International Finance

1. International Finance Lecture 1

2. International Finance • Course topics • Foundations of International Financial Management • World Financial Markets and Institutions • Foreign Exchange Exposure • Financial Management for a Multinational Firm

3. Foundations of International Financial Management • Globalization and the Multinational Firm • International Monetary System • Balance of Payments • The Market for Foreign Exchange • International Parity Relationships

4. Globalization and the Multinational Firm • International vs __________ finance • Goals for international financial management • __________ • Multinationals • Comparative advantage

5. International vs Domestic Finance • Foreign __________ and Political Risk • Differences in regulations, tax laws, __________ policies • Greater opportunity set for production and/or __________

6. Additional Risks • Foreign Exchange Risk • Cost of __________ goods changes for you, price of your product changes for foreign customers as FX changes • Political Risk: Macro, Micro • Changes in foreign laws/taxes, __________ • Additional risks increase cost of capital of multinational firms, __________ the required rate of return by investors and third parties.

7. Additional Opportunities • __________ opportunities • __________ costs for resources • New product __________

8. Managerial objectives • Consensus in North America • Long-run __________ wealth maximization • In other countries • Shareholder wealth • __________ wealth • Corporate wealth • Market share, et c. • Long-term owner wealth maximization is the only sustainable _______ for running a business • Who are the owners? Are home country owners’ interests superior to those of foreign country owners?

9. Managerial objectives • The goal of MNE should be shareholder wealth maximization. • However in Europe and Asia some companies follow __________ wealth maximization rule. • In France, Germany and Italy banks are the major shareholders, also generally companies are private __________. • In Japan Keiretsus are important. • All multinationals’ main operating objective should be to maximize consolidated after tax __________.

10. Recent Trends in the World Economy • Globalization • Introduction of __________ • Trade liberalization • __________

11. Multinational Enterprise • MNE: Multinational firm is a company that has operating branches, subsidiaries and affiliates located in __________ countries. • It has both domestic and foreign __________ • Go to World Investment Report and look for the list of largest transnational corporations (Largest TNCs). • Multinationals face two __________ of risks in addition to normal risks faced by domestic companies. (Fx and political)

12. Why do firms become multinational? • __________ Seekers • Raw __________ Seekers • Production __________ Seekers • __________ Seekers • Political __________ Seekers

13. Comparative advantage • A brief overview of the theory is here • Idea: • Situation 1: countries try __________ by themselves all products they need, no international trade occurs • Situation 2: countries produce only what they can produce __________ (efficiently as compared with the other countries), sell their products, and buy what they need but do not produce • According to the theory of comparative advantage, in Situation 2 all participating countries are _________ than in Situation 1, under a set of assumptions

14. Comparative advantage

15. No trade exists

16. Terms of trade

17. Comparative advantage

18. Comparative advantage

19. Comparative advantage • If countries specialize in producing certain goods because they can do it more ___________ than the others, they use their comparative advantage over the other countries • In general, countries that specialize and trade are ___________ than those that do not • This effect is ___________ automatic, all depends on the terms of trade (open the spreadsheet and see if dashed lines are always ___________ the solid lines for each country) • A constant need for international transactions = constant need for / interest in international finance

20. Foundations of International Financial Management • Globalization and the Multinational Firm • International Monetary System • Balance of Payments • The Market for Foreign Exchange • International Parity Relationships

21. International Monetary System • … is the institutional __________ within which international payments are made, movements of __________ are accommodated and exchange rates among currencies are determined.

22. International Monetary System • History of the international monetary system • Current currency __________ • Major events

23. History of the International Monetary System • Bimetalism: Before __________ • The Gold Standard, __________ • The Interwar Years and World War II, __________ • Bretton Woods and the International Monetary Fund, __________ • Fixed Exchange Rates, 1945-1973 • 1973- Present

24. Current Currency Regimes • Exchange Arrangements with no separate legal tender • Currency Board Arrangements • Fixed __________ • Pegged Rate within Horizontal Bands • Crawling Pegs • Crawling __________ • Managed Float • Independent Float

25. Fixed versus Flexible Exchange Rate • Fixed exchange rate brings foreign exchange, trade, and investment __________, may be very expensive to implement, creates currency arbitrage __________. • Flexible exchange rate allows to conduct __________ monetary policy, is cheaper for the government to implement, eliminates arbitrage opportunities, but introduces __________ that may adversely affect trade and investment.

26. Major Events after 1973 • Oil Crisis • Asian __________ • European __________ and the Euro • Russian Crisis • Emerging __________ Crisis

27. The Economics and Currencies of Asia, July–Nov 1997

28. Daily Exchange Rates: Russian Rubles per U.S. Dollar

29. The European Union, 1999

30. Financial Markets in the Brazilian Crisis, January 11–15, 1999

31. Daily Exchange Rates: Brazilian Real per U.S. Dollar