1. How is international financial management different from domestic financial management?
International financial management is similar in many ways to domestic financial management. However, there are several key differences. In domestic finance, the issue of exchange rates is not common. However, international financial management involves use of exchange rates considering the fact that different currencies are used in this market. Managers should be aware of implications of exchange rates in their managerial activities. International financial management involves being aware of the risks associated with exchange rates. This is not the case in domestic financial management where there are no exchange rate risks (Brigham, 2011).
International financial management involves acquiring capital from different countries. This means that the procedures of acquiring capital are different in different countries. The accounting and reporting standards to be adopted in international financial markets is different from domestic financial reporting and accounting. It will be noted that financial managers should be aware of different tax system and rates in international markets. This is different from the domestic market where the tax rates are known (Brigham, 2011).
2. Discuss the major trends that have prevailed in international business during the last two decades.
Integration of both financial and capital market is one of the trends in the international markets. The aim of this is to ensure that financial services are provided effectively to businesses and organizations. Shorter and long term funds can be easily obtained at same places in the financial markets (Brigham, 2011).
Globalization is another major trend that has been observed in the financial markets. One of the effects of globalization is that regulation of capital and financial markets has been reduced. People from different countries can now trade in different capital and financial markets.
Control of financial markets by the government has reduced greatly due to globalization. Currently, financial markets are controlled by demand and supply forces in the economy. The government plays no role in influencing prices of capital and other financial assets as it was before (Brigham, 2011).
3. How is a country’s economic well-being enhanced through free international trade in goods and services?
Free international trade benefits both countries involved in trade. With international trade, specialization is encouraged and the output of both countries increases. Economic growth of both countries improves. With international trade, the standards of living of people improve. This is due to the fact that trade avails a variety of goods and services to the people. Freedom of choice of people increases hence increasing the standards of living (Bhagwati, 2003).
International trade also boosts peace between countries. People interact through trade hence good relationship between these people ensure that there is peace. The trade is also important in creating more jobs for people. People find opportunities in other countries hence benefit from these opportunities. In short, international trade benefits both countries involved in the trade process.
4. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of such corporate scandals as those involving Enron and WorldCom, U.S.
President George W. Bush stated that while tougher laws might help, “ultimately, the ethics of American business depends on the conscience of America’s business leaders.” Describe your view on this statement.
The managers of American businesses are the people who determine the business ethics of their organizations. They have the role of creating a good culture in their organizations for the benefit of their customers. They have the responsibility of protecting their stakeholders. If the managers ensure that ethics are observed, scandals involving deceit of stakeholders will be completely eliminated.
The government should play a role in controlling the ethics of business organizations. Control is important in that it helps to avoid exploitation of investors. Without these laws, managers will cooperate with their employees to exploit their stakeholders, which is not ethically fit. Stakeholders of business organizations should evaluate business organizations carefully before dealing with them. Investors should evaluate the performance of organizations through evaluation of their websites. This will help make the appropriate decisions.
5. Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the franc is pegged to gold at 12 francs per ounce.
This, of course, implies that the equilibrium exchange rate should be two francs per pound. If the current market exchange rate were 2.2 francs per pound, how would you take advantage of this situation? What would be the effect of shipping costs?
If this is the situation, it is profitable to do some arbitrage in order to make profits. Considering that shipping costs of pounds is negligible, people will ship pounds to France and sell them in this country. The trade involved in this case would involve a profit of 0.2 francs for every pound. This is considering that shipping costs are equal to zero. The trade would involve buying large quantities of francs. For example, if an individual has 1000 pounds, the profit in the trade process will be 0.2 * 1000 =200 francs. The larger the amount of pounds one sells the more profit is gained.
As the process continues, the supply of francs increase hence the equilibrium price will be achieved in the market. There will be no more motivation to trade at equilibrium (Eichengreen, 2008).
The shipping costs have an impact on the trade process. If the shipping costs are very high, the motivation to trade will not be there. This is because most of the profit from the trade will be used as shipping costs. Therefore, shipping costs determines whether trade will take place or not (Bhagwati, 2003).
6. Discuss the criteria for a “good” international monetary system.
A good monetary system should provide enough liquidity in the economy. This means major currency being used in the monetary system should be enough such that anyone who wishes to use the currency can access it. If there is a shortage of the major currency, people will lose confidence in the currency since it will be creating inconveniencies to traders.
A good monetary system should be such that can regulate the balance of payment of a country. Whenever there is balance of payment problem, the monetary system should reduce the prices of goods in the country affected and increase the prices of goods in another country. This is through influencing the money supply in the two economies. This will lead to correction of balance of payment problem (Australia. 1997).
A good monetary system should create confidence to the users. The value of the major currency should be fixed such that people expect the value to remain constant for a long time. People will therefore have the confidence of storing their wealth in form of that currency. Trade using the currency will be encouraged since risks associated with the use of the currency will be low.
7. Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so.
After market integration, a country experiences both capital inflows and outflows. This means that the value of a country’s currency keeps on changing when there is international trade. With a fixed exchange rate, it becomes difficult for the economy to adjust its balance of payment disequilibrium. This is why fixed exchange rate cannot work for such an economy.
On the other hand, capital inflows and capital outflows keeps adjusting the value of a domestic currency. In response to this, a country needs to keep on adjusting the fixed exchange rate from time to time. Trying to defend the value of the fixed currency becomes too expensive and this is why countries end up leaving the system. Generally, it is difficult to work with a fixed exchange rate system in an integrated economy.
Eichengreen, B. J. (2008). Globalizing capital: A history of the international monetary system. Princeton: Princeton University Press.
Apte, P. G. (2006). International financial management. New Delhi: Tata McGraw-Hill Pub.
Brigham, E. F., & Ehrhardt, M. C. (2011). Financial management: Theory and practice. Mason, OH: South-Western Cengage Learning.
Bhagwati, J. N. (2003). Free trade today. Princeton, NJ [u.a.: Princeton Univ. Press.
Australia. (1997). Balance of payments. Canberra: Commonwealth Bureau of Census and Statistics, Australia.