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Nature & Scope

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18 views10 pages

Nature & Scope

Uploaded by

singhakanksha7122001
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MEANING OF IFM

•International financial management is concerned with the management of international


business related financial functions commonly known as the international financial
functions. The commonly stated goal of a firm is to maximize its value and thereby
maximize shareholder wealth. This goal is applicable not only to firms that focus on
domestic business but also to firms that focus on international business.
•In fact, many firms have expanded their international business as a means of enhancing
their value. Since foreign markets can be distinctly different from local markets they create
opportunity for improving the firm’s cash flows.
• 1.2.DIFFERENCE BETWEEN DOMESTIC FINANCIAL MANAGEMENT
AND INTERNATIONAL FINANCIAL MANAGEMENT
• There are similarities between domestic financial management and the international financial management of an
international business. Objectives of financial management i.e., profit maximization and wealth maximization are
same whether the firm serves on the domestic market or does its business in overseas markets. The major decisions
a finance manager needs to make remain the same notwithstanding whether the business is domestic or
international. The key decisions of financial management are investment financing and asset management. The
third important decision of the firm is the asset management decision. Once assets have been acquired and
appropriate financing provided these assets must be managed efficiently. The financial manager of a domestic
business or international business is required to make all the three decisions judiciously.
• INTERNATIONAL FINANCIAL
• MANAGEMENT
• DOMESTIC FINANCIAL
• MANAGEMENT
• Main object is to earn excess return on
• investment
• Normal returns are expected
• Attempts to maximize returns are often
• thwarted by several constraints.
• Enjoys relative freedom
• Historical cultural and institutional
• environment obtaining in each host country impacts the way financial decisions are made and implemented.
Decisions need to vary from one country to another.
• Impact is country specific
• Financial management requires an
• understanding of unique risks
• Domestic financial management is free from
• such risks.
• 1.4 SCOPE OF INTERNATIONAL FINANCIAL
MANAGEMENT
• International finance is subject to several external forces. The more
important of them namely foreign exchange markets currency
convertibility international monetary system balance of payments and
international financial system.
Scope of IFM
1.FOREIGN EXCHANGE MARKET: the foreign exchange market is the place where
money denominated in one currency is bought and sold with money denominated in another
currency.
2.CURRENCY CONVERTIBILITY: the discussion of the foreign exchange market was
based on the assumption that the currencies. This assumption is not valid. Many countries
result the ability of residents and non residents to convert the local currency into foreign
currency making international business more difficult.

• A countries currency is said to be freely convertible when the country’s government allows
north residents and non residents to purchase unlimited amounts of foreign currencies with
the local currency. A currency is non convertible when neither residents nor non residents are
allowed to convert local into a foreign currency.
3. INTERNATIONAL MONETARY SYSTEM: very country needs to have its own monetary
system and an authority to maintain order in the system. Monetary system facilitates trade and
investment. India has its own monetary policy that is administered by the reserve bank of India.
Primarily RBI aims at controlling inflation and money supply and maintaining an interest rate
regime that is helpful to economic growth.
4. BALANCE OF PAYMENTS: Balance of payments is a statistics statement that systematically
summarizes for a specified period time the monetary transactions of an economy with the rest of the
world. BOP data help measure financial transitions between residents of the country and residents of
all other countries. Transactions include exports and imports of goods and services income flows
capital and gifts and similar one sided transfer payments.
5. INTERNATIONAL FINANCIAL SYSTEM: The international financial system consists of the
numerous rules customs instruments facilities markets and organization that enable international
payments to be made and funds to flow across borders. In recent years the international financial
system has experienced tremendous growth. New financial instruments have been created and the
volume of transactions has exploded. The dramatic metamorphosis of international financial
markets is driven by technological changes the growth in world trade and the breakdown of barriers
to financial flows.
NATURE OF INTERNATIONAL FINANCIAL MANAGEMENT

International financial management is a distinct field of study and certain features set it apart from
other fields. The important distinguishing features of international finance are explained below.

1. FOREIGN EXCHANGE RISK: Understanding of foreign exchange risk is essential for


managers and investors in the modern day environment of unforeseen changes in foreign
exchange rates. In a domestic economy this risk is generally ignored because a single national
currency serves as the main medium of exchange within a country. When different national
currencies are exchanged for each other there is a definite risk of volatility in foreign exchange
rates. In fact this variability of exchange rates is widely regarded as the most serious
international financial problem facing corporate managers and policy makers.
2. POLITICAL RISK: another risk that firms may encounter in international finance is political risk. Political
risk ranges from the risk of loss from unforeseen government actions or other events of a political character
such as acts of terrorism to outright expropriation of assets held by foreigners. MNC must assess the political
risk not only in countries where it is currently doing business but also where it expects to establish
subsidiaries.
3. EXPANDED OPPORTUNITY SETS: when firms go global they also tend to benefit from expanded
opportunities which are available now. They can raise funds in capital markets where cost of capital is the
lowest. In addition firms can also gain from greater economies of scale when they operate on a global basis.
4. MARKET IMPERFECTIONS: The final feature of international finance that distinguishes it from domestic
finance is that world markets today are highly imperfect. There are profound differences among nation’s laws
tax systems business practices and general cultural environments. Imperfections in the world financial
markets tend to restrict the extent to which investors can diversify their portfolio. Though there are risks and
costs in coping with this market imperfection they also offer managers of international firm abundant
opportunities.
1.4.1 FUNCTIONS OF
INTERNATIONAL FINANCIAL
MANAGEMENT
1. INVESTMENT DECISIONS: when a company innovate a specific technology and its product is mature in the markets abroad or when the company wants to reap the

• location to reap the location advantage in a foreign country it sets up an affiliate there. Whatever the motivation behind foreign investment or foreign manufacturing the company evaluates the cash inflow and outflow

during the life of the project and makes investment only when the net present value of cash flows is positive.. IFM thus

• studies the different theories of oversees production the various strategies of investment capital budgeting decision and evaluation of foreign exchange and political risks pertaining to overseas investment.

INTERANTIONAL WORKING CAPITAL DECISIONS: when foreign


• operations begin the parent company evaluates different sources of working capital so that the cost of financing is the cheapest. In this context an international company maintains an edge over a domestic company
insofar as it can easily reach the international financial market or can siphon resources from one subsidiary to another. IFM helps in taking correct decisions regarding the size of working capital and suggests a
mechanism for its management. It also deals with how foreign trade is finished.

FINANCIAL DECISIONS: any investment needs rising of funds. The MNCs take
• advantage of the many innovations which have taken place in the international financial market and IFM guides them or how to take advantage of these. It deals with how different instruments are issued to raise funds
and how swaps are used for minimizing the cost of funds. The nature and management of interest rate exposure to form a part of IFM.

INTERNATIONAL ACCOUNTING AND TAXATION DECISIONS: international accounting forms an integral part of IFM. It analyses the techniques for consolidation of financial statements of the various affiliates
international audit international financial reporting and international taxation. Transfer pricing is an important area of international accounting as it is used lowering the overall burden of taxes and tariff as well as for
working capital management. Similarly international tax system should be so designed that it fosters economic efficiency and does not come in the way of the cross border movement of goods and factors of production

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