Global Finance Reviewer - 1

LESSON 1: FOUNDATIONS OF INTERNATIONAL FINANCIAL MANAGEMENT
International Monetary System

• It is a system that forms rules and standards for facilitating international trade among
nations and helps in relocating the capital and investment from one nation to another.
• It includes the broad network of banking and commercial practices through which day-
to-day international transactions are undertaken.
• covers the arrangements under which external reserves are held.
• Consists of:
➢ Central banks
➢ Commercial banks
➢ Multinational companies
➢ Various money and commodities market funds
International Monetary Fund

• supports economic policies that promote financial stability and monetary cooperation,
which are essential to increase productivity, job creation, and economic well-being.
Evolution of International Monetary System

The Gold Standard
• Between 1880 and 1914
• referred to as the monetary system through which each country could fix the value of
their currency in terms of gold.
The War Period

• Between 1925-1933 between the world wars
• The gold standard started losing its way. The war had created a dent in the world
economy, and every country wanted to export more to revamp and rebuild their
economies.
The Bretton Woods System
• The Bretton-woods conference led to the creation of a dollar-based fixed exchange rate
system.
• Under this system, the U.S. dollar was backed by reserve gold. All other currencies did
not have to maintain a gold reserve for conversion. Therefore, the conversion rates were
minimal.
The Jamaica System
• The global economy moved towards a flexible exchange rate system in 1973 and by 1976.
• They formalized the system through the convention in Jamaica. Under the Jamaica or
floating rate system, demand and supply would affect the currency exchange rates.
Balance of Payment
• is a summary of the economic transactions of a country with the rest of the world for a
specific period. It serves as an accounting statement on the economic dealings between
residents of the country and nonresidents
1. Current Account
• trade in goods – exports and imports
• services – trade related. Comprised largely of BPO
• primary income – receipts of OFW as well as profit from Phil. investment abroad
• secondary income – remittances of nonresident OFs together with other current
transfers such as gifts, grants and donations to and from abroad
2. Capital Account - Consists of capital transfers and acquisition and disposal of
nonproduced, nonfinancial assets between residents and nonresidents. Also
includes grants and donations, the intention of which is for investment.
3. Financial Account
• Direct Investment - refers to capital participation in a company in which the
investor has a significant degree of influence on management of the company
• Portfolio Investment - refers to as “hot money” since the investor’s motive is
short-term
• Other Investment - other forms of investments like financial derivatives, loans
(trade and non-trade), holdings of currency and deposits.
Surplus - a country exports more goods, services, and capital than it imports, indication it is
a net lender to the rest of the world
Deficit - a country imports more goods, services, and capital than it exports, indication it is
a net borrower from the rest of the world
Importance
• Helps policy makers understand the financial health of a country
• Influences exchange rates, inflation, and interest rates
• Can lead to significant adjustments from deficits and surplus
• Reflects the international economic position of a country
Corporate Governance Around the World
• It creates a system of rules and practices that determines how a company operates and
how it aligns with the interests of all its stakeholders.
Benefits
• Creates transparent rules and controls, guides leadership, and aligns the interests of
shareholders, directors, management, and employees.
• It helps build trust with investors, the community, and public officials.
• Can give investors and stakeholders a clear idea of a company’s direction and business
integrity.
• It promotes long-term financial viability, opportunity, and returns.
• It can facilitate the raising of capital.
• Good Corp. Gov. can translate to rising share prices.
• It can reduce the potential for financial loss, waste, risks, and corruption.
• It is a game plan for resilience and long-term success.
Board of Directors
• Insider members
➢ Major shareholders
➢ Founders
➢ Executive
• Independent members
➢ Experienced managing other large companies
Principles
• Fairness - must treat shareholders, employees, vendors, and communities fairly and
with equal consideration
• Transparency - provide timely, accurate, and clear information about such things as
financial performance, conflicts of interest, and risks to shareholders and other
stakeholders.
• Risk management - must determine risks of all kinds and how best to control them. They
must act on those recommendations to manage risks and inform all relevant parties
about the existence and status of risks.
• Responsibility - responsible for the oversight of corporate matters and management

activities. It must be aware of and support the successful, ongoing performance of the
company.
• Accountability - must explain the purpose of a company's activities and the results of its
conduct.
Models of Corporate Governance
1. The Anglo-American Model
• This model can take various forms, such as the Shareholder, Stewardship, and
Political Models. The Shareholder Model is the principal model at present.
• The Shareholder Model is designed so that the board of directors and shareholders
are in control.
• Management is tasked with running the company in a way that maximizes
shareholder interest.
• Shareholder Influence: Shareholders can withdraw support if dissatisfied,
motivating management.
• Board Composition: Includes both insiders and independent members; CEO and
board chairperson ideally separated.
2. The Continental Model
• Two groups represent the controlling authority under the Continental Model. They are
the supervisory board and the management board.
• Two-tiered system: the management board is composed of company insiders, such
as its executives. The supervisory board is made up of outsiders, such as
shareholders and union representatives.
• The two boards remain entirely separate.
• National interests have a strong influence on corporations with this model of
corporate governance.
3. The Japanese Model
• Key Players: Banks, affiliated entities, major shareholders (Keiretsu), management,
and the government.
• The board of directors is usually made up of insiders, including company executives.
Keiretsu may remove directors from the board if profits wane.
• The government affects the activities of corporate management via its regulations
and policies.
• In this model, corporate transparency is less likely because of the concentration of
power and the focus on the interests of those with that power.

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LESSON 1: FOUNDATIONS OF INTERNATIONAL FINANCIAL MANAGEMENT

International Monetary System

International Monetary Fund

Evolution of International Monetary System

The War Period

• Responsibility - responsible for the oversight of corporate matters and management

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