International Financial Management Essay Example | Topics and Well Written Essays - 3000 words - 1

International Financial Management - Essay ExampleThe staple types of exchange dictate regimes are the fixed exchange direct and the floating exchange rate. In the latter case the market decides the movements of the exchange rate. Exchange rate volatility is a common denominator of a countrys exposure to international risk through foreign transactions, whether international trade or investment (Madura, 2009). The higher the form of exposure the higher the degree of risk associated with such exposure. Thus the exchange rate flush toilet be considered as an important indicator in monetary policy and it mainly depends on the monetary policy framework of a particular country.Exchange rate can be identified as a target for particular governments policy and that it can actively manage with the other components of a monetary policy such as inflation, balance of payments and so on. For example the changes in exchange rate in a short term can impact on the real economy and the balance o f payments and in the recollective term those effects can be adjusted with the exchange rate movements. Therefore developing countries that depend on commodity exports to a greater effect are more likely to face a greater degree of risk due to the fact that commodity prices in international markets are crush to huge fluctuations. As a result their currencies against those of advanced industrialized economies are weaker. Even the well developed countries especially UK has been faced with this reality but their force to manipulate exchange rates in international markets is considerably higher when compared to those developing countries (Wheele, 1995). 2. Literature ReviewCurrently available literature on the subject of exchange rate regime and related price stabilization policy in a modern economy has both a theoretical approach and a broader empiric approach. Price stabilization policy refers to a government macro economical strategy designed and executed by the central bank to ensure stable economic growth based primarily on stable prices and lower unemployment levels. This is a contingency macroeconomic model that presupposes a smoothing out effect on preposterous fluctuations in aggregate supply. Alogoskoufis (1992) shows that the broader policy level approach includes monitoring and adjusting cyclical growth process and interest rates so that aggregate demand can be managed to achieve broader macroeconomic policy goals.This