1. International Financial Management Unit 1 The International Monetary System
Roland Fox

2. International Financial Management
International Financial Markets
UNITS
Madura & Fox International Financial Management*
1. International monetary system
Ch 2
2. The market for foreign exchange
Chs 3, 4, 6, 7 & 8
3. The derivative market and hedging strategies
Ch 5
Financial Management and the Multinational Firm
4. Globalisation and the multinational firm
Ch 1&16
5. Foreign investment
Chs 13, 14 & 15
6. Multinational treasury management
Chs 17,18 & 19
7. Review
Ch 20 1

3. The International Monetary system
overview
Home Economy
Finance - interest
rates, risk, return
Economics - prices,
wealth, companies
currency £
IMF
World Bank
UN (UNCTAD)
WTO G8 EU
NAFTA
International markets
Exchange rates  
Trade & investment
Other Economies
Finance - interest
rates, risk, return
Economics - prices,
wealth, companies
currency: euro, $ etc
Own Currency = own interest, prices (inflation) , borrowing, taxes

4. The International Monetary system
We look at:
IMF
Markets
Government
Balance of Payments  

5. The International Monetary system IMF
IMF role:
Promote cooperation among countries on international monetary issues
Promote stability in exchange rates
Help correct temporary imbalances in trade
Promote free trade and investment   4

6. The International Monetary system IMF
IMF role:
Promote cooperation among countries on international monetary issues
Promote stability in exchange rates
Help correct temporary imbalances in trade
Promote free trade and investment
Is accused of:
Promoting Western Interests
Imposing harsh conditions on loans
Not addressing problems of hot money
Not predicting crises
Allowing the gross imbalance of US trade to continue
Allowing slack standards for international transactions  

7. The International Monetary system IMF 

8. The International Monetary system markets
International Finance, K Pilbeam (Palgrave MacMillan)  

9. The International Monetary system markets
International Finance, K Pilbeam (Palgrave MacMillan)  

10. The International Monetary system.
Table 11.1 Foreign exchange market turnover (daily average in billions of US Dollars)
International Finance, K Pilbeam (Palgrave MacMillan)  
The audio talks about the advantages and disadvantages of the market place and addresses:
Maturity transformation
Risk transformation
Liquidity
And size
Valuation as being advantages and fopr the disadvantages
Limited information
Cost
Accounting rules
Corruption and market panics
UK GDP $2,814bn

11. The International Monetary system
What can Governments do?
Regulation: licensing, reporting, defining legality
Fiscal measures – increase/ decrease taxes
Government spending
Quantitative easing / restriction M x V = P x Q
increase the money supply [buy bonds, Government spending]
 interest rate falls – business increases?
 hold on to money– the liquidity trap
 Q remains static and P increases - inflation  
Inflation is a form of tax… 10

12. International Financial Management.
The Balance of payments

13. The Balance of Payments.
£bn (1 billion = 1,000 million)
Current a/c
Exports goods & services 404
Imports goods & services ( 424) (20)
Financial a/c & Capital a/c
Investment overseas (80)
Investment into UK
Red’n in reserves
other transactions (3)
Balancing item
( ) net supply of £’s for FC
no brackets net demand for £’s by FC  

14. The Balance of Payments 
If there were no banks and you wanted to buy US goods in $s you would have to find someone wanting £s. suppose you find someone who wants £100 to buy a Ted Baker handbag
And offers you $160 you accept. This is recorded as Imports (£100 ) and exports £100.

15. The Balance of Payments. 

16. The Balance of Payments
Current and Financial a/c Analysis
scenario
1 2
current a/c
financial a/c
0 0
+/- = net demand and supply of £’s for foreign exchange
How it should work: Developing country 1; Developed country 2
How it has worked: Developed country 1; Developing country 2
Which is better?  

17. The Balance of Payments 

18. The Balance of Payments Elasticity
Elasticity – a devaluation changes the price of all imports and all exports…but what happens to the quantity?
|%change in quantity of imports or exports| |%change in price of foreign currency|  
For a devaluation…
Elasticity greater than 1 e.g. 6% / 5% total £ value of exports increases or imports decrease we say that this is elastic
Elasticity less than 1 e.g. 3% / 5% total value £ of exports still increases but imports also increase we say that this is inelastic 17

19. The Balance of Payments (BoP) Elasticity
Elasticity – a devaluation changes the price of all imports and all exports…
|%change in quantity| |%change in price|
A devaluation to benefit the current account must be such that:
|%change in quantity imports| + %change in quantity exports > %change in price
e.g. devaluation of 5% and no change in export or import quantities worsens the balance of payments by 5% x quantity of imports
Devaluation of 5% and a decrease in quantity of imports of 4% and an increase in exports of 3% then
(%change in quantity imports) + %change in quantity exports > %change in price
|4%| + 3% > 5%  
If exports are £500 and imports are £500 and the elasticity of exports is 0.6 and the elasticity of imports is 0.8, what would be the effect of a 5% devaluation? 18

20. International Monetary System QUIZ–
Question
Slide
1. Why is currency more than national pride? 2
2. How is money democracy and sovereignty represented by international organisations?
3. What is meant by no overall system of international financial management
4. Name the two types of investment
2 &14
5. What are the problems facing the IMF? 5
6. Which is the largest stock market 7
7. Do stock markets reflect the size of the economy?
8. Name 2 large international financial centres? 8
9. What is the single most important fact in international finance and why? 9
10. Name 3 significant roles that governments play in international finance 10
11. What accounts make up the balance of payments? 12
12. Why does the balance of payments balance? 13
13. Name the 2 largest exporting countries 14
14. What has been far more effective than the efforts of all charities?
15. In what sense are the activities recorded in the balance of payments promoting world peace?
16. What are the 2 models of finance for developing countries? 15
17. How can devaluation worsen a balance of payments?
16 & 17
18. How can devaluation improve a balance of payments? 18  
If exports are £500 and imports are £500 and the elasticity of exports is 0.6 and the elasticity of imports is 0.8, what would be the effect of a 5% devaluation? 19