International Financial Management Overview
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Questions and Answers

What are the key forces that influence global finance?

Economic conditions, political stability, currency fluctuations, and market inefficiencies.

How does international financial management differ from domestic financial management?

International financial management deals with multiple currencies, varying political situations, and global market opportunities.

Define the international monetary system.

It is the framework for international payments, capital movements, and currency exchange rate determination.

What significant changes does the international monetary system undergo?

<p>It evolves based on shifts in business and political conditions in the global economy.</p> Signup and view all the answers

What are the two types of exchange rate systems compared in international finance?

<p>Fixed exchange rates and flexible exchange rates.</p> Signup and view all the answers

What was the bimetallism system that existed before 1875?

<p>Bimetallism was a monetary system that allowed the free coinage of both gold and silver.</p> Signup and view all the answers

Why is the international monetary system considered complex?

<p>It involves numerous agreements, rules, institutions, and policies impacting exchange rates and capital flows.</p> Signup and view all the answers

What is the importance of understanding the dynamic nature of international monetary environments?

<p>It is crucial for adapting financial strategies to changing global conditions and ensuring stability.</p> Signup and view all the answers

What defines the international monetary system prior to the 1870s?

<p>It was characterized by bimetallism, using both gold and silver as international means of payment.</p> Signup and view all the answers

What is Gresham’s law and how did it manifest in bimetallism?

<p>Gresham's law states that 'bad money' will circulate while 'good money' is hoarded, leading to the disappearance of the more valuable currency from circulation.</p> Signup and view all the answers

When was the first full-fledged gold standard established and where?

<p>The first full-fledged gold standard was established in 1821 in Great Britain.</p> Signup and view all the answers

Which countries formally adopted the gold standard in the 1870s?

<p>France adopted it in 1878, while the German Empire converted in 1875.</p> Signup and view all the answers

What conditions must exist for an international gold standard?

<p>Gold must be assured of unrestricted coinage, possess two-way convertibility with national currencies, and be freely exportable or importable.</p> Signup and view all the answers

How is the exchange rate between currencies determined under the gold standard?

<p>The exchange rate is determined by the gold content of each currency.</p> Signup and view all the answers

What automatically corrects misalignment of exchange rates under the gold standard?

<p>Cross-border flows of gold automatically correct misalignment of exchange rates.</p> Signup and view all the answers

What event caused the majority of countries to abandon the gold standard in 1914?

<p>The outbreak of World War I led to the abandonment of the gold standard by most countries.</p> Signup and view all the answers

What does adopting a currency board arrangement imply for a country's monetary policy?

<p>It implies a complete surrender of control over domestic monetary policy.</p> Signup and view all the answers

Name at least two countries that use a currency board arrangement.

<p>Hong Kong and Bulgaria.</p> Signup and view all the answers

What distinguishes a conventional peg from other exchange rate arrangements?

<p>It is an explicit commitment to peg the currency at a fixed rate to another currency or a basket of currencies.</p> Signup and view all the answers

Explain what constitutes a stabilized arrangement in exchange rate terms.

<p>A stabilized arrangement involves an exchange rate remaining within a margin of 2 percent for 6 months or more.</p> Signup and view all the answers

What is the primary characteristic of a crawling peg exchange rate arrangement?

<p>It involves a gradual adjustment of the currency's pegged rate over time in response to economic conditions.</p> Signup and view all the answers

List at least two examples of countries classified as having a stabilized arrangement.

<p>Cambodia and Angola.</p> Signup and view all the answers

How does a conventional peg provide stability in exchange rates?

<p>It requires country authorities to maintain fixed parity through direct or indirect interventions.</p> Signup and view all the answers

What does it mean for a currency to be fully backed by foreign assets?

<p>It means that the domestic currency issued is supported by a reserve of foreign currency or assets.</p> Signup and view all the answers

What is the primary responsibility of the board of directors in relation to shareholders?

<p>The board of directors is responsible for always seeking the best interests of shareholders.</p> Signup and view all the answers

How do shareholders influence corporate governance?

<p>Shareholders can elect the board of directors, giving them a direct say in how a company is run.</p> Signup and view all the answers

What role does transparency play in corporate governance?

<p>Transparency fosters trust by allowing anyone to review and verify the company's actions.</p> Signup and view all the answers

Why is security important in corporate governance?

<p>Security is crucial to protect personal information and proprietary processes from unauthorized access.</p> Signup and view all the answers

What are the consequences of poor corporate governance?

<p>Poor corporate governance can lead to a loss of trust and a decrease in stock price, affecting growth.</p> Signup and view all the answers

How does communication with the community benefit a company?

<p>Engaging with the community promotes transparency and encourages more individuals to become patrons or shareholders.</p> Signup and view all the answers

Which entities are responsible for maintaining accountability in corporate governance?

<p>The shareholders, board of directors, executive management team, and employees are all responsible for maintaining accountability.</p> Signup and view all the answers

What can a data breach reveal about a company's governance?

<p>A data breach can indicate weaknesses in a company's governance and security practices.</p> Signup and view all the answers

What is the primary purpose of the Balance of Payments (BOP)?

<p>The BOP summarizes all transactions made by residents of a country with the rest of the world over a specific time period.</p> Signup and view all the answers

Define visible trade in the context of the Current Account.

<p>Visible trade refers to the net of exports and imports of goods, and its balance is known as the trade balance.</p> Signup and view all the answers

What are unilateral transfers in the Balance of Payments?

<p>Unilateral transfers are payments sent to or from abroad that are not factor payments, such as gifts or donations.</p> Signup and view all the answers

Explain the role of the capital account in the Balance of Payments.

<p>The capital account finances deficits in the current account and absorbs surpluses, reflecting international borrowing and investing.</p> Signup and view all the answers

How does a Current Account deficit get financed?

<p>A Current Account deficit is financed by a surplus in the Capital Account through borrowing or increased lending to non-residents.</p> Signup and view all the answers

What are income receipts and payments in the Balance of Payments?

<p>Income receipts and payments include factor payments and receipts like rent, interest on capital, and profits on investments.</p> Signup and view all the answers

Describe the significance of Balance of Payments data.

<p>BOP data is crucial for users as it provides insights into a country's economic health and its international transactions.</p> Signup and view all the answers

What do changes in foreign exchange reserves indicate in the context of the Capital Account?

<p>Changes in foreign exchange reserves reflect the central bank's efforts to control the exchange rate and manage the BOP.</p> Signup and view all the answers

What is the role of transparency in corporate governance?

<p>Transparency allows shareholders to have access to accurate financial information, ensuring accountability.</p> Signup and view all the answers

How did Enron's corporate governance fail its shareholders?

<p>Enron executives engaged in shady tactics and provided erroneous financial figures, concealing the company's actual debts.</p> Signup and view all the answers

What distinguishes the governance issues of financial institutions from non-financial companies?

<p>Financial institutions face unique governance challenges due to their responsibility to uphold public trust and manage opaque balance sheets.</p> Signup and view all the answers

What is the significance of fiduciary responsibilities in good governance?

<p>Fiduciary responsibilities ensure that boards and senior management communicate effectively about strategic direction and risk management.</p> Signup and view all the answers

How does good governance support prudential supervision of financial institutions?

<p>Good governance enhances the effectiveness of financial supervisors by ensuring transparent risk assessment and sufficient capital support.</p> Signup and view all the answers

What can result from liquidity shocks in financial institutions?

<p>Liquidity shocks can lead to institutional failure and potentially cause overall financial instability.</p> Signup and view all the answers

Why are developing countries reforming corporate governance in state-owned banks?

<p>Developing countries seek to enhance efficiency and transparency in state-owned banks through governance reforms.</p> Signup and view all the answers

What are the consequences of poor corporate governance illustrated by the Enron example?

<p>Poor corporate governance can lead to bankruptcy, loss of employee pensions, and significant harm to shareholders.</p> Signup and view all the answers

Study Notes

Learning Objectives

  • Identify forces influencing global finance and global financial stability, plus their role in global business strategies
  • Recognize the essence of financial system and banking and globalization process
  • Describe the foundations of international financial management

International Financial Management

  • International Financial Management (also known as international finance) is financial management in an international business environment
  • It differs due to currency variations, differing political situations, imperfect markets, and varied opportunity sets across countries

International Monetary System

  • It's the institutional framework for international payments, capital movements, and currency exchange rate determination
  • It comprises agreements, rules, institutions, mechanisms, and policies related to exchange rates, international payments, and capital flows
  • The system has evolved over time, influenced by changing business and political conditions

Bimetallism (Before 1875)

  • Prior to 1870s, many countries used a double standard, maintaining free coinage for both gold and silver.
  • Exchange rates were determined by gold or silver content.
  • The system wasn't fully systematic before 1870s
  • Gresham's Law often occurred : the more valuable currency (good money) was hoarded, and the less valuable currency (bad money) circulated.

Classical Gold Standard (1875-1914)

  • The first full-fledged gold standard was established in 1821 in Great Britain.
  • Key features include unrestricted gold coinage, two-way gold convertibility with national currencies at a stable ratio, and facilitated gold export/import.
  • Exchange rates are determined by the gold content of currencies.
  • Disequilibrium in exchange rates is corrected by gold flows.
  • Trade imbalances are corrected automatically through the price-specie-flow mechanism (a model developed by David Hume).
  • This standard existed from 1875 until 1914 when World War I broke out

Interwar Period (1915-1944)

  • WW1 ended the Classical Gold Standard
  • Many countries experienced hyperinflation
  • Countries attempted to restore the gold standard, but with limited success

Bretton Woods System (1945–1972)

  • Representatives from 44 nations met to establish the post-war international monetary system
  • Established the International Monetary Fund (IMF) and World Bank
  • The US Dollar was pegged to gold at $35 per ounce
  • This system aimed to prevent the recurrence of economic nationalism and the unstable interwar years

The Flexible Exchange Rate Regime

  • Followed the demise of the Bretton Woods system.
  • The Jamaica Agreement (1976) officially established the flexible exchange rate regime.
  • The agreement declared floating exchange rates acceptable,
  • Gold was demonetized, and
  • Access to IMF funds was improved for developing nations

Current Exchange Rate Arrangements

  • IMF categorizes exchange rate arrangements based on the degree of market determination versus official government intervention(10 regimes)
  • No separate legal tender
  • Currency board
  • Conventional peg
  • Stabilized arrangement
  • Crawling peg
  • Other managed arrangement
  • Floating
  • Free floating

Balance of Payments

  • A statement of transactions between a country's residents and the rest of the world over a given period
  • Includes Current Account (exports/imports, services, transfers) and Capital Account (investment flows, foreign exchange reserves)

Components of Balance of Payments (Current Account)

  • Visible Trade (net of exports/imports of goods)
  • Invisible Trade (net of exports/imports of services)
  • Unilateral Transfers (gifts, donations)
  • Income Receipts/Payments (interest, dividends, profits)

Components of Balance of Payments (Capital Account)

  • Loans and Borrowing
  • Foreign Investment
  • Changes in Foreign Exchange Reserves

Corporate Governance

  • Corporate governance involves the system of direction and control within a company.
  • It involves the oversight of management and executive employees and is influenced by the interests of shareholders
  • It's crucial for transparency, security, company accountability and shareholder interests

Key Principles of Corporate Governance

  • Shareholder Primacy
  • Transparency
  • Security
  • Consequences of Poor Governance (e.g. Enron)

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Description

This quiz covers key concepts in international financial management, including the role of global finance and stability, the international monetary system, and the impact of globalization on financial strategies. Assess your understanding of how these elements interact in a global business context.

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