Question

1. Define international finance and state the components of international finance
2. Explain the following functions of international finance:

1. Distribution function
2. Control function ( 2marks)
3. Regulatory function
4. Stabilizing functions (2marks)

3. Differentiate between:

1. Discuss why some countries prefer the used of fixed exchange rate
2. Real exchange rate and nominal exchange rate ( 2 marks)
3. Direct quotation and indirect quotation (2marks)
4. Direct investment and portfolio investment

Answer 1

a.Define International Finance and the components of International Finance

International Finance is also known as international macroeconomics,is a part of financial economics which lays emphasis on the monetary interactions which occur between two or more nations.International finance deals with economies of the nations as a whole and not individual markets.As International Finance involves monetary transactions between two or more countries,money leaves one country and arrives in the other it involves issues of currency exchange as well as the exploitation of the under developed nations.International Finance helps to analyse the economic status of the countries,know foreign markets,compare the exchange rates as well as inflation rate,it also helps to determine the cost of doing a business across the border.

The various components of International Finance are:

1)Foreign Exchange Market:It a market of currency exchange.It is a place where currency is bought and sold.Currency of one country is exchanged with the currency of the other,as per their value.

2)Currency Convertibility:The Foreign Exchange market assumes that currency of one country can easily be converted into that of another country,however this assumption does not hold true as many countries impose restrictions on currency conversion,which acts as a barrier for international business.To overcome these restrictions many global firms use the counter trade practices.

3)International Monetary system:Every country in the world has its own monetary system which helps to promote international trade and investment.The International Monetary Fund as well as the World Bank help to maintain order in the International Monetary System.

4)International Financial Markets:International Financial Markets consists of various international currency markets,international stock markets,international bond markets as well as international banks.They facilitate international trade,investment as well as finance.

5)Balance Of Payments:International finance involves transactions between countries globally,which leads to flow of funds from one country to another.Balance of payments is a systematic record of the country's monetary transactions with the rest of the world.It is the sum of the Current Account,Capital Account as well as the change in the Official reserves.