Introduction

International finance is the branch of economics that studies

the dynamics of , , and how these affect . Some of the theories which are important in international finance include the , the (OCA) theory, as well as the (PPP) theory.

Exchange Rates
In finance, the exchange rates between two currencies

specifies how much one currency is worth in terms of the other. It is the value of a foreign nations currency in terms of the home nations currency. The refers to the current exchange rate. The refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

Foreign Exchange Market

The foreign exchange market trades currencies. It lets banks

and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The two main theories that explain exchange rate variations are:

Purchasing Power Parity

The purchasing power parity (PPP) theory uses the long-

term equilibrium exchange rate of two currencies to equalize their purchasing power. Using a PPP basis is more useful when comparing differences in living standards on the whole between nations. PPP exchange rate fluctuations are mostly due to market exchange rate movements

Interest Rate Parity

Interest rate parity is an economic concept, expressed as a

basic algebraic identity that relates and . Interest rate parity is a non-arbitrage condition which says that the returns from borrowing in one currency and investing in interest-bearing instruments of the second currency, should be equal to the returns from purchasing and holding similar interest-bearing instruments of the first currency.

Foreign Direct Investment

Foreign direct investment (FDI) in its classic form is

defined as a company from one country making a physical investment into building a factory in another country. It is the establishment of an enterprise by a foreigner. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form an international business or a multinational corporation (MNC)

Type of Foreign Direct Investors

A foreign direct investor may be classified in any sector of the economy and could be any one of the following: an individual; a group of related individuals; an incorporated or unincorporated entity; a public company or private company; a group of related enterprises; a government body

Methods of Foreign Direct Investment

The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: by incorporating a wholly owned subsidiary or company; by acquiring shares in an associated enterprise; through a merger; participating in an equity joint venture with another investor or enterprise

International Trade
International trade is exchange of capital, goods, and

services across international borders or territories. International trade is in principle not that different from domestic trade. The main difference is that international trade is typically more costly than domestic trade. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries

Various Bodies of International Finance

There are various global bodies regulating different aspects of international finance. These include: : International Finance Corporation is a prominent entity supporting sustainable investments in the private sector of developing countries to stimulate their growth. : International Monetary Fund monitors the balance of payments of its member countries. : It funds the development of projects, mainly in developing countries, that are not financed by the private sector. : World Trade Organization resolves multilateral and bilateral trade dispute.

International Finance Corporation

The International Finance Corporation (IFC) promotes

sustainable private sector investment in developing countries. IFC is a member of the World Bank Group and is headquartered in Washington, DC. It shares the primary objective of all World Bank Group institutions

International Monetary Fund

The International Monetary Fund (IMF) is

an international organization that oversees the global financial system by following the macroeconomic policies of its member countries. It is an organization formed to stabilize international exchange rates and facilitate development. Its headquarters are located in Washington, D.C.

Balance of Payments
In economics, the balance of payments (BOP) measures

the payments that flow between any individual country and all other countries. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow

World Bank
The World Bank is an international financial

institution that provides leveraged loans to poorer countries with a goal of reducing poverty. The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions:
(IBRD);

(IDA)

World Trade Organization

The World Trade Organization (WTO) is an international

organization designed by its founders to supervise and liberalize international trade. The World Trade Organization deals with regulation of trade between participating countries

Conclusion
International finance has come a long way in helping the world. Some of the benefits of international finance are: Access to capital markets across the world enables a country to borrow during tough times and lend during good times. It promotes domestic investment and growth through capital import. International finance leads to healthy competition and, hence, a more effective banking system. It provides information on the vital areas of investments and leads to effective capital allocation