International Financial Management Introduction - Financial Management

As the world economy has become more globally integrated, virtually every firm and individual is affected by developments in the economies of countries other than their own. The debate over the North American Free Trade Agreement (NAFTA) has brought many of these relationships to the fore. Individuals are affected by global economic conditions as multinational firms seek the cheapest place to produce their products—resulting in employment winners and losers. A textile firm may move to Mexico from North Carolina at the same time that Audi considers the construction of a new plant in the southeastern United States. In making plant location decisions, managers consider wage costs, the quality of the workforce, transportation costs, the cost of raw materials, exchange rate levels and risks, and political risk (such as the risk of expropriation or the blocking of funds).

In addition, firms may decide to locate in multiple countries to gain quicker access to new technologies as they develop. Some international plant location decisions are designed, at least in part, to avoid political and regulatory barriers. For example, Japanese and German auto firms, including Toyota, Nissan, Subaru, Mercedes,BMW, and Honda, have built large assembly plants in the United States to reduce the currency risk and labor cost risk associated with a one-country location strategy.

Financial managers willing to venture into the global financial marketplace may find lower-cost financing alternatives than are available in their home country.With trade barriers being lowered around the world, the managers of tomorrow cannot limit their knowledge to “Island America.” Rather, these managers will find that understanding the functioning of the global financial marketplace is a key element of their knowledge and skill base. Here we explore the factors that determine exchange rates, look at ways to forecast future exchange rates, and consider various aspects of foreign exchange risk and ways of managing that risk.


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