International Finance

International Finance

International finance is a section of financial economics that deals with the macro-economic relation between two countries and their monetary transactions. The concepts like interest rate, exchange rate, FDI, FPI, and currency prevailing in the trade come under this type of finance.

Explanation

• We live in a globalized world. Every country is dependent on another country by some other means. Developed countries look for a cheap workforce from developing countries, and developing countries look for services and products.
• When a trade happens between two countries, as in this case, many factors come into the picture and have to be considered during the execution of the business so that no violation of regulation happens. For any economy, international finance is a critical factor; the local government should accordingly execute the policies so that the local players are not facing severe competition from the non-local players.

International Finance Examples

• The Bretton Woods system was suggested in 1944 as the first common negotiated monetary order to facilitate financial transactions among two countries.
• In the Bretton Woods system, the member countries agreed to take care of their trade transactions across the borders and settle the bill in dollar-denominated bills, which it could exchange for that equivalent of gold.
• That was the reason for quoting these bills to be “As good as gold.” Every currency of the member countries like Canada, EU, Australia, and Japan was pegged against the common universal currency USD.
• The USA ended this in 1971. The conversion of US dollars to gold was unilaterally terminated. With this, the US and other mixed currencies became floating currencies again.
• Trump’s policies to increase the duty on products from China are another classic real-time example.

Scope of International Finance

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

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

Significance and Importance

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

International Finance vs Domestic Finance

1. When all the business and economic transaction occur within a domestic boundary of the country, it is said to be domestic finance. However, if the transactions occur across international borders, it refers to international finance.
2. There is more than taxation; international finance’s cultural and economic environment will be similar to domestic finance.
3. Currency rates and currency derivatives are usually involved in international finance. Whereas in domestic finance, not many financial instruments such are used.
4. The stakeholders in domestic finance are usually uniform with a similar culture, language, and beliefs. Still, we can see diversity among stakeholders’ culture, language, and values in international finance.
5. There are numerous options to raise capital from international finance, so the challenge will be high. Whereas in domestic finance, not many opportunities to raise money will be there. Thus, resulting in fewer challenges.
6. The accounting standards need to be as per GAAP in terms of international finance, whereas there is no need to maintain separate ones in domestic finance.

Benefits

• There is a range of options in international trade and finance to raise and manage the capital for the business.
• The scope of growth for companies concentrating on international trade is significantly higher than companies that do not.
• Different currencies and more opportunities to manage the capital involved will improve its financial performance.
• The competitiveness improves when international trade is enabled in such markets. That is because the quality of goods and services will improve without much difference in price due to competition.
• Revenue from international trade can protect the company and not worry about domestic demand as they still need overseas.
• The company has operations in more than one country and can act swiftly in emergencies and conduct BCP (Business Continuity Protocol).

Disadvantages

• Political turmoil in one country, a stakeholder of international trade can affect the other stakeholder of the same trade-in another country.
• Depending on other country’s exchange rates is always risky given that all currencies have significant volatility.
• One should carefully manage the credit risk because of international trade. Otherwise, it can hamper profitability to a greater extent.
• It requires the disclosure of sensitive data more than domestic finance; the chance of stolen confidential information is more in global markets.
• Local players cannot compete with big global players who are resource and research-backed to develop quality products and services.
• As more than one culture is involved, cultural differences can damage the brand’s reputation if not tackled properly.

Conclusion

• It is a concept growing significantly in the era of technology and globalization. The idea brings various opportunities for the company to manage capital more effectively and increases the competition to produce and deliver quality goods and services. The local players will have to compete with huge global players, so there is the least scope of mistake in the quality of products.
• With many factors like exchange rate, inflation rate, and diversity in culture and language, international finance can be a boon if managed perfectly by the company or become a bane if any aspects are out of understanding and mismanaged. Thus, companies involved in such finance have no choice but to engage. First, however, they have to make sure they do it efficiently.