International Finance Report: Analysis of International Finance

This report delves into the intricacies of international finance, commencing with an introduction to the field and its significance. Task 1 focuses on international accounting standards, their objectives, and their impact on financial statements, specifically referencing IAS 1. Task 2 explores key features of international finance, the role of international financial markets, and the importance of exchange rates for businesses, with specific examples. Task 3 examines capital requirements of multinational companies, using Unilever as a case study, and analyzes the contribution of financial theory to developing capital structures, referencing the Modigliani and Miller approach. The report also discusses foreign exchange management through various instruments like forward contracts and currency futures. Furthermore, it touches upon the planning, monitoring, and management of short-term assets and interest rate management using swaps and other instruments.

International Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
TASK 2............................................................................................................................................4
TASK 3............................................................................................................................................6
TASK 4............................................................................................................................................9
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................13

INTRODUCTION
The term international finance can be defined as a branch of financial economics that is
related to the monetary and macro economic relation between two or more then two nations
(Frieden, 2015). This is also known by the international macro economics. In other words it is
related to the monetary interaction that raises between two or more countries. To understand this
term, “Luxury chocolate limited” company is selected which is located in the North west of
England. As well as this company is the manufacturer of handmade chocolates. Herein, the
project report objectives of accounting standards is mentioned as well as impact on these
standards on financial reports is also described. Apart from it, this report also includes case study
on the basis of research. In the end the project report defines about micro and macro
environmental factors on the international finance management decision-making.
TASK 1.
1.1 Objectives of developing international accounting standards.
Converted in PPT.
1.2 Relevant accounting standards for specific financial situation.
Converted in PPT.
1.3 Effect on financial statements of the application of specified International Accounting
Standards.
The international accounting standards are useful in making financial statements more
comparative and reliable of companies (Shenkar, Luo and Chi, 2014). There are various kind of
accounting standards that help in the making financial statements. For this purpose mainly
international accounting standard 1 (IAS 1) is suitable. If companies will follow it then this will
be beneficial for them in preparation of financial statements in most effective manner.
IAS 1- According to this accounting standard, financial statements are prepared for the
purpose of providing the information about financial position and performance. Hence, the
financial statements should provide below mentioned information which are such as:
 Assets

 Liabilities
 Equity
 Income & expenses along with loss and revenue
 Cash flow
 Contribution by owners
 Distribution to shareholders
So these above mentioned information should be provided by the financial statements. Along
with as per this accounting standard, financial statements include some kind of components such
as:
 A statement of financial position by preparation of Balance sheet.
 A statement of change in equity.
 A statement of cash flow
Fair presentation and compliance- The financial statements should be able present the fair value
of financial position of companies. Eventually, the fair presentation needs the faithful
presentation of the effects of the financial transactions. As well as these international accounting
standards define about using the appropriate accounting concepts and principles. Some types of
accounting concepts are such as going concern, consistency, accrual basis, materiality etc. should
be adopted. In the absence of these accounting concepts it will be difficult for the companies to
make their financial statements reliable and comparative for further use.
M1. Evaluation of implication of accounting standards.
Converted in PPT.
TASK 2.
2.1 Key features of international finance and major institutions of international financial
environment.
Converted in PPT.
2.2 The contribution of international financial markets and financial instruments as sources of
finance.
The international financial markets and instruments play an important role to act as an
important source of the finance. This is why because of as follows:

International financial market- It can be defined as a market place in which wealth of two
countries is traded with each other. This acts as as source of finance because of below mentioned
reasons:
 International banks- It act as a source of finance because it provides the financial
assistance to the companies who deals at the world level.
 Security markets- This is also an important source of finance because under this market
securities are exchanged. As well as fund is transferred from buyer of securities to seller.
 Flow of fund from providers to seekers of international funds.
Financial instruments- This can be defined as a monetary contracts between two or more parties.
These instruments are not fixed because it can be created, traded or modified etc. It act as a
source of finance because it consists:
 Bonds- It is a kind of debt instrument in which companies can get the fund from the
general public and issue a written document that act as bond (Mundy and Menashy,
2014). This is an important source of fund. The bonds are divided into multi-pal types
such as simple bond, compound bonds, convertible bonds etc.
 Equity loans- In this type of loan creditor gets the amount of loan in return as per the
profit generated by the companies. This is also an another important source of fund for
the companies.
So due to these instruments it can be said that the financial instruments act as an important
source of finance.
2.3 Exchange rate market and importance of exchange rate for companies.
The exchange rate market can be defined as a kind of market in which currencies of two
countries are exchanged with each other. Eventually, the exchange rate can be defined as a kind
of rate on which currency of two countries get exchange with each other. There are various kind
of factors that impact to the exchange rate such as:
 Change in inflation- This is the main factor that can impact the exchange rate. This is
why because if a country has lower inflation rate then their purchasing power will
increase. So it is necessary that inflation rates should be stable of the countries.

 Change in the interest rates- The interest rates, inflation rates and exchange rates are
interrelated with each other. Certain changes in the interest rates can effect the exchange
rate. This is so because higher interest rate of countries leads to higher exchange rate
between countries.
 Current account deficits- It is related to the difference between the country's imports and
exports. If imports are more then the exports then it leads to the deficits. It shows that
country is spending is more and due to this exchange rate is effected.
So these are the factors which impacts the exchange rate.
Importance of exchange rates: The exchange rates are important for the organisations because
of following reasons-
 Domestic purchases are made with local currency- It is the one of big benefit of the
exchange rate (Argy, 2013). This is why because with the help of it, companies can
purchase the goods and services across the world with the use of domestic currency. Like
in the luxury chocolate limited, they can purchase the material from abroad in their own
currency by converting with the help of exchange rate mechanism.
 As well as the exchange rate is also important for analysing the rate of conversion.
 Better relation with other countries- Another advantage of the exchange rate is that it is
useful in the making better relation with other countries businesses. This is why because
due to this companies can make trade with other international companies. Same as in the
above respective company, they are able to make better relation with the other companies
and it becomes possible with the help of exchange rate.
So these are the advantage of exchange rate for the companies.
TASK 3.
3.1 Capital requirement of a multinational company.
Capital requirement- It can be defined as the amount of capital is which is needed by the
organisations for completing their operations.
Case study
The Unilever company is a UK based company whose headquarter is in London. The company
deals in providing groceries products such as daily usage products, beauty products etc. The
company's financial condition is good and they are planning to launch a new branch in

Manchester, UK. This is why because need of their products is high in that area. For this purpose
the company is required a huge amount of capital. They need about £ 15000000 and this can be
received by various sources. Herein, below capital structure is mentioned:
Capital structure:
Equity-
 Equity share capital
 Preference share capital
 Own funds
Debt-
 Debentures
 Loan from financial institution
£2.5 Crore (2500000 share @ £10 each)
£ 1.5 Crore (1500000 shares @ £10 each)
£5 Crore
£4 Crore (4000000 share @ £10 each)
£2 Crore
So this is the capital structure of Unilever company to establish a new branch in another location.
3.2 Contribution of financial theory in developing capital structures in the context of a
multinational enterprise.
Capital structure can be defined as a process of defining about the way in which
companies finances their overall operations and growth by various sources of fund (Bartlett, Doz
and Hedlund, 2013). To develop an effective capital structure it is necessary to implement any
particular theory so that it can help. There are various kind of financial theories for development
of the capital structure. In the context of Tesco plc are managing their capital structure with the
use of Modifliani and Miller approach which is also known by MM approach. This theory
includes two propositions which are as follows:
 Proposition I- According to this, capital structure is not linked with the value of any firm.
Eventually, the value of a firm will be same and will not be effected due to selection of
financial sources to finance of assets. The value of firm depends on the expected value of
the total earnings. Like in the aspect of Tesco plc company, their capital structure is not
linked with the value of their company.
 Proposition II- As per this proposition the financial leverage is important for boosting the
value of firm and minimise the weighted average cost of capital.

So overall accurate analysis of the optimised cost of capital and profitability of companies can be
useful in the development of the capital structure. Same as in the above mentioned international
company, Tesco they develop their capital structure by evaluating their profits.
M2. Foreign exchange management using forward contracts, currency futures, currency options
and money market hedge.
The foreign exchange management can be defined as a process of managing all the
foreign transactions with an objective of formulating the effective foreign exchange between the
countries (Morrell, 2018). In the context of foreign exchange management the forward contracts
are important because these related to cash market transactions in which delivery of an
instrument is differed until the transaction has been made. As well as currency future is linked
with the contract between two parties to sell and purchase the instruments in future. So all these
help in the effective foreign exchange management.
M3. The planning, monitoring and management of short term assets for a named multinational
enterprise.
It is essential to manage the short term and long term assets in an effective manner. This
is why because in the absence of plans this can be difficult for the companies to take advantage
of assets. The short term assets includes cash, debtors, prepaid expenses etc. Eventually, the
assets management plan can be defined as a plan for managing the companies infrastructure and
other assets to get the standard of service. This plan covers more then a single assets. Like in the
Tesco multinational company, they manage their short term assets. They plan to acquire the short
term assets on the basis of time period below one year as well as monitor the effectiveness day to
day. This is so because the short term assets are related to the assets which are being used in day
to day transactions. Additionally, these assets do not require to be manage because these are not
a big investment for the companies.
D2. Interest rate management using swaps, forward rate agreement and guarantees and interest
rate options.
The interest rate management is linked with the controlling the risk of interest rate
(Benson and Smith, 2014). Eventually, it is done with the help of assets liabilities management
that is also known by ALM. For this purpose, swap plays an important role. It is related to the

exchange of cash flow between the parties. While the forward rate agreement is an interest rate
derivative for interest rate management. Along with the interest rate option gives benefits to the
users from change in interest rates. So overall, the interest management is done with the use of
swaps, forward rate agreement etc.
D3. Working capital management strategies and their consequences.
Working capital is a kind of capital which is used for day to day operations. It is
necessary to manage this capital with the use of different kind of strategies (Germain, 2012).
Like in the Tesco plc they use maturity matching strategy in which each assets is financed by
debt instruments. As well as they use conservative strategy that finance the working capital by
low risk and profitability.
TASK 4.
INFORMATION SHEET
‘Approaches to International Financial Management’
Date- 31st July, 2019
To- Head of finance
From- Finance expert
Analysis of the micro-environmental and macro-environmental factors influencing
international financial management decision making:
The micro and macro both the environmental factors are effecting to the international financial
management decision-making. It is done with the help of analysis techniques which aer as
follows:
Macro & micro environmental analysis- It is done with the help of PESTLE analysis which is
mentioned below:
PESTLE- It is a kind of framework that analysis all the framework of external
environment such as-
 Political factor- This is related to the government rules and regulations which are needed
to be followed by all the companies. Eventually, this factor can impact to the

international financial decision-making because if political conditions will not stable
then international finance will effect.
 Economical factor- Under this factor, various kind of elements are included such as
interest rate, inflation rate etc. (Basuand Nair, 2012). This can also impact to the
international financial decision-making.
 Social factor- In this factor, people's income level, their perception etc. are included.
Due to this international financial decision-making effects because people's income level
is linked with the international finance.
 Technological factor- It is essential for the countries to adopt new and advanced
techniques and technologies. If a country is behind in the field of technique then it can
be difficult for them to sustain in the international financial market.
 Legal factor- Under this factor, legal policies and legislations are included. So during
international financial transactions it is required that companies should make the
transactions under legality.
 Environmental factor- This is the last factor which is related to the environmental and
natural elements of nations. If there is no environmental suitability then international
financial transactions can not be done.
Analysis of international merger, acquisition and investment policies and their relevance
for international financial management:
International merger & acquisition- The international merger & acquisition is enhancing day by
day. It can be defined as those merger and acquisition which take place across the boundaries of
any particular nation (Mügge, 2014). In the context of international finance management, it is
important because due to this big companies can expand their businesses by amalgamation of
small companies.
Investment policies- It can be defined as a government law which is related to encouraging the
foreign investment. In the international financial management it is important for companies to
choose the various investment options.

M4. Foreign government fiscal and monetary policies for global financial flows.
The foreign government fiscal policy is related to a kind of policy that effect to the
exchange rates and trade balance (Klonowski, 2012). In the aspect of global financial flows these
policies are important because it minimise the risks of higher rates of inflation.
The monetary policies are kind of policies which are related to the ensuring the price
stability and managing the currencies. For global financial flows these policies are crucial
because of maintaining the value of currency of any particular nation.
D4. Benefits and limits of international merger & acquisition.
Benefits- The key advantage of this is that due to this companies can merge their power
and control over the markets. As well as it is beneficial in the tax advantages (Hillier,
Westerfield and Jordan, 2014).
Drawback- Due to this small company's employees are needed to acquire the exhaustive
skills. In some case it leads to duplication and over capability in the companies which need
retrenchment.
CONCLUSION
As per above project report it can be concluded that international finance is very
important in the exchange of financial instrument between countries. In the project report,
financial market and exchange rates are concluded as well as capital requirement of
multinational companies is also mentioned. Apart from it, analysis of macro and micro
environment is also done which is effecting the international financial management decision. As
well as international merger and acquisition is also concluded.

REFERENCES
Books and journals:
Neal, L., 2015. A concise history of international finance: From Babylon to Bernanke.
Cambridge University Press.
Major, A., 2014. Architects of austerity: International finance and the politics of growth.
Stanford University Press.
Mundy, K. and Menashy, F., 2014. Investing in private education for poverty alleviation: The
case of the World Bank's International Finance Corporation. International Journal of
Educational Development. 35. pp.16-24.
Argy, V., 2013. The postwar international money crisis: an analysis. Routledge.
Bartlett, C. A., Doz, Y. and Hedlund, G., 2013. Managing the Global Firm (RLE International
Business). Routledge.
Klonowski, D., 2012. Private equity in emerging markets: The new frontiers of international
finance. Springer.
Hillier, D., Clacher, I., Ross, S., Westerfield, R. and Jordan, B., 2014. Fundamentals of corporate
finance (No. 2nd Eu). McGraw Hill.
Mügge, D. ed., 2014. Europe and the governance of global finance. Oxford University Press,
USA.
Basu, P. and Nair, S .K., 2012. Supply chain finance enabled early pay: unlocking trapped value
in B2B logistics. International Journal of Logistics Systems and Management. 12(3).
pp.334-353.
Germain, R., 2012. Governing global finance and banking. Review of International Political
Economy. 19(4). pp.530-535.
Benson, K., Faff, R. and Smith, T., 2014. Fifty years of finance research in the A sia P acific B
asin. Accounting & Finance. 54(2). pp.335-363.
Morrell, P. S., 2018. Airline finance. Routledge.