Question

The goal of international financial management is to maximize shareholders' wealth, same as that of financial management. Then what are the four factors/topics that make international finance separate or special? 

Answer 1

The Four factors that make international finance special are:

1. Foreign Exchange- Unexpected increase in the exchange rate affects the MNC as well as the individuals engaged in cross border transactions. Exchange rate uncertainty affects major economic functions such as consumption, production, investment, etc

2. Political Risk- Political risk is the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers or military control. There may be a change in tax rules or Expropriation of assets.

3. Market Imperfections- These refer to the friction or impediments preventing markets from functioning properly. These barriers may include legal restrictions, excessive transportation cost, Information asymmetry, discriminatory taxation, etc. MNC's are thus motivated to locate production overseas due to such imperfections.

4. Expanded Opportunity Set- Firms can benefit from Expanded Opportunity Set by locating production in any country or region to maximise profits, raising funds in capital market where the cost of capital is the lowest, deploying assets to gain greater economies of scale.