Discuss the difference between international finance and domestic finance. Explain the most traded currencies in the world and the reason of their popularity

1. INTERNATIONAL FINANCE – ASSESMENT 1
1. Discuss the difference between international finance and domestic finance.
a) Exposure To Foreign Exchange
MNE’s face foreign exchange due to their subsidiaries, as well as import/export
and foreign competitions. Domestic have no subsidiaries in their business due to
local.
b) Culture, History & Institution
In culture view, each foreign country is unique and not always understood by
MNE management, this is way MNE will face language and culture barriers.
Domestic financial management have a strong base case of their own country.
c) Corporate Governance
Foreign countries’ regulation and institutional practice are also uniquely different,
especially legal and tax impacts to MNE’s in foreign country. International
finance manager need to look at the taxation structure to find out whether the
business which is feasible in his home country workable in the foreign country or
not.
d) Political Risk
MNEs face political risks because of their foreign subsidiaries and high profile,
while domestic negligible political risks.
e) Modification of Domestic Finance Theories

2. MNEs must modify finance theories like capital budgeting and cost of capital
because of the foreign complexities. Domestic will stick to traditional financial
theory.
f) Modification of Domestic Financial Instrument
MNEs utilize modified financial instruments such as options, future, swaps, and
letters of credit. Domestic limited use of financial instruments and derivatives
because of fewer foreign exchange and political risks.
2. Explain the most traded currencies in the world and the reason of their popularity
a) The United States Dollar.
First and foremost is the US Dollar, which is easily the most traded currency on the
planet and can be attributed to the long term government stability and the economic
dynamism of the United States. This is because the USD acts as the unofficial global
reserve currency, held by nearly every central bank and institutional investment entity
in the world. The dollar is an important factor in the foreign exchange rate market for
other currencies, where it may act as a benchmark or target rate for countries that
choose to fix or peg their currencies to the USD's value. For instance, as of 2011,
China has its currency, the renminbi, still pegged to the dollar, much to the
disagreement of many economists and central bankers.
b) The Euro
The Euro is one of the youngest and it is considered as the official currency from
Finland to Portugal and from Slovakia to Slovenia. As well, the Euro is the world's
second largest reserve currency. With the euro being a widely used and trusted
currency, it is very prevalent in the forex market, adds liquidity to any currency pair it
trades within. The Euro is commonly traded by speculators as a play on the general
health of the eurozone and it member nations

3. c) The Japanese Yen
Currently, the Japanese yen has gained so much ground because its value has tripled.
Many use the yen to gauge the overall health of the Pan Pacific region as well, taking
economies such as South Korea, Singapore and Thailand into consideration,as those
currencies are traded far less in the global forex markets. With Japan having basicallu
0% interest rate policy for much of the 90s and 20s.
d) The British Pound
The pound has somewhat lost its glory. A few decades back, it was the second most
widely used currency, but with the decline of the British Empire and the rise of the
euro, the pound took the backseat. Today, only six % of all the foreign exchange
transactions use the pound for trading. If you are wondering why the pound suddenly
fell to fourth place, the best answer will be due to the fact that it is in a relative
vacuum. The government of the United Kingdom fixed its price relative to the dollar
and this is not good because it no longer reflects the currency’s actual importance.
e) The Australian Dollar
This currency was created in 1966 as a replacement to the Australian pound, which is
now obsolete. Ever since then, it became one of the most popular reserve currencies
that is traded throughout Oceania and the Asia-Pacific region Foreign exchange in the
21st century moves towards diversity. Investors are looking into the currency’s
stability and volatility. Also, the economy’s reputation and security as a nation also
matters in the process of choosing.
3. Discuss the methods to improve local currency stability.
a) Appropriate Choice of Exchange Rate Regime

4. Malaysia should adopt an exchange-rate regime that provides flexibility but reduces
volatility. It may be necessary for the ringgit to move within an exchange-rate band
against a trade-weighted basket of currencies that is reviewed regularly, at least every
three years. By establish an early warning system to be monitored among key
government agencies that identify negative developments within the financial and
currency markets well ahead of time. Also work towards getting an international
agreement for more transparency and greater disclosure in the operations of
investment funds, such as pension funds, currency funds, and hedge funds. Strengthen
international surveillance for an orderly international monetary system that is based
on sound banking and financial system.
b) Reduce an Over-Dependence on the US Dollar
Although 18 per cent of Malaysia is overall trade is with the United States, about 70
per cent of its trade settlements are conducted in the US dollar, which has appreciated
against most currencies. Only about 15 per cent of Malaysia is total trade settlements
are in ringgit and 6.5 per cent in yen. There is a need to reduce an over-dependence on
the US dollar in Malaysia is trade with other countries and build up reserves of
different foreign currencies. Therefore encourage quotations of Malaysia’s exports in
the currency of the country concerned. An expert group should examine the details on
the mechanics and operation of bilateral and multilateral payment arrangements for
trade among ASEAN countries.
c) Higher Interest Rates
Higher interest rate would attract some ‘hot money flow’. Hot money flows occurs
when banks and financial institutions move money to other countries to take
advantage of a better rate of return on saving. Given interest rate are close to zero in
the US, higher interest rate in developing countries give a significant incentive to
move money and saving there.
d) Reduce Inflation

5. If inflation is relatively lower than competitors, then the countries goods will become
more attraction and demand will rise. Lower inflation tends to increase the value of
the currency in the long term. To reduce inflation, the government can pursue tighter
fiscal and monetary policy.

6. If inflation is relatively lower than competitors, then the countries goods will become
more attraction and demand will rise. Lower inflation tends to increase the value of
the currency in the long term. To reduce inflation, the government can pursue tighter
fiscal and monetary policy.