Theory and Practice of International Financial Management Review

1. Theory and Practice of International Financial ManagementReview

2. What to Remember in 5 Years 1. Governments are important: - governments print money - governments intervene in foreign exchange markets - governments tax 2. Interest rates reflect anticipated exchange rate changes: - international capital budgeting recognizes this relationship implicitly (decentralized) and explicitly (centralized) - expected currency borrowing costs will depend on this, particularly on an after-tax basis - risks associated with interest-bearing exposures will account for this co-movement

3. What to Remember in 5 Years 3. Prices will reflect realized exchange rate changes: - the law of one price will hold in the short-run for homogeneous commodities - any goods that are tradable will face similar arbitrage pressures in the long-run - economic risks that are linked to both exchange rates and prices must recognize for this relationship 4. International capital markets are segmented: - investors prefer local investments - different investors value different risks differently - borrowing costs and required returns on equity depend on country of lenders and investors

4. What to Remember in 5 Years 5. Only risks which cannot be diversified are important: - valuations given by international capital budgeting will depend on what risks are systematic to shareholders - measurement of foreign exchange exposure risks must recognize that positions may naturally offset or diversify - risk management activities are only useful if they increase expected returns or reduce risks systematic to shareholders portfolios or managers’ careers.