Essay on International Financial Environment & the Determination of Exchange Rates

Financial management is an important topic in terms of understanding how the international financial markets and economies work. The structure of international finance differs significantly from domestic finance. The distinction from the two levels in financial management sets the pace towards understanding how international financial management operates and the primary areas of focus for the benefit of international relations. In essence, with the emergence of globalization, it is prudent to grasp the functions of the globalized and integrated world economy which is at the core of financial management (Eun & Resnick, 2015). Practically, with the integration of the global economies, the international monetary systems are factored and the roles that they play. Monetary systems are different and the functioning of international finance requires the implementation of uniform systems that facilitate for international trade and associated transactions (Khattak, 2019). Consequently, for the benefit of the stabilization of the global economies, it sufficed to implement monetary systems which trace their history to the 19^th century. The monetary systems define the currencies of countries and their stability in the international markets. In this perspective, maintaining currency stability is attributed to the sustainability of the economic books of a country and the avoidance of deficits. In the long term, currency exchanges are based on the performance of the monetary systems in the international economic market.

Module 2: International Money Market, Bond Market and Equity Market

The financial management of assets and financial transactions on an international level require the assistance of the financial institutions to regulate their use and overall performance. Differences are however in place concerning domestic and international banks. Primarily, the roles and functions of the international banks differ from that of domestic banks on basis of the diversity of the clientele. The international banks are responsible for interactions between countries and the management of the money markets (Eun & Resnick, 2015). The institutional differences in the international banking offices accommodate the diverse clientele inclusive of the Eurocurrency market. Ultimately, the international banks provide its clients with access to the Eurobonds which are distinguished from the domestic bonds (Eun & Resnick, 2015). Access to the international bond market avails more opportunities for both the developed and developing countries compared to the consideration of having to raise funds (Wieland et al, 2020). Countries are presented with the option of accessing funds easily and using the same for their various developmental purposes. Outside the international bond markets, the international equity market is also an important part of international financial management (Eun & Resnick, 2015). The differences in equity between the developed and developing countries highlights the size in equity market shares from a global perspective.

Module 3: Foreign Exchange Transactions and Risk Management

International trade in its capacity is an interaction and exchange of foreign currencies. Primarily, with the establishment of international monetary systems and the definition of the international currencies, the development of a foreign exchange market is required. Foreign exchange looks into the establishment of the rates of exchange between the different global currencies as well as the determination of a uniform currency for trade (Eun & Resnick, 2015). In the current status of international financial management, the United States dollar is the primary currency for trade and from which the transactions are based. In essence, the foreign exchange market is subject to the foundational currency that is used for the financial interactions. Institutional arrangements within the foreign exchange market provide the relevance guidance concerning nominal interest rates and the inflation rates between countries (Choi, 2020). The institutional arrangements provide clarity in the international parity relationships that emerge from the understanding of the nominal interest rates and inflation rates. Significantly, the international parity relationships are important in international finance management practices and they establish a form of stability in the long term concerning the financial interactions between countries (Eun & Resnick, 2015). The foreign exchange market in its capacity ensures that the financial management practices are maintained in a uniform approach for the benefit of the international parity relationships.

Module 4: International Taxation and Capital Budgeting

Globalization has paved way for the development of multinational companies (MNC) which venture their operations in different global locations to expand their capital expenditures. Primarily, MNCs utilize the option of expanding their location and presence in different countries as a measure of managing their capital expenditures as opposed to producing in their domestic location and exporting overseas (Eun & Resnick, 2015). The tact in the decision to be an MNC is subject to the need to increase on its shares internationally and accumulate profits from its capital structure. In essence, it stands out to be more financially feasible to lower the cost of capital when debt is sourced internationally compared to domestically (Eun & Resnick, 2015). The focus and interest in international trade in MNCs demands for the establishment of proper cash management systems to facilitate for the cash flow transactions. The establishment of a centralized cash depository system suffices to manage all foreign cash flow based transactions and subsequently enable the MNC to save its money, reduce on the transaction costs and to have absolute control over its cash flows (Philippe, 2015). The methods put in place become relevant in matters associated with the taxation of the MNCs. The tax liabilities of MNCs are reduced with the implementation of transfer pricing strategies which enable the MNCs to continue operating with ease.

Reference

Choi, J. (2020). Capital controls and foreign exchange market intervention. IJournal of International Money and Finance, 101(102098) https://doi.org/10.1016/j.jimonfin.2019.102098

Eun, C. & Resnick, B. (2015). International financial management (7^th ed.). McGraw Hill Education. ISBN 978-0-07-786160-5

Khattak, M. (2019). Does access to domestic finance and international finance contribute to sustainable development goals? Implications for policymakers. Journal of Public Affairs, 20(2), e2024 https://doi.org/10.1002/pa.2024

Philippe, M. (2015). Elements of international income taxation, Bruylant. ISBN 9782802750253

Wieland, I., Kovacs, L. & Taras, S. (2020). Conceptual study of the difference between the money market and the capital market. Financial Markets, Institutions and Risks, 4(1), 51-59 http://doi.org/10.21272/fmir.4(1).51-59.2020