international finance assignment help

international finance assignment help

International Finance: Understanding and Application

1. Introduction to International Finance

A similar situation was experienced in the 1970s, mainly because of fiscal and current account deficits in the U.S., resulting in soaring oil prices. More recently, the recession somehow pushed the world economic growth close to its long-term level. During the 1980s, developing countries, affected by rising oil prices, began to default on their debt interest payments. The prospects for the U.S. economy became even worse and the US dollar experienced a recession. The period 1985-1987 saw the dollar dropping severely against the pound sterling and Japanese yen, tumbling oil prices, which entered into more than three years of declining prices. By 1987, the U.S. trade deficit intensified, reaching a cumulated $0.5 trillion value, forcing Treasury Secretary James Baker, under the guidance of U.S. President Ronald Reagan, to propose a devaluation of the U.S. dollar. Finally, by 1988, the U.S. economy was completely rebounding in an economic expansion, reaching an annual growth rate of 4.6 percent, despite its move to curb inflation.

Finance behaves within the complex dynamics of shifting world positions and challenges. Its origin can be traced back to the days of the first human settlements, a couple of millennia ago. More specifically, the first stage of international business evolution spans from the late 1800s to the start of the First World War. Coinciding with the start of the new millennium, the second phase starts at the end of the Second World War and covers three decades until the early 1970s. The world growth was largely driven by the U.S. economy, growing at a rate of 5.0 percent per year, exceeding its long-term growth rate of 2.5 percent.

2. The Role of Exchange Rates

In this book, I focus on exchange-rate systems, how the exchange rates work and how countries or governments choose the exchange rate system. Foreign exchange involves risks, so companies often hedge or shore up exchange risk. Exchange rates can fluctuate, causing exchange gains or losses. What are exchange gains and losses, and how can exchange gains and losses be managed? I discuss these issues to help inspire graduate students and practitioners in international economics and finance, as well as analysts and researchers. Exchange rates also have important implications for a country’s economy. For example, when exchange rates fluctuate, they can boost or suppress trade and investment, and they can play a crucial role in economic development and growth, as well as in plays for economic and policy management. How do exchange rates work and how do they affect the economy, and how are exchange rates determined, and what factors drive exchange rate? I discuss these important questions frequently in the book to help instructors in economics, finance, and international business monetary economics.

What is the role of exchange rates? Exchange rates are important for countries’ international trade, investment, and global activities. Exchange rates are also a key part of governments’ international monetary policy. Exchange rates can affect trading in goods, services, and investments. For example, if I am a fish wholesaler buying fish from Turks & Caicos, the price of the fish that I pay in the Turks & Caicos depends on the exchange rates. Thus, changes in the U.S. dollar-Turks & Caicos dollar exchange rate can affect the competitiveness of my business by affecting the price of fish that I can buy in the Turks & Caicos. This has important implications for countries’ export and import industries, and for jobs and economic growth, as well as for the individual businesses. U.S. firms that sell goods and services in other countries’ local currencies can be affected by the exchange rates. Changes in exchange rates can also affect countries’ overall economy and can be a way to control the economy. Given that exchange rates are so important individually and for the overall economy, I want to know how they work.

3. International Investment and Capital Flows

In the absence of barriers to international capital movements, portfolio diversification can solve this problem to a great extent. A foreign securities portfolio allows the investor to spread out the risk of unfavorable return distributions to minimize the risk of large losses. By purchasing shares in different markets, the investor is effectively creating a more efficient investment portfolio with the same risk-return ratio as a comparable portfolio invested in the local market. This is known as the corollary effect, APT model of international asset prices. Apart from intrinsic motivations, investors (speculators) are attracted by ample opportunities created by the globalization of financial markets. Under globalization, many potential opportunities for diversification are not used in their entirety. Such opportunities have arisen from technological advances, which have greatly reduced the cost of executing international financial transactions.

International investment and capital flows. International investment has been a key factor influencing capital markets for many decades. Several factors are associated with increased investor interest in foreign markets. Globalization has removed most barriers to capital movements among countries and allowed foreign investments to flourish. In addition, the scope of operations of many economic entities has become global, making international investment part of the normal activity. This transformation has put economic entities in a position to compete with others in the international arena as well as to finance their economic growth. As a result, both the demand for and the supply of international capital have continued to increase, influencing the functioning of financial markets in the world.

4. Managing Risk in International Finance

In conclusion, we have shown that companies with a high index of financial flexibility make more use of debt, whereas a high index of operational flexibility is associated with higher investment opportunities and a higher index of financial flexibility emanating from a low fixed charge and a higher tax rate. This extends the views of others in this area, for operational flexibility in conjunction with financial leverage; because operating flexibility expands the growth possibilities of the enterprise, financial leverage becomes less risky to the stockholder. Our evidence relating the indexes of flexibility to corporate performance seems to support these hypotheses. Increases in operational flexibility lead to higher leverage without an increase in the cost of capital, better stockholder returns, and higher capital gains (and lower dividends). Increases in financial flexibility also lead to better stock performance and lower operating income (lower dividends).

Foreign exchange risk is the risk that a multinational firm may have to incur unexpected gains or losses due to currency fluctuations. Foreign exchange risks can be hedged through the selective management of the firm’s receivables, payables, and cash accumulation. Alternatively, foreign exchange can be controlled through the reduction in foreign outstanding investments or the manipulation of the firm’s financial structure. Hedging is the formation of the policy to offset the position risk that could be immediate, within the next three months, or medium term or long term. Preferences for the financial hedging strategy are influenced by factors that differentiate individual firms such as their growth, orientation, size, and location. The concrete implementation of foreign exchange hedge strategies alters the balance between risk, return, and strategic opportunities.

Foreign Exchange Risks and Their Strategy

Exchange rate theories can be classified into several categories. The first category of theories deals with exchange rate determination between any two countries. These theories include the purchasing power parity and interest rate parity theories. The second category of exchange rate theories explains the equilibrium nominal exchange rates between two countries in the long run. This category includes the monetarist model, the equilibrium model of the balance of payments, the elasticity model, the asset side model, and the equilibrium interest rate parity model. While none of these theories has been universally accepted, the exchange rate determination continues to be a major topic of debate among international economists. Exchange rates have often deviated far from those calculated on the basis of the theories.

Exchange Rate Theories

The chapter reviews briefly the theories of exchange rate determination. We then discuss the problems encountered by multinational enterprises while incurring foreign exchange risks and building a foreign exchange strategy. We present the various ways to control foreign exchange and city risks. Finally, we analyze the use of financial flexibility to control foreign exchange and city risk.

International Financing Management Handbook

5. Future Trends in International Finance

As part of the Bretton Woods compromise, participants agreed to try to establish an international trade-oriented economy in the words of one observer. More specifically, the 7th Session of the Preparatory Committee of the International Monetary Conference expressed the hope that orderly payments arrangements will become increasingly compatible with the expansion of international trade. Of course, not every nation in the world was party to this agreement. It was in 1965, days before the signing of the IMF’s Jamaica Agreement, that Charles de Gaulle gave his famous press conference in which he described the dollar as the exorbitant privilege of the US and announced that France asked for the settlement of its deficits in our French trade balance, and as a matter of preference, in gold. Not everybody approved de Gaulle’s attitude, but European countercyclical policies continued to foster the expansion of world reserves, causing inflationary pressures in the US.

East Asia and the Dollar

The possibility of the euro surpassing the dollar as the main international reserve asset is likely to become a genuine concern for the US. Basically, this would mean a stronger euro and a weaker dollar, with implications on real exchange rates. Furthermore, the euro could challenge the international financial hegemony of the US. Quotas in the IMF are still largely constructed on the basis of the financial statistics of the 1940s. Also, the US has leverage in international negotiations over, for instance, a world reorganization of bank capital requirements. To illustrate, Basel I and II may have been attentions of European resentments to US financial power, but the American counterparts have been proposing Basel III nevertheless. Ultimately, the US will have to decide in favor of their own safety – for instance, by running contiguous current account surpluses, or in favor of the world by moving away from such a defense strategy.

The Euro as a Threat to the Dollar?