INTERNATIONAL FINANCE

IF MEANS:
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

Dynamics
Global financial system International monetary system

Balance of payments
Exchange rates Direct investment

International trade

SCOPES
1. International Economics:-

This is related to the concerned with Causes and effects of financial flows among nations , where apllication of MACROECONOMICS comes into the scene with its Theory and policy to the global economy. 2. IFM:Concerned with HOW Individual economic units (MNCs) cope up with the complex financial environment of IB. 3. IF Markets:Concerned with FOREX markets,financial or Investment instrument Securities Market et

HISTORY
Historical overview of exchange rate regimes:
Classical Gold Standard: Pre - 1914

Bretton Woods System: 1944 - 1973

Floating Exchange Rates: 1973 European Monetary Union

A Short History of Fixed Exchange Rates

Gold standard: (prior to the 1929 Stock

Market crash) a nations currency was directly convertible into gold at a fixed exchange rate
Gold flowed out of a country that ran a balance of

payments deficit Gold flowed into a country that ran a balance of payments surplus This fixed exchange rate regime was seen as a form of discipline on countries to maintain a balance of interest rates and trade, though it was subject to breakdown if a country ran low on gold

 Countries went off the gold standard as

domestic needs took precedence over orderly international trade relations Protectionism curtailed trading between countries SDepression of 1929-1941 moot-Hawley tariff of 1930 World War II

 Bretton Woods: 1944 agreement which

established a new fixed currency regime with the dollar as the anchor and in turn, the dollar was tied to gold at a fixed price of $35 per ounce
Led to the creation of the International Monetary

Fund, the World Bank, the General Agreement on Tariffs and Trade (todays World Trade Organization)

 Inflation in the 1960s and consequent

escalating commodities prices led President Nixon to close the gold window in August 1971, effectively ending the Bretton Woods exchange rate regime.

 Floating exchange rate: exchange rate

between two currencies can move in price each day

Value of currencies is determined by supply and

demand in marketplace.

Floating Exchange Rates Under the floating exchange rate regime, international businesses must account for currency translation risk.
Currency translation risk: risk that value of

foreign currency changes in a way which makes business less profitable, absent an exchange rate devaluation

 Exchange rate of a particular currency with

U.S. dollar is either:

1. How many dollars it takes to buy one unit of

foreign currency 2. How many units of foreign currency it takes to buy one dollar

Cross rate (American perspective): exchange rate between two foreign currencies because it can be calculated by multiplying their rates relative to the U.S. dollar

European Monetary Union (EMU

MU

1979 1998: European Monetary System Objectives: To establish a zone of monetary stability in Europe. To coordinate exchange rate policies vis--vis non European currencies. To pave the way for the European Monetary Union. EMU (1999-): A single currency for most of the

European Union.

Recent trend in IF
Improved std & transparency Sound financial regulation & supervision

More flexible exchange rate regimes

Improved surveillance of national policies Management and regulation of the capital account

Orderly debt workouts during liguidity and insolvency

crises