INTERNATIONAL FINANCIAL TRANSACTIONS

International Financial Transactions



Table of Contents

Global Financial System3

.Difference In interest rates:4

International diversification:4

Economic growth prospects:5

Exchange rate fluctuations:5

Modes of Payments in International Trade6

Open Account:6

Consignment Sale:7

Deferred Payments:7

Bank Transfers:7

Barriers to satisfactory international financial transactions8

Factors affecting Business Trading Internationally9

British companies sell abroad12

Conclusion13

International Financial Transactions

Task 1

Global Financial System

Since the global financial system is an interdependent system, the first question before us is where to start, which angles offer observers the deepest insights into the global financial system, which bring into focus those components whose evolution can be traced over a significant span of time, and whose role in the global financial system have helped pave the way for growth in its size and interdependence.  A financial system is a framework that facilitates financial transactions, and these transactions require an accepted form of money, something that can serve as a medium of exchange, a unit of account, a store of wealth, and a standard of deferred payment (Thomas, 2002, pp. 84).  The swelling ranks of corporations, propelled by speculative fever, searching the globe for markets and raw materials, brought the added momentum needed for the development of a global financial system, but for it to freely run its course a world monetary system was necessary.  Trade itself can function, on the basis of batter, and credit agreements can be individually negotiated under a barter system if political entities exist that can enforce contracts.  The global financial system begins with an explanation of the functional framework for studying the financial system and a discussion of the six major functions the system performs.  The IMF, the World Bank, and the BIS all have unique roles in international financial system.  The IMF promotes exchange rates stability, oversees the international financial system, and lends to member countries experiencing temporary balance of payments deficits.  The World Bank promotes the economic development of the world's poorest countries by raising funds to make development loans (George, 2004, pp. 8).

The important motives for engaging in international financial transactions are discussed below:

Difference In interest rates:

The interest rates in different countries are different. The interest rate differentials across countries provide strong motivation for borrowing from other countries or lending to other countries. Business corporations would like to borrow funds from countries where the interest rates are lower compared to the domestic interest rates. Similarly, investors with surplus funds would like to transfer funds across countries seeking higher interest rates in other countries (George, 2000, pp. 58).

International diversification:

Diversification of investment is a method of reducing the risk in investment. The reduction in risk is generally proportional to the diversity of sectors over which the investment is spread out. That is, the wider the diversity of sectors, the larger the risk reduction expected. Different countries have different economic conditions and resources, and experience different economic performances. The diversity of economic conditions and performances across countries offers unique opportunities to investors for larger risk reduction through international diversification of their investment portfolios. An internationally diversified asset portfolio is expected to have lower risk than a domestically diversified ...