Description
International Finance is a distinct field of study and certain features set it apart from other fields. The important distinguishing features of international finance from domestic financial management are discussed in this document
Distinguishing Features of
International Finance
International Finance is a distinct feld of study and certain
features set it apart from other felds. The important
distinguishing features of international fnance from domestic
fnancial management are discussed below:
Foreign exchange risk
An understanding of foreign exchange risk is essential for
managers and inestors in the modern day enironment of
unforeseen changes in foreign exchange rates. In a domestic
economy this risk is generally ignored because a single national
currency seres as the main medium of exchange within a
country. !hen di"erent national currencies are exchanged for
each other# there is a defnite risk of olatility in foreign exchange
rates. The present International $onetary %ystem set up is
characterised by a mix of &oating and managed exchange rate
policies adopted by each nation keeping in iew its interests. In
fact# this ariability of exchange rates is widely regarded as the
most serious international fnancial problem facing corporate
managers and policy makers.
At present# the exchange rates among some ma'or currencies
such as the (% dollar# )ritish pound# *apanese yen and the euro
&uctuate in a totally unpredictable manner. +xchange rates hae
&uctuated since the ,-./s after the fxed exchange rates were
abandoned. +xchange rate ariation a"ect the proftability of
frms and all frms must understand foreign exchange risks in
order to anticipate increased competition from imports or to alue
increased opportunities for exports.
Political risk
Another risk that frms may encounter in international fnance is
political risk. 0olitical risk ranges from the risk of loss 1or gain2
from unforeseen goernment actions or other eents of a political
character such as acts of terrorism to outright expropriation of
assets held by foreigners. $34s must assess the political risk not
only in countries where it is currently doing business but also
where it expects to establish subsidiaries. The extreme form of
political risk is when the soereign country changes the 5rules of
the game6 and the a"ected parties hae no alternaties open to
them. For example# in ,--7# +nron Deelopment 4orporation# a
subsidiary of a 8ouston based +nergy 4ompany# signed a contract
to build India6s longest power plant. (nfortunately# the pro'ect got
cancelled in ,--9 by the politicians in $aharashtra who argued
that India did not re:uire the power plant. The company had
spent nearly ;
International Finance is a distinct field of study and certain features set it apart from other fields. The important distinguishing features of international finance from domestic financial management are discussed in this document
Distinguishing Features of
International Finance
International Finance is a distinct feld of study and certain
features set it apart from other felds. The important
distinguishing features of international fnance from domestic
fnancial management are discussed below:
Foreign exchange risk
An understanding of foreign exchange risk is essential for
managers and inestors in the modern day enironment of
unforeseen changes in foreign exchange rates. In a domestic
economy this risk is generally ignored because a single national
currency seres as the main medium of exchange within a
country. !hen di"erent national currencies are exchanged for
each other# there is a defnite risk of olatility in foreign exchange
rates. The present International $onetary %ystem set up is
characterised by a mix of &oating and managed exchange rate
policies adopted by each nation keeping in iew its interests. In
fact# this ariability of exchange rates is widely regarded as the
most serious international fnancial problem facing corporate
managers and policy makers.
At present# the exchange rates among some ma'or currencies
such as the (% dollar# )ritish pound# *apanese yen and the euro
&uctuate in a totally unpredictable manner. +xchange rates hae
&uctuated since the ,-./s after the fxed exchange rates were
abandoned. +xchange rate ariation a"ect the proftability of
frms and all frms must understand foreign exchange risks in
order to anticipate increased competition from imports or to alue
increased opportunities for exports.
Political risk
Another risk that frms may encounter in international fnance is
political risk. 0olitical risk ranges from the risk of loss 1or gain2
from unforeseen goernment actions or other eents of a political
character such as acts of terrorism to outright expropriation of
assets held by foreigners. $34s must assess the political risk not
only in countries where it is currently doing business but also
where it expects to establish subsidiaries. The extreme form of
political risk is when the soereign country changes the 5rules of
the game6 and the a"ected parties hae no alternaties open to
them. For example# in ,--7# +nron Deelopment 4orporation# a
subsidiary of a 8ouston based +nergy 4ompany# signed a contract
to build India6s longest power plant. (nfortunately# the pro'ect got
cancelled in ,--9 by the politicians in $aharashtra who argued
that India did not re:uire the power plant. The company had
spent nearly ;