International Financial

Management Vs Domestic
Financial Management

UNDER SUPERVISION OF DR. AHMED AZMY

PRESENTED BY: SAMAH FATHI
Contents
 Introduction
 IFM VS. DFM
 Foreign Exchange Rate
 Exposure to Foreign Exchange
 Use of Derivatives Instrument
 Legal and Tax Environment
 Macro Business Environment
 Different Standards of Reporting
 Banking Regulations
 Cultural Differences
 Conclusion
 Introduction
Domestic financial management is as integrated
part of overall family management. It is also know
International Financial Management is a
as family financial management, personal
well-known term in today’s world and it is
financial management and household financial
also known as international finance. It
management. It is concerned with the efficient
means financial management in an
and effective management of finance of a family
international business environment. It is
in order to achieve the happiness and better
different because of the different
standard of living. This involves planning and
currencies of different countries, dissimilar
controlling of the sources of income, the
political situations, imperfect markets,
allocation of income among various element of
diversified opportunity sets.
cost of living and finally the control of income and
International Financial Management
expenses of a family. Thus, domestic financial
came into being when the countries of
management can be defined as scientific process
the world started opening their doors for
of decision making of saving and investment,
each other. This phenomenon is well
finance and liquidity function of a family to
known by the name of “liberalization”.
achieve targets and needs of family members
within a given framework of financial resources
including time. .
International Financial Management
Vs.
Domestic Financial Management
International finance is different from domestic finance in many aspects and
first and the most significant of them is foreign currency exposure. There are
other aspects such as the different political, cultural, legal, economical, and
taxation environment. International financial management involves a lot of
currency derivatives whereas such derivatives are very less used in domestic
financial management.

In domestic financial management, we aim at minimizing the cost of capital

while raising funds and try optimizing the returns from investments to create
wealth for shareholders. We do not do any different in international finance.
So, the objective of financial management remains same for both domestic
and international finance i.e. wealth maximization of shareholders. Still, the
analytics of international finance is different from domestic finance.
 Foreign Exchange Risk

IFM It’s an additional risk which a finance manager is required to cater to under an
International Financial Management setting. Foreign exchange risk refers to the risk of
fluctuating prices of currency which has the potential to convert a profitable deal into
a loss making one.

DFM In domestic financial management the finance manager is required

to deal in domestic currency only, there is no need to deal with foreign
exchange, so there is no currency exchange risk.
 Exposure to Foreign Exchange

IFM The most significant difference is of foreign currency exposure. Currency

exposure impacts almost all the areas of an international business starting from
your purchase from suppliers, selling to customers, investing in plant and
machinery, fund raising etc. Wherever you need money, currency exposure will
come into play and as we know it well that there is no business transaction without
money.

DFM In domestic financial management exposure to a single currency of particular

country. Entire business transaction takes place in single currency
Use of Derivatives Instrument

Definition of Derivatives
 Derivatives are financial contracts, and their value is determined by the value of
an underlying asset or set of assets. Stocks, bonds, currencies, commodities, and
market indices are all common assets.
 The underlying assets' value fluctuates in response to market conditions. The main
idea behind getting into derivative contracts is to benefit by betting on the future
value of the underlying asset.
 Consider the possibility that the market price of an equity share will rise or fall. A
drop in the stock value may cause you to lose money.
 You can enter a derivative contract, in this case, to generate gains by placing an
appropriate bet. Alternatively, you might simply protect yourself from losses in the
spot market where the stock is traded.
Use of Derivatives Instrument

IFM In international financial

management we use
derivatives instrument to
hedge the risk. DFM In domestic financial
management we do not use
derivatives because there is
less risk.
Legal and Tax Environment

IFM The other important aspect to look at is the legal and tax front of a
country. Tax impacts directly to your product costs or net profits i.e. ‘the
bottom line’ for which the whole story is written. International finance manager
will look at the taxation structure to find out whether the business which is
feasible in his home country is workable in the foreign country or not. The
manager has to deal with different tax structure and legal laws & it’s difficult to
manage this.

DFM In domestic financial management the finance manager have

to deal with domestic country’s legal rules and tax structure. He is
more familiar with the laws of domestic country.
Macro Business Environment

IFM An international business is exposed to altogether a different

economic and political environment. All trade policies are different
in different countries. Financial manager has to critically analyze the
policies to make out the feasibility and profitability of their business
propositions.

DFM In domestic financial management the manager is well

aware the local macro business environment and he have to deal
with macro business environment of single country.
Different Standards of Reporting

IFM
If the business has a presence in say US and India, the books of accounts need to
be maintained in US GAAP and IGAAP.It is not surprising to know that the booking of
assets has a different treatment in one country compared to other. Managing the
reporting task is another big difference. The financial manager or his team needs to
be familiar with accounting standards of different countries.

DFM
In domestic financial management have to deal with reporting standard of
domestic country only.
Banking Regulations

IFM
The international financial management have to deal and follow
the banking regulations of different countries. The different banking
rule and regulations may negatively impact the international
financial management.

DFM
The domestic financial management have to deal with banking
rules and regulations of domestic country. There is more familiarity
with banking rules and regulations
Cultural Differences

IFM
The international financial management deals with cultural
differences of different countries, values, traditions etc differ
country to country. It effects the international financial
management

DFM
The domestic financial management deals with
cultural environment of domestic country, so there is
less risk due to cultural differences.
Conclusion
may be such more points of
difference between international
and domestic financial
management. Mentioned above
are lists of major differences. We
need to consider each of them
before taking any decision
involving multinational financial
environment.
Just like domestic financial management, the
goal of International Finance is also to
maximize the shareholder’s wealth. The goal
is not only is limited to the ‘Shareholders’ but
extends to all ‘Stakeholders’ viz. employees,
suppliers, customers etc. No goal can be
achieved without achieving welfare of
shareholders. In other words, maximizing
shareholder’s wealth would mean
maximizing the price of the share. Here again
comes a question, whether in which currency
should the value of the share be maximized?
This is an important decision to be taken by
the management of the organization.
References

International Financial Management Vs

Domestic Financial Management
May 19, 2020•Download as PPTX, PDF•
Advance Saraswati Prakashan Pvt Ltd

https://www.slideshare.net/PrinceRajzCrestha/international-financial-management-
vsdomestic-financial-management

https://www.lawinsider.com/dictionary/domestic-
financing#:~:text=Domestic%20Financing%20means%20the%20line,by%20a%20Loan%20a
nd%20Security

https://groww.in/p/what-is-derivatives
Thank You