International Finance
Lecture# 1 and 2
Chapter 1.
International finance: basic concepts
1.1. The economic nature of the international finance
International finance is defined as the set of relations for the creation and using of funds
(assets), needed for foreign economic activity of international companies and countries.
Assets in the financial aspect are considered not just as money, but money as the capital, i.e. the
value that brings added value (profit).
Capital is the movement, the constant change of forms in the cycle that passes through three
stages: the monetary, the productive, and the commodity.
So, finance - is the monetary capital, money flow, serving the circulation of capital. If money is
the universal equivalent, whereby primarily labor costs are measured, finance is the economic
tool.
The definition of international finance as the combination of monetary relations, that develop in
process of economic agreements - trade, foreign exchange, investment - between residents of the
country and residents of foreign countries, is not exhaustive. It does not reflect all the essential
features, that are generated by the set of conditions outside the company (i.e. the external
environment of the international business), which effects on their activity in practice.
These specifics lie in the fact of the relation between the international finance actions and the set
of temporary and spatial risk factors (currency, credit, investment, political) caused by
uncertainty and fluctuations in exchange rates of securities, the comparative difference in
inflation and interest rates in different countries, the uncertainty of the economic policy of the
country.
Uncertainty and increased risk are exacerbated by the fact, that international company has a
small effect on the business areas in which it operates. However, while choosing alternative
financial decisions in the international business area, we cannot dispense with the analysis of the
value of future costs and revenues of time (term commercial transactions), space (geographically
remote) and the uncertainty caused by the need to work with a large number of currencies, taking
into account the differences in interest rates and inflation, legislation and political systems in
many countries.
This feature of international finance is represented in such determination. International finance
,as a subject of special disciplines, reflect the economic aggregate of time and uncertainty,
regarding the decisions, that touches several different countries, taking into account that every
sovereign country has the own currency, business laws and political systems International
finance is one of the main subsystems of the world economy, which makes a decisive impact on
the national and global economy. At the same time, the international finance functions as a
integral system, the elements of which are:
- the international monetary system, which is characterized by the components: the national and
reserve currency, international collective currencies , the conditions of mutual convertibility,
currency parity, exchange rate, national and international regulatory mechanisms of exchange
rates ;
- international payments that serve the movement of goods and factors of production, financial
instruments, and the balance of payments, which reflect all the transactions related to
international payments; - international financial markets and the mechanisms of trading by
specific financial instruments – currency, loans, securities;
- international taxation, as the method of mobilization of funds;
- international financial management of TNC, where international investment, risk management,
transnational financing etc. take the main place [Fig. 1.1].
To the main functions of international finance belong:
- Distribution function, which is the mechanism of international finance carries cash distribution
and redistribution of world product. Due to the international finance cash funds are created,
distributed and used, different needs of the world economy are met.
Distribution function is intended to promote the organization of the balanced and efficient global
production and development of all the sectors of the world economy with the aim of the most
complete satisfaction of necessities of the world community;
- The control function, the general essence of which is monitoring the production and
distribution of global social product in money form by recording and analyzing its motion. The
result of this function is making decisions on international finance and development of current
and strategy international financial policy;
- Regulatory function is associated with the intervention of international monetary and financial
institutions with the help of finance in the process of production ;
- Stabilizing function is to create stable conditions for economic and social relations in the global
system. International financial transactions are carried out in the international financial markets
and solve the problems of organizing and managing money relations in the formation and using
of the funds within the global financial environment. The objects of financial operations are the
various financial assets: national and foreign currency, securities, real estate, precious metals.
The major international financial transactions are the real money transfer, operations with
capital, investment and speculation operations. International transactions develop dynamically in
modern conditions, transforming the financial systems of individual countries as well as the links
between financial systems of these countries.
To the competence of international finance belong:
- Analysis of the financial sector on a global scale;
- Determine the interaction of financial transactions on a global level and consideration the
international financial transactions as a continuous process with regular changes;
- The development of new financial methods, that affect the regional financial system and
facilitate its integration;
- The analysis of financial activities at different levels: national, regional, global. International
finance contributes to the internationalization of social economic and monetary relations on the
accumulation, distribution and redistribution of internationalized financial resources and
international financial flows. The influence of international financial relations on the
development of economic relations makes through the internationalization of all the set of
structural parts of trade, currency and credit relations system, the mechanism of securities and
investments. The proportions of international exchange are formed on this basis, so internal unity
of components of the global market and a unified system of international monetary-financial and
credit relations is achieved.
