FN 313: International Financial Management

1. FN 313: International Financial Management Semester 1/2008

2. FN 313 Lecture Time: Saturdays, 13:00 – 16:00 Texts: Eun, Cheol S. and Bruce G. Resnick (2007), International Financial Management (Fourth Edition), McGraw-Hill. Instructor: Aj.Nasha Ananchotikul bo.nasha@gmail.com Course website: http://ajnasha.wordpress.com/

3. FN 313 GradingPolicy: Midterm Examination 30% (Saturday, October 4) Final Examination 50% (Tuesday, December 2) Attendance & Participation 10% Assignments & Quizzes 10%

4. Course Outline Part 1: Introduction to International Finance • Globalization and the multinational firm • International monetary system • Balance of payments Part 2: Foreign Exchange and Derivatives • FX market • FX determination and forecasting • FX futures and options

5. Course Outline Part 3: Foreign Exchange Exposure and Management • Transaction exposure • Economic exposure • Translation exposure Part 4: World Financial Markets and Institutions • Banking and money market • Bond market • Equity market • Interest rate and currency swaps • International portfolio investment

6. Course Outline Part 5: Multinational Financial Management • FDI and cross-border acquisition • International capital structure and the cost of capital • International capital budgeting • International trade finance • International tax environment • Corporate governance around the world

7. INTERNATIONAL FINANCIAL MANAGEMENT Fourth Edition EUN / RESNICK

8. 1 Globalization & the Multinational Firm Chapter One • Chapter Objectives: • Understand why it is important to study international finance. • Distinguish international finance from domestic finance.

9. Chapter One Outline • What’s Special about “International” Finance? • Goals for International Financial Management • Globalization of the World Economy • Multinational Corporations

10. What’s Special about “International” Finance? • Foreign Exchange Risk • Political Risk • Market Imperfections • Expanded Opportunity Set

11. What’s Special about “International” Finance? Foreign Exchange Risk • The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. Suppose an American invests in a Thai stock: Increased to ฿ depreciated to Pay $ 10 Receive $ 9.7

12. What’s Special about “International” Finance? Political Risk • Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways. • Political uncertainty also affects investor confidence about the direction of the economic and investment policy.

13. What’s Special about “International” Finance? Market Imperfections • Legal restrictions • Transactions costs • Shipping costs • Discriminatory taxes • Information asymmetry

14. What’s Special about “International” Finance? Expanded Opportunity Set • By expanding business internationally, firms can benefit from greater economies of scale, lower cost of capital, cheaper labor and raw materials, lower risks and higher potential returns from diversification. • True for corporations as well as individual investors.

15. Goals for International Financial Management • International financial management is designed to provide financial managers with an understanding of the fundamental concepts and the tools necessary to reach the goal of shareholder wealth maximization, i.e. firm value maximization.

16. Other Goals • In other countries shareholders are viewed as merely one among many “stakeholders” of the firm including: • Employees • Suppliers • Customers • In Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs.

17. Other Goals • As shown by a series of recent corporate scandals at companies like Enron and WorldCom managers may pursue their own private interests at the expense of shareholders when they are not closely monitored. • These calamities have painfully reinforced the importance of corporate governance (CG) i.e. the financial and legal framework for regulating the relationship between a firm’s management and its shareholders.

18. Other Goals • These types of issues can be much more serious in many other parts of the world, especially emerging and transitional economies, such as Indonesia, Korea, and Russia, where legal protection of shareholders is weak or virtually non-existing. • Shareholders are the owners of the business. It is important to strengthen CG so that shareholders receive fair returns on their investments.

19. Globalization of the World Economy: Major Trends • Emergence of Globalized Financial Markets • Emergence of the Euro as a Global Currency • Trade Liberalization and Economic Integration • Privatization

20. Emergence of Globalized Financial Markets Factors contributing to increased financial globalization: • Deregulation of Financial Markets • Advances in Technology have greatly reduced information and transactions costs, which has led to: • Financial Innovations, such as • Currency futures and options • Multi-currency bonds • Cross-border stock listings • International mutual funds

21. Emergence of the Euro as a Global Currency • A momentous event in the history of world financial systems. • Currently more than 320 million Europeans in 15 (Eurozone) + 5 (w/ formal agreement) + 6 (w/o formal agreement) countries are using the common currency. • The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future.

22. Euro Area Countries participating in the euro: Eurozone • Austria • Belgium • Cyprus • Finland • France • Germany • Greece • Ireland • Italy • Luxembourg • Malta • Netherlands • Portugal • Slovenia • Spain With formal agreements: • Mayotte • Monaco • Saint Pierre and Miquelon • San Marino • Vatican City Without formal agreements: • Akrotiri and Dhekelia • Andorra • Kosovo • Montenegro • Saint-Martin

23. Value of the Euro in U.S. Dollars Jan 4, 1999 to Aug 11, 2008

24. The US dollar as the dominant global currency Key factors: - dominant size of the U.S. economy - mature and open capital markets - price stability - political and military power of the U.S. Advantages to the U.S.: - can run large trade deficits without having to hold large reserves - little exchange rate risk in int’l transactions

25. Economic Integration • The virtue of international trade is based on the theory of comparative advantage • Over the past 50 years, international trade increased about twice as fast as world GDP. • There has been a sea change in the attitudes of many of the world’s governments who have abandoned protectionist views and embraced free trade as the surest route to prosperity for their country.

26. Liberalization of Protectionist Legislation • The General Agreement on Tariffs and Trade(GATT) a multilateral agreement among member countries has reduced many barriers to trade. • The World Trade Organization(WTO) has the power to enforce the rules of international trade. • China and India implemented market-oriented economic reforms. The huge supplies of labor in these countries– together with their demands for natural resources, capital goods, technologies—will profoundly alter the pattern of international trade and investment.

27. Privatization • The selling of state-run enterprises to investors is also known as “Denationalization”. • Often seen in socialist economies in transition to market economies. • By most estimates this increases the efficiency of the enterprise. • Often spurs a tremendous increase in cross-border investment.

28. What is a Multinational Corporation? • A firm that has incorporated on one country and has production and sales operations in several other countries. • There are about 60,000 MNCs in the world. • FDI by MNCs is also a major force driving globalization of the world economy.

29. Top 10 MNCs by foreign assets (2007) Source: United Nations Conference on Trade and Development (UNCTAD)

30. Top 10 MNCs by market cap(June 2008) Source: Financial Times

31. Why do firms “go global”? • To benefit from economies of scale • To broaden their markets • To seek raw materials • To seek new technology • To seek production efficiency • To avoid political and regulatory hurdles • To diversify

32. MNCs vs. Domestic firms What makes financial management of MNCs more complicated than that of domestic firms? Because of the differences in:

33. Who else might need to know international financial management? • Exporters/Importers • Individuals or corporations that borrow or lend in foreign currencies (through banks or bond market) • International portfolio investors • Financial service providers (mainly banks) • Financial regulators

34. End Chapter One Homework: - Read Chapter 1 - Write your info on the provided sheet