International financial Environment
  Important questions from the topic:
  • Functions of foreign exchange market
  • Short note on foreign exchange risk
  • Types of foreign exchange rate
  • Foreign exchange risk and foreign exchange 
   exposure
                    International financial environment
       •  International financial system relates to the management of 
          and  trading  in  international  money  and  monetary  assets. 
          These monetary assets are claims on foreign currency, foreign 
          deposits and investments and/or foreign assets. The claims 
          may be denominated in various foreign currencies purchased 
          and sold and involve exchange as between various currencies. 
          Thus, these transactions give rise to (i) Borrowing and lending 
          operations in foreign currencies or trading in financial assets 
          denominated in foreign currencies and (ii) A foreign exchange 
          transaction involving an exchange of one currency for another. 
          The  first  is  called  the  foreign  currency  market  and  the 
          second is the foreign exchange market.
                 Foreign Exchange Market:
    • International economic and commercial relations 
      between countries involve exchange of goods and 
      services and payments for these exchanges. The 
      payments lead to conversion of one currency into 
      another.
    • Each country has its own financial system and its 
      own  currency  and  financial  assets.  Exchanges 
      between the money and financial assets of one 
      country for money or financial assets of another 
      country    constitutes   international   financial 
      transactions. 
 • THE DEMAND FOR ANY CURRENCY AS AGAINST ITS SUPPLY IN SUCH 
  MARKETS DETERMINES THE EXCHANGE RATE. THESE FINANCIAL 
  ASSETS COULD BE MONEY OR NEAR-MONEY ASSETS, CHEQUES, 
  DRAFTS, MAIL TRANSFERS AND OTHER NEGOTIABLE INSTRUMENTS. 
    Functions of foreign exchange 
           market
  1. Transfer Function:
  It transfers purchasing power between the 
  countries involved in the transaction. This function 
  is performed through credit instruments like bills of 
  foreign exchange, bank drafts and telephonic 
  transfers.
  2. Credit Function:
  It provides credit for foreign trade. Bills of 
  exchange, with maturity period of three months,