6

~"'r-rf Vfpul'•™ ·international Finance (BMsi

(S) International Financial Markets:_ concerned With

international financial/ investment mstrume~ts, foreign
exchange , maTket~, international banking, mtemationaj
securities markets, financial derivatives etc.
(9) Currency Convertibility:_ The currency o!
a country is freely
,, ,· ~~nyertible when the resident or non-r~s1dent o_f the country
' ~re allowed to convert local currency mto foreign currency.
1
,,
1

';'. J '\!·arfous· cquntries do not allow converting the currency · .

~'':; ft.r~~ly~it makes the international business difficult. .
:~jofslt~~~e ~f Payment: international :inance in_cludes Balance
~,
ofl ayment (BoP). It is defined as, Systematic record of all
I ,. •

, ..., ~c?~.?~ic transactions with the · residents of .a reporting

1
·,' ·c9tj.ntry and residents of foreign countries during a given
1 11 1
·: : petiotl)~f time". Balance of Payments includes all visible and
1
' un:Snlvisi~le transact1ons of a country during a given period,
, ' r" h~u~lly a_y~ar. it represents a summation of country's current
' r;i c'.teM~hH_and supply of the claims on foreign currencies and of
1
.'' 'foi~igi{ daiihs on its currency. It is the riet result by recording
, ,all t1n~ib1e ·'and intangible items which are imp'orted and·
exported from the country. It is an' accounting statement
;,{ ' Whi'ch' shows 1all economic· transactions between . domestic.
I

ccmnfrf1 and foreign- countries. It is nothing but' an account

·· which ·shows all receipts -and payments on go.ods exported
servic'es rendered . .

1.4 IMPORTANCE OF INTERNATIONAL FINANCE:

1
.·, :int~rncitio'riJ1 finaAce .plays·a critical role in intern~tional trade
and inter-economy exchange of goods and services. It is important
f~r) #\1?1~~r of ~~~~qns; the most notable ones are listed here:
(1) International finance helps to ke~p international issues in a
. , disciplined·state.
,(2); , 'International finance system maintains peace among the
. ··, nations. Without a solid finance measure, all nations would
. 1 , worl.< for their self-interest. Internationa.l finance helps in
keeping that issue at bay. , -
(3) It is an important to_ ol to find the exchange rates, compare
inflation rates, get an idea about investing in international
I
Introduction to lntemationa·I Fi;ance
. ' . '
,rrrrrr 7.

debt securities, ascertain the economic status of other

countries and judge the foreign markets.
(4) It · helps in c~lculating exchal}g~ rates which are very
important in international finance, as they •, assist in
determining relative values·of the currendes. ·
(5) Various · economic •factors help in making international
investment decisions. Economic factors of econo~ies. help in
determining ··whether or not investors' money is safe with
foreign debt securities. ·
(6) It has grown in stature due t~ globalizatfon: It helps
understand the basics of all international .organizations and
keeps the balance intact
' .
among them.
.
,
(7) It helps to promo_te domestic investment and growth 't hrough
~apital markets. . _
(8) H helps in healthy c_ ompetition amongst international
institutior;ts, "';hich leads to .increase in better banking system.
(9) It helps to integrate economies of various coµntries. Free flow
• I• • •

of capital results in more equality amongst the countries. ·

(10) It helps countries in allocating their capital effectively with
th~ help of information available to them via in_ternational -
financial system. - -
(11) It helps countries to access capital market across the world,
thus ena}?lirig them to lend and borrow-finance easily. -
(12) With - the emergence o[ . international : finance, variou~ ·
international institutions help <;:ountries in .managing any ..
financial disputes ~nd t~ki:ng any corrective actions. · _,
113) It helps- in . stabilizing Intern_ational Financial Reporting
. · Standards . (IFRS) across various cquntries. IFRS aids many
countries to follow s·iP1:ilar repo~ting systems. -
(14) IJRS system also helps in saving m6ney by followin~ . the,
-~-rules of reporting on a single accounting -,::.>-
standa~d.
- '

1.5 GLOBALIZATION OF THE WORLD

. '
ECONOMY:
_ In ·simple· terms, Globalizatio_n mea~s . removing the cross-:-
border trade barri~s and integrating nations across. the globe.
I
Globalization refers · to growing interdependence of ·'countrigs
 ~'"{f¥1'" Vipul's™ International Finance (Brv,S)
8
resulting from the increasing ~ntegration of trade,_ fi!}ance, people ,
and ideas in one global_ marketplace. Inte~ational trade and
· cross-border investment flows are the main elements of thi
integratio'-n . Globalization has changed the picture of Wort~
Economy, by increasing th~ cross-border trade, exchanges of
currency, free flow of Capital, ·movement of people and flow of
information. Globalization has introduced the concept of border.
less and integrated world economy. Globalization has given a
new thought to the businesses worldwide. A lot of Strategic
changes have been occurred in the businesses. Now target market
for businesses is not only their home land, but the overall world.
Globalization started after World War II but has accelerated
considerably since the mid-1980s, driven by two main factors:
(1) Technological advances that have lowered the costs of
tr_ansportation, communication, and computation to the
extent that it is often economically feasible for a firm to locate
different phases of production in different countries.
(2) Increasing liberalizatjon of trade and capital markets.
1.5.1 Financial globalization:
Economic globalization is th~ increasing economic integration
and ·interdependence of national, regional and local economies
acros~ the world through ~an intensification of cross-border
movement of goods, service·s, technologies and capital. Financial
globalization is . the integration ·of a country's local financial
system with international financial markets· and institutions. The
potential benefits of financial globalization will likely lead to a
more financially interconnected world and -'a .deeper degree of
financial integration ·of developing countries with international
financial markets.
Financial globalization, defined as global linkages through
cross-border financial flows, has become increasingly relevant for
emerging markets as they integrate financially with the rest of ·the
world. Financial globalization is also defined as an amalgamation
of domestic financial system of a particular country with the 1
international organizations as .well as financial m~rkets. Massive
growth have been noticed in global economy in the last couple of
years, and in the field of technology, I?ore precisely in transport
 Introduction to International Finance
9

and communications there was a silent revolution which made the

globalization of finance an obvious choice.• The Internationp.l
Monetary Fund (IMF) and World Bank are the ·two international
institutions of finance which were set up to endorse world trade
to keep up .w ith the growth of Financial Globalization.
· The financial economies have increasing~y got .interconnected .
around the world. The World_Bank provides a mediator's- role in
· managing international finance disputes. Th~ very existence of an ·
international financial system means that there are possibilJ.ties of
international financial crises. Perhaps, the main benefit of
financial globalization for · developing countries is the
development .of · their finandal system, what involves more
complete, deeper, m9re stable, and ·better-regulated · financial
marke.ts. Financial globalization can lead to a variety of outcomes:
(i) domestic .capital .flight and ambiguous effects on net capital
. flows, investment, · and growth; ·(ii) . capital inflows and higher
·investm~rit .and growth; ~r (iii) volatile capital flows and unstable
domestic financial markets .
. . Some of the benefits of Financial Globalization an~:
• It has ·enhanced capital flow_in each and every country
with which a <;01.1I1_try may always remain prepared to
counter any financial crisis. . .
• _Capital f19ws between nations increase which causes well-
organized allocation of money.
• Improvement in living standards of the people.
• It is the safeguard to defend against national shocks, and
an exc·ellent system for more efficient global allocation of
· resource.
It has been noticed that the developing countries could hardly
derive the benefits of globalization as their infrastructure is not
well-equipped. On the contrary, financial globalization proves to
be extremely. . advantageous
.. -
for the developed countries. .
i.5.2 . Effects .of globalization:
The impact of _globalization has been felt in every aspect of ·
economy. Globalization has positive as well as negative impact on
developed ·. and developing economies. Some of the effects of
globalization are as follows:
 10 Vipul's™ Jnternational Finance (BMs)

(A) Positive effects:

(1) Global Market: With the emergence of globalization
_ ·there has been growth of global mar~ets . . Number of
international transactions has increased with the
I -- · formation of · global markets. There has been
liberalization of economic activities and removal of cross-
border trade .barriers because of globalization.
(2) International Institutions: There has been increase in the
international institutions with the help of globalization.
Institutions like UNO, IMF, WTO and World Bank are
regulating the relationship between different countries
and governing the issues of justice, human relations and
political factors.
(3) Increase in World Trade: Before the · phase ·of .
Globalization, United .States of America was dominant in ,
world export. ·After the advent of globalization, other
nations also have increased their world trade transactions
drastically.
(4) Increase in Foreign Direct Investment: Globalization
leads to increase· in foreign capital flow in 'a country.
There has been increase in ·Foreign Direct Investment
(FDI) and Foreign Institutional Investment (FIi). Nations
that have major economic expansion attract FOL FOi
leads to economic growth and development in
developing nations.
(5) Increase in Standard of Living: Globalization .leads to
increasing .the standard of living o-f · · developing
economies. ·Foreign capital and technological i~ow· has
led to expansion of .trade and investment: Per capital--
, income has increased. Poverty rate has deqeased in the
developing regions because of globalization.
(6) Increase ·in Employment opportunities: Globa1ization ·
· leads to increase in flow of capital and investment to
developing economies .. This le~ds to increase in the job
opportunities.fo_r local people; _
(7) cuitural Changes: Through the ._ development . of
globc,1lization,_world js getting into an identical culture
Introduction to International Finance 11

that · is understood by every nation. This leads to

intermixing of the cultures and people at large.
(8) 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 and services in .
order to match global brands. ·
(9) Resource Allocation: Developed countries usually need
· human resources whereas developing i:ountries are in
need capital and technology. Globalization leads to
-interdependence of · countries around . ·the .world'.
Resources can be rightly allocated by ~veloped and
developing countries.
(10) Technological S~ift: · With the help of globalization,
cutting edge technology can be brought in to developing
nations from developed nations. There will also be
increase · in global technological infrastructure across
· borders.
(11) Political . Relations: Globalization helps in ·increasing
world trade, thereby also bringing in integration ·between
economies: It helps the countries build good and cordial
relationships.
(B) · Negative effects:
(1) Environmental Effects: Though globalization contributes
to economic growth and development, it c1lso adversely
impacts natural environment. With _the increase in trade
and transportation, there has ~een destruction of Ozone
layer and many species on the earth. · · ·
· . (2) Loss of Jobs: In the short-run, globalization may bring in
new job opportunities in developing countries, but in the
long:..run, only labour jobs will be left for such nations.
All the white collar jobs may get shifted to developed
nations: Also, technological advancement has reduced
the manual work which als9 leads · to increase ·in
unemployment. .
u rr!rrr -Vipul'sTM International Finance (BMs1
1
(3) Western Culture: Globaliz~tio~ is lea~ing · to s_preact of
western culture in developing economies. The influence
of western culture is increasing on the locals.
(4) Inequality: Globalization has res~ted · in increasing
inequality of wealth between nations. Some of the
nations are becoming more developed with the advent of
globaliz¥ttion. Also, there has been increasing ·gap
between rich and poor in .the same country. , . ·
(5) Inflation: Globalization leads to increase in the demand t
of basic commodities across the global. This leads to step l
increase in the prices of commodities.
(6) .. Dominance of Power: Globalization can also lead to
shifting of · economic power to select economies. The
powerful developed nations of the world will influence
the developing economies.
Financial Globalization can alsb lead to stock market disord~r,
failure of banks, corporate ·bankruptcies, currency depredation,
etc. In spite of all the above , adverse effects, Globalization has
become an unavoidable necessity for Economic Development.

1.6 GOALS OF INTERNATIONAL.FINANCE:

(1) ·International Financial Management is designed to provide
today's financial managers with an understanding of ·the
fundamental concepts and the tools necessary to be effective ·
global managers. ·
(2) It helps in understanding and managing foreign exchange
risks, politic.al risks and coping with market imperfections. ·
(3) _ It emphasizes on ho_w to deal with exc~ange r,i sk and market
_im~erfections, usi~g vari~u~ inst,ruments and tools _that a;;.
available. It heJps m max1m1zing the benefits from exp/ind
global opportunities. ·
(4) It is. conc~med with . ·how individual economic_ ~::~
esp~cially MNCs, cope. · up with complex _ finan
environment of international business. ·
(5) It focuses on issues that are most rele·v ant for ~aking so1J1ld c

business decisior, in a global economy. ·