Essay, Pages 7 (1544 words)
What is international finance
International Finance could be a critical issue of international economics. It is primarily associated with issues raised from the financial interactions of a minimum of two nations. Foreign exchange of currencies, the world financial system, direct investment abroad, and other important topics related to international monetary management are examples of international finance issues.
The importance of international finance stems from the fact that commercial activities of firms, governments, and organizations get suffering from the existence of borders across nations.
It is well-known that countries regularly borrow and lend from one another. In international trades, many countries use their own currencies. Therefore, we should perceive how to compare currencies with one another. Moreover, we should always even have a good understanding of how these goods and services are paid for and what is the crucial factors that have an effect on the prices that the currencies exchanged for.
International trade is one in all the foremost important factors of growth and prosperity of participating economies.
Its significance has got enlarged many times due to globalization. Moreover, the conversion of the United States from being the largest international creditor to be the leading international debtor is an important issue. These issues are considered to be a part of international macroeconomics, which is usually known as international finance.
There are special issues that arise from ﬁnancial and commercial relations between countries. Many of these issues are because of the utilization of various currencies issued by different countries and the resulting must to exchange them.
The rates of exchange between currencies – the number of currency received for one another – are set by a range of arrangements, with the rates of exchange as well as the arrangements themselves subject to change. Movements in exchange rates between currencies will have profound effects on sales, costs, proﬁts, asset and liability values, and individual well-being.
Other special international ﬁnancial problems arise from the fact that there are political barriers that provide additional opportunities and risks when engaging in overseas borrowing and investment.
International finance can be defined as any financial transaction that takes place, across national borders. If the transmittal and receipt are located in two different countries, as a result, the transaction falls into the categorization of international finance.
International finance is defined as the set of relations for the creation and exploitation of funds (assets), required for foreign economic activity of international corporations and countries.
International finance functions as an integral system, the elements of which are:
The international monetary system
It includes the national and reserve currency, currency parity, exchange rate, national and international regulatory mechanisms of exchange rates;
It serves the movement of goods and factors of production, financial instruments, and the balance of payments, which reflect all the transactions related to international payments;
International financial markets
It includes the mechanisms of trading by specific financial instruments – currency, loans, securities;
It involves the method of mobilization of funds;
International financial management of TNC
It is concerned with international investment, risk management, transnational financing etc.
Importance of International Finance
International finance plays an important role in international trade and inter-economy exchange of merchandise and services. It is vital for a variety of reasons; the most remarkable ones are listed here:
- International finance is a vital tool to search out the exchange rates, compare inflation rates, get an idea about investing in international debt securities, ascertain the economic status of different countries and evaluate the foreign markets.
- Exchange rates are vital in international finance, as they allow us to determine the relative values of currencies. International finance helps in finding out these rates.
- There are a large number of economic factors help in making international investment decisions. These factors help to identify whether or not investors’ money is safe with foreign debt securities.
- Utilizing international financial reporting standards (IFRS) is a vital issue for several stages of international finance. Financial statements made by the countries that have adopted IFRS are similar. It helps various countries to follow similar reporting systems.
- IFRS system, that could be a part of international finance, furthermore helps in saving money by following the rules of reporting on a single accounting standard.
- International finance has grown sharply due to globalization. It helps to perceive the role of all international organizations and keeps balance among them.
- An international finance system maintains peace among the nations. Without a solid finance measure, all nations would work for their self-interest.
- International finance organizations, like IMF, the World Bank, etc., act like mediators in managing international finance arguments.
The very existence of an international financial system means that there are possibilities of international financial crises. This is where the study of international finance becomes very important. In order to understand the international financial crises, we have to comprehend the nature of the international financial system.
Without international finance, chances of conflicts and thereby, a resultant mess, is apparent. International finance helps keep international issues in a disciplined state.
During the last two decades, the financial economies become more interconnected around the world. The effect of globalization has been touched in every aspect of the economy. Financial globalization give benefits to all involves parties such as the national economies and both investors and wealth creators. However, it has an effect on financial markets as well.
Functions of international finance
International finance has a number of important functions among which:
According to this function, international finance shows the mechanism of how international finance incorporates cash distribution in addition to world product redistribution. Without international finance cash funds cannot be created, distributed and used, which means that different needs of the world economy are not met.
The control function
The core of this function is to monitor the production and distribution of world social product in money form by recording and analyzing its motion. The consequence of this function is making decisions on International financial environment.
It is related to the intervention of international monetary and financial institutions with the assistance of finance in the production process.
It is to generate stable conditions for economic and social relations within the international system. International financial transactions are carried out in the international financial markets and solve the issues of organizing and managing money relations in the formation and using of the funds within the world financial environment.
To the competence of international finance belong:
- Analysis of the financial sector on a worldwide scale;
- Regulate the interaction of financial transactions on a worldwide level and concern the international financial transactions as an endless process with accepted changes;
- Develop new financial methods, that have an effect on the regional financial system and facilitate its integration;
- The analysis of monetary activities at various levels: national, regional, global.
Driving Forces of Financial Globalization
When we discuss financial globalization, there are four major factors to be thought-about. They are:
Advancement in ICTs
Technological advancements have created far more efficient market players and governments in gathering the information needed to manage financial risks.
Globalization of national economies
Economic globalization has made production, consumption, and investments spread over varied geographic locations. As barriers to international trade have been lessened, international flows of goods and services have increased noticeably.
Liberalization of national financial and capital markets
Liberalization and rapid developments in IT and the globalization of national economies have resulted in extremely unfold financial innovations. It has enlarged the expansion of international capital movements.
Competition amongst intermediate services providers
Competition has enlarged due to technological advancements and financial liberalization. A new class of non-bank financial bodies, including institutional investors, have moreover emerged.
Changes in Capital Markets
Financial globalization has led to a number of remarkable changes within the structure of national and international capital markets.
- First, banking systems have been beneath a method of disintermediation. Financial intermediation is happening due to trading securities and not due to bank loans and deposits.
- Second, cross-border financing has enlarged. Investors are currently making an attempt to boost their returns by diversifying their portfolios internationally. They are currently seeking superlative investment opportunities from around the world.
- Third, both banks and non-banking financial institutions compete with each other in national and international markets, through decreasing the prices of financial instruments. In order to take advantage of economies of scale.
- Fourth, banks have accessed a market elsewhere for their established businesses. It has enabled the banks to diversify their sources of income as well as the risks.
Benefits and Risks of Financial Globalization
One of the key advantages of Financial Globalization is that the danger of a \”credit crunch\” has been reduced to tremendously low levels. Once banks are beneath strain, they can currently raise funds from international capital markets. Another advantage is that, with a lot of choices, borrowers and investors get far better pricing on their financing.
International businesses will finance investments more cheaply. The disadvantage is that the markets are currently very volatile, and this could be a threat to financial stability. Financial globalization has led to an improvement in the balance of risks in international capital markets. With financial globalization, responsible banks and businesses in developing markets will currently cut back their borrowing costs. However, developing markets with weak or poorly managed banks are in danger.