Multinational Financial Management

Multinational Financial Management
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Course Introduction
The world has become more integrated with increased international trade between and among countries influencing consumption, production as well as investment patterns. However, nations are still sovereign, and there are unique circumstances that affect international finance. For instance market imperfections, political risks, the foreign exchange risk and opportunities the global economy. Globalization has also been characterized with increased privatization of previous sate run corporations in many countries. In any case, the 2008/ 2009 financial crisis highlighted the links among the world financial systems. Besides international trade the multinational corporations also contribute towards foreign direct investments, they improve productivity while also encouraging competition on a global scale.
Foreign Exchange Market
The foreign exchange market provides a platform for the exchange of one currency for another since currencies are convertible (Madura, 2012). The interbank market is the wholesale while the client market consists of the retailers. Non bank dealers, foreign exchange brokers’ international banks, central banks and customers of the international banks are the main participants in the foreign exchange market. The foreign exchange market mostly focuses on the spot rate quotation and the forward rate quotation. Another financial instrument in the FX market is the swap which allows parties to exchange cash flows/ securities based on cash or interest rates, and they facilitate interbank FX trading.
In order to facilitate the functioning of the FX market, commercial banks demand deposit accounts through correspondent banking relationships. It is through communication that the international commercial banks enhance FX transactions offering a platform as clearing houses. The bid-ask spread then influences the spot FX market, with the increase in foreign exchange rate volatility as well dealer competition have a direct impact on the exchange rate (Levi, 2009). At the same time, the extent to which people have access to information also influences the spot exchange rates.
Nonetheless, the spot market is dependent on the spot rate quotations, the spread, spot FX trading as well as the cross rates the spot quotations may take the form of direct quotation or the indirect quotation depending on the expression of a currency either as the U.S. dollar equivalent or the U.S. dollar in another currency. The spread is dependent on the ask price that a buyer is willing to pay, with the ask price that the dealer desires to sell (Eiteman, Stonehill, & Moffett, 2007). The spread then facilitates currency conversion with the speculator looking at the spread to make arbitrage profit. Overall, the cross bid-ask spread as well as triangular arbitrage in turn influence the spot exchange.
The important elements of the forward market include the forward rate quotations, the forward positions, cross exchange rates, swap transactions and forward premium. The forward contract gives a one the right to buy or sell an asset in the future at agreed prices, but there is no obligation. The aspect of differences in the interest ra...