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Home » Finance Homework Help » International Financial Mgmt
International Financial Mgmt
The basis objectives of financial management in international (or multinational) firms remain the same as in domestic firms. Like a domestic firm, a multinational firm’s goal is to maximize the shareholder value on a global basis. It acquires assets that have present value more than their initial investment and it creates claims against them by issuing liabilities that are worth as much as or less than the funds raised. Multinational firms, however, operate in more than one country and their operations involve multiple foreign currencies. Their operations are influenced by politics and the laws of the countries where they operate. Thus, they face higher degree of risk as compared to domestic firms. A matter of great concern for the international firms is to analyze the implications of the changes in interest rates, inflation rates and exchange rates on their decisions and minimize the foreign risk.

The foreign exchange market is the market where the currency of one country is exchanged for the currency of another country. Most currency transactions are channeled through the worldwide interbank market. Interbank market is the wholesale market in which major banks trade with each other. Foreign market is a worldwide market of an informal network of telephone, telex satellite, facsimile, and computer communications between the foreign market participants which include banks, foreign exchange dealer’s arbitrageurs and speculators. The foreign market operators are guided by different motives when they deal in the foreign exchange market.

Consider an example of how and when a foreign exchange (forex) is involved. Suppose that reliance industries limited (RIL) has entered into a contract with a French firm to import a machine for twenty million French franc (FF). As per the contract, RIL (importing firm) is required to make the payment to the French firm (exporting firm) in French francs. RIL will need French francs to honor its payment obligation for which it will approach commercial bank dealing into the foreign exchange market to purchase French francs by exchanging Indian rupees (INR). Take another example Hindustan lever limited (HIL) has exported goods to a German importer. The importing German company will make payment to HLL in its currency-Duesch make (DM). HLL will convert gleeman marks in Indian rupees in the foreign exchange market.

The following is a typical classification of the participants in the foreign exchange market:

1. Arbitrageurs: - arbitrageurs seek to earn risk-less profits by taking advantage of difference in exchange rates among countries.

2. Traders: - traders engage in the export or import of goods to a number of countries. They operate in the foreign exchange market because exporters receive foreign currencies which they have to convert into local currencies, and importers make payments in foreign currencies which they purchase by exchanging the local currency. They also operate in the foreign exchange market to hedge their risk.

3. Hedgers: - multinational firms have their operations in a number of countries and their assets and liabilities are designated in foreign currencies. The foreign exchange rates fluctuations can souse diminution in the home currency value of their assets and liabilities. They operate in the foreign exchange market as hedgers to protect themselves against the risk of fluctuations in the foreign exchanges rates.

4. Speculators: - speculators are guided purely by the profit motive. They trade in foreign currencies to benefit from the exchange rate fluctuations. They take risks in the hope of making profits.

Some of its main topics are:

1. Foreign exchange rates
2. Foreign exchange risk and hedging
3. Political risk of foreign investments
4. Foreign exchange exposure
5. Financing international operations


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