ENVIRONMENT OF INTERNATIONAL FINANCIAL MANAGEMENT
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This section consists of the following subsections:
? Determination of Exchange Rates
? The International Monetary System
? The Balance of Payments
? Foreign Exchange Market
? International Parity Conditions
These five themes basically define the environment in which a MNC functions.
Determination of Exchange Rates
One of the basic issues which a company should consider when stepping on a foreign market are the exchange rates of this country and the way by which they are determined.
Wikipedia gives the following definition for exchange rate: “in finance, the exchange rate between two currencies specifies how much one currency is worth in terms of the other.”
(http://en.wikipedia.org/wiki/Exchange_rates)
There are a number of methods that can be used to determine an exchange rate:
a) A flexible or floating exchange rate is where the market forces of supply and demand determine the exchange rate.
Under a flexible or floating exchange rate the value of a countries currency changes frequently, even by the minute. The market rate will depend on the demand for, and supply of, that currency in the forex (foreign exchange) markets. When there is no intervention in the free market operations by a government or its’ agency a “clean float” is said to exist.
b) A fixed exchange rate is where the government determines the exchange rate for a period of time based on the value of another countries currency such as the US dollar.
c) A managed exchange rate is where the governmen ...