0When a firm operates only in the domestic market, both for procuring inputs as well as selling its output, all the dealings are done only in domestic currency. As the companies strive to increase their international footprints, either by undertaking international business or by establishing operations abroad,they start dealing with people and firms in various nations. Since different countries have different domestic currencies, the question arises as to which currency should the trade be settled in. The settlement currency may either be the domestic currency of one of the parties to the trade, or may be an internationally accepted currency such as Dollar, Euro, Pound, yen.
Such a situation gives rise to a problem of dealing with a number of currencies. The mechanism by which the exchange rate between these currencies (i.e., the value of one currency in terms of another ) is determined, along with the level and the varibility of the exchange rates, can have a profound and far reaching effect on the sales, costs and profits of a firm.The exchange rates have a great impact on various financial decisions, and their movements can alter the profitability of these decisions. For example if INR depreciates against the abovementioned currencies, profitability of the firms that import raw materials from abroad will be adversely affected because of higher raw materials cost, whereas firms in IT and Pharma sector which export goods and services stand to gain because INR depreciation increases their Revenue. The situation is reversed when INR starts to appreciate. Thus there is a need to study International Finance and its implications.
