International Financial Management Overview

International Financial Management

• A well-known term in today's world, also known as International Finance, is the financial management of businesses operating in an international environment.
• It involves handling various financial aspects that arise due to multiple currencies, varied political and economic situations, and different markets.
• International financial activities connect businesses with overseas partners (customers, suppliers, lenders, etc.).
• It can also be used by government organizations and non-profit institutions.

International Monetary System

• The system dictates international payments, capital movements, and exchange rates.
• It outlines the structure and rules for these processes, including how payments occur between countries, capital moves across borders, and exchange rates are determined.
• Each country now has its own currency, and the international monetary system governs the rules for valuing and exchanging these various currencies.
• This system uses agreements and policies to ensure smooth international trade and investment.
• It includes four main elements: exchange arrangements/rates, international payment transactions and capital movements, and international reserves.

Bimetallism (Before 1875)

• A monetary system where the value of money is tied to both gold and silver.
• Both metals were accepted for coinage and usage in international payments.
• The exchange rates were determined by the amount of gold or silver each currency contained.
• This system lacked a strong organizational structure.
• Gresham's Law explains that less valuable money will dominate when two types of money circulate at the same time.

Classical Gold Standard(1875–1914)

• Countries used gold as a basis for their currency, with a fixed exchange rate.
• Countries had to have gold reserves to back up their currency.
• The system allowed for free trade and commerce, and exchange rates could automatically adjust through international trade imbalances (specie-flow mechanism).
• Began in 1821 with Great Britain, with other countries following suit until 1914.

Interwar Period (1915–1944)

• The Classical Gold Standard ended during World War I due to internal issues.
• Countries suspended the exchange of currencies for gold and imposed restrictions to regulate trade during wartime.
• Many countries experienced hyper-inflation after the war as they tried to stabilize their currency from the war.

Bretton Woods System (1945–1972)

• A post-World War II system created a new international monetary order with a fixed exchange rate pegged to the US dollar.
• Countries agreed to convert their currencies into US dollars, which in turn were convertible into gold at a fixed rate.
• The US dollar gained prominence as the global reserve currency.
• The US eventually ended the convertibility of the dollar into gold in 1971.
• The system collapsed in 1973 due to difficulties with managing the exchange rate system.

Flexible Exchange Rate Regime (1973-Present)

• An international monetary system that lets supply and demand determine exchange rates.
• Countries decided on their own exchange rate management structure or pegged it to a basket of currencies.
• Monetary policies are now more flexible to accommodate domestic economic circumstances.
• The International Monetary Fund's Jamaica Agreement legalized the system and set rules for it.

Current Exchange Rate Arrangements

• The International Monetary Fund categorizes exchange rate arrangements in 10 different regimes.
• These regimes can be grouped by features like the degree of market determination or level of government intervention.

Balance of Payments

• A record of all economic transactions between residents of a country and the rest of the world during a specific period.
• The current account reflects trade in goods and services, investment income, and transfers.
• The capital account reflects capital flows and changes in reserves.
• A country's deficit or surplus in its current account is balanced by a surplus or deficit in its capital account.

Corporate Governance

• An essential aspect that directs and controls companies, ensuring accountability and transparency.
• It includes considerations like shareholder primacy, transparency, and security factors.
• It outlines relations between investors and corporations, with the aim of building trust and confidence.
• Important for investors and corporations as it minimizes risks and builds trust.

Explore the essentials of International Financial Management and the International Monetary System in this quiz. Understand how businesses navigate financial practices across different countries and currencies. Additionally, learn about the rules governing international payments and capital movements.