Int. fin Lecture1

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Course Outline

Understanding international financial markets,international parity conditions, currency futures andfutures markets.

The major international monetary systems and theirhistorical evolution.

Understand foreign exchange forecasting andanalyze various hedging methods to reduce foreignexchange risks.

Analyze cross-border capital budgeting andmultinational capital structure and cost of capital.

Understand taxes and multinational businessstrategy options.

Assess and analyze the past and presentinternational financial institutions and relate thisinformation to trade, finance, and investments.

Develop an appreciation for the pitfalls and benefitsof diversifying international portfolios.

Understand international bond markets andinternational equity markets and how they impact theglobal economy.

Analyze spot and futures foreign exchange marketsand how international organizations operate andintegrate the spot and futures in international tradeand financial transactions.


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Learning Outcomes

By the end of this course, you will have done, or beable to:

Understand why firms and nations seek out and

benefit from international business activities. Analyze and identify factors that cause exchangerates to change.

Identify the linkages between internationalfinancial prices.

Understand the costs and benefits of different

monetary systems. Identify and measure political risk associated witha sovereign nation.

Measure the impact of exchange rate movementson the cash flows of a firm.

Understand the basic mechanics of currencyforwards, futures and options.

Identify and implement a variety of differentstrategies to manage exchange rate risk.

Implement strategies to manage a multinationalcorporations ongoing global operations


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An Introduction to International

Finance

International financial management is financialmanagement conducted in more than onecultural, social, economic, or political environment

Well develop a framework for evaluating theopportunities, costs and risks of operating in theworlds markets for goods, services, and financialassets and liabilities

Challenges facing themultinational manager

The gentle reader will never, never know whata consummate ass he can become,until he goes abroad.

Mark Twain

Viv la difference

- Language & culture - Human resource

management- Accounting - Marketing- Distribution - Logistics- Financial markets - Corporate governance- Other business conventions

(legal, accounting, taxation, regulation, etc.)


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International financial

management

International finance is interdisciplinarywithin the field of finance

International financial managers must befamiliar with

Foreign exchange and Eurocurrency markets

Derivatives securities

International financial (debt & equity) markets

International markets for real assets

International portfolio investment

- The MNCs opportunities

Multinational investment policy

- Higher returns from existing investments- New investment opportunities

Multinational financial policy

- Reduced capital costs through access to internationalcapital markets


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International Finance as a field of

study.

International Finance: Decomposition. a. Areas of research and study

International Corporate Financial Management International Capital markets International Portfolio markets International Banking

b. New Developments Pricing International financial assets Globalization of transactions Control of international operations

c. International Finance in Practice Domestic financial management vs. International

financial management. Similarities

Emphasis on cash flows rather than earnings Time value of money Tax factors Function of financial managers

Differences Multiple currencies Differential taxation Barriers to capital mobility Multiple capital markets Structure of internal transfers


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What is so special about

International Finance?

Foreign exchange and political risk

Market imperfections

Expanded opportunity set

International Financial managementManagerial Decisions

Passive and active decision choices

Considerations: Time

Value

Risk

Motivation for International Business/Evolution of

the MNC Doctrine of comparative advantage

International mobility of factors of production

Imperfect markets theory

Product life cycle


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Overview of International FinancialManagement and the Multinational

Corporation

What is the Goal ofInternational FinancialManagement Corporate Goals

Shareholder Wealth Maximization Corporate Wealth Maximization

Operational Goals Maximizing consolidated profits after taxes Minimizing the firms effective global tax burden Correct positioning of the firms income, cash

flows, and available funds

Conflict and Constraints with the MNCs Goal Agency problem Environmental constraints Regulatory constraints Ethical constraints

R

ecent developments ArbitrageMarket efficiency Systematic vs. unsystematic risk Total risk


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Growth in International Trade

Globalization of the World Economy

Emergence of Globalized Financial Markets

Trade Liberalization and Economic Integration

Privatization

Growth in International Trade

Consistently lower for the U.S.

Generally much larger for Canada and European

countries. Has increased over time.

Growth in Foreign Direct Investment

In the 1990s, annual growth rate of 10%, comparedto 3.5% in international trade.

In 1998, MNCs worldwide sales reached $11trillion, compared to about $7 trillion of worldexports

In 2000, FDI reached $1.27 trillion


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What are the Characteristics of

the MNC?

What is a MNC? The MNC is a firm engaged in producing and selling goods or services

in more than one country.

Characteristics of a MNC

Controls Subsidiaries in Several Host Countries Derives a Significant Proportion of its Revenues

from Foreign Subsidiary Sales Makes Financial Decisions that Reflect its

Multinational Orientation Types of MNCs

Raw Material Seekers

Market Seekers

Cost Minimizers

Knowledge Seekers

Political Safety Seekers

What Are the Benefits to MNCs? Economies of scale

Costs Purchasing power Know-how

Access to under priced labor services and special R&D capabilities

Global presence will boost profit margins and create shareholdervalue


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Basic Concepts for the Study

ofInternational Finance Currency value and terminology

Fixed vs. flexible exchange rates b. Appreciation vs. depreciation

c. Strengthening vs. weakening d. Soft vs. hard

International financial markets The foreign exchange market Eurocurrency market Euro credit market

Eurobond market International stock markets Derivatives Markets

Liquidity is a financial marketsmost important characteristic Liquidity - the ease of capturing an assets value

Reflects a markets operational efficiency Impacts a markets informational and allocational

efficiency

The interbank foreign exchange market for largetransactions is the worlds most liquid market


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Other market characteristics

Maturity Short-term money markets

Long-term capital markets

Regulatory jurisdiction Single-country internal markets

Multi-country external markets

Middlemen Intermediated through a commercial bank

Non-intermediated or direct to the public, through abroker or investment bank

Foreign exchange marketsconducted through commercial banks

Spot market Cash market with delivery in two business days

Forward market Trade at a prearranged date and price

Volume More than $1 trillion per day

75% is in the interbank market


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Intermediated markets

in bank deposits and loans

Money markets Capital markets

Internalmarkets Short termaccounts withdomestic clients

Long termaccounts withdomestic clients

ExternalMarkets

Eurocurrencydeposits andloans

Long termaccounts withforeign clients

Money markets Capital markets

Internalmarkets

Short termcommercial paper

Stocks & bondsissued in thedomestic market

ExternalMarkets

Eurocommercialpaper

Global equityForeign bonds

Eurobonds

NonNon--intermediated (direct) marketsintermediated (direct) markets


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Eurocurrency markets

Eurocurrencies

Bank deposits and loans residing outside anysingle country

Floating rate pricing

usually with maturities less than five years

Few regulatory restrictions

because they are outside the jurisdiction of anysingle government

Competitive pricing

more than $2.5 trillion outstanding

The Eurocurrency market has few regulations Typically, there are

- No reserve requirements

- No interest rate regulations or caps- No withholding taxes

- No deposit insurance requirements

- No credit allocation regulations

- Less stringent disclosure requirements


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Public debt markets

Domestic markets

Domestic bonds are issued and traded domestically anddenominated in the domestic currency

Major domestic debt markets(billions)

Source: Bank for International Settlements (June 2002)


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Public debt markets

International markets

Foreign bonds are issued in a domestic

market by a foreign borrower Toronto Dominion 6.4509 trade OTC in the

U.S.

Eurobonds are placed outside the borders ofthe country issuing a currency

FNMA 7.2530 traded OTC outside the U.S.

Global bonds trade in the Eurobond market aswell as in one or more internal bond markets


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Major international debt markets

(billions)

Source: Bank for International Settlements (December 2002)


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Major stock markets(billions)

Source: Compiled from FTSE and MSCI Indices (December

2002)


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Int. fin Lecture1

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