Fundamentals of International Finance

Fundamentals of international finance deal with the study of foreign investments, the changes in the foreign exchange rates, and how international trade is influenced by them. Financing is a method by the help of which funds or resources are allocated for maximizing returns for a particular organization.
Financing is a means of raising and allocating capital and management of funds over a time period taking into consideration the risks related to investments. Financing is termed as a tool for efficient administration of asset and wealth.

Business finance or corporate finance deals with stocks, bonds, and other types of investments. These investments are done in order to increase the earnings of the corporate enterprise.

For successful allocation of wealth, the following methods are implemented:
Capital budgeting
Dividend policy
Capital budgeting uses the formula of the Internal Rate of Return (IRR) on the capital invested.

The decisions of financing are dependent on the choices of financing that are available for an organization for raising capital.

In case of the Net Present Value (NPV) or the IRR, if the IRR or NPV is greater than the cost of invested capital, it is assumed that the capital invested is giving a positive yield or return.

Financing involves investments in equities (common stock and preferred stock), debt securities (bonds, debentures, or loans from financial services providers). The dividend policy distributes the profits among the company’s stockholders through dividends.

International finance also follows the similar techniques for allocation of funds and resources in international trade. However, it faces certain hindrances regarding mobility of capital and foreign currencies, as well as the foreign exchange rates prevalent in different countries.

In case of international financing, the capital budgeting methods implemented in comparison to conventional financing are associated with local tax rates and international cash flows, the expected return on investment or the cost of capital for which adjustments have been made taking into consideration the degree of risk in that particular country or the susceptibility of the project.

International financial markets function as a principal source of equity and debts for the majority of the foreign and domestic subsidiary operations.

The international financial markets influence the international trade to a considerable degree because of the unpredictability that is present in the international capital markets. Another factor working behind this is the minimum effort taken by a large number of countries for complete capital account convertibility.

The foreign exchange rates function as an overriding element in influencing international finance because if there are fluctuations in foreign exchange rates, international imports or exports can face heavy losses. Forward currency contracts sometimes prove to be helpful in this regard.

Currently, international finance has become more comprehensive or broader in scope and is dealing with matters related to globalization, fair trade, multinational banking, and multinational corporations.

As globalization is the buzz word of the present age, the factors contributing to the broadening of the domain of international finance include the consumption markets, rapid integration of global production, and the far-flung dispersion of modern technology. These issues should be efficiently addressed by international finance.

International finance also tries to solve the problem of human resource exploitation carried out by MNCs in the poor and developing countries by applying its own principles.

The International Finance Corporation (IFC) was incorporated in 1956. It is one of the top international organizations which encourages sustainable investment in the private sector of the developing countries to increase the potential growth and the prospective transactions with the developed world. IFC is a World Bank Group member. It functions as the biggest source of equity and debt financing for private sector projects that are taking place in the developing countries. It facilitates private companies of the developing countries to circulate funds in the international capital markets in addition to supplying technical aid to governments and businesses in the developing countries.

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Last Updated on : 1st August 2013

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