International Financial

Management
The outlook of the world through domestic markets
  International Finance is an important part of financial economics.
 It mainly discusses the issues related with monetary interactions
of at least two or more countries.
 International finance is concerned with subjects such as exchange
rates of currencies, monetary systems of the world, foreign direct
Introduction investment (FDI), and other important issues associated with
international financial management.
 International trade is one of the most important factors of growth
and prosperity of participating economies.
 Its importance has got magnified many times due to globalization
  International finance is an important tool to find the exchange
rates, compare inflation rates, get an idea about investing in
international debt securities, ascertain the economic status of
other countries and judge the foreign markets.
 Exchange rates are very important in international finance, as they
let us determine the relative values of currencies. International
finance helps in calculating these rates.
 Various economic factors help in making international investment
Introduction decisions. Economic factors of economies help in determining
whether or not investors’ money is safe with foreign debt
securities.
 Utilizing IFRS is an important factor for many stages of
international finance.
 Financial statements made by the countries that have adopted
IFRS are similar. It helps many countries to follow similar reporting
systems.
  IFRS system, which is a part of international finance, also helps in
saving money by following the rules of reporting on a single
accounting standard.
 International finance has grown in stature due to globalization. It
helps understand the basics of all international organizations and
keeps the balance intact among them.
 An international finance system maintains peace among the
Introduction nations. Without a solid finance measure, all nations would work
for their self-interest. International finance helps in keeping that
issue at bay.
 International finance organizations, such as IMF, the World Bank,
etc., provide a mediators’ role in managing international finance
disputes.
  There are four major factors to be considered
 Advancement in information and communication
technologies −
Driving Forces  Technological advancements have made market players and
of Financial governments far more efficient in collecting the information
needed to manage financial risks.
Globalization  Globalization of national economies −
 Economic globalization has made production, consumption, and
investments dispersed over various geographic locations.
 As barriers to international trade have been lowered, international
flows of goods and services have dramatically increased.
  Liberalization of national financial and capital markets −
Liberalization and fast improvements in IT and the globalization of
national economies have resulted in highly spread financial
innovations.
Driving Forces  It has increased the growth of international capital movements.
of Financial  Competition among intermediary services providers −
Globalization  Competition has increased manifold due to technological
advancements and financial liberalization.
 A new class of nonbank financial entities, including institutional
investors, have also emerged.
 a) Foreign exchange risk
 Variability of exchange rates is widely regarded as the most
serious international financial problem facing corporate
managers and policy makers.
Distinguishing b) Political risk
Features of  It is the risk of losing money due to changes that occurs in a
country’s government.
IFM  Political actions and instability may make it difficult for companies
to operate.
 Acts of war, terrorism, trade barriers and military coups are all
extreme examples of political risk.
 c) Expanded opportunity sets
Firms can raise funds in capital markets where cost of capital is
the lowest.
Firms can also gain from greater economies of scale when
they operate on a global basis.

Distinguishing
features of IFM d) Market imperfections
There are profound differences among nations’ laws, tax systems,
business practices and general cultural environments.
At least one of the assumptions for perfect competition is
violated and out of this is comes what we call an imperfect
market
 IFM is concerned with financial decisions taken in international
business.

 IFM is an extension of corporate finance at international level.

Nature of IFM IFM set the standard for international tax planning and
international accounting

 IFM includes management of exchange rate risk.

 • International Institutions

• Balance of Payments

• International Financial Markets

Scope of IFM
• FOREX Markets

• International financial services

• International Taxation & Accounting

Indian Rupee 1.00 INR inv. 1.00 INR
US Dollar 0.012108 82.586641
Euro 0.011291 88.565296
British Pound 0.010010 99.903270

Australian Dollar 0.017504 57.130081

Canadian Dollar 0.016307 61.324369

Singapore Dollar 0.016078 62.198447

Swiss Franc 0.011178 89.460924

Malaysian Ringgit 0.052432 19.072219

Japanese Yen 1.594259 0.627251

Chinese Yuan
0.082320 12.147690
Renminbi
  An exchange rate is the rate at which one currency can be
exchanged for another between nations or economic zones.
 It is used to determine the value of various currencies in relation
to each other and is important in determining trade and capital
flow dynamics.
 Exchange rates are defined as the price that one nation or
Exchange economic zone’s currency can be exchanged for another currency.
Rates  The rates are impacted by two factors:
 The domestic currency value
 The foreign currency value
  1. Interest Rates
 Changes in interest rates impact currency value and exchange
rates. All else being equal, a higher interest rate in a domestic
country will increase the demand for a domestic currency since
more foreign investors will seek to invest at the higher interest
rate, thereby investing foreign capital into the domestic
Factors currency. However, in practice, it is balanced out by inflationary
pressures.
affecting  2. Inflation Rates
exchange rates  Changes in inflation rates impact currency value and exchange
rates. All else being equal, a higher inflation rate in a domestic
country will decrease the demand for the domestic currency since
the value of the currency depreciates relatively faster over time
than other foreign currencies.
  3. Government Debt
 Government debt is the amount of debt owed by a federal
government. It impacts currency value and exchange rates since a
country with higher debt is less likely to acquire foreign capital,
which, in turn, leads to inflation. It puts downward pressure on the
Factors domestic currency and decreases its value in exchange rates.
 4. Political Stability
affecting  The political state of a country influences the currency value and
exchange rates exchange rates since a country with higher political turmoil is less
likely to attract foreign investors. Political instability fosters more
risk for investors, as they are unsure of whether they will see their
investments protected via fair market practices or a strong legal
system.
  5. Export or Import Activities
 A country’s net exports or imports impact currency value and
exchange rates. A domestic country that exports more goods than
it imports will experience a higher demand for its currency, and
thereby, will see its exchange rate increase relative to other
Factors foreign currencies.
affecting  6. Recession

exchange rates  A country that experiences a recession is less attractive to foreign

investors. Firstly, it is due to the increased risk of investing in an
economy with a poor economic outlook. Secondly, when a
recession occurs, interest rates typically decrease, which
decreases the foreign demand for domestic currency.
  7. Speculation
 If a country’s currency is expected to rise for any reason, investors
will demand more of the currency to realize a profit based on that
expectation. It can cause immediate demand increases for
Actors domestic currency relative to foreign currencies.
 8. Special Considerations
affecting  There are other special considerations when exchange rates are
exchange rates determined. For example, various “safe-haven” currencies are
believed to be stable and attract foreign capital when the global
economic outlook is uncertain. It includes currencies such as the
U.S. dollar, euro, Japanese yen, and Swiss franc.
Calculation of
Exchange
rates
  Founded in 1944, the International Bank for Reconstruction and
Development—soon called the World Bank—has expanded to a
closely associated group of five development institutions.
 The World Bank is like a cooperative, made up of 189 member
countries.
 These member countries, or shareholders, are represented by
Introduction a Board of Governors, who are the ultimate policymakers at the
World Bank.
 Generally, the governors are member countries' ministers of
finance or ministers of development.
 They meet once a year at the Annual Meetings of the Boards of
Governors of the World Bank Group and the International
Monetary Fund.
  International Bank for Reconstruction and Development
(IBRD) provides loans, credits, and grants.
 International Development Association (IDA) provides low- or no-
interest loans to low-income countries.
 Five  The International Finance Corporation (IFC) provides investment,
development advice, and asset management to companies and governments.

institutions.  The Multilateral Guarantee Agency (MIGA) insures lenders and

investors against political risk such as war.
 The International Centre for the Settlement of Investment
Disputes (ICSID) settles investment-disputes between investors
and countries.
 All of these efforts support the Bank Group’s twin goals of ending
extreme poverty by 2030 and boosting shared prosperity of the
poorest 40% of the population in all countries.
  The Bank only finances sovereign governments directly or
projects backed by sovereign governments.
 Today, the IBRD focuses its services on middle-income
countries or countries where the per capita income ranges from
$1,026 to $12,475 per year. 
IBRD  IBRD raises most of its funds in the world's financial markets. 
 This has allowed it to provide more than $500 billion in loans to
alleviate poverty around the world since 1946, with its shareholder
governments paying in about $14 billion in capital.
  IBRD earns income every year from the return on its equity and
from the small margin it makes on lending. 
 This pays for World Bank operating expenses, goes into reserves to
strengthen the balance sheet
 IBRD Boards of Governors 
 The Boards of Governors consist of one Governor and one Alternate
Governor appointed by each member country.

IBRD  The office is usually held by the country's minister of finance, Governor
of its Central Bank.
 IBRD Board of Directors: The Board of Directors consists of currently
25 executive directors and is chaired by the President of the World
Bank Group.
 Executive Directors are appointed or elected by the Governors.
Executive Directors select the World Bank President, who is the
Chairman of the Board of Directors. Executive Directors
are authorised for daily matters such as lending and operations.
  IFC is the largest global development institution focused
exclusively on the private sector in developing countries.
 The Bank Group has set two goals for the world to achieve by
2030: end extreme poverty and promote shared prosperity in
every country.
IFC  It is a private-sector arm of the World Bank Group, to advance
economic development by investing in for-profit and commercial
projects for poverty reduction and promoting development.
 IFC is also a leading mobilizer of third-party resources for projects.
  IFC raises virtually all funds for lending activities through the
issuance of debt obligations in international capital markets.
 Our borrowings are diversified by country, currency, source, and
maturity in order to provide flexibility and cost-effectiveness.
 It does not have a policy of uniform interest rates for its
investments.
 The interest rate is to be negotiated in each case in the light of
all relevant factors, including the risks involved and any right
IFC to participation in profits, etc.
 IFC attempts to guide businesses toward more sustainable
practices particularly with regards to having good governance,
supporting women in business, and proactively combating climate
change.
  IDA is the part of the World Bank that helps the world’s poorest
countries.
 Overseen by 173 shareholder nations, IDA aims to reduce poverty
by providing loans (called “credits”) and grants for programs that
boost economic growth, reduce inequalities, and improve people’s
living conditions.
 IDA is one of the largest sources of assistance for the world’s 75
poorest countries, 39 of which are in Africa, and is the single
largest source of donor funds for basic social services in these
IDA countries.
 IDA lends money on concessional terms.
 This means that IDA credits have a zero or very low-interest
charge and repayments are stretched over 30 to 38 years
 Including a 5- to 10-year grace period.
 IDA also provides grants to countries at risk of debt distress.
  ICSID was established in 1966 by the Convention on the
Settlement of Investment Disputes between States and Nationals
of Other States (the ICSID Convention).
 The ICSID Convention is a multilateral treaty formulated by the
Executive Directors of the World Bank to further the Bank’s
objective of promoting international investment.
 States have agreed on ICSID as a forum for investor-State dispute
ICSID settlement in most international investment treaties and in
numerous investment laws and contracts.
 ICSID provides for settlement of disputes by conciliation,
arbitration or fact-finding.
  ICSID Panel of Arbitrators and Panel of Conciliators
 Each ICSID Member State may designate four persons to each Panel.
 Conciliation Commission or Arbitral Tribunal
 Arbitral tribunal or Conciliation Commission is constituted by
Secretary-General. In most instances, the tribunals consist of three
arbitrators: one appointed by the investor, another appointed by
the State, and the third, presiding arbitrator appointed by
agreement of both parties.
 Each case is considered by an independent Conciliation
ICSID Commission or Arbitral Tribunal, after hearing evidence and legal
arguments from the parties.
 A dedicated ICSID case team is assigned to each case and provides
expert assistance throughout the process.
 An ICSID award according to Article 53 of the ICSID
Convention is final and binding and immune from appeal or
annulment, other than as provided in the ICSID Convention.
 India is not a member of ICSID.
  MIGA is a member of the World Bank Group and its mandate is to
promote cross-border investment in developing countries by
providing guarantees (political risk insurance and credit
enhancement) to investors and lenders.

MIGA  It was created to complement public and private sources of

investment insurance against non-commercial risks (currency
inconvertibility and transfer restriction, government
expropriation, war, terrorism, and civil disturbance, breaches of
contract, and the non-honouring of financial obligations) in
developing countries.
  Membership in ICSID is available to IBRD members, and those
which are a party to the Statute of the International Court of
Justice (ICJ), on the invitation of the ICSID Administrative Council
by a vote of two-thirds of its members.
MIGA  Become a member of the Bank, under the IBRD Articles of
Agreement, a country must first join the International Monetary
Fund (IMF).
  The IMF, also known as the Fund, was conceived at a UN
conference in Bretton Woods, New Hampshire, United States, in
July 1944.
 The 44 countries at that conference sought to build a framework
for economic cooperation to avoid a repetition of the competitive
devaluations that had contributed to the Great Depression of the
1930s.
IMF  Countries were not eligible for membership in the International
Bank for Reconstruction and Development (IBRD) unless they
were members of the IMF.
 IMF, as per Bretton Woods agreement to encourage international
financial cooperation, introduced a system of convertible
currencies at fixed exchange rates, and replaced gold with the U.S.
dollar (gold at $35 per ounce) for official reserve.
  It has three critical missions:
 Furthering international monetary cooperation, encouraging the
expansion of trade and economic growth,
 Discouraging policies that would harm prosperity.
 To fulfill these missions, IMF member countries work collaboratively
IMF with each other and with other international bodies.
 The International Monetary Fund (IMF) is an organization of 190
member countries, each of which has representation on the IMF's
executive board in proportion to its financial importance, so that
the most powerful countries in the global economy have the most
voting power.
  Foster global monetary cooperation
 Secure financial stability
 Facilitate international trade
 Promote high employment and sustainable economic growth

Objectives of  And reduce poverty around the world

IMF  Macro-economic growth

 Policy advise & financing for developing countries,
 Promotion of exchange rate stability, and an international
payment system
  Provides Financial Assistance:
 Financial assistance to member countries with balance of payments
problems, the IMF lends money to replenish international reserves,
stabilize currencies and strengthen conditions for economic growth.
Countries must embark on structural adjustment policies monitored
by the IMF.
 IMF Surveillance: 
 It oversees the international monetary system and monitors the
economic and financial policies of its 190 member countries.
Functions of
IMF  As part of this process, which takes place both at the global level and in
individual countries, the IMF highlights possible risks to stability and
advises on needed policy adjustments.
 Capacity Development: It provides technical assistance and training
to central banks, finance ministries, tax authorities, and other
economic institutions.

 This helps countries raise public revenues, modernize banking systems,

develop strong legal frameworks, improve governance, and enhance the
reporting of macroeconomic and financial data. It also helps countries to
make progress towards the Sustainable Development Goals (SDGs).
  On joining the IMF, each member country contributes a certain
sum of money, called a quota subscription, which is based on the
country’s wealth and economic performance (Quota Formula).It is
a weighted average of GDP (weight of 50 %)
 Openness (30 %),
Pay a quota  Economic variability (15 %),
subscription  International reserves (5 %).
 GDP of member country is measured through a blend of GDP—
based on market exchange rates (weight of 60 %) and on PPP
exchange rates (40 %).
  The currency value of the SDR is determined by summing the
values in U.S. dollars, based on market exchange rates, of a SDR
basket of currencies
Special  SDR basket of currencies includes the U.S. dollar, Euro, Japanese
Drawing yen, pound sterling and the Chinese renminbi (included in 2016).
 The SDR currency value is calculated daily (except on IMF holidays
Rights (SDRs) or whenever the IMF is closed for business) and the valuation
basket is reviewed and adjusted every five years.
  Financial stability is a long quest. It requires the financial world to
regain trust and confidence from just about any part of society, as
well as a process that will eradicate some of the least acceptable
behaviors and implement a risk management culture.
 Having walked the reader through this complex and arduous
Conclusion journey in global financial regulation, I now need to look at
financial stability as it is being prepared by global regulation.
There will be no quotes or references, just a plain expression of a
personal opinion enlightened by several years of analysis of the
consequences of the recent financial crises.
  It would be unfair not to recognize the enormous task that has
been undertaken and the tens of thousands of regulatory texts
that have been written by lawmakers and regulators over the past
five years.
 Dismissing that effort would not make sense, and there is no
doubt that the best intentions prevailed through that process.

Conclusion  However, this excruciating analysis should leave us with limited

hope.
 It might be that the size and implications of the next crisis of a
systemic nature will not threaten global stability.
 Progress will have been made in ensuring that financial
institutions will not be the source of future instability.