INTERNATIONAL BUSINESS & FINANCE

BC-613
B.Com (Hons) 8th Semester Compulsory Course

INTERNATIONAL FINANCE

Meaning & Definition
International finance is the branch of economics that studies the dynamics of exchange rates,foreign investment and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps. Together with international trade theory, international finance is also a branch of international economics.

Explanation
‡ Linkage of domestic finance activities with IF focusing on problems arise in IF such as exchange rate complications, opportunities and risk involved in overseas borrowing and investment such as inflation, discount rate etc IF is a subfield of Finance and all finance is going to be µinternational¶ (international financial
crises in USA effected whole the world)

‡

The benefits of studying IF
IF helps in two ways ‡ Helps FM to decide how international events will affect a firm and which steps can be taken to exploit positive developments and insulate the firm from harmful ones ‡ Helps managers to anticipate events and make profitable decisions before the events occur. Among in exchange rates, as well as in interest rates, inflation rates and asset values.

It is difficult to think of any firm or individual that is not affected in some way or other by the international environment. Jobs, bond and stock prices, food prices, government revenuers and other important economic variables are all tied to exchange rates and other development in the global financial environment.

Demonstration of some effects of change in exchange rate
December 2008
Exchange Rate US $ 1 = Pak Rupee 60
International price (US $) Price in Pakistan (PKR)

Imported Commodity (per unit) Raw Material Foreign Loans FDI

2 100 40 billion 10 billion

120 6000 2400 billion 600 billion

February 2010
Exchange Rate US $ 1 = Pak Rupee 88

International price (US $)

Price in Pakistan (PKR)

Imported Commodity (per unit) Raw Material Foreign Loans FDI

2 100 40 billion 10 billion

176 8800 3520 billion
?

Change
Internati Change Price I Pakistan (PKR) onal December February 2010 price 2008 (US $)
Imported Commodity (per unit)

2

120

176

56

Raw Material Foreign Loans FDI

100 40 billion 10 billion

6000 2400 b. 600 b.

8800 3520 b. ?

2800 1120 b. ?

Some questions for you
Consequences to ‡ Public finance ‡ Tax matters ‡ Govt negotiation power to foreign & local businessmen ‡ Debt servicing ‡ Foreign & economic policies

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