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Globalization
The continued trend of globalization is sought by organizations in an attempt to
access more lucrative markets for both products and labor. As with any promise of
increased profit, comes the potential for increased risk. While the basic principles of
domestic financial management and international financial management are basically
the same, international financial management is more challenging and dynamic
because it must consider a wider range of possibilities, opportunities and challenges
than purely domestic.(Khosrow, 1993) Potential problems to a financial manager can
be (but not limited to); Accounting practices, political factors, taxation, regulations, and
exchange rates. These can be collectively grouped into National financial systems
known as the international financial architecture (IFA).(World bank, 2002)
Accounting Practices
Domestically, accounting practices are typically regulated by the Generally
Accepted Accouting Practices (GAAP). There is an international equivalent. The
differences in these standards causes problems. Adding to this is that many emerging
markets are not part of these organizations. This can lead to discrepancies between
reports that appear similar, but vastly different due to the practices applied. A financial
manager must look at these reports carefully, along with the collection methods in order
to compare apples to apples.
Political factors
Part of financial management involves carefully considering risks. As an
organization increases investment in a developing nation, political factors must be

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considered. An excellent example of this is Venezuelan President Hugo Chavez
nationalizing the last privately run oil fields in the country. The government is taking
over four oil projects run by some of the world's biggest petroleum companies.) (NPR,
2007). This led to Exxon losing a large amount of its investments in the country.
Taxation
While great strides have been made in reducing tariffs between countries, some
barriers still exist. Transporting raw and finished goods across international lines can
add costs. These costs must be anticipated when analyzing the profitability of projects.
On a local level, some areas may enact odd taxes in attempts of lining the pockets of
those in power. The last time the author of this section was in Mexico, he was subjected
to this tax. The author encountered a road tax from a police officer, or risk jail. While
this is more like extortion, the possibilities of these practices do exist in emerging
markets where the central government is unable or unwilling to curtail them.
Regulations
Not all international finance issues are centered around emerging markets. Some
markets, like Europe, hold potential for sales. These areas can have more strict
regulations for items like pollution and labor. The costs for compliance needs to be
considered when attempting to produce or sell in these countries. In emerging markets
this change can be less regulations, making it less costly. No matter the location
chosen, having an expert in the form of a local employee or consulting firm can help to
negotiate the red tape.
Exchange Rates

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By far, the single most important factor affecting continued operations in a foreign
country are exchange rates. As items flow from country to country, the costs build in
multiple currencies until they reach the end user. For those unfamiliar with currency
exchanges, they vary from day to day, based upon health of economies, government
fiscal policy, and the direction of the wind. When viewing the returns generated from
potential or existing operations, a slight change in exchange rates can skew results,
making them unreliable.
These changes can also present an opportunity for investment. When the
corporations home currency is worth more, it can increase its overseas buying power.
This power can make the costs of building and setting up operations in a foreign country
a cheaper act.
In the present economy, as the dollar decreases in value against other world
economies, you see examples of both concepts. The first, changes in reporting has
been seen in companies that do a substantial business overseas. In the latest reports
from Coca-Cola, they show that revenues are up, along with profits. The odd part is that
unit sales are relatively unchanged. The difference is that the company reports in
dollars, but its sales are in almost every currency in the world. The net result is that
these foreign sales are of more value to the company once converted into dollars. The
weakness of the dollar has encouraged investment from overseas investors in shares of
US companies. A recent example is the purchase of Commerce bank by a Canadian
Bank. The parity of the Canadian dollar to the United States dollar had the effect of
lowering the price of the company to attractive levels. The amount of further foreign
investments has been slowed due to questions about the future of the economy.

Commodities trading
The need for a fluid trading of goods, where supply and demand are accurately
reflected in price, has created the commodities market. These markets function by
means of three major instruments. These are the futures contract, the forward contract,
and options. In this section of the paper, the authors will go into further depth on these
instruments, describing the differences and similarities.
Introduction to Instruments
The first item the authors will go into detail on is a brief description of each
instrument. . With a futures contract, the holder is obligated to buy or sell on a certain
future date, and at a specific price. A forward contract is similar, and the differences will
be described further in the following paragraph. If, however, you have an options
contract, you have the right to buy or sell, but you dont have to.
Futures Vs. Forwards
A forward contract is similar to a futures in that they both have to deliver a
commodity at a certain date and price. However, a forward is not changed by the
market on a day-to-day basis. Because of this, one party will suffer a loss when the
delivery date comes around. A futures contract is updated daily, so when it is time to
settle, there will usually be little additional money due. As an example the author will
use a barrel of oil currently trading around $100 a barrel. Half way through the term, the
forward (with the $100 delivery price) is trading at $102 a barrel. The mark to market
principle would mandate that the holder of the future pay the $2 difference on the next
day. This money is to track the changes of the commodity, and is typically made via a

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margin account( Valdez, 2002). For a forward holder, this adjustment is not made until
the final day, when the differences may have accumulated into a large amount.
Options
Options are generally bought for a premium, which is a fraction of the actual
cost for the future. If the future becomes less valuable, the buyer of the option can
simply choose not to execute the option, forfeiting the premium (Redhead, 1996). The
seller of the option can sell it for a commodity price higher than their target price. This
can limit the upside benefit of a price change to the seller of the option. It can also
reduce potential losses. This is called hedging. If the price doesnt change, the seller
still makes money from selling the premium.
Tying it all together
For some organizations, a consistent price for raw goods can help isolate the
organization from market fluctuations. As students of Financial management, this can
simplify financial planning. Using these instruments does involve risk, but with risk
comes returns. A student of finance must understand this in order to make decision that
best align the needs of the organization with factors in the world around us.

References
Khosrow, F. (2003) Foreign Exchange Issues, Capital Markets, and International
Banking in the 1990s. Taylor & Fracis Publishing, New York.
NPR (2007) Chavez Nationalizes Venezuelan Oil Fields. Retireved March 27, 2008
From, http://www.npr.org/templates/story/story.php?storyId=9937606
Redhead, K. (1996), Financial Derivatives: An Introduction to Futures,
Forwards, Options and Swaps, Prentice-Hall, Phillidephia
Valdez, Steven, (2002). An Introduction To Global Financial Markets. Macmillan Press
Ltd. London

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