Importance of International Finance

Topics: Foreign exchange market, Exchange rate, Forward contract Pages: 37 (10390 words) Published: April 10, 2012
TABLE OF CONTENTS

Importance of International Finance- 1 -

Multinational Corporations- 1 -

Financial advantages of foreign operations- 1 -

Exchange rates and their effects- 2 -

Foreign Exchange Market and its Fluctuations- 2 -
Types of Transactions- 3 -
1.Spot Trade:- 3 -
2.Forward Trade:- 3 -
Futures Market- 3 -
Options Exchanges- 4 -
Cross rates- 4 -

Exchange Rate Theories- 5 -

Purchasing Power Parity Theory- 5 -
Absolute Purchasing Power Parity- 5 -
Relative Purchasing Power Parity- 5 -
Interest Rate Parity Theory- 6 -
Covered Interest Arbitrage- 6 -
Interest Rate Parity- 6 -
Unbiased Forward Rates- 7 -
International Fisher Effect- 7 -
Domestic Fisher Effect- 7 -
International Fisher Effect- 7 -

International Capital Budgeting or Investment Decisions- 8 -

1.Foreign Currency Approach:- 8 -
Calculations:- 8 -
2.Home Currency Approach- 9 -
The Cost of Capital for Foreign Investment- 9 -
Avoiding Fudge Factors- 9 -

Investment Financing Decisions- 9 -

Short-Term and Medium-Term Financing- 10 -
International Bond Markets- 10 -
Foreign bonds:- 10 -
Eurobonds:- 10 -
Other Financing Sources- 11 -
International Lending Agencies:- 11 -
Government Export Incentives:- 11 -
Financing Trade Credit- 11 -
Letter of Credit:- 11 -
Draft:- 11 -
Banker’s Acceptance- 11 -

Exchange Rate Risk and its Management- 11 -

1.Short Run Exposure:- 12 -
2.Long Run Exposure:- 12 -
3.Translation(accounting) Exposure:- 12 -
Effect of Exchange Rates on MNCs- 13 -
Effects of Exchange Rate on Foreign Stock and Bond Investment- 13 -

Managing Risk- 13 -

I.The Do-Nothing Strategy- 14 -
II.Transacting in the Home Currency- 14 -
III.Using Foreign Exchange Markets- 14 -
1.Forward Contracts- 14 -
2.Covering in the Spot and Money Markets:- 14 -
3.Future Contracts:- 15 -
IV.Swaps- 15 -
V.Monetary Balance- 15 -
VI.Funds Flow Adjustments- 15 -
Third party dealings:- 15 -
Intercompany operations:- 16 -
Diversification Benefits of Foreign Investment- 16 -

Political And Cultural Risks Facing MNCs- 16 -

Political Risk- 16 -
Cultural Risk- 17 -

International Trade Agreements- 17 -

1.NAFTA:- 17 -
2.GATT:- 17 -
3.EU- 17 -

Conclusions- 18 -

BibliographyA

GlossaryB

AppendicesD

Appendix A: Key Equations:D
Appendix B: Supplementary TopicsE

TABLE OF FIGURES

FIG # 01. TRIANGLE ARBITRAGE…………………………………………………………..7

FIG # 02. INTEREST ARTE PARITY THEORY……………………………………………...9

FIG # 03. BASIC RELATIONSHIPS………………………………………………………….11

FIG # 04. HEDGING A FUTURE PAYEMNT WITH A FORWARD CONTRACT………...17

DEDICATION:

I dedicate this project to my parents and my siblings- all of whom were very supportive and helpful.

Acknowledgements

I acknowledge Allah Almighty for granting me the health and ability to make this project on time. Then, I give my heartfelt appreciation to my parents who made studying here a possibility by bearing my tuition fees and my teacher who guided me in understanding this topic well enough to make a project on it. In the completion of the project, I owe a heavy debt to my brother Rashid Mansoor for helping me with the making of the graphs and charts. Finally, my friends had a huge hand in this for they assisted me in researching the material for it.

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