The document discusses international monetary systems and the International Monetary Fund (IMF), including the IMF's role in fostering global monetary cooperation and financial stability. It describes the IMF's governance structure, operations, and efforts to reform its quota system to increase representation of emerging markets. The IMF works to ensure stability of international monetary exchange rates and payments systems between its 189 member countries.

1. INTERNATIONAL FINANCIAL
MANAGEMENT
Prepared By
Ms.Jissy.C
Assistant
Professor

2.  UNIT 2
 International Monetary and Financial
Environment – International Monetary
Investments.

3.  The International Monetary Fund (IMF) is an
international organization headquartered
in Washington, D.C., consisting of 189 countries
working to foster global monetary cooperation, secure
financial stability, facilitate international trade,
promote high employment and sustainable economic
growth, and reduce poverty around the world while
periodically depending on the World Bank for its
resources.[1] Formed in 1944 at the Bretton Woods
Conference primarily by the ideas of Harry Dexter
White and John Maynard Keynes,[6] it came into
formal existence in 1945 with 29 member countries
and the goal of reconstructing the international
payment system. It now plays a central role in the
management of balance of payments difficulties and
international financial crises.[7] Countries contribute
funds to a pool through a quota system from which
countries experiencing balance of payments
problems can borrow money. As of 2016, the fund
had XDR 477 billion (about US$667 billion).[8]

4.  International Monetary System
International monetary systems are sets of
internationally agreed rules, conventions and
supporting institutions, that facilitate international
trade, cross border investment and generally there
allocation of capital between nation states.
International monetary system refers to the system
prevailing in world foreign exchange markets through
which international trade and capital movement are
financed and exchange rates are determined.

5. Features that IMS should possess
 Efficient and unrestricted flow of
international trade and investment.
 Stability in foreign exchange aspects.
 Promoting Balance of Payments
adjustments to prevent disruptions
associated.
 Providing countries with sufficient liquidity to
finance temporary balance of payments
deficits.
 Should at least try avoid adding further
uncertainty.

6. Requirements of good international monetary
system
 Adjustment : a good system must be able to
adjust imbalances in balance of payments quickly
and at a relatively lower cost
 Stability and Confidence: the system must be able
to keep exchange rates relatively fixed and people
must have confidence in the stability of the system
 Liquidity: the system must be able to provide
enough reserve assets for a nation to correct its
balance of payments deficits without making the
nation run into deflation or inflation.

7. • Currencies and Exchange Rates
• More than 150 currencies in use worldwide.
• Currency regimes are simplifying. e.g., The euro
in Europe; the dollar in Panama and Belize.
• Most currencies are not very convertible. The
dollar, yen, pound, euro are hard currencies –
universally accepted and preferred in
international transactions.
• Exchange rate: Price of one currency in terms of
another.
• Exchange rates affect the fortunes of the firm in
various ways – costs of inputs, sales
performance, which market entry strategies to
use, etc.

8. Constantly Fluctuating Exchange Rates Require
International Managers to Keep in Mind Three Facts
• The prices the firm charges can be quoted in the
firm’s currency or in the currency of each foreign
customer.
• Because several months can pass between
placement and delivery of an order, fluctuations in
the exchange rate during that time can cost or earn
the firm money.
• The firm and its customers can use the exchange
rate as it stands on the date of each transaction, or
they can agree to use a specific exchange rate.

9.  Four risk of international business
Risk in
international
Business
Cross-
cultural
Risk
Commercial
Risk
Currency
Risk
Country risk
•Cultural Differences
•Negotiation patterns
•Decision –Making styles
•Ethical Practices
•Weak Partner
•Operational problems
•Timing of entry
•Competitive intensity
•Currency exposure
•Asset valuation
•Foreign taxation
•Inflation &transfer strategy
•Harmful or unstable political
system
•Laws & regulation unfavorable to
foreign firms
•Underdeveloped legal system
•Bureaucracy and red tape
•Corruption and other ethical
blunders
•Mismanagement or failure of the
national economy

10.  Foreign Exchange Markets
 • Foreign exchange: All forms of internationally-
traded monies including foreign currencies,
bank deposits, checks, and electronic transfers.
 • Foreign exchange market: The global
marketplace for buying and selling national
currencies. Exchange rates are in constant flux.
In 2012, for example, the Indian rupee was
trading at 48 rupees to the U.S. dollar. By 2013,
the rate had depreciated to 58 rupees—the
rupee’s value went down relative to the dollar by
more than 20 percent.
 • This shift made the rupee less expensive for
Americans, and the U.S. dollar more expensive
for Indians. Such shifts can complicate
international business.

11.  How Exchange Rates are Determined
In a free market, the “price” of any currency
(rate of exchange) is determined by supply
and demand:
 The greater the supply of a currency, the
lower its price
 The lower the supply of a currency, the
higher its price
 The greater the demand for a currency, the
higher its price
 The lower the demand for a currency, the
lower its

12.  Equilibrium price of Euros for Dollar
Demand
Supply
Quantity of Euros
Dollar price for
Euros
Q
1
P
1

13.  Factors That Influence the Supply and
Demand of a Currency
 Economic growth
 Interest rates and inflation
 Market psychology
 Government action
 Balance of payment

14. Economic Growth
 The increase in value of the goods and services
 produced by an economy.
 Typically measured as the annual increase in real
GDP.
 Innovation and entrepreneurship drive business
activity and demand.
Interest Rates and Inflation
Inflation:
 a rise in the prices of goods and services.
 Reduces the purchasing power of the affected
currency
 Interest rates and inflation are positively related. I.e.,
high inflation = high interest rates, because investors
expect a return that exceeds inflation rate.
 Where inflation or interest rates are rising, the value

15. Market Psychology
 Herding: the tendency of investors to mimic each
others’ actions
 Momentum trading: investors buy stocks whose
prices have been rising and sell stocks whose prices
have been falling- usually done via computers set to
do massive buying/selling when asset prices reach
certain levels
Government Action
 Governments intervene to influence the value of their
own currencies. E.g., the Chinese government
regularly intervenes to keep the renminbi
undervalued, ensuring that Chinese exports remain
strong.
 Intervention is conducted via the nation’s Central
Bank, by buying and selling currency in the foreign

16. Balance of payment
 It is the nation’s balance sheet of trade
,investment and transfer payments with the
rest of the world .It reflects the difference
between the total amount of money coming
into and going out of a country

17. Valuation of Currency Affects Trade Surplus
or Deficit
 Trade surplus: country’s exports exceed its
imports; may result when currency is
undervalued.
 Trade deficit: nation's imports exceed its
exports, causing net outflow of foreign
exchange.
 Balance of trade: difference between the value
of a nation’s exports and its imports

18.  The Bretton Woods Agreement
Signed by 44 countries in 1944
 Pegged value of the dollar to an established
value of gold, at $35 per ounce.
 U.S. government agreed to buy and sell gold
to maintain the fixed rate.
 All other signatories pegged their currencies
to the U.S. dollar, and agreed to maintain this
value via central bank intervention.
 System kept exchange rates stable for 25
years.
 Broke down in early 1970s

19.  The Bretton Woods Legacy
Instituted the concept of ‘international
monetary cooperation’ among central banks.
 Established the concept of fixing exchange
rates to minimize currency risk.
 Created the International Monetary Fund
(IMF) and the World Bank, agencies that aim
to stabilize currencies and reduce global
poverty.

20.  The Exchange Rate System Today
Most advanced economies (e.g., Europe,
Japan, U.S.) use the floating exchange rate
system. The value of a currency ‘floats’
according to market forces, with little
government intervention.
 Many developing economies and emerging
markets use the fixed exchange rate system.
The value of a currency is set at a specified
rate to the value of another currency, or
basket of currencies. E.g., China, African
countries.

21. Monetary and Financial Systems
International monetary system:
The institutional framework, rules, and procedures
by which national currencies are exchanged for
one another.
Global financial system:
The collection of financial institutions that facilitate
and regulate the flows of investment and capital
funds worldwide, incorporating the national and
international banking systems, the international
bond market, national stock markets, and the
market of bank deposits denominated in foreign
currencies. Has become huge since the 1990s.
E.g., 15% of U.S. equity funds are invested
abroad

22.  Globalization of Finance
Advantages:
 Reduces cost of capital for firms
 More financing alternatives for firms
 More investment opportunities for people
 More financing options for emerging markets
and developing economies
 Facilitating trends:
 Monetary and financial deregulation
worldwide
 New technologies and the Internet
 Growing role of single-currency systems,
e.g., euro

23.  Key Participants and Relationships in the
Global Monetary and Financial system
The Firm
Commercial
Bank
National Stock exchange
& Bond market
Central
Banks
IMF
Bank for
Internationa
l
Settlements
World
bankInternational
Organization Level
National Level
National
Infrastructure
Level
Firm Level

24.  The Firm : International transactions require
firms to deal with huge sums of foreign
exchange
 National Stock Exchanges and Bond
Markets: Facilities for trading securities and
bonds
 Commercial Banks : Lend money to finance
business activity, play a key role in nations’
money supplies, and exchange foreign
currencies.
 Central Banks : Regulate money supply, issue
currency, manage exchange rates, control
national reserves.

25.  International Monetary Investment
 The International Monetary Fund (IMF) is an
organization of 189 countries, working to foster global
monetary cooperation, secure financial stability,
facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty
around the world.
 Created in 1945, the IMF is governed by and
accountable to the 189 countries that make up its
near-global membership.
 The IMF's primary purpose is to ensure the stability of
the international monetary system—the system of
exchange rates and international payments that
enables countries (and their citizens) to transact with
each other. The Fund's mandate was updated in 2012
to include all macroeconomic and financial sector
issues that bear on global stability.

26.  The importance of IMF can be explained for its
following works :
 To bring about international monetary
cooperation.
 To promote and establish system of
multinational trade and payments system.
 To help member nations to achieve balanced
economic growth.
 To ensure stability in foreign exchange rates.
 To reduce the disequilibrium in the balance of
payments.
 To offer special aids or loans to member
countries in solving their economic problem.

27.  Structure of IMF
IMF is Governed by FOUR main Bodies:
 1: Governing Body
 2: Executive Board
 3: Managing Director
 4: IMF Staff

28. Governing Body
 Voting Power
Each member nation is required to contribute
funds according to its Economic size and
Strength
 Special Drawing Rights(SDR)
A unit for the amount of foreign currency
member states can draw on Currencies
including: • Euro, Pound Sterling, Japanese yen
and US Dollar
 Advisers of the Governing Body
It is being advised by TWO Committees:
I. International Monetary & Financial Committee
(IMFC) II. The Development Committee

29.  International Monetary & Financial
Committee (IMFC)
 IMFC has 24 Members
 Meets twice a year (Spring , Annual)
 Matters of common concern affecting the
global economy
 Communiqués provide guidance for the
IMF's work program

30. The Development Committee
 24 Members
 A joint committee, tasked with advising
 IMF & World Bank
 Issues related to Economic development
 Developmental issues

31.  2. Executive Board
 24 Executive Directors
 5 are appointed by the countries having
Largest Quotas
 US, UK, Japan, Germany, France
 19 are appointed by Regional Groups of
remaining members
 Fund General Operation
 Function in Continuous Session

32. 3. IMF Managing Directors
 Headed by Executive Board
 Managing Director is chosen by Executive
board
 It is responsible for the conduct of the
ordinary business of the Fund
 Manager appointed for 5-Years
 May not serve concurrently

33. 4. IMF Staff
 It has staff of about 2,600 economists,
statisticians, research scholars, experts in
public finance and taxation and in finance
systems and banking, linguists, writers and
editors, and support personnel.
 • Most headquartered in Washington, DC

34.  How the IMF Makes Decisions

35.  Governance reform
The Fund’s governance structure must keep pace
with the rapidly evolving world economy to ensure it
remains an effective and representative institution of
all its 189 member countries. To secure this objective,
in December 2010 the Board of Governors of the IMF
completed the 14th General Review of Quotas, which
involved a package of far-reaching reforms of the
Fund's quotas and governance. The conditions for the
effectiveness of these reforms were met on January
26, 2016. Among others, the reform included:
 A quota increase and shift in shares.
The 14th General Review of Quotas resulted in an
unprecedented doubling of quotas and a major
realignment of quota and voting shares to emerging
and developing countries (with a more than 6 percent
quota shift to dynamic emerging market and
developing countries, and under-represented
countries).

36.  Protecting the quota and voting share of the poorest
member countries.
This group of countries was defined as those eligible for the
low-income Poverty Reduction and Growth Trust (PRGT) and
whose per capita income fell below $1,135 in 2008 (the
threshold set by the International Development Association) or
twice that amount for small countries.
 Quota formula and next review.
A comprehensive review of the current quota formula was
completed in January 2013, when the Executive Board
submitted its report to the Board of Governors. Work on a new
quota formula has started in the context of the 15th General
Review of Quotas.
 A new composition and more representative Board.
The 2010 reforms also included an amendment to the Articles
of Agreement established an all-elected Executive Board, which
facilitates a move to a more representative Executive Board (as
noted above, the first all-elected Board has been in place since
November 2016). The European members are committed to
reducing by two the number of Board members representing
advanced European countries in favor of emerging market and
developing countries, and have made significant progress.