International Financial Management

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