FINANCIAL PERSPECTIVES : INTERNATIONAL

MONETARY SYSTEM
From the financial perspective the issues in
international business are :
1.Currency to be used in the international
business.
2.Creditworthiness of the importer
3.Acceptable methods of payment
4.Arranging 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

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:
a.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.
b.Open Account Under open account the importer first
receives the goods and then arranges for the payment.
c.Documentary Collection- Under this method the
commercial banks facilitate the payment process. They
are 2 types of bills:

1. Sight bill of exchange

2. Time Bill of exchange
d. 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 TradeINTERNATIONAL FINANCIAL ENVIRONMENT
SYSTEM
1. Gold Standard- it was experienced a key day
between 1870s and 1914 which was finally
abandoned in 1930s.
2. 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 :
a.Floating Rate System
b.Pegging of Currency
c.Crawling Peg
d.Target Zone Arrangement

THEORIES OF EXCHANGE RATE BEHAVIOUR

The theories of exchange rate behaviour are classified
as follows :
1.Balance of Payment approach
2.Monetary Approach- This includes Monetary approach
of Flexible-Price Version and Monetary Approach of
Sticky- Price Version
3.Portfolio Balance Approach