International Financial Management Notes
Subject Overview
The second Accounting and Finance elective, covering the international financial environment — foreign exchange markets and rate determination, international financial markets/
Subject at a glance
4
Units
21
Topics
4
Credits
4
Infographics
Unit-wise Syllabus
4 units — open any unit for detailed topic-wise notes, diagrams and important exam questions
- Globalization and the multinational firm
- importance and goals of international financial management
- foreign exchange market structure
- exchange rate quotations (direct/indirect, spot/forward)
- determination of exchange rates
- international parity relationships
Purchasing power parity
Expected change in spot rate ≈ inflation difference
Interest rate parity
F / S = (1 + i home) / (1 + i foreign)
International Fisher effect
Spot change ≈ interest rate difference
Forward premium
(F − S) / S × 12/n × 100
Study guide
This unit covers globalisation, goals of international finance, the foreign exchange market, quotations (direct, indirect, spot, forward), exchange rate determination and parity relationships. Practise reading and converting quotations.
- Eurocurrency and domestic interest rates
- international bond and equity markets
- international portfolio investment
- international sources of finance
- futures/forwards/options/swaps on currency/equity/interest rates
- trading strategies
Forward
Over the counter, customised
Yes, both parties
Future
On exchange, standardised
Yes, marked to market daily
Option
Exchange or OTC
Buyer has a right, not an obligation
Swap
Over the counter
Yes: exchange of cash flows
Study guide
You study Eurocurrency markets, international bond and equity markets, portfolio investment, sources of finance and currency, equity and interest rate futures, forwards, options and swaps. Learn how a forward contract hedges a currency payment.
- Foreign exchange exposure concept and relevance
- management of economic/transaction/translation/interest rate exposure
- hedging against equity
- currency and interest rate exposure using derivatives
Transaction exposure
Cash flows of contracts already made
Forwards, futures, options, netting
Translation exposure
Reported values in consolidated accounts
Balance sheet hedging
Economic exposure
Future cash flows and firm value
Diversified sourcing and markets
Study guide
You study the concept of foreign exchange exposure, managing economic, transaction, translation and interest rate exposure and hedging with derivatives. Hedge a simple import payment as an exercise.
- Foreign direct investment and cross-border acquisitions
- international capital structure and cost of capital
- international capital budgeting
- multinational working capital policy and cash management
- exports and imports
- 1Estimate project cash flows
In foreign currency
- 2Adjust for taxes and blocked funds
- 3Convert to home currency
Forecast exchange rates
- 4Discount at adjusted cost of capital
Country risk premium
- 5Compute NPV from parent's view
Study guide
You study foreign direct investment, cross-border acquisitions, international capital structure and cost of capital, capital budgeting, working capital and cash management and exports and imports. Adjust a capital budgeting example for exchange rate risk.
Why International Financial Management Matters
International finance is essential for companies that import, export or invest abroad, and it supports careers in treasury, forex, banking and multinational finance.
How to Prepare for International Financial Management
- Practise forex quotation, forward rate and parity problems.
- Follow exchange rate news and relate it to theory.
- Learn hedging instruments with numerical examples.
International Financial Management: Frequently Asked Questions
What is a forward contract?
A forward contract is an agreement to buy or sell a currency at a fixed rate on a future date, used to hedge exchange rate risk.