1. International Trade and Finance General Overview - New 1.pptx

international finance

1. International Trade and Finance: General Overview

2. INTERNATIONAL TRADE International trade is the exchange of capital, goods, and services across international borders or territories. Trading partners reap mutual gains when each nation specialises in goods for which it holds an advantage and then engages in trade for other products. International trade has existed in the absence of any international financial arrangements through direct exchange or barter. International trade activities are the major causes of international finance. International Trade can be defined as ‘the exchange of capital, goods, and services across international borders or territories CHARACTERISTICS OF GLOBAL TRADE Exposure to new markets Globalization Transport Network Industralization Joseph K Okunato International Trade and Finance - General Overview 2

3. Domestic & Internation Trade Difference include; Language barrier Currency difference Cross border Transaction Cost of Transaction Mobility of factors of production TRADE FINANCE Trade finance is the process of financing the international trade flows. It exists to mitigate or reduce, the risks involved in international trade transactions . Exporters and Importers are the major parties Banks, insurance companies, government, inspection agents act as intermediaries. Joseph K Okunato International Trade and Finance - General Overview 3

4. Balance of Payment & Exchange Rate International transactions affect the balance of payments. Balance of payments is a concept which is applied to transactions between countries and sometimes problems of financing and adjustments do arise between regions and individual units. When the spending of an individual or country exceeds income, that deficit must be financed and ultimately, the deficit is closed either by increasing incomes or reducing spending . BOP deficit can be financed in many ways by the CBN including Borrowing, in limited sense currency printing, barter trade, etc Joseph K Okunato International Trade and Finance - General Overview 4

5. Balance of Payment & Exchange Rate Exchange rate is the price at which one country’s currency exchanges for another. It is occasioned by the existence of international trade. Exchange rates could be determined by; 1. Purchasing Power Parity [Law of one price] 2. Balance of Payment Approach [balance of recipt against expenditure of a country] 3.Monetary [use BOP model]or Portfolio Approach [uses financial assets model] Joseph K Okunato International Trade and Finance - General Overview 5

6. Foreign Exchange Management One major feature of foreign exchange management is the rate at which the home currency exchanges for one unit of a competing currency. This calls for intelligent management and recognises that exchange rates fluctuate alongside a country’s economic and political standing. Strong economic growth and stable political system will support high domestic exchange rates. Conversely, domestic exchange rates will fall in periods of economic and political uncertainty and turbulence . This could lead to currency devaluation, particularly in war-torn nations with military build-ups or when there is perceived economic mis -management. Joseph K Okunato International Trade and Finance - General Overview 6

7. Foreign Exchange Market intervention [CBN] Manage the domestic economy. Lower the exchange rates for the benefit of the export market. Monetary Measures for Correcting BOP Deficit: Deflation Deflation means falling prices. Deflation has been used as a measure to correct deficit disequilibrium. A country faces deficit when its imports exceeds exports . Joseph K Okunato International Trade and Finance - General Overview 7

8. Foreign Exchange Market intervention [CBN] Bank rate policy, Open market operations, etc. or Through fiscal measures like higher taxation, reduction in public expenditure, etc. 2. Exchange Rate Depreciation Exchange rate depreciation means decline in the rate of exchange of domestic currency, Naira, in terms of foreign currencies. This device implies that a country has adopted a flexible exchange rate policy . Joseph K Okunato International Trade and Finance - General Overview 8

9. Foreign Exchange Market intervention [CBN] 3. Devaluation Devaluation refers to deliberate attempt made by monetary authorities to bring down the value of home currency against foreign currency. While Depreciation is a spontaneous fall due to interactions of market forces, Devaluation is an official act enforced by the monetary authority. 4. Exchange Control This is an extreme step taken by the monetary authority, to take complete control over the exchange dealings in the country. Under such a measure, the central bank directs all exporters to surrender their foreign exchange to the central authority. Joseph K Okunato International Trade and Finance - General Overview 9

10. Risks Inherent in International Trade Risk is defined as the potential of losing something of value, weighed against the potential to gain something of value . Risks in international trade can be classified under four broad headings; viz : Political risk; Financial risk; Commercial/Business risk; and Exchange risk . Various methods have been devised through which exchange risk could be eliminated or minimised . These are: Invoicing in local currency; Invoicing in foreign currency; Borrowing foreign currency; Operating foreign currency account; or Forward cover. Joseph K Okunato International Trade and Finance - General Overview 10

11. Exchange Risk Foreign exchange risk is the risk to the value of an asset when it is valued in another currency. Forward Cover This is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency at a future date. A currency forward is essentially a hedging tool that does not involve any upfront payment. Joseph K Okunato International Trade and Finance - General Overview 11