FINANCIAL PERSPECTIVES : INTERNATIONAL MONETARY SYSTEM

From the financial perspective the issues in international business are :Currency to be used in the international business.Creditworthiness of the importerAcceptable methods of paymentArranging Finance

1. Currency to be used Selecting currency to be used for settling the international business transactions is an important issue in International finance. The exporter prefers to have his home currency or hard currency while the importer prefers to pay in his home currency.

2. Creditworthiness of the Importer- It is about the relationship between exporter and importer.3. Methods of Payment Both the importer and exporter should agree on a particular type of payment, after assessing the importer creditworthiness. This include:Payments advance- Most of the exporters prefer the advance payment prior to the shipment as it involves no risk. But from the importers point of view its most undesirable method as it involves high risk in delivering goods as per the order.Open Account Under open account the importer first receives the goods and then arranges for the payment.Documentary Collection- Under this method the commercial banks facilitate the payment process. They are 2 types of bills:

Sight bill of exchangeTime Bill of exchanged. Letters of Credit Instrument issued by a bank promises the exporter to pay upon receiving the proof that the exporter completed all the necessary formalities specified in the document.e. Credit Cards f. Counter Trade-

INTERNATIONAL FINANCIAL ENVIRONMENT SYSTEMGold Standard- it was experienced a key day between 1870s and 1914 which was finally abandoned in 1930s.The Bretton Woods Systems of Exchange Rates

The collapse of gold standard led to the conduct of the Bretton woods conference in July 1944 and the establishment of international monetary fund in 1945 and evolution of new system of exchange rates which is known as the Bretton Woods System of Exchange rates. Under this system each country was to fix the par value of its currency in terms of gold and US dollar. The authorities were allowed to make adjustments to the extent of +/- of the fixed par value.3. Exchange Rate Regime since 1973-The four suggested options are :Floating Rate SystemPegging of CurrencyCrawling PegTarget Zone Arrangement

THEORIES OF EXCHANGE RATE BEHAVIOURThe theories of exchange rate behaviour are classified as follows :Balance of Payment approachMonetary Approach- This includes Monetary approach of Flexible-Price Version and Monetary Approach of Sticky- Price VersionPortfolio Balance Approach