International Finance

International Finance

International Finance is a section of financial economics which deals with the macro-economic relation between two countries and their monetary transactions. The concepts like interest rate, exchange rate, FDI, FPI and currency prevailing in the trade come under this type of finance.

Explanation

  • We live in a globalized world. Every country is dependent on another country in some other means. Developed countries look for the cheap workforce from developing countries and developing countries look for services and products from developing countries.
  • When a trade happened between two countries as in this case, there are many factors that come into the picture and have to be considered while the execution of the trade so that no violation of regulation happens. For any economy international finance is a significant critical factor, the local government should accordingly execute the policies so that the local players are not facing severe competition from the non-local players.
International Finance

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International Finance Examples

  • The Bretton woods system was suggested in the year 1944 as the first common negotiated monetary order to facilitate the monetary transactions among two different countries.
  • In Bretton Woods’s system, the member countries agreed to take care of their trade transactions across the borders and settle the bill in dollar-denominated bills which could be exchanged for that equivalent of gold.
  • This was the reason for quoting these bills to be “As good as gold”. Every currency of the member countries like Canada, EU, Australia, and Japan was pegged against the common universal currency USD.
  • The USA ended this in the year 1971. The conversion of US dollars to gold was unilaterally terminated, with this the US along with other mixed currency became floating currencies again.
  • Trump’s policies to increase the duty on products from China are another classic real-time examples.

Scope of International Finance

As there are many prospects that come into the picture and there is the scope it books profits and benefits from each of these prospects accordingly.

Significance and Importance

International Finance vs Domestic Finance

  1. When all the business and economic transactionBusiness And Economic TransactionA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements.read more occur within a domestic boundary of the country, it is said to be domestic finance and if the transactions occur across the international borders, refers to international finance.
  2. There are more than taxation, cultural, economic environment in international finance whereas it will same in domestic finance.
  3. Currency rate and derivatives of currency are involved usually in international finance whereas in domestic finance not many financial instruments as such are used.
  4. The stakeholders in domestic finance are usually uniform with a similar culture, language, and beliefs but in international finance, we can see diversity among the culture, language, and values of their stakeholders.
  5. There are literally numerous options to raise capital from international finance, hence the challenge will be high. Whereas in domestic finance not many options to raise capital will be there thus resulting in fewer challenges.
  6. The accounting standards need to be as per GAAPAs Per GAAPGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors.read more in terms of international finance, whereas there is no need to maintain separate ones in domestic finance.

Benefits

  • There is a range of options in international trade and finance to raise and manage the capital for the business.
  • The scope of growth for companies concentrating on international trade is significantly high compared to companies that don’t.
  • With different currencies involved and more opportunities to manage the capital involved, the financial performance of the company will be improved.
  • The competitiveness of a market improves only when international trade is enabled in such markets. The quality of goods and services will improve without much difference in price due to competition.
  • Revenue from international trade can act as a shield to the company and doesn’t have to worry about domestic demand as they have still demand from overseas.
  • Company has operations in more than one country can act swiftly in case of emergencies and conduct BCP (Business Continuity Protocol)

Disadvantages

Conclusion

  • This is a concept that is growing significantly in the era of technology and globalization. The concept not just brings various opportunities for the company to manage capital more effectively but also increases the competition to produce and deliver quality goods and services. The local players will have to compete with global huge players, so there is the least scope of mistake in the quality of products.
  • With many factors like exchange rate, inflation rate and diversity in culture and language the international finance can be a boon if managed perfectly by the company or become a bane if any of the aspects which are out of understanding and mismanaged. Thus, companies involved in such finance have no choice but to engage, they have to make sure they do it in an efficient manner.

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