International Finance - Term Paper Example

?Running Head: International Finance International Finance [Institute’s International Finance International finance is the subdivision of economics that deals with the dynamics of exchange rates, foreign investment, and the way they influence international trade. It as well studies international ventures, international funds and investment flows, and trade shortfalls. It incorporates the study of future options as well as currency swaps. Exchange rates influence the international trade within a free market structure that facilitates to keep a balance of trade and balance of investment. Such as a skewed change rate can create a business's exports inexpensive as compared to their foreign counterparts, although for a nation to attain this artificially, they have to trade their own currency by borrowing against the country's assets to pay for another country's currency. If exports or all investment is in high demand, a nation's currency will increase in value due to the demand for that currency to fund exported commodities, services, as well as investment. Companies that depend on exports can find their goods unexpectedly competitive - or excessively costly - in a foreign country’s markets as exchange rates rise and fall. In the same way, businesses that depend on imports can see the charges of these imports fluctuate with the exchange rate. “Exchange rates directly affect the realized return on an investment portfolio with overseas holdings. If you own stock in a foreign company and the local currency goes up 10 percent, the value of your investment goes up 12 percent even if the stock price does not change at all” (Levi, p. 201, 2009). The study of international finance usually refers to trade and foreign investment as alternative policies. This replacement can however be called into uncertainty as the need to struggle on several foreign markets taken into account. With reference to the theory of international trade, classical conclusion of Mundell has been challenged because of inadequate competition. In addition, macroeconomic series of foreign investment and trade emphasize that these two approaches of internationalisation are complements evidently. “If foreign investment displaces trade, exports will be at least replaced by local sales on foreign markets, detrimental to the domestic industry of the investor. On the contrary, if trade and foreign investment are confirmed as complements, investing abroad might lead to greater competitiveness in foreign markets, which is beneficial to exports from the investing country and thus to its industry. In order to clarify these relationships, a bilateral and sectoral empirical approach is proposed based on a matching of trade and foreign investment data authorising a break down by industry and partner country. It permits to control for joint determinants of trade and foreign investment such as market size, per capita income or regional integration, or conversely for economies of scale having an opposite impact on both forms of internationalisation” (Sercu, p. 184, 2009). With the most disaggregated data, the finding of complementarities involving trade and foreign investment flows is legalized for many industries. Outward foreign investment is linked further exports and imports, within the industry considered, in comparison with the state of investment. However, in view of the fact that the previous rise more as compared to the latter, investment in a foreign country is linked with a trade excess. On the other hand, inward foreign investment is linked with a trade deficit of the host nation. Overflows between industries are substantial. The impact of foreign investment on trade is much higher as these overflows are accounted for, even if the international trade surplus stays comparable with the one approximated on the industry of investment level. A huge share of the complementarities between trade and foreign investment at the macroeconomic level can be clarified by huge overflows between industries. One of the main issues in front of international finance is the rate at which governments are borrowing or taking out loans to continue working effectively. Government borrowing affects the worth of its currency. If a government has 21 million US dollars in loans, but has a high gross domestic product, its fiscal health would expected be measured as high - as they would be capable of paying the loan off with relieve during a lesser amount of time. This assurance, by means of complex financial equations, turns into a better value for the nation's currency. In contrast, a nation with a huge amount of debt that it will not be capable to pay back in the near future, will notice its currency's value decrease. At the moment, there are no restrictions on government borrowing “which places even super powers like the United States at risk of getting in over its head, causing the value of its currency to sink in the global market. When this happens, citizens relying on this currency will have to spend more of it to buy the same things, putting massive amounts of financial strain on a population” (Madura, p. 284, 2010). There are a large number of international financial institutions operating in the world these days, together with the International Monetary Fund as well as the World Bank. These organizations have the capacity to give loan to governments during difficult times, generally on a lower rate in comparison to what other nations would offer. Nonetheless, this lending is associated with strict requirements on the way this loan can be funded and the types of programs a government can control while paying back the loan. Such as nations that are part of the International Monetary Fund's Structural Assistance Program are restricted in spending on concerns like physical wellbeing, schooling and progress, which could compel its citizens into poor quality of living. These types of strategies are counter-productive for encouraging countries in the development process. In the financial environment of these days, the financial systems of the world are inextricably interrelated. On a number of fronts, this is considered as a good thing, because it compels, to some extent, a nominal level of political communication. Nonetheless, as the weakness of one financial system will unavoidably have an effect on the rest, dialectical stress in discussions on international finance have arisen with respect to international welfare, as well as independence. For instance, In the European Union, “the fall of the Greek financial system caused countries like France to call for a bailout, while Germany argued that they would not provide financial assistance to another country while trying to keep their own afloat. While Germany eventually agreed to provide financial backing to stabilizing the debt crisis in Europe, a conflict of priorities exists between worldwide and national interests and until a balancing act can be struck, the fate of every nation's economy hangs in the balance” (Scott, p. 184, 2010). As the world financial systems make efforts to recover from its different weaknesses, the international financial order is under more scrutiny. Currencies as well as exchange rates, specifically, ‘are getting a hard look’. A number of economists in Unites States argue for the United States’ structure of floating exchange rates regulated by market forces. This inclination triggers a lot of criticism of China’s fiscal strategy. It as well initiates uncertainty as Europe started down the path to a common currency near the beginning of 1990s. In the present day, those euro cynics feel justified by the troubles within Greece. “Though economists should be cautious when recommending exchange rate policy because it is far from obvious what is best. In fact, Americans’ embrace of floating exchange rates is relatively recent. From World War II to the early 1970s, the United States participated in the Bretton Woods system, which fixed exchange rates among the major currencies. Moreover, in 1998, as much of Asia was engulfed in a financial crisis, the United States treasury secretary of that time, Robert Rubin, praised China’s exchange rate policy as an island of stability in a turbulent world” (Eun & Resnick, p. 302, 2011). Even the euro trial is founded to some extent on a United States model. Anybody going on a journey across the United States does not have to change currency with each crossing of a country border. A common currency between the 50 states has been beneficial for Americans. Europeans were hopeful for same gains. Bigger financial incorporation has been mainly apparent in the foreign exchange market. Complete observance to a floating exchange rate rule in addition to the lack of capital controls has paved the path for a ‘peso-dollar market’ that has developed more than the anticipations, in terms of both quantities traded as well as number of participants. Financial incorporation, primarily revealed in increased struggle within domestic markets, has added to a more developed as well as sounder local economy. Exposure to international investment markets has increased struggle in addition to the number of intermediaries as well as shareholders, leading to more transparent pricing along with lesser operational costs. Foreign players’ participation within local markets has altered trading patterns by endorsing the utilization of more refined instruments, as a result contributing to the implementation of the most excellent international market practices. A stable financial market has benefited the economy by letting both individuals as well as institutions to get more constructive terms of financing. The ‘liquid’ as well as ‘deep’ local financial markets have protected the financial system throughout the current phases of market instability. During these occurrences, local markets have stayed amazingly flexible to external shocks. Economic incorporation has also driven ahead the implementation of actions intended at improving understanding of economic plan decisions. These progresses, in conjunction with expanding financial markets, have supported the anticipations as well as credit transmission paths of financial policy. “Financial integration has given access to world capital markets to more people, providing for a better allocation of savings and investment as well as more and sophisticated instruments to better manage risks. At the same time, however, it has also brought new global challenges. Nations must be prepared to face them by acting in two dimensions: on the internal side, by strengthening their macroeconomic fundamentals and continually revising their legal and regulatory frameworks; and, on the external side, by adopting a more active role within the global community of central banks, regulators and other authorities to improve the international financial architecture” (Eun & Resnick, p. 421, 2011). Trading internationally provides consumers as well as countries the chance to be exposed to commodities and services not accessible in their own countries. More or less every sort of product can be found on the global market such as ‘groceries, garments, spare parts, oil, ornaments, wine, stocks, currencies and water’. Services are also traded, “such as tourism, banking, consulting and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country's current account in the balance of payments” (Eun & Resnick, p. 76, 2011). International finance allows affluent nations to utilize their capital - whether manual labour, expertise or funds - more economically. Since nations are provided with various resources as well as natural resources, a number of nations may manufacture the similar commodity more resourcefully and as a result, trade it more economically as compared to other nations. If a nation cannot economically manufacture a good, it can acquire that good by trading with some other nation that can. This is identified as specialization in international investment. References Eun, C. and Resnick, B. 2011. International Financial Management. McGraw-Hill. Levi, M. D. 2009. International Finance. Routledge. Madura, J. 2010. International Financial Management. South-Western College Pub. Scott, H. S. 2010. International Finance, Transactions, Policy, and Regulation. Foundation Press. Sercu, P. 2009. International Finance: Theory into Practice. Princeton University Press. Read More