International Financial Management

This document provides an overview of international financial management, including the calculation of exchange rates, country risk analysis, and the implications of exchange rate volatility. It discusses the importance of managing finances in an international business environment and explores topics such as inflation rate, purchasing power parity, and interest rates. The document also highlights the role of multinational companies in promoting globalization and discusses its impact on the economy. Find study material and solved assignments on international financial management at Desklib.

International Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Part A...........................................................................................................................................3
Part B...........................................................................................................................................6
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Financial management can be defined as the process of performing financial operations to
maintain financial position of the company. When an entity maintains it at international level
then it is considered as the international financial management. The management of finances in
an international business environment is international management of financial relations, and it is
the exchanging of foreign currency which trades and produces the money. International financial
activities allow companies to link to foreign trading associates, clients, vendors, borrowers etc. It
is used by public agencies and non-profit bodies as well. It is essential for countries to manage
overall financial resources in an effective manner. The project report is based on calculation
regards to inflation rate, exchange rate and many more. The further part of report consists
detailed information about country risk analysis and globalization.
MAIN BODY
Part A
1.
(a) Calculation of new exchange rate:
A. Current exchange rate
$
1.10
B. Percentage increase in
dollar 2%
New exchange rate A + (A *
B)
$
1.1220
Thus, the new exchange rate is 1.1220 after 2% increase in value of dollar.
(b) Calculation of GBPEUR rate:
Calculation of GBPEUR
A. EURUSD
=
$
1.1043
B. GBPUSD $

= 1.2970
GBPEUR
(B/A) =
$
1.1745
So, the value of new GBPEUR is 1.1745.
(c) Explain the relationship between answer in part b and triangular arbitrage.
Triangular arbitration is characterized as a negotiating technique, which takes advantage
of the arbitrage incentive in a foreign exchange market between three currencies, due to price
differentials. The demand disparities also occur as one sector is overvalued and the other
underrated.
For example in part b) above;
Using cross rate formula;
GBPEUR=0.9056*1.2970 =1.1746
The pairs must have equal cross rates. There is no triangular arbitration in the above scenario.
Since the exchange point for the pairs is the same as the GBPEUR amount in b) When GBPEUR
is inflated, there is a probability of arbitration that is below 1.1746.
2.
a. According to Purchasing Power Parity which currency area should have had the higher rate of
inflation in 2017 and by how much?
Purchasing power parity is a type of theoretical model which is used to compare the
purchasing power of different types of currencies around the world against each other. With the
help of it, an individual can buy same amount of a product or service in exchange of a current in
any country around the world. When economists compare GDP of different countries then they
ise the it so that they can analyse the nation with higher economic growth. Purchasing-power
parity (PPP) is an economic concept that states that the real exchange rate between domestic and
foreign goods is equal to one, although this does not mean that nominal exchange rates are
constant or equal to one. In other words, PPP is the idea that the same items in different countries
should have one and the same real prices, that a person who purchases an item domestically
should be able to sell it in another country and save no money supports. This means that a
consumer of electricity does not depend on whether the currency with which he or she is done
while shopping is the amount of the purchase. The "Dictionary of Economics" defines PPP

theory as one that "states that the exchange rate between one currency and another is in
equilibrium when their domestic purchasing rights over it are equal to the exchange rate."
In January 2017 the rate of inflation is higher by 0.044 than December 2017.
b. If inflation in the US were 3% higher than in the euro area, calculate the change in the real
value of the dollar. What are the implications of this change?
Current rate of dollar in January 2017
$
1.1000
Increase in dollar value 3%
Change in dollar value
$
1.1330
Current rate of dollar in December
2017 =
$
1.1440
Increase in dollar value 3%
Change in dollar value
$
1.1783
Implications of the change in dollar value:
Dollar is a currency which is reserved by most of the countries around the world. Slight
change or alteration in it results in changes in economic policies of countries. If the value of it
becomes very high then it will leave negative impact upon the nations having lower value as
compared to dollar. On the other hand, decrement in its value can help developing countries to
attain economic growth. Exchange rates depends upon fluctuations in dollar. An extension of the
effect on currency time estimates is that it reduces the dollar estimate after some time. Estimating
time in money is an idea that shows that the money available to you today is worth more than a
uniform amount of money that is not far away. It is agreed not to withhold the funds that are
accessible to you today for the commitment that gives security value, bond instrumentation or
financial balance. By default, if you have a dollar in your pocket today, that dollar will be worth
or less than a year from now with the ability to keep it in your pocket.
The expansion expands the cost of goods and campaigns in a short time, greatly reducing
the amount of products and campaigns that can be purchased with a dollar later instead of a

dollar today. In the event that wages do not continue as before, however the swelling increases
the merchandising and business costs after a short period, it will take a higher percentage of the
wages to buy or manage similar will be purchased later.
c. What are the implications of a change in the real exchange rate of a currency?
Expansion in the real exchange scale means that people in a country can get more and
more products for a proportionate amount of local goods. In this way, expanding the real
exchange scale usually increases net imports. Foreigners will buy our cheapest rates. It seems to
be currently more attractive to buy imports.
d. Explain why you would expect interest rates in the US to be higher than in the euro area.
The ability to nationalize US banks and the euro zone long before limiting the progress of
currency reconciliation is allowed at rates relating to currency markets and showing their
concerns. Market Elements Members are planning to change the extent of the dispute; however,
although this may make a regular large duplicate, it does not follow from the large study.
e. Explain why you would expect there to be no difference in the interest rates of government
bonds of any two countries in the euro area and also explain why in practice there are differences
In line with the accent that enhances the strength of value, some national banks have presented a
bulge with a focus on a monetary-related approach. Inflammation aimed at (future IT) has three
features: I) designated numerical expansion goal, ii) the finance agreement options are based
essentially on the differences between bulge metrics and this numerical objective, and iii) a high
degree of simplicity and responsibility. IT was introduced in 1989 in New Zealand. Since then,
several nations have followed. For example, the Bank of England and Riksbank (Sweden's
national bank) use this method.
Part B
3. Country risk analysis with exchange rate volatility.
Exchange rate volatility or volatile exchange rate is the part of international trade. It
results in impacts upon the decision making as it increases the risk of exchange rate. Due to this

nations may face threats of losing money due to changes in the exchange rate. A stable exchange
rate results in higher savings of monetary resources and continuous changes in it increases the
possibility of country risk. Expenditure is not the same as continuing to invest in the United
States in a region like South Africa. This is due to the different risk profiles of each country.
Nation risk relates to threats correlated with activity in a foreign area. Economic hazards and
political risk are key examples of nation threats. At the other hand it is possible to define
currency risk as a risk that affects returns of a company due to exchange rate volatility or
variability (Liu, Sun, Chen, and Li, 2016). The threats above must also be taken into account
when investing in a foreign country. For these shareholders, it is very necessary to track and
control these threats over time. Volatile currencies make it more challenging for foreign trading
and investment decisions as uncertainty raises currency risk. The currency risk relates to the risk
of losing money as the interest rate changes
It is necessary for a shareholder to perform nation risk assessment before deciding to
enter business or execute new international projects. Under nation risk, the economic risk can be
described as a government's ability to serve its debts. The more trustworthy asset ground is
provided by a nation able to meet its debts, also with a robust economy, as well as by a growing
economy. Political risks can be described as policy decisions in a country which could affect an
investor's yields in that nation. The rational foreign company is not able to choose a nation with
an unsupportable climate. Volatility in the exchange rate reflects the degree to which a nation's
exchange rates differ over time. Fluid exchange levels raise currency instability and make
investment challenging and costly in a foreign market.
While making decision regarding foreign direct investment it is very important for
investors to analyse the volatility in the exchange rate as it can help to make sure that the
decision of trade or investment is right of not. In case of higher level of volatility, the investors
or the exporter may face loss of monetary resources. To measure the extent to which investors
are subjected to share price risk and country risks, stakeholders monitor their businesses closely
(Bachmair, 2016). Financial advisors should be aware how their investment funds' exposure
against such risks can be measured and how their investments can be protected. Due to the
complexity of the country danger, it may be a challenging challenge to quantify such danger.
There are two methods to calculating nation risk: the quantifiable and the quantitative approach.

The risk analysis can be made using various instruments available to investors, from nation state
ratings ratios to betas.
Quantitative methodology allows the use of figures and specific equations for the
calculation of risk, the equity-to-GDP ratio or the beta-coefficient, and other indicators for nation
risk measures such as the MSCI index. This knowledge can be obtained by investors via various
internet outlets or ratings agencies in publications. The qualitative method, on the other side,
utilizes quantitative research to classify threats. There are various political and economic
variables, and scores are then combined to create an aggregate nation risk evaluation indices.
This information can be acquired between other outlets from financial journals or global news
search engines. In comparison, foreign currency risk can be evaluated by measuring trade
visibility, which can be classified into three forms: payment exposure, financial exposure and
attention to translation. Transaction exposure may be measured using various approaches one, a
risk-to-gain approach that utilizes price and currency differences to calculate the overall possible
day loss to exchange-rate fluctuations of the valuation of the MNCs. Exposure to economics may
be calculated using exchange rate risk exposure. This involves creating a quantitative estimate of
client sales and expenses by contrasting earnings changes with variations in currencies. Finally,
the access to MNCs for translation depends on such considerations as the share of their company
taken out by international subsidiary firms, the position and responsibility of their foreign
subsidiaries.
In order to reduce the possibility of country risk it is very important for the economists of
the nations to find best ways to deal with volatile exchange risk. Various strategies may be used
to control both nation vulnerability and foreign exchange fluctuations. For example, if MNCs are
unfairly treated, they may depend on unique materials or technology where they can stop their
supplies. In its manufacturing process, it could also hide its technology; lend local money in the
event that complete collapse takes place. In addition to losing subsidiary firms, the MNCs still
owe the lenders of the native country. Finally, MNCs can want to buy insurance covering
different risks and policy risks. Future alternatives, billing in domestic currency or slowing
transactions for currency that are likely to be appraised or depreciated respectively, or
accelerating or slow down a set of depreciated currencies will buffer or reduce exchange risk, on
the other hand (Clark, 2018).

In addition, risk and exchange-rate fluctuations for MNCs and international investors are a big
obstacle. Therefore, it is important to accurately assess and quantify exposure such that the
vulnerability of businesses from such causes may be minimized and at times negative losses
minimized.
4. MNCs promote globalization. Is this a force for good or bad? Discuss.
Globalisation is creating opportunities for all the business entities as it is reducing the
barriers which are affecting the international trade of organisations. All the multinational
companies are promoting it as it facilitates them to operate business in different countries
without any restrictions. It leaves negative as well as positive impacts upon the functionality of
enterprises. This is rightly stated that MNCs promote to globalization. This is a good for an
economy. It is so because if companies will start their business in different nations then it
becomes easier for those nations to boost their economy. It becomes possible because of increase
in total production of country, increased jobs and many more. In order to understand this aspect
first it is necessary to know about concept of globalization that is as follows:
Globalization- Globalization is the diffusion through national boundaries and societies of goods,
technologies, ideas and employment. It describes economically the interdependence of free
trade-enhanced nations worldwide (Pieterse, 2019). Along with, globalization, through the inter-
border flow of goods, labor and capital, has introduced new jobs and economic development. It
is a simple concept that due to globalization, jobs increase in a country that lead to better
development of economy. It is because if a multinational company expands its business in a
country then they hire local people of that nation due to which unemployment rate reduces.
Western cultures are new to question historical views of freer markets as a win-win for all
nations. There is a nagging suspicion that globalization might have been wonderful for a certain
nations, but not others, and that the longest broom has been drawn from affluent West nations.
In this vision of globalization there are profound faults. The main is that there is not skepticism
about the effects of commerce and boundary-border investment, which are well established
statistics and economic trends. Although open markets are still exposed to fresh competitiveness

and technological shifts that impact industries and employment, there are a variety of new jobs
and growth prospects generated by the same market processes, which inevitably contribute to
better living standards. In turn, new workers are better off and improved working practices are
established. New production, which leads to good changes outside the economy as well, is often
better for the environment and thrives on new technologies.
Basically, in globalization multinational companies play a big role which is as follows:
1. Globalization is a process of rapid interrelationship between the nations of the world. In the
cycle of globalization, the multinational company (MNCs) played a significant part. It is so
because multinational companies initiate governments to make flexibility between two nations in
order to make business transaction.
2. MNCs typically set up manufacturing units around the world close to consumer, where
qualified and unskilled employees are accessible at low cost and other variables which are
critical to the growth of the manufacturing sector. If in a nation, international companies provide
jobs to their skilled and non skilled people then government promotes to globalization. But
ultimately, it is MNCs that promote to globalization.
3. Processing set-up in different countries contributes to higher production worldwide. Often, the
MNCs can create collective liability for their development with the local firms of a region
(Enloe, 2016). Basically due to collaboration of international companies and local firms, it
becomes easier for them to boost their financial conditions and local firms also contribute to
economy’s development.
4. Big MNCs in developed nations frequently place manufacturing orders with worldwide small
farmers. Due to this, small farmers and businesses get an opportunity to sell their products in
different location by help of multinational companies as well as they do not makes higher
expenses to sell their products and services because it is done by MNCs.
5. The strength of influence of these companies helped to link these widely dispersed sites
around the world. It means, by help of multinational companies local companies can make their
network strong and they become independent to do their business with collaboration of MNCs.

6. MNCs also culminated in goods in any nation being accessible from across the globe. In India,
for instance, cars from other nations have been made available in companies such as Ford and
Hyundai. As a result people from developing nation can access products of other developed
nations which lead to improvement in their life style.
7. Developed nations' MNCs are also enhancing their participation in developing nations. For
instance, a few years ago, Tata Tea bought Tetley, a British tea brand. Due to this link between
these two big companies, both countries’ people will be able to experience a better service at
same cost which they were paying earlier.
8. They also contributed to a growing worldwide job revolution. Indian software engineers
employed in TCS, for instance, are likely to operate in the United States. It is only one example,
there are many multinational companies who are operating in different nations and providing
jobs to talented and skilled employees.
9. The inflow of foreign investment across various countries has been raised by MNCs. When a
business like General motors’ spends in India, it collects money from overseas. As a result nation
in which multinational companies are establishing their branches, become able to increasing
foreign currency funds.
10. It also culminated in further technological transfer between the nations. In developing
countries for example, Samsung brings in state-of-the-art electronics equipment (Baylis, 2020).
So these are the key role which is being played by multinational companies for promotion of
globalization. As well as it can be stated that multinational companies not only promotes to
globalization but also this leads to good result for both to the countries and companies. In the
above mentioned each point, it has been summarized that globalization is beneficial for each
aspect of external environment including general public, government, economy and many more.
so globalization is good which is promoted by MNCs.
Eventually, globalization is beneficial for a nation due to following reasons:
 Foreign Direct Investment- FDI continues to develop even more rapidly than global trade
expansion, helping to fuel technology transfer, industrial reorganization, and
development of world firms FDI.

 Technological Innovation- Increased globalization competitiveness supports new
technology creation, especially with FDI growth that contributes to improving economic
output through efficient processing.
 Economies of Scale- Globalization helps major businesses to gain production and quality
cuts that in effect encourage more economic development. This may also affect other
small businesses struggling to survive at home.
CONCLUSION
Hence on the basis of above project, globalization is ambitious as well as unscrupulous,
but large companies located in the western world have benefited from the development of a
global free market. The influence remains uneven in both industrialized and developing
economies on jobs, communities and small businesses worldwide. It has become a boon to firms,
customers and the whole western world through globalization. They are now, though, in trouble
of a backlash towards globalization and any advantage they have gained over recent decades
through growing economic independence.

REFERENCES
Books and journal:
Pieterse, J.N., 2019. Globalization and culture: Global mélange. Rowman & Littlefield.
Enloe, C., 2016. Globalization and militarism: Feminists make the link. Rowman & Littlefield.
Baylis, J., 2020. The globalization of world politics: An introduction to international relations.
Oxford University Press.
Liu, C., Sun, X., Chen, J. and Li, J., 2016. Statistical properties of country risk ratings under oil
price volatility: Evidence from selected oil-exporting countries. Energy policy, 92,
pp.234-245.
Bachmair, F.F., 2016. Contingent Liabilities Risk Management: A Credit Risk Analysis
Framework for Sovereign Guarantees and On-Lending: Country Experiences from
Colombia, Indonesia, Sweden, and Turkey. The World Bank.
Clark, E., 2018. Evaluating Country Risks for International Investments: Tools, Techniques and
Applications. World Scientific Books.