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  1. Introduction
  2. International finance theory
  3. Conclusion

When we study the international economy, like domestic activity, requires money and the same forces which lead to convergence on a single domestic money lead to convergence on a single domestic money lead the world to convergence on a limited number of international monies. Before World War I, the pound sterling was the international currency; during the interwar period the pound and the US dollar shared the role; then during the Bretton Woods era the dollar became dominant. Over the past 50 years, it appears that number of currencies in the world have proliferated greatly, but there are a few clearly dominant and some of them are less known(Mundell,2003).

The question then arises what if we had only one currency for the entire world. This question has intrigued economists for quite sometime. Just like language is a medium of expression and transmission of information, in the similar way, currency is a medium for exchange and payment. So, just as a common language is the most efficient way to communicate across the countries, on paper a common unit of currency would be the most effective way to communicate prices. A common currency would bring about transparency of prices and economy of transaction (Mundell, 2003). But, on the other hand having a single currency would mean that the value of the commodity bought and sold would only have the value of its worth of buying other commodities. In simple terms, money would be just become money. Its purchasing power would be the result of the adjustment of interest rates and other monetary policy tools in response to inflation or deflation (Rogoff, 2001). Hence today, we live in a multicurrency world where foreign exchange markets and international monetary systems play a major role in the macroeconomics of international finance. Hence it becomes essential for an international manager to study different relationships of the currencies and the trade markets (Bonpasse, 2007).

[...] The entire well being of every human being in this world depends on the international financial system and therefore it should be clearly understood and is an important aspect in the study of international business (Bonpaase, 2007). If there were one global currency, the theories of International finance would not need to exist, but since we live in a multi currency world, the importance of the international financial theory is clearly seen. References Bonpasse, M The single global currency. Newcastle, Me: Single Global Currency Assoc . Buckley, A Multinational finance. London [u.a.]: Prentice Hall. Buckley, A Multinational Finance. 5th ed. [...]


[...] If a country's nominal exchange rate falls and if this fall is an exact compensation for the difference in inflation rate, then its real effective exchange rate is said to remain constant. This is relative purchasing power parity. Absolute purchasing power parity assumes that the exchange rate between two countries will force their purchasing power to equal. This theory is likely to hold for commodities that are easily transportable between two countries but likely to be false for other goods and services, which cannot easily be transported, because transportation costs will distort the parity. [...]


[...] The international fisher theory attempts to predict spot rates by comparing expected long-term interest rates in two countries. In a world where markets are extremely efficient, investors would use all forms of information available to them to arrive at fair estimates of spot and future exchange rates, this would eliminate the difference between the spot exchange rates and the interest rates differentials and bring them in line with future spot rate rates. The formula for the international fisher effect is(Buckley, 2004): = Where, is differences in interest rates, and, is the expected change in spot rates. [...]


[...] INTERNATIONAL FINANCE THEORY: The first thing an international manager must know is the international monetary system. The international monetary system is broadly defined as a set of rules, procedures and conventions that administer the management of financial relations between nations. Amore descriptive definition of the international monetary system given by Buckley(1996) defines the international monetary system as a system that encompasses the instruments, institutions, rule, laws and procedures for handling international payments particularly those in final settlement of debt. The institutions responsible for the management of these settlements are the central banks and the assets they use may be termed as international money. [...]


[...] It is necessary for the international manager to know the different theories of international finance and how these theories support the multi currency world that we live in. The exchange rate may be simply defined as the price of one currency in terms of another currency. There are two ways of expressing the exchange rates: foreign currency units per unit of domestic currency and US dollar as the foreign currency. We can say that $ 1.61 is needed to obtain in other words $ 1.61 Domestic currency per unit of foreign currency, taking the same example as above, in this case we would say that 0.62 is required to buy in other words 0.62 Foreign exchange dealers not only handle a variety of currencies but also have certain dealing rates for each currency known as spot rates and forward rates. [...]

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