International financial management would be no different than domestic financial management were it not for the fact that at the international level problems are introduced by two factors: the presence of different countries and the presence of different currencies. This is an important distinction, because the domain over which countries are defined (political divisions) is different from the domain over which currencies are defined (currency areas, or areas within which exchange rates are fixed). For example, different countries may use a common currency; Panama and the USA both use the US dollar, and on a larger scale one of the ultimate aims of the European community is to introduce a common currency for all of Europe. Similarly, it is possible to deal in different currencies within a given country; term deposits denominated in various currencies are commonplace in the major international financial centres.

A consequence of the existence of countries and currencies is the need for international financial managers to assess and manage political and exchange rate exposure and risk. As explained below, exposure represents the amount at risk while risk relates to the dispersion of possible outcomes. Exposure and risk are therefore conceptually and even dimensionally different. However, at the same time as countries and currencies create special problems they also create special opportunities, including higher returns and/or better diversification than is possible in any one country or currency. If exposures and risks are to be properly managed, then it is necessary that they be correctly measured. However, while measurement is in principle straightforward, there are major problems in practice.

The key concepts are the balance of payments (the record of transactions between domestic residents and residents of foreign countries over a period of time) and the exchange rate; important issues include the relationship between exchange rate policy and monetary policy, and the link between the balance of payments and the exchange rate. The most prominent models of exchange rate determination are the neoclassical or monetarist model and the Keynesian model, which distinguishes between internal and external equilibrium and makes calculations assuming prices are fixed in the short run. More recent models emphasize the role of international capital movements. Current issues in international finance include the role of the International Monetary Fund and the World Bank, the development of the European Monetary System and whether efficient markets hypothesis can be applied to exchange rates.