International finance

1. INTERNATIONAL FINANCE -AN OVERVIEW
Unit-1
Introduction - Definition, features, scope, importance of international finance, issues involved in international
business & and finance, methods of payment in international business; International monetary system (meaning &
evolution). (14 Hours )
INTERNATIONAL FINANCIAL MANAGEMENT
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VIPULKUMAR N M
Assistant Professor,
Department of Commerce,
Kristu Jayanti College, Bengaluru

2. International Finance
International finance, sometimes known as international macroeconomics, is
the study of monetary interactions between two or more countries, focusing
on areas such as foreign direct investment and currency exchange rates.
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3. Definition of International Finance
International finance cover all procedures techniques and tools that
financial institution such as banks and insurance companies, provide
to clients. These tools may include financing agreements and
transaction strategies on securities exchanges International finance
plays a significant role in modern economies.
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4. Meaning of International Finance
 It is related to the economic, commercial, and accounting activities
of Multi National companies, International, Global Companies,
government and individuals.
 International Finance is a discipline of exploring avenues of inputs
and outputs from overseas in the area of goods and services and
information with the objective of profit maximization
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5. Features of International Finance
 It affects the economic and monetary system that transcends
national borders
 MNCs, TNCs. Global Companies and Foreign Companies are the
main players
 International Institutions like World Bank. WTO and IMF play a
major role in the growth and development of International Trade.
 International business covers currency conversion Trade Credit
and risks associated with international and domestic markets.
 It involves methods of financing international business and foreign
trade
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6. Features of International Finance
 It is concerned with the economic relationships, developments
and trade relationships amongst the countries of the world.
 It includes International sources of funds such as ADR and GDR
 Involves economic accounting and commercial transactions
between different countries.
 It involves funds flow on account of Capital and Current Account
Transactions.
 The cross border connections impact the economies of the
transacting nations as a whole.
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Differences between Domestic Finance And International Finance

8. Emerging Challenges in International Finance
1. Varied Economic System
2. Tariff and Non-Tariff Barriers
3. Political Risk
4. Environmental Safeguard
5. Dumping
6. Cultural Differences
7. Language Differences
8. Intellectual property Rights
9. Cybercrimes
10. Transfer Pricing
11. International Taxation
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9. Emerging Challenges in International Finance
12. Economic and Currency Crisis
13. Interest Rates Charging
14. Foreign Exchange Risk
15. Cold war between countries
16. International business cycle
17. Operational Cash Management
18. International Terrorism
19. International Cash Management
20. Creditworthiness
21. Methods of Payment
22. Foreign Exchange Market
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1. Varied Economic Systems:
Economic system refers to the kind of governance of a country. It
may be on the basis of the principles of communism, capitalism,
socialism and mixed economy, rules and ideologies. The international
companies have to navigate with country specific economic systems.
American companies are looked with scepticism by Japan, European and
gulf countries and vice versa. The economic system issue is not possible
to address but MNCs may harness for their economic gains.

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2. Tariff and non-tariff trade barriers:
The progress of the world trade is dependent on FREE TRADE
POLICY. Many countries distorted the free trade among themselves
and this trade restriction is called trade barrier. The opposite of free
trade is trade barrier.
These barriers are of two kinds:
• Tariff and
• Non-tariff

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3. Political Risks:
The instability in the governance by political system in different countries is a
major setback for international companies. The draconian rules and policies of some
countries restrict market access.
• Risk of non-renewal of import and exports licenses
• Risks due to war
• Risk of the imposition of an import ban after the delivery of the goods
• Surrendering of political sovereignty
• Changes in the policies of the government
• Exchange control regulations
• Trade embargoes
• Cold War amongst nations
• Rise and fall of Political Power
• Restrictive trade policies of the government

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4. Environmental safeguards:
One of the major challenges today in the world is global warming.
The carbon dioxide emissions by different countries and the greenhouse
effect therein resulted in depletion of ozone layer. The relentless use of
natural resources is the route cause for environmental delay. The
international trade and environmental protection should go hand in hand in
the interest of the future generation

14. 5. Dumping:
It refers to selling a product at a high price in the home currency and
relatively at a LOW PRICE in the host country by an international company.
This practice ruins industries and employment opportunities in the host
country especially micro and small scale industries. For example, the
Chinese goods like goods sold in Diwali, Holi and other festivals are sold, at
very low prices in India.
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15. OBJECTIVES OF DUMPING
The main objectives of dumping art follows
1. Creating artificial demand: A monopolist resorts to dumping in order to
create demand the foreign market. Due to perfect competition in the foreign
market he lower the price of his commodity in comparison to the other
competitors so that the demand for his commode may increase. Therefore he often
sells his commodity by incurring loss in the foreign market.
2. Disposal of excess: When there is excessive production of a monopolist's
commodity and he is not able to sell in the domestic market, be wants to sell the
surplus at a very low price in the foreign market.
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16. OBJECTIVES OF DUMPING
3. Expansion of Industry. Even though he sells at a lower price he makes good
profits which helps the trader in expansion and innovation.
4. Developing Trade Relations. The monopolist sells his commodity at a low
price foreign market, thereby establishing new connections in the foreign market.
As a result, the monopolist increases his production, lowers his costs and earns
more profit.
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17. Effects of Dumping: Dumping affects both the importer and exporter countries in the
following ways
Effects on Importing Country: Dumping a harmful for the importing country if continues
for a long period This is because it takes time for changing production in the importing
country and its domestic industry is not able to bear competition.
If the monopolist dumps the commodity for removing, his competitors from the
forma market the importing country gets the benefit of cheap commodity in the beginning.
But after competition ends and he sells the same commodity at a high monopoly price the
importing country incurs a loss because now it has to pay a high price.
Effects on Exporting Country: Dumping affects the exporting country in the following
way:
The exporting country earns foreign currency by selling its commodity in large quantity in
the foreign market through dumping. As a result, its balance of trade improves.
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18. Anti-Dumping Measures: Anti-dumping is a measure to rectify the situation
arising out of the dumping of goods and its trade distortive effect. Thus, the
purpose of anti-dumping duty is to rectify the trade distortive effect of dumping
and re-establish fair trade. The following are essential for initiating an anti-
dumping investigation
Sufficient evidence to the effect that
(a) there is dumping
(b) there is injury to the domestic industry, and
(c) There is a causal link between the dumping and the injury, that to say that
dumped imports have caused the alleged injury.
b) The domestic production expressly supporting the ant-dumping application
must account for not less than 25% of the total production of the like article by
the detective industry.
The following measures are adopted to stop dumping:
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19. Tariff Duty: The importing country implies tariff on the dumped commodity consequently
the price of the importing commodity increases and the fear of dumping ends But it is
necessary that the rate of duty on imports should be equal to the difference between the
domestic price of the commodity and the price of the dumped commodity. Genetically, the
tariff duty in import more than thin difference to end dumping, but it is likely to have harmful
effects on other imports
Import Quota: Import quota is under measure to stop dumping under which a commodity of
a specific volume or value is allowed to be imported into the country For this purpose. It
includes the imposition of a duty along with fixing quota and providing time amount of
foreign exchange to the importer.
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20. Import Embargo: Import embargo is an important retaliatory measures against dumping
According to this, the inputs of certain or all types of goods from the dumping country are
banned.
Voluntary Export Restraints: To restrict dumping, developed countries enter to bilateral
agreements with other countries from which they fear dumping of commodities. These
agreement ban the export of specified commodities so that the exporting country may not
dump its commodities in the country, such bilateral VER agreements exist between India and
EU countries in exporting Indian textiles.
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21. Types of Dumping
Dumping can be of several types, and the one adopted by a country target
depends upon a objectives and ether attend it circumstances
1. Persistent Dumping: If a trader has resorted to continuously selling
goods at prices lower than what is normally charged in the domestic
country this type of dumping is a continuous, long-term one. It is termed
as Persistent Dumping.
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22. Sporadic Dumping: It is occasional dumping of a product whereby the seller wants to get
rid of surplus stocks or wants to dispose of stock of an older technology item which is being
replaced by a newer technology in other words disposal of unsold inventory to a foreign
buyer is termed as Sporadic Dumping It is not aimed at competing rivals right out of the
market or capturing the market permanently it is therefore temporary in nature. In other
words, occasional sale of a commodity below cost to unload unforeseen and temporary.
surplus of a type of commodity E.g. Milk products in the international market without
reducing the domestic prices are comes in this category
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23. Predatory Dumping: This is also a temporary type of dumping. However as the name
suggests. Its purpose is to kill the competition and capture the market by inflicting heavy
losses and posing a threat on the competing firm. Its main area of focus competitors. This
type of dumping carries with it, the risk of dragging for a period longer than planned and
therefor can be undertaken only by films with huge resources
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6. Cultural differences:
Every country has unique cultural heritage that shape values and influence
the conduct of business. Even within geographic regions that are considered
relatively homogeneous, different sub-cultures are prevailing. International
companies have to cope with these differences and adopt to the culture and sub-
culture of the countries, where they operate. MNCs find that matters such as
defining the appropriate goals of the company, attitudes toward risk, dealing with
employees and the ability to curtail and profitable operations vary dramatically
from one country to the next.

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7. Language differences:
The ability to communicate is critical in all business, including international
transactions. The Indian and US. citizens are often at a disadvantage because they are
generally fluent in English, while European and German people are usually fluent in
several languages including English.

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8. Intellectual property rights:
The trinity of intellectual properties are patents (for inventions) trade marks (for
brand name, image etc.) and copyright (for author, musicians, lyrics, filmmakers). The
invention of the new things require world class Research and Development set up by
foreign firms. The problem of privacy is haunting several leading companies and
brands. India, after a great fight with USA has registered the patent protection for
Basmati rice, turmeric and tomato. In case of pharma products, a large number of
patent infringements is happening around the world especially the life savings drugs.
This is a vital issue in international business and finance.

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9. Cybercrimes:
Cybercrime is a crime committed with the use of computer and internet. Today, all
around the world e-commerce and e-business, e-governance, are flourishing. The flip side
of the e-commerce, is cyber crime stantalising the international finance. The privacy is
interrupted, money in some others accounts are withdrawn, manipulated and transferred.
The cybercrimes if unabated will pose a great danger to the world business. The WTO has
asked all the member countries to have in place a proper and comprehensive cyber law in
place to check the maladies and anomalies of cybercrimes. We in India, have the first cyber
law, styled Information Technology Act, 2000.

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10. Transfer Pricing:
In any international business there are normally a large number of transfers of
goods, services, technology and other resources between the parent company and foreign
subsidiaries. The price at which goods, services and others are transferred between affiliates
within the company is called transfer price. Transfer price also affects an international
company’s ability to monitor the performance of individual corporate subsidiaries and to
reward or punish managers responsible for their performance.

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11. International Taxation: Taxes have a significant impact on areas, as
diverse as making foreign investment decisions, managing exchange risks,
planning capital structures, determining financing costs and managing inter
affiliate funds flows. For the international business with activities in many
countries, the various treaties have important implications for how the
international company should structure its internal payments system among the
foreign subsidiaries and the parent company. A typical company uses several
strategies to manage the tax issues. They are tax havens, offshore financial
centres, transfer prices, fronting loans and the income revital form. Tax Havens
Tax Issues Offshore financial centre Fronting loans Transfer Pricing
(i) Tax Havens
(ii)Offshore Financial Centre
(iii)Transfer Pricing
(iv)Fronting Loan

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12. Economic and Currency Crisis:
The Asian crisis, Malaysian crisis, Pacific-Rim country crisis are in relation to
economic crisis wherein they have experienced. RECESSION and ADVERSE,
BALANCE OF PAYMENTS position. The same countries along with Japan
experienced currency crisis in that the value of currencies were either depreciated or
devalued and further they were exposed to shortage of foreign exchange reserves.

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13. Interest Rates Charging:
The rate of interest charged by World Bank on its loans disbursed is 7.5 per
cent p.a. and Asian Development Bank’s concessional interest rate is 4 per cent p.a.
The equity cost of capital is less when compared to debt funds in the global capital
market. The increasing interest rate raises cost of capital and profitability of the
company is lessened interest rate is a parameter in global finance which plays a
dominant role in production and operational risks of global corporates.

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14. Foreign Exchange Risk:
Exchange Rate refers to the price of one currency against another currency.
The exchange of currency happens in two ways — fixed exchange rate and floating
exchange rate. The exchange rate risk is more pronounced under flexible or floating
exchange rate. This is because floating exchange rate is based on market forces of
DEMAND for and SUPPLY of foreign currencies, at a particular time Trade
surplus/deficit vis-a-vis the currencies of the countries, a host of economic factors like
GNP, Fiscal Deficit, balance of payments position. Industrial production data, and
employment data, inflation rate differentials and interest rate differentials.

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15. Cold war between countries:
The enmity, animosity, difference of opinion between and among countries be
routed out at the surface level. Hatred is external while jealousy is internal. The cold
war among nations is because of the twin pests — hatred and jealousy between the
countries in the World

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16. International business cycle:
Countries are subject to the times of good trade and bad trade. Goal trade is
characterised by increased economic activities, production, profitability and revenue.
The opposites are low economic activities, production and other parameters
representing the bad trade. Business or trade cycle is international in character,
recurring in nature and time period of each stage of the cycle such as inflation,
deflation, revival and recession are uncertain.

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17. Operational risks:
The operational risk encompasses commercial risks, foreign exchange risk,
political risks and country specific risks. Different currencies, payments and receipts
socioeconomic systems, laws, habits, tasks preferences, and environmental aspects
lead to higher risks in the form of credit, market access, currency and exchange risks

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18. International terrorism: The growing menance of international terrorism is
ruining international business. Terrorism obstructs the smooth flow of economic
activities. It pushes the economy into bankruptcy and insolvency. It worsens
import and export trade. The countries which want to have cordial business
relations with other countries will rethink and hesitate to have relationship with
terror hit countries. The free flow of foreign investment is affected due to
terrorism.

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19. International Cash Management: One major task of an international
financial manager relates to the management of cash. This task is more
complicated for international companies. For example, Cathay Pacific uses over
30 currencies in its operations. While managing cash, the international financial
manager needs to address three issues —
 minimising cash balances.
 minimising currency conversion costs, and
 minimising foreign exchange risks

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20. Creditworthiness:
International business and finance stands on and runs through the credibility,
trustworthy and credentials of the borrowers of goods, services technology or information.
As the risks are high in the international finance, creditworthiness is an essential part of
entering into any trade or payment agreement.

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21. Methods of Payment:
Every shipment abroad requires some kind of financing while in transit. The
exporter also needs funds to buy or manufacture its good. Similarly the importer has to
carry these goods in inventory until they are sold. There are 6 methods of payments in
international market. Such methods are
(i) Cash in advance
(ii) Letter of Credit
(iii) Draft or bill of exchange
(iv) Consignment of goods
(v) Open account selling
(vi) EFT

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22. Foreign Exchange Markets:
It is the market where foreign currencies are bought and sold against each
other. Foreign Exchange (FEX) market is an organised one and banks are the
important players. Bulk of trade is accounted for small number of currencies, viz.
US Dollar, Euro, Japanese Yens, Pound Sterling, Swiss Francs, Canadian Dollar
and Australian Dollar. It is an over the counter market. This means that there is no
single physical or electronic market place. The market itself is actually a worldwide
network of interbank traders consisting of authorized dealers, i.e., banks, connected
by telephonic lines and computers. The currency appreciation and depreciation of a
particular currency will affect international corporates business considerably. In
advanced countries, the capital account convertibility as in existence conversely in
Indian, capital account convertibility of currency is restricted for the fear of foreign
capital exodus. Though the Tarapore Committee recommended capital account
convertibility in the phased manner, but could not happen.

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SOME BASIC CONCEPTS
1. Balance of payments:
The balance of payments is a statistical statement that summarises transactions
between residents and non-residents during a period. It consists of the goods and
services account, the primary income account, the secondary income account, the
capital account, and the financial account.

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2. Current account:
The current account shows flows of goods, services, primary income, and
secondary income between residents and non-residents.
3. Capital account:
The capital account shows credit and debit entries for non-produced non-
financial assets and capital transfers between residents and non-residents. It records
acquisitions and disposals of non-produced non-financial assets, such as land sold to
embassies and sales of leases and licenses, as well as capital transfers, that is, the
provision of resources for capital purposes by one party without anything of economic
value being supplied as a direct return to that party.

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(iv) Financial account:
The financial account shows net acquisition and disposal of financial
assets and liabilities. Financial accounts transactions appear in the balance of
payments and, because of their effect on the stock of assets and liabilities, also
in the integrated lIP statement.
(v) The International Investment Position:
The international investment position (IIP) is a statistical statement that
shows at a point in time the value and composition of:
(a) Financial assets of residents of an economy that are claims on non-residents
and gold bullion held as reserve assets, and
(b) Liabilities of residents of an economy to non-residents.

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Methods of Payment in International Trade
Cash-in-Advance
With cash-in-advance payment terms, an exporter can avoid credit risk
because payment is received before the ownership of the goods is transferred.
For international sales, wire transfers and credit cards are the most commonly
used cash-in-advance options available to exporters. With the advancement of the
Internet, escrow services are becoming another cash-in-advance option for small
export transactions. However, requiring payment in advance is the least attractive
option for the buyer, because it creates unfavorable cash flow. Foreign buyers are
also concerned that the goods may not be sent if payment is made in advance.
Thus, exporters who insist on this payment method as their sole manner of doing
business may lose to competitors who offer more attractive payment terms.

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Letters of Credit
Letters of credit (LCs) are one of the most secure instruments available
to international traders. An LC is a commitment by a bank on behalf of the
buyer that payment will be made to the exporter, provided that the terms and
conditions stated in the LC have been met, as verified through the presentation
of all required documents. The buyer establishes credit and pays his or her
bank to render this service. An LC is useful when reliable credit information
about a foreign buyer is difficult to obtain, but the exporter is satisfied with the
creditworthiness of the buyer’s foreign bank. An LC also protects the buyer
since no payment obligation arises until the goods have been shipped as
promised.

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Documentary Collections
A documentary collection (D/C) is a transaction whereby the exporter entrusts
the collection of the payment for a sale to its bank (remitting bank), which sends the
documents that its buyer needs to the importer’s bank (collecting bank), with
instructions to release the documents to the buyer for payment. Funds are received
from the importer and remitted to the exporter through the banks involved in the
collection in exchange for those documents. D/Cs involve using a draft that requires
the importer to pay the face amount either at sight (document against payment) or on a
specified date (document against acceptance). The collection letter gives instructions
that specify the documents required for the transfer of title to the goods. Although
banks do act as facilitators for their clients, D/Cs offer no verification process and
limited recourse in the event of non-payment. D/Cs are generally less expensive than
LCs.

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Open Account
An open account transaction is a sale where the goods are shipped and
delivered before payment is due, which in international sales is typically in 30,
60 or 90 days. Obviously, this is one of the most advantageous options to the
importer in terms of cash flow and cost, but it is consequently one of the highest
risk options for an exporter. Because of intense competition in export markets,
foreign buyers often press exporters for open account terms since the extension
of credit by the seller to the buyer is more common abroad. Therefore, exporters
who are reluctant to extend credit may lose a sale to their competitors.
Exporters can offer competitive open account terms while substantially
mitigating the risk of non-payment by using one or more of the appropriate
trade finance techniques covered later in this Guide. When offering open
account terms, the exporter can seek extra protection using export credit
insurance.

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Consignment
Consignment in international trade is a variation of open account in which payment is
sent to the exporter only after the goods have been sold by the foreign distributor to the
end customer. An international consignment transaction is based on a contractual
arrangement in which the foreign distributor receives, manages, and sells the goods for
the exporter who retains title to the goods until they are sold. Clearly, exporting on
consignment is very risky as the exporter is not guaranteed any payment and its goods are
in a foreign country in the hands of an independent distributor or agent. Consignment
helps exporters become more competitive on the basis of better availability and faster
delivery of goods. Selling on consignment can also help exporters reduce the direct costs
of storing and managing inventory. The key to success in exporting on consignment is to
partner with a reputable and trustworthy foreign distributor or a third-party logistics
provider. Appropriate insurance should be in place to cover consigned goods in transit or
in possession of a foreign distributor as well as to mitigate the risk of non-payment.

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INTERNATIONAL MONETARY SYSTEM
International monetary system refers to a system that forms rules and standards for facilitating
international trade among the nations. It helps in reallocating the capital and investment from one
nation to another. It is the global network of the government and financial institutions that determine
the exchange rate of different currencies for international trade. It is a governing body that sets rules
and regulations by which different nations exchange currencies with each other.
With the growing complexity in the international trade and financial market, the international
monetary system is necessary to assign a standard value of the international currencies. The rules and
regulations set by the international monetary system to regulate and control the exchange value of the
currencies are agreed upon by the respective governments of the nations. Thus, the government’s
stand may affect the decision making of the international monetary system. For example, change in
the trade policy of a government may affect the international trade of goods and services

50. GOALS OF INTERNATIONAL FINANCE
 To achieve higher rate of profits
 Expansion of production capacities
 Severe competition in the home country
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51. GOALS OF INTERNATIONAL FINANCE
 Limited home market
 Political Stability Vs Political Instability
 Availability of Technology and skilled human resources
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52.  High cost of Transportation
 Nearness to raw materials
 Availability of human resources
 Liberalisation and Globalisation
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53.  Increased market share
 To achieve higher rate economic development
 Tariff and import quotas
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