Ch-1-Introduction-to-International-Finance-1.ppt

PPT

1. CH. 1
INTRODUCTION TO
INTERNATIONAL FINANCE

2. MEANING
•Globalization led to the emergence of International
Finance.
•It is a branch of economics that studies the
dynamics of foreign exchange rates & foreign
investments.
•It deals with monetary interactions between two or
more currencies.

3. FEATURES OF INTERNATIONAL FINANCE
•Multiple Currencies: It involves the use of multiple
currencies. Every currency has different values
relative to each other.
•Various Players: There are multiple players
involved in international finance, which include:
Commercial Banks, Investment Banks, Central
Banks, Corporate, Fund Managers, Brokers & other
Financial Institutions.
•Foreign Exchange Rate: It involves the concept of
exchange rate. It is the price of one currency in
terms of other currency.

4. •Expanded Opportunity to Business: Due to
globalization, there is an expanded opportunity to
business. Businesses can raise more funds globally
from capital markets at lesser cost of capital.
•Foreign Exchange Risk: Since the countries deal in
multiple currencies, there is a risk of volatility in the
exchange rates.
•Imperfect Market: International market is said to
be an imperfect market due to difference in law &
customs, tax systems, culture, business practices
etc.

5. •Political Risk: It includes risk of loss from
unforeseen political & government issues.
International finance can be affected because of
unfavorable political decisions.

6. SCOPE OF INTERNATIONAL FINANCE
•International Institutions: It includes:
a.World Bank – it funds the development of projects,
mainly in developing countries. It offers loans,
grants & other financial products through IBRD.
b.International Monetary Fund – it monitors the
balance of payments of its member nations. It is a
lender of last resort for countries facing financial
crisis
c.World Trade Organization – it deals with the global
rules of trade between nations. It resolves
multilateral & bilateral trade disputes.

7. d. International Finance Corporation – it supports
sustainable investments in the private sector. It is a
source of multilateral loans & equity financing for
projects undertaken by the private sector in
developing countries.
•International Financial Services: It includes –
a.Asset/Fund Based Services – Bill Discounting,
Factoring, Hire Purchase, Lease Financing.
b.Fee Bases services – Merchant Banking, M&A
Services, Credit Rating Services, Custodian Services.

8. •International Monetary System: For better
economic growth & to trade efficiently, a country
need to have its own monetary system & an
authority who can control the system.
•International Financial System: It includes various
rules, facilities, markets, instruments, organization
& customs which enable the international
payments & receipts between the countries.
•Foreign Exchange Market: It is a market where one
country’s currency can be purchased through the
sale of another country’s currency. It includes
Forex, Euro-currency, Euro-credit, Euro-bond, ADR,
GDR etc.

9. •International Financial Economics: It is concerned
with the causes & effects of financial flows among
nations application of macroeconomic theory &
policy to the global economy.
•International Financial Management: It is
concerned with how individual economic units cope
up with the complex financial environment of
international business. It also focuses on the issues
related to making better business decisions in
global economy.

10. •International Financial Markets: It is concerned
with international financial instruments, foreign
exchange markets, international banking,
international securities markets, financial
derivatives etc.
•Currency Convertibility: The currency of a country
is freely convertible when the resident or non-
resident of the country are allowed to convert local
currency into foreign currency.
•Balance of Payments: It is a systematic record of all
the economic transactions with the residents of a
reporting country & residents of foreign country
during a given period of time.

11. IMPORTANCE OF INTERNATIONAL
FINANCE
•Helps to keep international issues in a disciplined
manner.
•Helps maintain peace among the nations.
•Acts as an important tool to determine & calculate
exchange rates, compare inflation rates, investing in
international securities, ascertain economic status
of other countries & judge the foreign markets.
•Helps in making international investment decisions.

12. •Helps understand the basics of all international
organizations & keeps the balance among them.
•Helps promote domestic investment & growth
through capital market.
•Helps in healthy competition among international
institutions.
•Helps to integrate economies of various countries.
•Helps in capital allocation with available
information.
•Helps countries to access capital market.

13. •Helps to manage any financial disputes & taking any
corrective actions.
•Helps in stabilizing International Financial Reporting
Analysis (IFRS) across various countries.
•IFRS System also helps to save money by following
the rules of reporting on a single accounting
standard.

14. FINANCIAL GLOBALIZATION
•‘a global linkage through cross-border financial
flows’ – it has become increasingly important for
upcoming markets as they financially integrate with
the rest of the world.
•It is also defined as ‘an amalgamation of domestic
financial system of a particular country with the
international organizations as well as financial
markets.

15. Benefits of Financial Globalization
It has enhanced capital flow in each & every
country with which a country may remain prepared
to counter any financial crisis.
Capital flows between nations increase which
causes well-organized allocation of money.
Improvement in living standards of the people.
It is a safeguard to defend against national shocks &
an excellent system for more efficient global
allocation of resource.

16. POSITIVE EFFECTS OF GLOBALIZATION
•Global Market: Globalization has led to the growth
of international markets. International transactions
has increased & there has been a liberalization of
economic activities & removal of cross-border trade
barriers.
•International Institutions: There has been an
increase in the international institutions like UNO,
IMF, WTO, World Bank, which regulate the
relationship between different countries & govern
the issues of justice, human relations & political
factors.

17. •Increase in World Trade: World trade has incresed
due to globalization.
•Increase in FDI: Globalization has led to increase in
foreign capital flows in a country. there has been an
increase in Foreign Direct Investment & Foreign
Institutional Investment.
•Increase in Standard of Living: Foreign capital &
technological flows has led to expansion of trade &
investment, which in turn has increased the per
capita income, leading to better living standards.

18. •Increase in Employment Opportunities: Increase in
the flow of capital & investment has also led to
creation of job opportunities for local people.
•Cultural Changes: Through the development of
globalization, world is getting into an identical
culture that is understood by every nation.
•Increase in Competition: Globalization has helped
in making the world a smaller place thereby
increasing competition amongst the players. Local
players are bound to increase quality of their goods
& services in order to match global brands.

19. •Resource Allocation: Developed countries need
human resources whereas developing countries are
in need of capital & technology. Globalization has led
to interdependence of countries around the world.
•Technological Shift: With the help of globalization,
cutting edge technology can be brought into
developing nations from developed nations. There
will also be increase in global technological
infrastructure across borders.
•Political Relations: Globalization helps in increasing
world trade thereby bringing integration between
economies. It helps build good & cordial relationships

20. NEGATIVE EFFECTS OF
GLOBALIZATION
•Environmental Effects: Globalization adversely
afets natural environment. With the increase in
trade & transportation, there has been destruction
of Ozone layer & many species on the earth.
•Loss of Jobs: All the white collar jobs may get
shifted to developed nations. Also, technological
advancements has reduced the manual work which
also has led to increase in unemployment.
•Western Culture: Globalization is leading to the
spread of western culture in developing countries.

21. •Inequality: Globalization has resulted in increasing
inequality of wealth between nations. Some of the
nations are becoming more developed with the
advent of globalization. Also, there has been
increasing gap between rich & poor in the same
country.
•Inflation: Globalization leads to increase in the
demand of basic commodities across the globe,
which in turn leads to increase in prices of such
commodities.
•Dominance of Power: Globalization helps the
powerful developed countries to influence the
developing countries.

22. GOALS OF INTERNATIONAL FINANCE
To provide the financial managers with an
understanding of the fundamental concepts & the
tools necessary to be effective global managers.
To help understand & manage foreign exchange risks,
political risks, & cope up with market imperfections.
To emphasize on how to deal with exchange rate risk
& market imperfections using the available tools &
instruments

23. It is concerned with how economic units, especially
MNCs cope up with complex financial environment
of international business.
It focuses on issues that are most relevant for
making sound business decisions in a global
economy.
It maintains peace & order amongst the nations.
It helps increase in utilization of IFRS, across the
globe in an efficient way.

24. EMERGING CHALLENGES IN
INTERNATIONAL FINANCE
To manage ever increasing risks in global markets.
To monitor & manage dynamic international Forex
markets.
To be up-to-date with significant environmental
changes & analyze its implications.
To be aware of the changes in taxation structure,
foreign trade policies, capital markets, fiscal &
monetary developments, new financial instruments
etc.

25. To be able to adapt the finance function to significant
changes in the firm’s own strategic posture.
To take into consideration the past failures & mistakes
to minimize their adverse impact.
To design & implement effective solutions to take
advantage of the opportunities offered by the markets.
To cope up with increasing volatility in international
markets.

26. To manage complex foreign laws & regulations.
To deal with international accounting & compliance
requirements.
To deal with increasing advancement in information
technology in the global financial system.