences and unforeseen economic hurdles. The motivation arises out of the realization of the limitations imposed by national frontiers and the expected benefits of a wider market, consisting of several national economies. Regional trade agreements represent an attempt by a group of countries to increase the flow of trade and investment by reducing direct and indirect trade barriers between them, as well as implement similar trade policies vis-Ã -vis outsiders. Multinational trade blocks are a major global trend. Most of these blocks are formed by geographically close countries, and revolve around a small group of larger economies. This is further testament to the importance of closeness and proximity in establishing network structures. Proximity in this case refers Continue reading
Gains from International Trade and Investment
The major gain of international trade is that it has brought about increased prosperity by allowing nations to specialize in producing those goods and services at which they are relatively efficient. The relative efficiency of a country in producing a particular product can be described in terms of the amounts of other, alternative products that could be produced by the same inputs. When considered this way, relative efficiencies are described as the comparative advantages. All nations can do simultaneously gain from exploiting their comparative advantages, as well as from the large-scale production and broader choice of products that are made possible by the international trade. Suppose that Japan is relatively more efficient in producing steel than food and the United States is relatively more efficient in producing food than steel. So we can expect food to be cheap relative to steel in United States, and steel to be cheap relative Continue reading
Factors That Affect Currency Values
To date, there is no exchange rate model that can predict future currency prices with 100% accuracy. In rapidly growing global foreign exchange markets, currency movements become harder to predict as more participants enter the market on a daily basis, bringing with them all their research opinions, emotions, and expectations about where currencies should be headed. Currency movements in the short term can be influenced by publicly available information like the release of the country’s gross domestic product data, the consumer price index, or employment data. The following publicly available information can have immediate impact on currency movements: Local economic data releases and the anticipation of those releases. Economic data releases in foreign countries, especially of major trading partners, and the anticipation of those releases. Central banks, such as the U.S. Federal Reserve or the European Central Bank, raising or lowering interest rates. Central banks making public their thoughts on Continue reading