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International Financial Management

Notes It started with genuine home loans and later as good credit people diminished, they
lended money to the people who could not pay back the first instalment of EMI. So, when
return of investments did not come back, it stopped the entire cash flow cycle. This core
issue impacted the international market.
Questions

1. Comment on the current financial crisis and the role of central banks in this regard.
2. The International Monetary Fund has said the global recession will be deeper and
the recovery slower than previously thought as financial markets take longer to
stabilize. The key factor determining the course of the downturn and recovery will
be the rate of progress toward returning the financial sector to health. Comment in
the context of the cause of the crisis.
3. Briefly discuss the role of academics in the current financial crisis. (Hint- Academics,
often more than most others, are susceptible to inventing ‘fashions’ in their respective
disciplines to extend their own relevance. The motive may or may not be financial.)
Source: International Financial Management, Madhu Vij, Excel Books.

1.6 Summary

Knowledge of international finance is very crucial for MNCs as it helps the companies and
financial managers to decide how international events will affect the firm and the steps
companies can take to be insulated from adverse movements in exchange rates, interest
rates and inflation rates.
An understanding of international finance has become important as the world has entered
an era of unprecedented global economic activity with worldwide production and
distribution.
The distinguishing features in international finance which need special focus are – foreign
exchange risk, political risk, expanded opportunity sets and market imperfections.
The important aspect here is that MNCs that compete in the global market place must not
only be managed in such a way that they can withstand the effects of crisis in foreign
countries, but must also have the flexibility to capitalise on these crisis.
There are five methods by which firms conduct international business activity – licensing,
franchising, joint ventures, management contracts and establishing new foreign
subsidiaries.
The challenge for multinational managers is to find that form of international business
activity that is most consistent with his or her strategy.
The agency problem reflects a conflict of interest between decision making managers and
the owners of the MNC. Agency costs occur in an effort to ensure that managers act in the
best interests of the owners.
Generally, the agency costs are normally larger for MNCs than for purely domestic firms.

1.7 Keywords

Agency Problem: Agency problem reflects a conflict of interest between decision making managers
and the owners of the MNC.
Foreign Direct Investments (FDI): Foreign direct investments are investments made for the
purpose of actively controlling property assets or companies located in host countries.

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