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INTERNATIONAL FINANCE

INTERNATIONAL FINANCE. Introduction. What are we going to learn in this chapter ?. What kinds of risks does International Finance expose the firm to ?. What about CFO related decisions / issues ?. Key Issues. What is Exchange Rate Risk? What is Credit Risk?

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INTERNATIONAL FINANCE

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  1. INTERNATIONAL FINANCE

  2. Introduction

  3. Whatarewegoingtolearn in thischapter?

  4. Whatkinds of risksdoesInternationalFinanceexposethefirmto?

  5. Whatabout CFO relateddecisions/issues?

  6. KeyIssues • What is Exchange Rate Risk? • What is Credit Risk? • What is Political Risk? • Importance of Access toForeignFinancialMarkets • Importance of CorporateGovernanceApplications

  7. KeyIssues • Importance of InternationalTaxIssues • Effects on Project Valuationbythe CFO • Effects on Project Fundingbythe CFO • Effects on Risk Managementbythe CFO

  8. IntroductoryTopics • Whyarefirmsexposedtotherisksdiscussed? • What’sGlobalization? • What’s a MNC? • What’s an emerging market?

  9. IntroductoryTopics • Whataretheinternationaleffortstopromotetrade? (WTO) (EU) (NAFTA) (ASEAN)

  10. IntroductoryTopics • TheImpact of Openness on TradeFlows • HowcouldMNCsenterforeignmarkets?

  11. IntroductoryTopics • Theultimategoal of a regularcompany is “shareholderwealthmaximization”. Howabout a MNC? • What is ForeignDirectInvestment? • HowaboutInternationalMergersandAcquisitions?

  12. IntroductoryTopics • InternationalBanks • IMF • World Bank

  13. TheForeign Exchange Market

  14. Whatarewegoingtolearn in thischapter?

  15. Organization of the FOREX Market • Interbank Market • Howmanyhours a day is the FOREX market open? • Do you (theindividual) haveanyadvantagesrelatedtohavingaccesstoInterbank Market?

  16. Organization of the FOREX Market • Volume of the FOREX market aroundtheworld. Anyguesses? • What’s “spot market” for FOREX?

  17. Organization of the FOREX Market • ForeignExhangeDealers • Liquidityand market making • ForeignExchange Brokers • Arethereanyotherpotentialparticipants?

  18. CurrencyQuotesandPrices • What is exchange rate? • Quote: Example? • AlternativeGoogleStyleQuote?

  19. CurrencyQuotesandPrices • Directquote vs. Indirectquote • Howmuch TRL do youneedto buy 1,000 USD? • Howmuch USD do youneedto buy 1,000 TRL?

  20. CurrencyQuotesandPrices • What is a “vehiclecurrency”? Why do weneed it? • What is a “cross rate”?

  21. TriangularArbitrage • What is triangulararbitrage? • Whybother? • Directquote vs. Implied rate

  22. TriangularArbitrageExample • SupposethatMr. Susam, who is a forextraderobservesthefollowingexchangerates: EUR 1.1555/GBP or GBP 0.86543/EUR EUR 0.76388/USD or USD 1.3091/EUR USD 1.5386/GBP or GBP 0.64994/USD IfMr. Susam startsthetradewith 10,000,000 EUR andbuys GBP, can he profit?

  23. TriangularArbitrageExample

  24. TriangularArbitrage • Howfastshouldyou be? • Howlongdoesthearbitrageopprtunitylast? Hour, Day, Week, Forever? • Do youalwayshaveto start withsellingEurosto buy Pounds?

  25. Bid-Ask Spread • How do forextradersmakemoneyif not throughTriangularArbitrage? • Bid? • Ask? • Spread?

  26. Bid-Ask Spread • Example ¥110.25/$ & ¥110.30/$ Yen perdollar ask & bid? Dollarper yen ask & bid? Any general rule?

  27. Bid-Ask Spread • The competitive nature of the foreign exchange market • Pip • Example: $1.3096/GBP and 2 pips • Percentage spread? • Majorcurrency vs. TRL

  28. Bid-Ask Spread • Forhowlongdoesthe spread staythesame? • Anypotentialfactorsaffectingthe spread? • Online vs. in life spread (forexampletourists)

  29. Changes in Exchange Rates • Howtodescribevaluechanges? • Appreciation • Depreciation • Fixedcurrencies & Devaluation

  30. Changes in Exchange Rates • Therationalefordevaluation? • Anypotentialproblems? • Areothercountriesstupid?

  31. Rates of Appreciation & Depreciation • A currencyappreciated. Fine! Howmuch is theappreciation? • Formula • Example: from$2.00/£ to $2.50/£. Dollarappreciation/depreciation? Pound appreciation/depreciation?

  32. ForwardMarkets and Transaction Exchange Rate

  33. Whatarewegoingtolearn in thischapter?

  34. BasicConcepts • Metro Market sellsmany goods imported from the United States.Ifthe USD strengthens, is thisgoodorbadnewsfor Metro? • What is transactionexchange risk?

  35. BasicConcepts • What is forwardforeignexhange market? • What is thedifferencefrom spot exchange market? • Why do forwardmarketsexist? • What is hedging?

  36. Transaction Exchange Risk • What is themain element thatmakesforwardmarketsimportant/desirable? • How can youknow in whichdirection a currency’svalue is goingtomove?

  37. Transaction Exchange Risk • Motorola USA importsmaterialsfromJapan. Paymentdue in 90 days. Payment in Yen. Whathappensif USD weakensduringthat time?

  38. ForwardContracts & Hedging • Migrosmust pay Hershey’sChocolateUSD 1,000,000 in 90 days, and the current exchange rateis TRL2.20/USD. Theexchange rate is expectedto be between TRL 2.00/USD and TRL 2.40/USD. • Whathappensifthesescenarioshappen?

  39. ForwardContracts & Hedging • AnypotentialremediesforMigros? • What’s a forwardcontract? • Fixedamount • Fixeddate • Whoaretherelatedparties? • Owe & Buy

  40. ForwardContracts & Hedging • Owe & Buy • Receive & Sell

  41. ForwardContracts & Hedging • Migrosexamplecont’d: Forward rate: TRL2.25/USD as opposedto spot of TRL2.20/USD Profit/Loss? Paymentsdue? • Balancesheetlogic

  42. ForwardContracts & Hedging • Anypotentialregrets? Ifyes, in whichcase? • Cost vs. Benefit? When? Quantifymaybe?

  43. HedgingImportPayments • Assume that you are the financial manager of Zachy’s, an electronicsstore in NewYork, that imports parts from France. You have just contracted to import some parts and your invoice is for EUR4 million. Payment of the euros are scheduled for 90 days in the future. • The following data are available: Today’ssport rate = $1.10/EUR Today’s 90-day forward rate = $1.08/EUR • Potentialmaximumlosswithoutforwardtransaction? • Whatifthe rate is $1.05/EUR in 3 months?

  44. HedgingExportReceipts • YouareShetland Sweaters, a British manufacturer. You agree to ship sweaters to Japan and are willingto accept ¥500,000,000 in payment from the Japanese sweater importer Nobu Inc.Delivery of the goods and receipt of the yen are scheduled for 30 days from now, andthe following data are available: • Today’s spot rate = ¥176/£ • Today’s 30-day forward rate = ¥180/£ • What is thepotentialmaximumloss? • Howtoeliminatethe risk?

  45. Organization of theForward Market • Outright forward contracts • Forwardsettlementdate • Most active maturities • Over-the-counter market • Bid–ask spread

  46. FOREX Swap Market • What is a SWAP? • Howdoes it work? • Whyuse it?

  47. FOREX Swap Market • Quotation of SWAPs Spot: YEN/USD 104.30 – 35 30-day: 15/20 • Addorsubtractthe SWAP points? Generalization?

  48. FOREX Swap Market • Nomura, a Japanese investment bank, quotes the spot rates ¥104.30 / $ bid and ¥104.35/$ ask and swap points of 20/15. Suppose that IBM wants to swap out of $10,000,000 and into yen for 30 days. Whatdoes IBM do?

  49. FOREX Swap Market

  50. Balance of Payments

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