International financial management PDF

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International financial management
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1INTERNATIONAL FINANCIAL MANAGEMENT
Answer 4 a.
Brexit is a short form of the words “Britain” and “exit”. This term indicates the
situation when the United Kingdom has decided to leave the European Union. In 2016,
citizens of Britain have voted for Brexit after which the country has experienced various ups
and downs in their socio-political and economical sectors. The decision of Brexit also has
influenced the valuation of British pound significantly. After taking this decision, the UK has
experienced currency devaluation (Srovnalikova & Razinskaite, 2017). The pound has lost its
value overnight after the Brexit vote, based on some factors, as people have lost their faith on
the market of British currency. This continuous falls of pound value has raised the question
among economists regarding the decision Brexit. Over the years, this political decision has
destabilised the pound value. Therefore, the purchasing power of this country has reduced
drastically. However, devaluation of currency has decreased the value of this currency in
terms of other currencies (Ribeiro, McCombie & Lima, 2017). As a result, exports of the UK
have become cheaper while imports of the country have become expensive.
Answer 4 b.
Brexit has significantly influenced export, import as well as outward and inward of
foreign direct investment (FDI) related to UK. Due to currency devaluation, exchange rate
has increased within the country and this further has changed international business market of
the United Kingdom. A devaluation of the UK pound in terms of the US dollar has helped the
former country to experience comparative advantage regarding international trade. The
country can export goods in other countries at comparatively low prices (Sampson, 2017). As
a result, demand for UK products has increased in international market. However, the slow
growth of wages along with weak economic growth in the international market has made
several constraints for the UK to increase exports in international market. On the contrary,

2INTERNATIONAL FINANCIAL MANAGEMENT
country devaluation has made imports costlier for the UK and consequently imported
products have become expensive within the country.
On the other side, currency devaluation has negatively influenced investors of other
countries to invest comparatively less amount of money. Therefore, the overall amount of
inward FDI has reduced by 22 percent. On the other side, due to fall in exchange rate, the UK
cannot invest significant amount of money in other countries. This is because UK needs to
pay comparatively more amount of pound for the same unit of foreign currencies after Brexit.
Figure 1: Spot exchange rate of UK pound in terms of US dollar
Source: (Gudgin et al., 2018)
The above figure has represented the spot exchange rate between the UK pound and
the US dollar. This figure has sharply represented the exchange rate fluctuation between the