LESSON 1: FOUNDATIONS OF INTERNATIONAL
FINANCIAL MANAGEMENT
International Financial Management - It means
financial management in an international business
environment
International Monetary System - The
international monetary system can be defined as
the institutional framework within which
international payments are made, movements of
capital are accommodated, and exchange rates
among currencies are determined. It is a complex
whole of agreements, rules, institutions,
mechanisms, and policies regarding exchange
rates, international payments, and the flow of
capital.
and weights reflect the geographic distribution of
trade, services, or capital flows.
Stabilized arrangement: Classification as a
stabilized arrangement entails a spot market
exchange rate that remains within a margin of 2
percent for 6 months or more (with the exception
of a specified number of outliers or step
adjustments) and is not floating. Crawling peg:
Classification as a crawling peg involves the
confirmation of the country authorities’ de jure
exchange rate arrangement.
Crawl-like arrangement: The exchange rate must
remain within a narrow margin of 2 percent
relative to a statistically identified trend for six
months or more (with the exception of a specified
number of outliers), and the exchange rate
arrangement cannot be considered as floating.
Pegged exchange rate within horizontal bands:
The value of the currency is maintained within
certain margins of fluctuation of at least positivenegative 1 percent around a fixed central rate, or
the margin between the maximum and minimum
value of the exchange rate exceeds 2 percent.
Bimetallism (before 1875)
Classical Gold Standard (1875-1914)
InterwarPeriod (1915-1944)
Bretton Woods System (1945-1972)
Flexible Exchange Rate Regime (since 1973)
The Current Exchange Rate Arrangements
No separate legal tender: The currency of another
country circulates as the sole legal tender.
Currency board: A currency board arrangement is
a monetary arrangement based on an explicit
legislative commitment to exchange domestic
currency for a specified foreign currency at a fixed
exchange rate, combined with restrictions on the
issuing authority to ensure the fulfillment of its
legal obligation.
Conventional peg: For this category the country
formally (de jure) pegs its currency at a fixed rate
to another currency or a basket of currencies,
where the basket is formed, for example, from the
currencies of major trading or financial partners
Other managed arrangement: This category is a
residual, and is used when the exchange rate
arrangement does not meet the criteria for any of
the other categories.
Free floating: A floating exchange rate can be
classified as free floating if intervention occurs
only exceptionally and aims to address disorderly
market conditions and if the authorities have
provided information or data confirming that
intervention has been limited to at most three
instances in the previous six months, each lasting
no more than three business days.
Balance of Payments
The Balance of Payments is a statement that contains
the transactions made by residents of a particular
country with the rest of the world over a specific time
period. It is also known as the balance of international
payments and is often abbreviated as BOP. It
summarizes all payments and receipts by firms,
individuals, and the government. The transactions can
be both factor payments and transfer payments.
Components of Balance of Payments
Current Account
Corporate Governance

1. Visible trade – This is the net of export and
imports of goods (visible items). The balance of
this visible trade is known as the trade balance.
2. Invisible trade – This is the net of exports and
imports of services (invisible items). Transactions
mainly consist of shipping, IT, banking, and
insurance services.
3. Unilateral transfers to and from abroad –
These refer to payments that are not factor
payments
4. Income receipts and payments – These include
factor payments and receipts.
Capital Account
1. Loans to and borrowings from abroad – These
consist of all loans and borrowings given to or received
from abroad.
2. Investments to/from abroad – These are
investments made by nonresidents in shares in the
home country or investment in real estate in any other
country.
International Perspective: Corporate Governance
(CG) concerns the system by which companies are
directed and controlled. It is about having
companies, owners and regulators become more
accountable, efficient and transparent, which in
turn builds trust and confidence.
Transparency - means that anyone, whether
inside or outside the company, can choose to
review and verify the company’s actions.
Security - A data breach is not just very expensive.
It also weakens public trust in the company, which
can have a drastically negative effect on its stock
price.
Consequences of poor corporate governance

3. Changes in foreign exchange reserves – Foreign
exchange reserves are maintained by the central bank
to control the exchange rate and ultimately balance
the BOP.
4. A Current account deficit is financed by a surplus in
the Capital account and vice versa.
Significance of BOP


The BOP data is affected by vital
macroeconomic variables such as exchange
rate, price levels, interest rates, employment,
and GDP.
Businesses use BOP to analyze the market
potential of a country, especially in the short
term. A country with a large trade deficit is
not as likely to import as much as a country
with a trade surplus. If there is a large trade
deficit, the government may adopt a policy of
trade restrictions, such as quotas or tariffs.
Corporate
governance
is
something
altogether different from the daily
operational management activities enacted
by a company’s executives. It is a system of
direction and control that dictates how a
board of directors governs and oversees a
company.
One of the biggest purposes of corporate
governance is to set up a system of rules,
policies, and practices for a company – in
other words, to account for accountability.
Each major piece of the “government” – the
shareholders, the board of directors, the
executive management team, and the
company’s employees – is responsible to the
others, therefore keeping them all
accountable. Part of this accountability is the
fact that the board regularly reports financial
information to the shareholders, which
reflects the corporate governance principle of
transparency.
Corporate Governance in the Financial Sector

Governance issues in financial institutions are
similar but differ in important ways from
those in non-financial companies:
- Financial institutions are charged with upholding
the public's trust and protecting depositors.
Balance sheets are opaquer, leading to less
transparency and greater ability to conceal
problems. Good governance requires boards and
senior management to fulfill their fiduciary
responsibilities by effectively communicating
strategic business direction and risk appetite while
assuring transparent and effective organization,
risk assessment and mitigation, and sufficient
capital support.
- Good governance complements traditional
supervision of financial institutions, protects the
interests of depositors and other investors in
commercial banks, builds and maintains public
confidence in the financial sector, and ultimately
contributes to its integrity and credibility.
- Financial institutions are uniquely vulnerable to
liquidity shocks which can result in institutional,
and potentially, financial instability.
- Many developing countries are embarking on
wide-ranging corporate governance reforms of
their state-owned banks in order to improve their
efficiency and transparency. Development banks
are now playing a more prominent role in the
economy of emerging markets. Development
banks play a central role in financial inclusion, SME
development and, housing, agriculture and
infrastructure finance.
Corporate Governance in Capital Markets
Corporate governance continues to be a key
component of capital market development. Good
CG reduces emerging market vulnerability to
financial crises, reduces transaction costs and cost
of capital, and leads to capital market
development. Capital markets in turn are a major
driver of transparency. In addition to private
companies, many SOEs are also listing on the
capital markets to access alternative sources of
capital and enhance transparency