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International Business Finance

International Business Finance

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MBA- H4030
International Business Finance
1
UNIT \u2013 I
INTERNATIONAL MONETARY AND FINANCIAL SYSTEM
Objectives:
After studying this unit, you should be able to understand the:
* Concept of International Monetary and Financial System:

* Importance of international finance;
* Bretton woods conference and afterwards developments;
* Role of IMF and the World Bank in International business;
* Meaning and scope of European monetary system.

Structure:
Introduction
Currency terminology

History of International Monetary System
Inter-war years and world war II
Bretton Woods and the International Monetary Fund, 1944-73.
Exchange Rate Regime, 1973-85
1985 to date : The era of the managed float
Current International Financial System
International Monetary Fund (IMF)
The IMF\u2019s Exchange Rate Regime classifications
Fixed vs. Flexible Exchange Rates
Determination of Exchange Rate
World Bank
European Monetary System
European Bank of Investment (EBI)
European Monetary Union (EMU)
Foreign Exchange Markets
International Financial Markets
Summary
Further Readings

MBA- H4030
International Business Finance
2
INTRODUCTION

The international monetary system is the framework within which countries borrow, lend, buy, sell and make payments across political frontiers. The framework determines how balance of payments disequilibriam is resolved. Numerous frameworks are possible and most have been tried in one form or another. Today\u2019s system is a combination of several different frameworks. The increased volatility of exchange rate is one of the main economic developments of the past 40 years. Under the current system of partly floating and partly fixed undergo real and paper fluctuations as a result of changes in exchange rates. Policies for forecasting and reacting to exchange rate fluctuations are still evolving as we improve our understanding of the international monetary system, accounting and tax rules for foreign exchange gains and losses, and the economic effect of exchange rate changes on future cash flows and market values.

Although volatile exchange rate increase risk, they also create profit opportunities for firms and investors, given a proper understanding of exchange risk management. In order to manage foreign exchange risk, however, management must first understand how the international monetary system functions. The international monetary system is the structure within which foreign exchange rates are determined, international trade and capital flows are accommodated, and balance-of-payments (BoP) adjustments made. All of the instruments, institutions, and agreements that link together the world\u2019s currency, money markets, securities, real estate, and commodity markets are also encompassed within that term.

MBA- H4030
International Business Finance
3
CURRENCY TERMINOLOGY
Let us begin with some terms in order to prevent confusion in reading this
unit:
A foreign currency exchange rate or simply exchange rate,is the price of one

country\u2019s currency in units of another currency or commodity (typically gold or silver). If the government of a country- for example, Argentina- regulates the rate at which its currency- the peso- is exchanged for other currencies, the system or regime is classified as a fixed or managed exchange rate regime. The rate at which the currency is fixed, or pegged, is frequently referred to as its par value. if the government does not interfere in the valuation of its currency in any way, we classify the currency as floating or flexible.

Spot exchange rate is the quoted price for foreign exchange to be delivered at

once, or in two days for inter-bank transactions. For example, \u00a5114/$ is a quote for the exchange rate between the Japanese yen and the U.S. dollar. We would need 114 yen to buy one U.S. dollar for immediate delivery.

Forward rate is the quoted price for foreign exchange to be delivered at a

specified date in future. For example, assume the 90-day forward rate for the Japanese yen is quoted as \u00a5112/$. No currency is exchanged today, but in 90 days it will take 112 yen to buy one U.S. dollar. This can be guaranteed by a forward exchange contract.

Forward premium or discount is the percentage difference between the spot
and forward exchange rate. To calculate this, using quotes from the previous two
examples, one formula is:

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