It is difficult to draw a line demarcating financial and monetary environments. In fact finance involves money and money involves finance and hence it is too difficult to discuss why to study them individually.
1. To understand a global economy, we must understand the change factors and their impact. Four recent changes have had a profound impact on the international financial environment – the end of Cold War, the emergence of growing markets among the developing countries of
East Asia and Latin America, the increasing globalisation of the international economy, and the current global slowdown and the recovery. All of them have had financial impact.
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2. No international business is possible without significant understanding of international finance. All of us will agree that national currencies exist; international trade is a reality and therefore, exchange rates are necessary and often change depending upon so many factors.
Credit risks are real and different judicial systems among different countries complicate it. Similarly, the sovereignty adds further salt by way of political risks to standard commercial credit risks; and the individual tax system of each country makes tax systems incompatible as there are issues of double and triple taxation.
If intelligent decisions are to be made a thorough understanding of international finance is a must. “For successful international operations, a manager must have information about environmental factors that affect business operations in foreign countries. Domestic methods should be adjusted to accommodate customs, attitudes, economic factors, and political factors that prevail in the country of operation.”
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3. The field of finance deals with the concepts of time, money, risk and how they are interrelated. It also deals with how money is spent and budgeted.
4. Even if a firm is not doing any international business, the knowledge of international financial environment is a must. The domestic prices and the profitability are greatly influenced by the changes taking place in the international financial environment.
5. There are many players and many instruments in vogue. The study of international financial environment will tell us who these are and when to use whom.
6. There are many regulatory agencies. We can understand what role they play in international finance and how and when they have faulted.
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7. There have been many financial crises. A study of them tells about the reasons thereof and the steps taken to overcome those crises.
8. There does exist national currencies and hence doing international business is constantly concerned with exchange rates and the associated risks.
9. Most countries have their own money. In the absence of any gold or silver backing, it is impossible to find their intrinsic value. Thus, there is exchange risk. It often implies that there is contractual exposure.
10. Appreciation (Revaluation) or Depreciation (Devaluation) can make a country less attractive as a place to produce and export from or as a market to export to. The market values and competitiveness of firms and countries are affected, i.e., there is risk of economic exposure.
11. The money which is there in a foreign country faces transfer risk, if the political set up does not allow its remittance. Another problem is that of expropriation. In the Gas pricing row between Ambani Brothers, Government of India says that the State has absolute control over natural resources. Similarly, Vedanta is facing problem in seeking permission for its acquisition of Cairns.
12. Sercu says that a truly international stock and bond market does not exist. The basic reason is that of asymmetric information and investor protection. Governance is big issue and indifference to the issue has caused frauds and crises. Today, organisations to meet the individual country regulator accounts have to prepare different sets of accounts.
Infosys and other international MNEs from India have to prepare one set according to Indian regulator and the other set is prepared on GAAP basis. Probably the third would be required on the basis of IFRS (International Financial Reporting Standard).