The International Financial Environment

Understanding Exchange Rates

Exchange rates dictate the value of one country’s currency compared to another’s. These rates fluctuate due to various factors including economic performance, interest rates and political stability.
A strong currency can be a double-edge sword. It can make foreign goods and services cheaper but also make a country’s exports more expensive, potentially hampering international trade.
Conversely, a weak currency might make imports more expensive but can potentially boost exports as the products become cheaper for foreign customers.

Understanding Interest Rates

Interest rates, set mostly by a country’s central bank, can significantly affect the cost of borrowing and the returns on savings and investments.
High interest rates can deter businesses from borrowing money for international trade activities, but they can also attract foreign investors looking for better returns.
Low interest rates can stimulate business activities by making borrowing cheaper, but might lead to capital flying out to other countries offering better returns.

Managing International Financial Risks

Businesses involved in international trade are exposed to various financial risks including exchange rate risk, credit risk, and interest rate risk.
Exchange rate risk pertains to changes in currency values that can affect business profits.
Credit risk involves the possibility of nonpayment by overseas customers. This can be mitigated by obtaining insurance or using secure methods of payment.
Interest rate risk is associated with fluctuations in interest rates that can directly affect business costs. Businesses can use a variety of strategies, such as forward contracts and options, to manage their exposure to these risks.

Understanding Import Tariffs and Trade Barriers

Tariffs are taxes imposed on imported goods. They raise the cost of imports, making domestically-produced goods more attractive.
Non-tariff barriers include quotas and complex administrative requirements. These can be just as obstructive as tariffs for businesses trying to access international markets.
Understanding and negotiating such barriers is key for businesses to succeed in the international marketplace.

Benefiting from Financial Assistance for International Trade

Many countries provide financial assistance to businesses looking to export goods and services. This might be in the form of grants, loans or guarantees.
These financial aids can help businesses overcome the initial hurdles of entering foreign markets.
Through these schemes, a government might aim to stimulate economic activity, create jobs, or achieve a positive balance of trade.