International Finance

International finance, sometimes known as international macroeconomics, is the study of monetary interactions between two or more countries, focusing on areas such as foreign direct investment and currency exchange rates.

International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.

Sometimes referred to as multinational finance, international finance is additionally concerned with matters of international financial management. Investors and multinational corporations must assess and manage international risks such as political risk and foreign exchange risk, including transaction exposure, economic exposure, and translation exposure.

International finance deals with the economic interactions between multiple countries, rather than narrowly focusing on individual markets. International finance research is conducted by large institutions such as the International Finance Corp. (IFC), and the National Bureau of Economic Research (NBER). Furthermore, the U.S. Federal Reserve has a division dedicated to analyzing policies germane to U.S. capital flow, external trade, and the development of global markets.

Scope of International Finance

As there are many prospects that come into the picture and there is the scope it books profits and benefits from each of these prospects accordingly.

• It plays a crucial role in investing in foreign debt securities to have a clear idea about the market.
• It is important while determining the exchange rates of the country. This can be done against the commodity or against the common currency.
• The arbitrage in tax, risk, and price due to market imperfections can be used to book good profits while transacting in international trade.
• The transaction between countries can be significant in assessing the economic conditions of the other country.

International finance analyzes the following specific areas of study:

• International Fisher Effect is an international finance theory that assumes nominal interest rates mirror fluctuations in the spot exchange rate between nations.
• The Mundell-Fleming Model, which studies the interaction between the goods market and the money market, is based on the assumption that price levels of said goods are fixed.
• The optimum currency area theory states that certain geographical regions would maximize economic efficiency if the entire area adopted a single currency.
• Interest rate parity describes an equilibrium state in which investors are indifferent to interest rates attached to bank deposits in two separate countries.
• Purchasing power parity is the measurement of prices in different areas using a specific good or a specific set of goods to compare the absolute purchasing power between different currencies.

The three major components setting international finance apart from its purely domestic counterpart are as follows:

• Market imperfections.
• Foreign exchange and political risks.
• Expanded opportunity sets.

Significance and Importance

• It considers the world as a single market instead of individual markets and carries out the other procedures. For the same reason the firms, corporations doing such research include institutions like International Monetary fund (IMF), International Finance Corp (IFC), the World Bank. Trade between two foreign countries is one the factor for developing the local economy and improve economies of scale.
• In a growing world which is moving towards globalization, its importance is just growing in magnitude. With every day the transaction between two countries for trade is scaling up with the supporting factors.
• Currency fluctuations, arbitrage, interest rate, trade deficit, and other international macroeconomic factors are crucial in prevailing scenarios.

Advantages:

• The scope of growth for companies concentrating on international trade is significantly high compared to companies that don’t.
• There is a range of options in international trade and finance to raise and manage the capital for the business.
• With different currencies involved and more opportunities to manage the capital involved, the financial performance of the company will be improved.
• Revenue from international trade can act as a shield to the company and doesn’t have to worry about domestic demand as they have still demand from overseas.
• The competitiveness of a market improves only when international trade is enabled in such markets. The quality of goods and services will improve without much difference in price due to competition.
• Company has operations in more than one country can act swiftly in case of emergencies and conduct BCP (Business Continuity Protocol)

Disadvantages:

Rivalry Among Countries

There are a few examples when an international business has lead to tension between the nations. Such things mainly take place when one country exports much more to another country, or resort to dumping.

Currency Risk

This is the inherent and one of the biggest risks of doing international business. Since you are doing business in another country, you make sales in that currency only. But, when you repatriate money back to your home country, the fluctuations in the currency may reduce the actual amount. One can, however, overcome it by entering various derivatives contracts.

Another type of currency risk is at the time of the pricing of the product in foreign country. The problem arises when the home currency is strong than the currency of the target market. In this case, a company may have to reduce the selling prices to offer competitive prices in the foreign market.

Foreign Rules and Regulations

Doing business in another country requires a company to follow a lot of rules and regulations. The company also needs to carry a lot of paperwork. Moreover, every country has their own rules when it comes to tax and employment. Adhering to all rules and regulations is not easy. But, a company can overcome this by hiring local tax experts and law agencies.

Destruction of Home Industry

MNCs can result in local companies going out of business. Usually, MNCs are more powerful, when it comes to money. They can resort to aggressive pricing to gain market share. And, this in turn, could drive local companies out of business.

Language Barrier

Different countries have varying languages and culture. This makes it difficult for a foreign company to operate in that country. However, a company can overcome this barrier by hiring local talent, as well as understanding and respecting the culture of another country.

Heavy Opening and Closing Cost

Starting a business requires a lot of money. And, starting a business in a foreign location requires even more money. If the business didn’t do well, then the company would have to shut it down also. In many nations, shutting down a business could be costly, as well as time consuming.