After countries traded freely, demand for cross-border financial management rose. This trend is called liberalisation. People started to expand their businesses beyond borders, aided by affordable modern communication and transportation. Innovations like currency derivatives, international stock exchange listings, bonds with multiple currencies, and global mutual funds helped the global economy. Financial economics study the challenges of linking finances of multiple countries. To learn more, check out these features of international financial management.
“International Financial Management,” which can also be shortened to “international finance,” has become a common term in the modern world. It is a term for how the money of a company is managed all over the world. Currency exchange rates, political climates, market flaws, and opportunities all play a role in the wide range of differences. International financial management is the process of running a company’s many financial operations in other countries. To understand more about nature of international financial management, read beyond what seems evident.
Top 6 – Features of International Financial Management
Global financial management is needed for multinational companies to be more competitive on international markets and make more money for their shareholders. Traditional ways of managing money are changing to keep up with changes in technology, new business models, and changing market conditions. This article discusses in detail about features of international financial management.
Foreign Exchange Risk
Companies and governments often say that currency volatility is the most important international financial issue. Foreign exchange risk is the chance that changes in the exchange rates of different currencies will hurt one’s finances. Foreign exchange risk is the chance that a company’s finances will be affected by changes in the value of one currency compared to another.
When a company deals in currencies other than its own or keeps financial records in a currency other than its own, it puts itself at risk. Foreign exchange risk impacts the bottom line of a Canadian company doing business in China, receiving payment in Chinese yuan, but reporting finances in Canadian dollars.
Before they can be added to the company’s financial records, the Chinese yuan transactions must be changed into Canadian dollars. Foreign exchange risk is the chance of losing money because the value of one currency changes in comparison to another (domestic currency).
Because the world’s currency markets are hard to predict, managers and investors must look at foreign exchange risk. People often overlook this risk in domestic economies because they frequently use a single national currency. Trading different currencies from different countries causes volatility in the foreign exchange rate. CFOs and central bankers view currency volatility as the most important international financial problem to tackle currently.
Problems with the Market
Lastly, international finance is different from domestic finance because of how broken global markets are right now. There are big differences between countries’ legal systems, tax structures, business norms, and cultural norms. Due to flaws in the market, investors often can’t diversify their holdings as much as they would like to. Managers of multinational companies have a number of ways to deal with the risks and costs that come with this flaw in the market.
An imperfect market is any economic market that doesn’t meet all the requirements of an ideal, perfect, or completely competitive market. It’s important to keep in mind that different countries have very different legal systems, tax policies, business norms, and cultural environments. Considering a market imperfect is necessary if it fails to meet at least one condition for perfect competition.
In a worldview based on principles, the goal of any standard is an acceptable assessment, and there may be more than one way to get there. Organizations can change IFRS to meet their own needs, which makes their financial reports clearer and more useful to investors. Features of international financial management involve the management of financial resources across borders.
Political risk is the chance that political actions, events, or conditions will have a big effect on the profit or expected value of a business or economic activity. The risk of losing money because of political or government changes in a country. Politics and insecurity are two things that can make it hard for a business to run. War, terrorism, trade restrictions, and military coups are all extreme forms of political risk.
Political risk can happen to companies that do business in different countries. Political risk is the chance of losing money because of unexpected actions by the government or other political events, such as terrorist acts. Foreign asset seizure is an example of political risk. Assess political risk in current and potential operating countries of a multinational company.
More Ways to Compare
Using the same standards to make financial statements for different companies makes them easier to compare. Comparing companies from different countries is especially important since each country may have its own rules about financial statement preparation. When things are more alike, it’s easier for investors to decide where to put their money. The main features of international financial management is to maximize shareholder wealth.
Businesses can get money from the capital markets if the cost of capital is low enough. Larger economies of scale can help businesses that grow internationally. When a company goes into a new market, they hope to take advantage of what is called a “expanded opportunity set.” Businesses can put factories anywhere in the world to be as productive as possible, and they can get money from investors in whichever capital market has the best terms.
When a business goes global, it usually gets more chances to make money. Through the capital markets, you can get money for a low price. Companies that do business all over the world also get bigger economies of scale.
Frequently Asked Questions
What are the Goals of Managing Money on a Global Scale?
The main goal of any international financial management firm is to raise their stock price. This would require the company to make smart financial and investment decisions that are good for the business.
How does the International Financial System Work?
International finance is the study of how companies in different countries use and manage their money. This helpful book will teach you everything you need to know about international trade, changing currencies, and making money. The study of economics and finance in general needs to know about international financial markets and institutions.
Where does Money Come from on a Global Scale?
Financial institutions all over the world can give loans to businesses in foreign currencies. Thus, international non-trade activities rely heavily on them for payment. Banks in one country may offer a very different set of services than banks in another.
Without international finance, countries would not be able to trade with each other or share goods and services. The most important ones include using international finance to determine exchange rates, compare inflation rates, invest in foreign debt instruments, evaluate the performance of other countries’ economies, and assess overseas market conditions. In this article, we will discuss about features of international financial management in brief with examples for your better understanding.