Contents
International Financial Management
Rationale
Financial Management at a Corporate level is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to enhance corporate value while reducing the firm's financial risks. Equivalently, the goal is to maximize the corporations' return to capital. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms.
The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of debt and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).
The terms Corporate finance and Corporate financier are also associated with investment banking. The typical role of an investment banker is to evaluate investment projects for a bank to make investment decisions.
- Capital investment decisions
- Working capital management
- Financial risk management
- Relationship with other areas in finance
- Related Professional Qualifications
- References
Related topics by category:
International Trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is the usually primary meaning of "globalization".
International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.
Trade Series
Today's Videos
- Connect with us on http://www.youtube.com/finntrack
- Google's Playlists
Teaching and Learning Resources
Foundations of International Financial Management
- External Shocks to the Global Economy
- Globalisation
- International Economics
- Multinational Financial Management
- Balance of Payments
- Corporate Governance
- Globalization and the Multinational Firm
- International Monetary System
- Balance of Payments
Globalization (or globalisation[1]), is an umbrella term for a complex series of economic, social, technological and political changes that have been identified since the 1980s. These changes and processes are seen as increasing interdependence and interaction between people and companies in disparate locations.
|
 |
Multinationals have played an important role in globalization. Given their international reach and mobility, prospective countries, and sometimes regions within countries, must compete with each other to have MNCs locate their facilities (and subsequent tax revenue, employment, and economic activity) within. To compete, countries and regional political districts offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards. This process of becoming more attractive to foreign investment can be characterized as a race to the bottom. There is a dispute as to which was the first MNC. Some have argued that the Knights Templar, founded in 1118, became a multinational when it stumbled into banking in 1135. However, others claim that the Dutch East India Company (Dutch:Vereenigde Oostindische Compagnie) was, which first appeared in 1602.
A Monetary System secures the proper functioning of money by regulating economic agents, transaction types, and money supply.
Monetary systems are traditionally formed by the policy decisions of individual governments and administrated as a domestic economic issue. The current trend, however, is to use international trade and investment to alter the policy and legislation of individual governments. The best recent example of this policy is the European Union's creation of the euro as a common currency for many of its individual states. Apart from monetary systems based on money, there do also exist systems based on "favours". One example of this is the LETS system. LETS, or Local Exchange Trading Systems, are local community trading groups where members exchange their goods and services with each other.
The Balance of Payments (or BOP) is a measure of the payments that flow into and out from a particular country from and to other countries. It is determined by a country's exports and imports of goods, services, and financial capital, as well as financial transfers. The balance of payments is a summary of all economic transactions between a country and all other countries for a specific time period, usually a year. The balance of payments account reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).
|
 |
Corporate Governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. Corporate governance is a multi-faceted subject. An important part of corporate governance deals with accountability, fiduciary duty, disclosure to shareholders and others, and mechanisms of auditing and control. In this sense, corporate governance players should comply with codes to the overall good of all constituents. Another important focus is economic efficiency, both within the corporation (such as the best practice guidelines) as well as externally (national institutional frameworks). In this "economic view", the corporate governance system should be designed in such a way as to optimize results, as well as to detect and prevent fraud. Some argue that the firm should act not only in the interest of shareholders, but also of all the other stakeholders. |
 |
Recently there has been considerable interest in the corporate governance practices of modern corporations, particularly since the high-profile collapses of large firms such as Enron Corporation and Worldcom.
Activities
Image: House prices respond to changes in demand and
supply and this in turn is influenced by the cost of buying a house -
determined by the interest rate. Copyright: Esra Su, stock.xchng
Image: The falling dollar may mean a rise
in tourism to the US but the effect might be
mitigated by the increased security measures
being introduced by US authorities.
Source: Jake Levin, stock xchng
The Foreign Exchange Market, Exchange Rate Determination, and Currency Derivatives
Tutorials
Readings
|
|
|
 |
 |
|
In finance, the Exchange Rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 120 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.
The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.
- Quotations
- Free or pegged
- Nominal and real exchange rates
- Fluctuations in exchange rates
- Foreign exchange markets
- BBC cross rates
- Disk Lectures MBA level audio lecture with slideshow on foreign exchange rates
- Federal Reserve daily update
- Federal Reserve daily history since 2000
- Foreign Currency Units per 1 U.S. Dollar, 1948 - 2004
In economics, Purchasing Power Parity (PPP) is a theory which says that the long-run equilibrium exchange rate of two currencies is the rate that equalizes the currencies' purchasing power. This theory is based on the law of one price, the idea that, in an efficient market, all identical goods must have only one price. In this case the goods in question are currencies and the prices are the exchange rates of each currency.
- Explanation
- Method
- Examples
- West and Central African Franc
- GDP of China
- Lists of countries of the world sorted by their gross domestic product (GDP)
- Need for PPP adjustments to GDP Difficulties
A Derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather conditions). This performance can determine both the amount and the timing of the payoffs. The diverse range of potential underlying assets and payoff alternatives leads to a huge range of derivatives contracts available to be traded in the market. The main types of derivatives are futures, forwards, options and swaps.
The Derivatives Markets are the financial markets for derivatives. The market can be divided into two, that for exchange traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.
Fundamental analysis is a security or stock valuation method that uses financial and economic analysis to predict the movement of security prices such as Bond prices, but more commonly stock prices. The fundamental information that is analyzed can include a company's financial reports, and non-financial information such as estimates of the growth of demand for competing products, industry comparisons, analysis of the effects of new regulations or demographic changes, and economy-wide changes. It is commonly contrasted with so-called technical analysis which analyzes security price movements without reference to factors outside of the market itself.
A potential (or current) investor uses fundamental analysis to examine a company's financial results, its operations and the market(s) in which the company is competing to understand the stability and growth potential of that company. Company factors to consider might include dividends paid, the way a company manages its cash, the amount of debt a company has, and the growth of a company's revenues, expenses and earnings. A fundamental analyst may enter long or short positions based on the result of fundamental analysis.
- CANSLIM
- Trader (finance)
Foreign Exchange Exposure and Management
Tutorials
- Measuring and Managing the Risk in International Financial Positions
- Measuring Accounting Exposure
- Management of Economic Exposure
- Management of Transaction Exposure
- Management of Translation Exposure
- Measuring and Managing Economic Exposure
Readings
Financial Risk Management is the practice of creating value in a firm by using financial instruments to manage exposure to risk. Similar to general risk management, financial risk management requires identifying the sources of risk, measuring risk, and plans to address them. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.
In finance, a edge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is just now making), and combine this with a short sale of a related security or securities. Thus the hedger doesn't care whether the market as a whole goes up or down in value, only whether the under-priced security appreciates relative to the market. Holbrook Working, a pioneer in hedging theory, called this strategy "speculation in the basis," [1] where the basis is the difference between the security's theoretical value and its actual value (or between spot and futures prices in Working's time).
Some form of risk taking is inherent to any business activity. Some risks are considered to be "natural" to specific businesses, e.g. the risk of oil prices increasing or decreasing is natural to oil drilling and refining firms. Other forms of risk are not wanted, but cannot be avoided without hedging. For example someone who has a shop, takes care of the risk of competition, of poor or unpopular products, and so on, has natural risks. The risk of their inventory being destroyed by fire is unwanted, however, and can be hedged via a fire insurance contract.
Some related concepts to investigate:
World Financial Markets and Institutions
Tutorials
 |
Readings
Financial economics is the branch of economics concerned with the workings of financial markets, such as the stock market, and the financing of companies. It can be distinguished from other branches of economics by its "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade." The questions addressed are typically framed in terms of "time, uncertainty, options and information" [1]. Time: money now is traded for money in the future . Uncertainty (or risk): The amount of money to be transferred in the future is uncertain. Options: one party to the transaction can make a decision at a later time that will affect subsequent transfers of money. Information: knowledge of the future can reduce, or possibly eliminate, the uncertainty associated with future monetary value. |
 |
Financial economics thus attempts to answer questions such as:
How are the prices of financial assets: stocks, bonds, currencies, and commodities, determined?What are the effects of a company choosing different methods of financing its operations, such as issuing shares or borrowing?
What portfolio of assets should an investor hold in order to best meet his/her objectives?
In recent decades, a lot of work has concerned itself with the prices of derivatives, financial instruments that derive their value from other, underlying, assets. Stock options are a classic form of derivative - Fischer Black, Myron S. Scholes, and Robert C. Merton did ground-breaking work in the early 1970s on the determination of stock option prices on the basis of the underlying stock's price and volatility.The work soon proved to have widespread applications, and helped inspire the creation of ever more complicated derivatives, (swaps, swaptions, etc.) which in turn has kept theorists busy building newer models.
The underlying point behind all the model construction is that of finding a value that arbitrage will enforce. Arbitrage is always a self-terminating activity- it brings prices to a level at which it can no longer occur. At a certain useful level of abstraction, arbitrage is said to terminate so quickly that it never happens at all, even if some traders do have private information. See no-trade theorem. But real markets have various sorts of friction that inhibit that ideal operation .Financial economics is based on some hypothesis. However, recently, researchers in Experimental economics and Experimental finance have challenged those assumptions by conducting some experiments to observe people's behavior and decision-making. Experiments are often conducted in the Laboratory, by a simulation software, etc.
The top 3 finance journals are Journal of Finance, Review of Financial Studies and the Journal of Financial Economics. Path breaking research is also published in Econometrica.
Important concepts |
 |
See also
In Financial economics, a financial institution acts as an agent that provides financial services for its clients. Financial institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, and similar businesses.
Financial institutions provide a service of moving funds from investors, those with excess funds, to companies, those in need of funds. These financial institutions make it easy and affordable for small investors to invest.
- Bank
- Advising bank
- Central bank
- Commercial bank
- Community development bank
- Custodian bank
- Depository bank
- Investment bank
- Islamic banking
- Merchant bank
- Mutual bank
- Mutual savings bank
- National bank
- Offshore bank
- Private bank
- Savings bank
- Swiss bank
- Bank holding company
- Building society
- Clearing house
- Commercial lender
- Community development financial institution
- Credit rating agency
Financial Management of the Multinational Firm
Tutorials
- Foreign Direct Investment
- International Capital Structure
- International Capital Budgeting
- Multinational Cash Management
- Exports and Imports
- International Tax Environment
Readings
Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." [1] The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment .
|
|
Recommended Texts
 |
International Financial Management Second Edition
Check the availability and buy your books from our Bookshop.
|
Resources
Case Studies
Enron Corporation is an energy company based in Houston, Texas. Prior to its bankruptcy in late 2001, Enron employed around 21,000 people and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of $101 billion in 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. It became most famous at the end of 2001, when it was revealed that its reported financial condition was sustained mostly by institutionalized, systematic, and creatively planned accounting fraud. Its European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection in the U.S. two days later on December 2. At the time, it was the biggest bankruptcy in U.S. history, and it cost 4,000 employees their jobs [1]. The lawsuit against Enron's directors, following the scandal, was notable in that the directors settled the suit by paying very significant amounts of money personally. In addition, the scandal caused the dissolution of the Arthur Andersen accounting firm, which had effects on the wider business world, as described in more detail below. Enron still exists, operating a handful of key assets and making preparations for the sale or spin-off of remaining businesses. Enron emerged from bankruptcy in November of 2004 after one of the biggest and most complex bankruptcy cases in US history. It has since become a popular symbol of willful corporate fraud and corruption. |
|
 |
Strategy: Analysis and Practice
Check the availability and buy your books from our Bookshop. |