Features of IFM – Risks, Markets & Currency Impact
Why is IFM a separate subject? Because doing business in New York is fundamentally different from doing business in New Delhi.
1. Unique Features of IFM
A. Foreign Exchange Risk (Forex Risk)
- The Problem: Currencies fluctuate. If you sell goods worth $1,000 today (at ₹83/$), you expect ₹83,000. If the rate drops to ₹80/$ tomorrow, you receive only ₹80,000.
- Impact: Profit can turn into loss purely due to currency movement.
B. Political Risk (Sovereign Risk)
- The Problem: Foreign governments can change rules.
- Examples: Wars, Nationalization of assets, blocking funds (not allowing profit repatriation).
C. Expanded Market Imperfections
- The Problem: Markets are not perfect.
- Barrier: Tariffs, Quotas, Shipping costs, Cultural differences.
- Opportunity: MNCs exist because markets are imperfect (they exploit cheap labor in Vietnam to sell high-price shoes in USA).
D. Complex Tax Environment
- The Problem: Double Taxation. Income earned in UK might be taxed in UK and India.
- Solution: Double Taxation Avoidance Agreements (DTAA).
2. Diagram: The IFM Environment
Loading diagram…
3. Exam Notes: Writing the Answer
Question: "What are the distinguishing features of International Finance?" (5 Marks)
Key Points:
- Forex Risk: Mention that domestic finance assumes zero currency risk.
- Political Risk: Mention risk of government change.
- Market Imperfections: Labor/Capital cannot move freely.
- Cultural Differences: Language and taste barriers.
Summary
- No Free Lunch: Global markets offer high rewards but come with high risks (Forex, Politics).
- Core Feature: The separation of the "Political Boundary" and "Currency Boundary" is what defines IFM.
Quiz Time! 🎯
Loading quiz…