International finance is the branch of economics that studies the dynamics of exchange

rates, foreign investment, and how these affect international trade. It also studies international
projects, international investments and capital flows, and trade deficits. It includes the study of
futures, options and currency swaps. International finance is a branch of international economics.

Important theories in international finance include the Mundell-Fleming model, the optimum
currency area (OCA) theory, as well as the purchasing (PPP) theory. Whereas international trade
theory makes use of mostly microeconomic methods and theories, international finance theory
makes use of predominantly macroeconomic methods and concepts.
International financial management, essentially an extension of corporate finance to a global context
has undergone an extraordinary metamorphosis since the mid-1960's. From a relatively stable
and predictable economic environment at that time, the forces of inflation, technological
innovation, and deregulation led to new and volatile markets and a plethora of financial
instruments. Many of these developments would not have been possible without the academic
research in this subject which went from mainly descriptive and anecdotal to analytical.
Arguably the most important theoretical developments in finance took place since then: the
capital asset pricing model [CAPM], option pricing models, and the recognition of agency costs
as a potential conflict of interest between management and shareholders of a firm. These are
still areas of disagreement: the cost of capital for a company with global markets and investors
needs more study; managing currency, interest rate, and other risks in a complex international
organization is still a work in progress. On balance, the case can be made that the changes
seen over more than three decades have been positive.

Importance of International Financial

Management
International financial management deals with the financial decisions taken in the area of
international business. The growth in international business is, first of all, evident in the
form of highly inflated size of

international trade. In the immediate post-war years, the general agreement on the Trade
and Tariffs was set up in order to boost trade. It axed the trade barriers significantly over the
years, as a result of which international trade grew manifold. Naturally, the financial
involvement of the trader's exporters and importers and the quantum of the cross country
transactions surged significantly. All this required proper management of international flow
of funds for which the study of International Financial Management came to be
indispensable.

Not unexpectedly, the second half of the twentieth century witnessed the emergence, and fast
expansion, of multinational corporations. Normally, with the growth of international trade,
the products of the exporter become mature in the importing countries. When the product
becomes mature in the importing countries, the exporter starts manufacturing the product
there so as to evade tariff and to supply it at the least cost. Thus it would not be wrong to say
that the emergence of the multinational companies was the by-product of the expansion in
world trade. There were some countries in the developing world too which were liberal in
hosting the multinational companies. They imported technology on a big scale and built up
their own manufacturing base. As a result, their own companies went international. Thus
multinational company's emergent not only in developed countries but also in the developing
world and because of their operation the cross country flow of funds increased substantially.
The two way flow of funds, outward in the form of investment and inward in the form of
repatriation divided, royalty, technical service fees, etc., required proper management and so
the study of International Finance Management become a real necessity.
With growing operation of Multinational companies, a number of complexities arose in the
area of their financial decisions. Apart form the considerations of where, when and how
much to invest, the decision concerning

the management of working capital among their different subsidiaries and the parent units
become more complex especially because the basic polices varied from one Multinational
companies to the other. Those Multinational companies that were more interested in
maximizing the value of global wealth adopted a centralized approach while those not
interfering much with their subsidiaries believed in a decentralized approach.

The second half of the twentieth century has also experienced a vast magnitude of lending y
international and regional development asks and different governmental and non-
governmental agencies. The movement of funds mostly to the developing world and the
reverse movement of funds in form of interest and amortization payments needed proper
management. Besides, there were big changes in the character of the international financial
market with the emergence of Euro banks and offshore banking centre and of various
instruments, such as Euro bonds, Euro notes and Euro commercial papers. The nature of the
movement of funds become so complex that proper management become a necessity and the
study of International Finance Management become highly relevant. In fact, International
Finance Management suggests the most suitable technique to be applied at a particular
moment and in a particular case in order to hedge the risk.