Meaning of International Finance

• It is process of convert one country currency into another country currency

(exchanging).
• International finance deals monetary interactions that occur between two or
more countries.
Importance of IF
• Encourage international trade
• Simplifying the currency convertibility
• Promoting international trade
• Helping for exchanging the technology
• Free flow of capital
• Minimizing exchange rate risk
• Attracting FDI and FII
• It covers global source of finance ADR, GDR, Joint Venture and foreign
collaboration.
• More investment option
• It covers international trade laws etc…
Rewards & risk of IF
Rewards
– Diversification and growth potential
– Internment investment opportunities that arise from fast-growing
economies
Risk
– Varied Economy (Capitalisms, communism, socialism and mixed)
– Political risk.
– Information risk
– Environment safeguard (Global Warming)
 – Culture differences (region)
– Transfer Pricing
– Taxation
– International business cycle
– Financial risk
– Economic risk
– Country risk
– Market risk
– Exchange rate risk
– Operational risk
The most common methods are:
1. International trade
Imports: a good or service brought into one country from another.
Exports: a good or service produced in one country then get marketed
to other country.
Import-export is the most fundamental and the largest international
business activity,
2. Licensing
Licensing is one of other ways to expand the business internationally.
Licensing is the arrangement between a firm, called licensoR
3. Franchising
Franchising is closely related to licensing. Franchising is  a parent
company (franchiser) gives right to another company (franchisee) to
do business using the franchiser’s name and products in a prescribed
manner.
4. Joint ventures
A joint venture is a venture that is owned and operated by two or more
firms. Many firms penetrate foreign markets by engaging in a joint
venture with firms that reside in those markets.
 5. Acquisitions
Firms frequently acquire other firms in foreign countries as a means of
penetrating foreign markets. Acquisitions allow firms to have full control
over their foreign businesses and to quickly obtain a large portion of foreign
market share.

6. Contract manufacturing In contract manufacturing, A hiring firm may

enter a contract with a contract manufacturer (CM) to produce
components or final products on behalf of the hiring firm and ship the
hiring firm’s goods for some agreed-upon price. It is a form of
outsourcing

7. Subsidiaries A subsidiary is a company with a majority of its stock

owned by a parent company, a holding company or a company
controlled by another entity. At least 50 percent of a company’s stock
must be owned by another firm for the company to be considered a
subsidiary.
8. Strategic Alliances
Any agreement between two or more parties to collaborate with each other,
in order to achieve certain objectives while continuing to remain
independent organizations is called strategic alliance.

Expose to international risk

• The international financial market has experienced a significant shift in the
1980s and 1990s.
• The international financial transactions have become more complicated and
rapid and as a result of this, the international financial markets are facing
greater uncertainties.
The reasons behind this are:
• The globalization of financial markets
• The unpredictability or volatility of the international financial markets
• The complex structure of the new types of investments
• The increase in the global supply of loanable funds
• The intense international market competition, which is increasing day by day
Multilateral Financial Institutions
A multilateral development bank (MDB) is an institution, created by a group of
countries, that provides financing and professional advising for the purpose
of development. MDBs have large memberships including both developed donor
countries and developing borrower countries.
International Monetary System
• International monetary system refers to the system prevailing in world
foreign exchange markets through which international trade and capital
movement are financed and exchange rates determined.
Feature of IMS
• Efficient and unrestricted flow of international trade and investment.
• Stability in foreign exchange aspects.
• Promoting Balance of Payments adjustments to prevent disruptions
associated.
• Providing countries with sufficient liquidity to finance temporary balance of
payments deficits.
• Should at least try avoid adding further uncertainty.
• Allowing member countries to pursue independent monetary and fiscal
policies.
Factors Affecting International Trade Flows
Inflation
If country’s inflation rate increases relative to the countries with which it trades, its
current account will be expected to decrease, other things being equal. Consumers
in that country will prefer to
National Income
If country’s income level increases by a higher percentage, its current account will
be expected to decrease, other things being equal. With the increasing
Exchange Rates
Each country’s currency is valued in terms of other country’s currencies through
the use of exchange rate. The value of most currencies can fluctuate over time
because of market and Govt. forces. If a country’s
Government Restrictions
A government may reduce its country’s imports by imposing tariffs on
imported goods, or by enforcing a quota. Other countries may retaliate by
imposing their own trade restrictions.
factors influencing international trade and capital flows
Impact of Inflation:
If a country’s inflation rate increases relative to the countries with which it trades,
its current account will be expected to decrease, other things being equal.
Consumers and corporations in that country will most likely purchases more goods
overseas (due to high local inflations), while the country’s exports to other
countries will decline.

2) Impact of National Income:

If a country’s income level (national income) increases by a higher percentage than
those of other countries, its current account is expected to decrease, other things
being equal. As the real income level (adjusted for inflation) rises, so does
consumption of goods
3) Impact of Government Policies:
A country’s government can have a major effect on its balance of trade due to its
policies on subsidizing exporters, restrictions on imports, or lack of enforcement
on piracy.

4) Subsidies for Exporters:

Some governments offer subsidies to their domestic firms, so that those firms can
produce products at a lower cost than their global competitors. Thus, the demand
for the exports produced by those firms is higher as a result of subsidies.

5) Restrictions on Imports:
If a country’s government imposes a tax on imported goods (often referred to as a
tariff), the prices of foreign goods to consumers are effectively increased. Tariffs
imposed by the U.S. government are on average lower than those imposed by other
governments. Some industries, however, are more highly protected by tariffs than
others. American apparel products and farm products have historically received
more protection against foreign competition through high tariffs on related imports.

6) Lack of Restrictions on Piracy:

In some cases, a government can affect international trade flows by its lack of
restrictions on piracy. In China, piracy is very common; individuals (called pirates)
manufacture CDs and DVDs that look almost exactly like the original product
produced in the United States and other countries. They sell the CDs and DVDs on
the street at a price that is lower than the original product.

7) Impact of Exchange Rates:

Each country’s currency is valued in terms of other currencies through the use of
exchange rates, so that currencies can be exchanged to facilitate international
transactions
BOP
• There are two accounts in the BOP statement:  Current Account and Capital
Account:
• Current account records all transactions involving goods,
services, investment income and current transfer payment.
Capital account shows the net change in ownership of foreign assets and
transactions in financial instruments

Accounting components of BOP

Current Account
The four major components of current account are as follows:
• Visible trade – Total export and imports of goods (visible items). The
balance of this visible trade is known as the trade balance. There is a trade
deficit when imports are higher than exports and a trade surplus  when
exports are higher than imports.
• Invisible trade – Total exports and imports of services (invisible items).
Transactions mainly constitute of shipping, IT, banking and insurance
services.
• Unilateral transfers to and from abroad – These refer to payments that
are not factor payments. These are ‘one-way’ transactions. For examples,
gifts or donations sent to the resident of a country by a non-resident relative.
• Income receipts and payments – These include factor payments and
receipts. These are generally rent on the property, interest on capital and
profits on investments.
BOP equilibrium & disequilibrium
Equilibrium of Balance of Payments:
• Equilibrium is that state of the balance of payment over the relevant time
period which makes it possible to sustain an open economy without severe
unemployment on a continuing basis.
Justification:
• (i) Decrease in Foreign Exchange:
• (ii) Increase in Foreign Debts and Loans:
• (iii) Decrease in Foreign Exchange Rates:
reasons for the cause of disequilibrium
• (a) Domestic Inflation
• (b) Technological Changes:
• (c) Short Supply:
• (d) Fall in Demand or Structural Disequilibrium:
Methods of Correcting Disequilibrium in Balance of Payments:
a) Stimulating exports or to check imports:
Similarly, imports must be discouraged by:
(i) Imposing import duty,
(ii) Prohibiting the product totally or
(iii) Adopting quota system,
(iv) Manufacturing the equivalent product within the country etc.
(b) Depreciate the External Exchange value:
(c) To deflate the Currency:
(d) Exchange Control:
(e) Devaluation:
Types of Disequilibrium
• i. Cyclical Disequilibrium:
• ii. Structural Disequilibrium:
• iii. Short-run Disequilibrium:
• iv. Long-run Disequilibrium: