2. • All the economies in the world carry out various
transactions with each other that bear an economic
value.
• The two persons in these transactions are capable
of transacting in different currencies.
• Hence, to complete the trade they have to refer to
the Foreign Exchange Reserves of the respective
countries.
• To improve such transactions which involve foreign
currency, the government should have a good
position in Foreign Reserves.
3. International Financial Economics – concerned with
causes & effects of financial flows among nations –
application of macroeconomic theory & policy to
the global economy.
International Financial Management - concerned
with how individual economic units, especially
MNCs, cope with the complex financial
environment of international business. Focuses on
issues most relevant for making sound business
decision in a global economy.
4. International Financial Markets – concerned with
international financial instruments, foreign
exchange ,markets, international banking,
international securities market, financial derivatives
etc.
5. FEATURES OF INTERNATIONAL
FINANCE
• Expanded Opportunity to Business – globalization-
expanded opportunity- raise more funds – less cost
of capital
• Foreign Exchange Risk – exists when financial
transaction is denominated in a currency other than
that of base currency
• Imperfect Market – difference in law & customs,
tax systems, cultural difference, etc.
• Political Risk – affected by government policies &
political issues.
6. GOALS OF INTERNATIONAL FINANCE
• Designed to provide a proper understanding of
fundamental concepts & the tools necessary to be
effective global managers
• Helps in understanding & managing foreign
exchange & political risks & coping with market
imperfections
• Emphasizes how to deal with exchange risk &
market imperfections using various instruments &
tools that are available
7. • Concerned with how individual economic units,
especially MNCs cope up with complex financial
environment of international business
• Focuses on issues most relevant for making sound
business decisions in the global economy
• Maintains peace among nations
• Utilizing IFRS in an efficient way in many stages of
international finance
8. EMERGING CHALLENGES
• To keep up-to-date with significant environmental
changes & analyze their implications for the
changes in industrial tax & foreign trade policies,
stock market trends, fiscal & monetary
developments, emergence of new financial
instruments & products etc.
• To understand & analyze the complex inter-
relationships between relevant environment
variables & corporate responses –own &
competitive –to the changes in them.
9. • To be able to adapt the finance function to
significant changes in the firm’s own strategic
posture
• To take in stride past failures & mistakes to
minimize the adverse impact
• To design & implement effective solutions to take
advantage of the opportunities offered by the
markets & advances in financial theory
10. • The increased complexity & pace of environmental
changes calls for greater reliance on financial
analysis, forecasting & planning, greater co-
ordination between the treasury management &
control functions
• Extensive use of computers & other advances in
information technology is a challenge before global
financial system.
12. IMPORTANCE OF INTERNATIONAL
FINANCE
• Helps keep the international issues in a disciplined
state
• An important tool to find the exchange rates,
compare inflation rates, get an idea about investing
in international debt securities, ascertain the
economic status of other countries & judge the
foreign markets
13. • Helps in calculating exchange rates that are very
important to determine the value of currencies
• Helps in making international investment decisions
& maintains peace among various nations
• Helps in saving money by using IFRS system that
follows the accounting standards
• Helps understand the basics of all international
organizations & keeps the balance intact among
them.
14. PRINCIPLES OF INTERNATIONAL
FINANCE
• Advantages to become international
• Comparative merits
• Economies of Scale
• Diversified Portfolio
• Perfect Completion
• Risk & Profitability Trade-off
• Valuation of Assets
15. ADVANTAGES OF INTERNATIONAL
FINANCE
• Promotion of Domestic Investment
• Better Banking System by healthy Competition
• More Equality by Economic Integration
• Effective Capital Allocation
• Capital in Need
• Corrective Measures to bad government policies
16. SCOPE OF INTERNATIONAL FINANCE
• International Finance is dealing with matters
relating to globalization, fair trade, multinational
banking & MNCs.
• It has a wide scope.
• It consists of –
Foreign Exchange Market,
Currency Convertibility,
BOP,
International Finance &
International Monetary System.
17. International Monetary System
• For better economic growth & to have trade &
investment efficiently, a country should have its
own monetary system & also an authority that can
control this system. For example, India’s monetary
system is controlled by RBI.
18. International Financial System
• The growth in world trade, liberalization &
globalization brought changes in the financial
system.
• It includes various rules, facilities, markets,
instruments, organization, customs.
• Compared to the past the volume of transactions
has increased in international finance
19. Foreign Exchange Market
• This is a market where one country’s currency
denominated in that currency can be purchased
through sales of another country’s currency
20. Currency Convertibility
• The currency of a country is freely convertible when
the resident or non resident of the country are
allowed to convert the local currency in foreign
currency
• Various countries do not allow converting the
currency freely because it makes international
business difficult
21. BALANCE OF PAYMENTS (BOP)
• BOP is a standard double entry accounting record
that captures the transactions of an economy.
• It is a regular double entry accounting statement of
economic transactions between the home country
& the host country.
• In other words, it is a record of payments & receipts
of the country.
22. COMPONENTS OF BOP
1. Current Account: All the transactions related to Profit
& Loss A/c are recorded in current account. This
account is further divided into the following:
Merchandise: All the transactions relating to movable
goods, except gold are covered under this account. In
other words, it is import & export of tangible goods.
Non monetary Gold: Export & import of gold by all the
organizations except RBI is recorded in this account.
Invisibles: Export & Import of all services such as
travel, transportation, insurance, and other
miscellaneous services are recorded here. In addition,
gifts, transfer of interest, dividends & profits are also
included in this account.
23. 2. Capital Account: All the transactions related to
Balance Sheet are recorded in capital account.
These include loans, investments, issue of equity,
bonds, term loans, acquisitions etc.
3. Reserve Account: This includes stock of foreign
currency denominated assets held by RBI. This
includes Forex Reserves of RBI, Gold stock with RBI,
Contributions to IMF, & Special Drawing Rights by
IMF.
24. BOP ALWAYS BALANCES
Balance of payment is a double entry account. Hence
it is always balanced. There may be deficit or
surplus in the account, but it is adjusted by
increasing or decreasing the Forex Reserves. It
means that the government balances the BOP
account either by borrowing or reducing reserves.
25. OFFICIAL SETTLEMENT ACCOUNT
The imbalance that is left in the flows is
transferred to reserves account. The reserves
account is also known as official settlement
account & it consists of IMF, SDR, Forex
Reserves & Monetary Gold.
26. Concept of Currency Convertibility
• Convertibility refers to the freedom to transact
across the border and freedom to convert home
currency into foreign currency and vice-versa
• This account is divided into two categories current
account and capital account
27. Current Account Convertibility
• It means freedom to undertake purchase and sales
transaction without licensing or procedural
requirements
• We can import and export any products and
services from and to others countries, receive and
send money abroad for payment against
transaction
29. Disadvantages
• Threat to domestic industry from foreign
competitors
• Dumping
• Inflation in domestic market
30. • In 1995 , the government establish S.S. Tarapore
committee to introduce capital account
convertibility
• The recommendations of the this committee could
not be implemented due to international events
like South East Asian crises (1997),currency failure
in brazil and Russia (1998-99) and 11sept 2001
episode in USA
• A second committee was setup in oct2005 which
provided its recommendations for achieving full
CAC by 2011-12
31. Recommendations
• Resident individuals are allowed to invest upto 2lac
USD in approved foreign securities
• Resident individuals are allowed to open current
account denominated in foreign currencies with
bank in India
• Indian companies have permitted greater freedom
to borrow and invest in international markets
• Banks in India are allowed to open branches in sez
with status of offshore banking units , which means
they can undertake all baking activities only in non
resident currency
32. Capital Account Convertibility
• It deals with the freedom to convert domestic
assets and liabilities into foreign assets and
liabilities at market driven rate
• In other words ,it implies converting receivables
and payables from domestic to foreign currencies
• Capital accounts records all the cross border
transaction relating to loans and investments
33. Advantages
• FDI inflow for capital formation
• Other benefits of FDI
• FDI outflow
• Integration with other markets
• Dampening of inflation
• Other Economic Benefits
