1. An Overview of International Financial Management
Topic # 01
An Overview of International
Financial Management
Zulfiqar Hasan
BBA, MBA(Finance), London, UK
Associate Professor

2. Code: FIN 625 Title: International Financial Management
Text Book
David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett “ Multinational Business Finance”, 10th/11th/12th =>, Pearson Education,
Additional Readings
Madura, Jeffe, “ International Financial Management”, 9th or Above Ed, Thomson/Southwest
Kim, T., International Money and Banking, Philip Allan
Eun and Resnick, 2007, International Financial Management, Irwin McGraw-Hill, Boston, 4th Edition

3. Instructions To Be Followed
Counseling beyond the Class:
Over phone: (Plz do not call after 11:00 pm)
When you are in the Class Room:
Switch off your mobile phone
Write as much as you can from the slides and from the delivered lectures
Be interactive, ask questions/queries freely
Participate all discussions/presentations /class tests as the marks will be averaged
Except surprised class tests, one week prior notice will be given.

4. Contents of this Topic
Definition of International Finance and International Banking, Finance vs. International Finance; Areas of International Finance, Benefits of International Finance, MNC and its Features; To describe the key theories that justify international business; and To explain the common methods used to conduct international business. Multinational v.s. domestic financial management, Reasons for going international, Exchange rates and trading in foreign exchange, International money and capital markets, Numerical Problems and Solutions. 1

5. Recalling: What is Finance?
Deficit Sector
Surplus Sector 01
They are the individual /organization/govt. who have shortage/deficit of money
They are the individual /organization/government who have excess/surplus of money 02
They don't know from where they can collect this money
They don't know in where they can invest/utilize this money 03
They don't know how to collect this money
They don't know how to invest/utilize this money
Finance is the process of transferring fund from surplus economic unit to deficit economic unit.
Domestic finance is the process of transferring fund from surplus economic unit to deficit economic unit within a country.

6. What is International Finance?
International Finance is the process of transferring fund from surplus economic unit to deficit economic unit when any of these units is located outside a national country.
International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade.

7. Functions of International Finance
International Finance basically do the following things for a Multinational Corporation and for the government.
Financial Planning in international aspects
Identification of Sources of Financing Globally
Analyzing and Selecting of Global Sources of Financing
Raising of Funds for the organization
Identification of the scopes of International capital budgeting/Investment of Funds/Utilization of Fund
Protection of Funds
Dealing with the foreign Exchange/Export/Import business
Distributions of Profit
Currently, international finance is dealing with matters related to globalization, fair trade, multinational banking.
International finance also tries to solve the problem of human resource exploitation carried out by MNCs in the poor and developing countries by applying its own principles. 4

8. Barriers of International Finance
Restrictions on capital movements
Tax differentials
Inability of a group of investors to transact
Implications of exchange rate risk on international asset-pricing
Percent of foreign ownership limits
Political constraints
Religious barrier
Cultural and moral questions

9. Domestic Finance versus International Finance
Currency
Single (Domestic)
Many currencies
Exchange rate fluctuations
Indirect impact
Direct impact
Language
Single or Domestic languages
More than one language
Role of government
Favorable or easy
Complex
Market imperfection
Low
High
Opportunity set
Low
High
Political Risk
Low
High
Laws
Local Law
International and different countries laws 4

10. Some of The Benefits of International Finance
Access to global capital markets across the world enables a country to borrow during tough times and lend during good times.
It promotes domestic investment and growth through capital import.
Worldwide cash flows can exert a corrective force against bad government policies.
It prevents excessive domestic regulation through global financial institutions.
International finance leads to healthy competition and, hence, a more effective banking system.
It provides information on the vital areas of investments and leads to effective capital allocation.
International finance promotes the integration of economies, facilitating the easy flow of capital. The free transfer of funds would eventually result in more equality among countries that are a part of the global financial system

11. International Finance: Prominent Institutes
IFC: International Finance Corporation is a prominent entity supporting sustainable investments in the private sector of developing countries to stimulate their growth. It is the biggest source of multilateral loans and equity financing for projects undertaken by the private sector in developing countries. IFC plays a key role in providing technical assistance to businesses and governments of developing countries.
IMF: International Monetary Fund monitors the balance of payments of its member countries. It is regarded as the lender of last resort for countries facing a financial crisis, such as deficits and currency crisis. The relief amount is relative to the size of the country’s contribution in the global trading system.
World Bank: It funds the development of projects, mainly in developing countries, that are not financed by the private sector.
WTO: World Trade Organization resolves multilateral and bilateral trade disputes in addition to the negotiation of different trade agreements among its various member nations.

12. International Banking
International banking is the process in which financial institutions allow foreign clients – both companies and individuals – to use their services. Perhaps the most talked – about international banks are located in Switzerland. However, many other countries have fully developed international banking infrastructures. Many individuals and companies participate in international banking to minimize (or evade) their tax liability. This strategy, however, has certain disadvantages. In addition, several international organizations have made recent efforts to curb the use of international banks as tax havens.

13. Definition of Corporate Governance
The term “Corporate governance” has traditionally been used to describe how shareholders can contract with management to act on their behalf.
The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed Corporate Governance.
Dimensions of corporate governance
Agency Theory
Composition And Control Of Boards Of Directors
Cultural, Historical, And Institutional Variables

14. Goal of the MNC and Corporate Governance
The commonly accepted goal of an MNC is to maximize shareholder wealth.
For corporations with shareholders who differ from their managers, a conflict of goals can exist - the agency problem.
Agency costs are normally larger for MNCs than for purely domestic firms, but can vary with the management style of the MNC.
Various forms of corporate control can reduce agency problems - stock compensation, threat of hostile takeover, monitoring by large shareholders.
As MNC managers attempt to maximize their firm’s value, they may be confronted with various environmental, regulatory, or ethical constraints.