International finance

• Nations like the Philippines are not immune from the effects of changes in the various factors affecting the economies of other nations
• A sharp decline in the value of the US dollar may severely affect the purchasing power of our own currency
• Financial markets around the world no longer function as separate and independent markets but those that interact with one another
• To properly provide a clear perspective of a country's financial activities, it must be seen from the context of international finance
• One of the realities that cannot be disregarded is the exchange of goods and services between nations
• Trade between nations is inevitable, since not all products or services can be produced economically by any country
• The benefits of international trade allow countries to concentrate in producing goods that they have "comparative advantage"
• International trade would require exchange of goods using foreign currencies, or an exchange of currency with another currency
• Foreign exchange market


  The institutional structure that facilitates the operation of the international monetary system
• Foreign exchange market


  The market where people buy and sell foreign currencies
• Functions of the foreign exchange market

  • Transfer purchasing power between countries
  • Obtain or provide credit for international trade transactions
  • Minimize exposure to the risks of exchange rate fluctuations
• Transfer of purchasing power

  1. International trade involves parties residing in different countries

  2. Each party has its own national currency

  3. Foreign exchange market provides the mechanism for carrying out this purchasing power transfer transaction
• Provision of credit


  1. Exporter might agree to provide credit until the importer sends payment

  2. Importer might pay cash on shipment and finance its imports under its normal inventory financing arrangements

  3. Specialized instruments, such as banker's acceptances and letters of credit, might be used to finance trade
• Minimization of foreign exchange risk

  Foreign exchange market provides hedging facilities for transferring the exchange rate risk to professional risk takers
• Participants in the foreign exchange market

  • Banks and non-bank foreign exchange dealers acting as dealers
  • Individuals and firms conducting commercial or investment transactions
  • Arbitragers and speculators
  • Central banks and treasuries
• Exchange rate


  The price at which one currency is exchanged with another
• Exchange rates are quoted at specific times, since they may change throughout the day as supply and demand for currencies change
• When the Philippine peso becomes less valuable relative to other currencies, foreign goods and travel become more expensive
• When the peso appreciates in value, foreign goods and travel become cheaper
• Factors influencing exchange rates

  • Trade flows of goods and services
  • Financial factors and capital flows
  • Government intervention in the foreign exchange market
• Trade flows


  • Difference in the cost of producing a given product or service in various countries
  • Producers will tend to move to countries where critical factors of production are cheap
  • Changes in the preferences of consumers from various countries
  • Ability of a country to satisfy its own needs domestically
  • Trade barriers
• Financial factors and capital flows

  • Differential interest and inflation rates
  • International capital flows
• Balance of payments


  The international financial position of a country, including invisible as well as visible trade
• Balance of payments is a bookkeeping system for recording all payments that have a direct bearing on the movements of funds between a nation (private sector and government) and foreign countries
• Trade balance


  The difference between receipts and payments, where a deficit indicates that payment exceeds receipts and a surplus means receipts exceed payments
• Official international financial institutions

  • International Monetary Fund (IMF)
  • International Bank for Reconstruction and Development (IBRD or World Bank)
  • Bank for International Settlements
  • Affiliates of the World Bank (IDA, IFC, MIGA)
• International Monetary Fund (IMF)

  • Promotes the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that are experiencing balance-of-payments difficulties
  • Renders temporary assistance to countries trying to defend their currencies against cyclical, seasonal, or random occurrences
  • Assists countries having structural trade problems
• World Bank


  • Facilitates the provision of private long-term credit from developed to developing countries for the construction of basic capital projects necessary for higher incomes through more rapid domestic development
  • Provides long-term loans to build dams, roads, and other physical capital to help developing countries
• Nations like the Philippines are not immune from the effects of changes in the various factors affecting the economies of other nations
• A sharp decline in the value of the US dollar may severely affect the purchasing power of our own currency
• Financial markets around the world no longer function as separate and independent markets but those that interact with one another
• To properly provide a clear perspective of a country's financial activities, it must be seen from the context of international finance
• One of the realities that cannot be disregarded is the exchange of goods and services between nations
• Trade between nations is inevitable, since not all products or services can be produced economically by any country
• The benefits of international trade allow countries to concentrate in producing goods that they have "comparative advantage"
• International trade would require exchange of goods using foreign currencies, or an exchange of currency with another currency
• Foreign exchange market


  The institutional structure that facilitates the operation of the international monetary system
• Foreign exchange market


  The market where people buy and sell foreign currencies
• Functions of the foreign exchange market

  • Transfer purchasing power between countries
  • Obtain or provide credit for international trade transactions
  • Minimize exposure to the risks of exchange rate fluctuations
• Transfer of purchasing power

  1. Filipino exporter sells to Australian importer

  2. Australian importer transfers Australian dollar to Philippine peso