International finance deals with more than individual markets by including managing exposure to exchange rate, and financing international capital marketing and budgeting. Additionally, foreign exchange focuses on aspects such as political risk, legal, cultural, and taxation. Corporate finance relates to the financial activities of a corporation. The goal of corporate finance is to increase the value of the firm to shareholders through implementing plans and strategies to achieve the goals. Strategies include making profitable decision on raising and managing capital, dividend distributions, and acquisitions.
The exchange rate is one of the most significant factors of international finance. which assist in creating financial balance. Exchange rates are used to provide information for corporations when undertaking capital budgeting and making financial decision regarding foreign markets. The exchange rate is the currency value as determined by domestic and foreign currency.
Domestic and International Markets
Corporations are called international corporations or multinational if they have significant foreign operations. The principles of corporate finance are applied to international corporations. International corporations seek investments that generate company value and shareholder wealth. To increase the value of a firm, companies take on projects that have a positive NPV. With both international and domestic markets, a positive NPV is paramount for organizational success. Both international and corporate finance focus on generating profitable capital investment decisions related to dividends, leverage, and financing.
The Foreign exchange market is the worlds largest financial market. The difference between international finance and corporate finance is that international finance not only considers domestic rules and regulations, but also considers foreign policies, politics, risk, culture, environmental changes, and government intervention. Consequently, international finance is not just simply “corporate finance with an exchange rate.”
In addition to an exchange rate being the value of one country’s currency transacted into another country’s currency; nearly all currency trading takes place in U.S. dollars, and the rate of exchange changes constantly. The abbreviation used for foreign exchange is FX; currency swaps are considered to be FX swaps. Currency swaps present hedging risk in international trade. For example, if a firm produces in products in one country and then exports to another, the firm is responsible for paying its workers along with its suppliers in its domestic currency. However, the firm may receive revenue in foreign currency. The risk involved with currency exchange rates is that currency changes over time. If the value of foreign currency decreases, the firm loses profits. To protect itself against rising and falling currency, the company can enter a currency swap. A currency swap protects companies by setting fixed terms of revenue exchange over a period of time. In addition to currency swap, there are also the interest rate swaps, and credit default swap.
In addition to the foreign exchange rates, there is the foreign exchange market, which give opportunities and provides information to international organizations when undertaking capital budgeting and making financial decisions. Within the foreign exchange market, countries trade their currency for another country’s currency. Within the market, most trading takes place between the U.S. dollar, the British pound sterling, the Japanese yen, and the euro.
The foreign exchange market is not an actual physical location where participants meet to trade and exchange currency, but instead its participants go to major commercial and investment banks around the world to convert their currency. Additionally, trading can take place over computers, telephones, and through other methods. A popular communication network for foreign transaction is the Society for Worldwide Interbank Financial Telecommunication (SWIFT), which uses data transmission lines to help banks communicate with one another. Foreign exchange participants include importers, exporters, portfolio managers, brokers, traders, and speculators.
Dr. Elijah Clark (August 11, 2015). International Finance [Web log post]. Retrieved from http://elijahclark.com/international-finance/