Int. fin Lecture1

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  • 8/7/2019 Int. fin Lecture1


  • 8/7/2019 Int. fin Lecture1



    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


    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


    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


    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



    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


    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


    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


    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


    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


    Eurocurrencydeposits andloans

    Long termaccounts withforeign clients

    Money markets Capital markets


    Short termcommercial paper

    Stocks & bondsissued in thedomestic market



    Global equityForeign bonds


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

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    Eurocurrency markets


    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


    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


    Source: Bank for International Settlements (December 2002)

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    Major stock markets(billions)

    Source: Compiled from FTSE and MSCI Indices (December


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