Benefits Of International Finance

Knowledge of international finance can help a financial manager consider how international events may affect a firm and what steps can be taken to exploit positive developments and insulate the firm from harmful ones.  Among the events that affect the firm and that must be managed are changes in exchange rates as well as interest rates, inflation rates and asset values.  These different changes are themselves related.  For example, declining exchange rates tend to be associated with relatively high interest rates and inflation.  Furthermore, some asset prices are positively affected by a declining currency, such as stock prices of export-oriented companies that are more profitable after devaluation.  Other asset prices are negatively affected, such as stock prices of companies with foreign-currency denominated debt that lose when the company’s home currency declines: the company’s debt is increased in terms of domestic currency.  These connections between exchange rates, asset and liability values and so on mean that foreign exchange does not simply add an extra exposure and risk to other business exposures and risks.  Instead, the amount of exposure and risk depends crucially on the way exchange rates and other financial prices are connected.  For example, effects on investors in foreign countries when exchange rates change depend on whether asset values measured in foreign currency move in the same direction as the exchange rate, thereby reinforcing each other, or in opposite directions, thereby offsetting each other.  International finance is not just finance with an extra cause of uncertainty.  It is a legitimate subject of its own, with its own risks and ways of managing them.  It is difficult to think of any firm or country that is not affected in some way or other by the international financial environment.  Inflation, jobs, economic growth rates bond and stock prices, oil and food prices, government revenues and other important financial variables are all ties to exchange rates and other developments in the increasingly integrated, global financial environment.