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International Finance

International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, global financial system, and how these affect international trade. It also studies international projects, international investments and capital flows, and trade deficits. It includes the study of futures, options and currency swaps. International finance is a branch of international economics.

Importance of International Finance : International Finance is an important input in the decision making process of different entities. It affects all aspects of economic activity.

1. Every firm is confronted with four financial decision making areas, namely investment decision i.e decisions regarding where to set up a new plant,financing decision i.e what the capital structure should be and where finances should be raised, dividend decision i.e whether dividend should be paid or not and working capital management decision i.e how much cash to hold, in what currency should receivables and payables be denominated.

2. Commercial banks play an extremely active role in foreign exchange markets all over the world. They buy, sell and hold various foreign currencies on behalf of their clients, central bank and their own behalf. As agents of their client, they fulfill client requirements for foreign exchange or conversion of foreign exchange into domestic currency. Sometimes, a commercial bank may be asked to buy or sell foreign exchange on behalf of the central bank. In many countries around the world, commercial banks are the only entities that offer foreign exchange risk management solutions to corporate clients.Banks also arrange foreign exchange loans, underwrite the corporate issue of securities in the euro currency and international bond markets and participate in bailing out countries that are in an economic crisis.

3. Speculators take short term positions in foreign currency with a view to making a profit. Speculators play an important role in the foreign exchange market by imparting liquidity.

4. The flow of capital between countries has been facilitated by the removal of controls that impede such flows. The complete removal on movements of capital into and out of a country is termed Capital Account Convertibility. One of the biggest dangers of regulation is that there is a need for a continuing fine-tuning and there is no guarantee that it will always work.

Types of International Transaction

1. International Trade - International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price that you have to pay to buy the tennis shoes at your local mall. A decrease in the cost of labor, on the other hand, would result in you having to pay less for your new shoes.

Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, stocks, currencies and water. Services are also traded: tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments.

2. Foreign Direct Investment (FDI) - An investment abroad, usually where the company being invested in is controlled by the foreign corporation. Foreign Direct Investment, or FDI, is a measure of foreign ownership of domestic productive assets such as factories, land and organizations. Foreign direct investments have become the major economic driver of globalization, accounting for over had of all cross-border investments. The most profound effect has been seen in in developing countries, where yearly foreign direct investment flows have increased. China is at the forefront of FDI growth, followed by Russia, Brazil and Mexico.

FDIs do not only provide a foreign capital and funds, but also provides domestic countries with an exchange of skill sets, information and expertise, job opportunities and improved productivity levels. FDI has increased and is moving towards developing nations, especially in the emerging economies around the world. Many companies and organizations are now looking at FDI was a way to internationalize. FDIs allow companies to avoid governmental pressure on local production and cope with protectionist measures by circumventing trade barriers.

3. Foreign Institutional Investment -