Finance

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22-1. What additional factors are encountered in international as compared with domestic financial management? Discuss each briefly.

According to Fabozzi (2003), the main source of disparities between financial management of an international organization and a domestic organization is that international organizations operate all over the world. This implies that they are concerned with an international group of clients, distributors and shareholders. For instance, international financial management differs largely with domestic financial management in that an international organization has the advantage of dealing with exchange rate changes and an array of ideas concerning raising capital from its stakeholders.

In addition, they have differences in the accounting standards of reporting. Nevertheless, the most important factor that differentiates the international and domestic financial system is the introduction of exchange rates. This is because any international organization has to put into consideration the frequent fluctuations of the exchange rate because it affects their sales and their decisions concerning investments. For instance, in most cases, an exchange rate has the tendency of changing the company’s revenue from clients and therefore making the process of decision making very difficult. This difficulty is brought about by the problem of consumers converting the assets into their home country’s currency in order to check if the return is higher or if the investment is profitable (Fabozzi, 2003).

Exchange rates also have the effect on their pattern of reporting financial statements, which involves the balance sheet or profit and loss system. Moreover, there are many challenges experienced in an international financial system especially in reporting because they have a good number of standards to follow. For instance, they are usually not sure which currency – home or foreign – they should report in when declaring their yearly profit and loss financial reports. This shows that they may be gaining profits in the home currency yet making large losses in the foreign currency.

22-2. What different types of businesses operate in the international environment?

A good number of organizations in the international environment participate in different businesses such as direct foreign investments where they have the freedom to control and manage companies and assets in other nations. Another type of business that operates in an international environment includes making portfolio investments by getting holding stock of organizations in different countries so that they are able to have full control of these organizations.

Organizations may also participate in international business environment by licensing or franchising. For instance, through licensing, other organizations will be granted the right to use its brand names, trademarks or copyrights as a way of exchanging royalty payments. Franchising involves permitting an organization in another nation to use its name and methods of operation in exchange for royalty payments.

Why are the techniques and strategies available to these firms different?

The techniques and strategies in these firms are employed in order to help the firms compete successfully in the markets selected. Moreover, the strategy-planning component helps in determining the relevant importance of different organization functions thus directing the allocation of resources on the relative importance of each function (Fabozzi, 2003). These techniques help in identifying the area in which the company performs best as compared to its competitors. For instance, this could be achieved through the application of improved technology and the implementation of more effective and efficient practices and supply systems in companies.

22-3. What is meant by arbitrage profits?

An arbitrage profit in economics is the continuous buying and selling of products in order to earn profit from a difference in the pricing process. In this type of trade, profits are earned through exploiting the price differences of the same financial instruments on different markets.

22-4. What are the markets and mechanics involved in generating (a) simple arbitrage profits, and (b) triangular arbitrage profits?

In simple arbitrage, profits may be excluded in case there is the existence of a martingale measure. In this case, the fundamental theorem of goods pricing may be proved solely on simple processes but the usual reinforcement of the simple arbitrage is required (Fabozzi, 2003). On the other hand, triangular arbitrage is the process that involves exploiting a chance in arbitrage that occurs because of a pricing discrepancy among three different currencies in an international market. The market and the mechanics of generating a triangular arbitrage involves a bank making calculation of cross exchange rates and then making comparisons with the exchange rates that are quoted by the other banks in order to identify a pricing discrepancy.

References

Fabozzi, F. (2003). Financial management and analysis. New York, NY: John Wiley and Sons.