Forum-NexusInternational Finance Class ndashLecture 1

Brian David ButlerBrian Butler is a specialist in international economic analysis and is founder of the prestigious ldquoGloboTrendsldquo (wwwglobotrendscom) online economics site which has been featured as syndicated content on Nouriel Roubinirsquos RGE Monitor Emerginvestcom Business Week Exchange Wikinvestcom and other leading news outlets

Brian earned an MBA with distinction from the Thunderbird School of Global Management and he has taught Finance Economics and Global Trade at Thunderbirdrsquos Global MBA program in Miami Brian is currently a teacher and country director for Forum-Nexus study abroad program in Brazil

He previously worked as financial analyst for the Columbia University Business School and for NextLogics a boutique investment and consulting firm focused on early stage endeavors with social impact

A global citizen Brian was born in Canada raised in Switzerland (where he attended international schools) educated in the US started his career with a Japanese company moved to New York to work as a financial analyst married a Brazilian and has traveled extensively in Latin America Asia Europe and North America

brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler

Brian David ButlerBrian Butler is a specialist in international economic analysis and is founder of the prestigious ldquoGloboTrendsldquo (wwwglobotrendscom) online economics site which has been featured as syndicated content on Nouriel Roubinirsquos RGE Monitor Emerginvestcom Business Week Exchange Wikinvestcom and other leading news outlets

Brian earned an MBA with distinction from the Thunderbird School of Global Management and he has taught Finance Economics and Global Trade at Thunderbirdrsquos Global MBA program in Miami Brian is currently a teacher and country director for Forum-Nexus study abroad program in Brazil

He previously worked as financial analyst for the Columbia University Business School and for NextLogics a boutique investment and consulting firm focused on early stage endeavors with social impact

A global citizen Brian was born in Canada raised in Switzerland (where he attended international schools) educated in the US started his career with a Japanese company moved to New York to work as a financial analyst married a Brazilian and has traveled extensively in Latin America Asia Europe and North America

brianbutlerforum-nexuscombriandbutlergmailcomLinkedInbriandbutlerSkype briandbutler

Introduction to International Finance

bull Topics we will cover What is ldquointernational financerdquo International Financial Markets

The Foreign Exchange Market

Determination and Forecasting of Exchange Rates

(fundamentals purchasing power parity and international

Fisher effect)

Protection against Exchange Rate Risk

The International Monetary System

The European Monetary Union (and the euro)

Fixed vs Flexible Exchange Rate regimes

Introduction to International Finance

bull Topics we will cover

The Balance of Payments

National Income and the BOP

Monetary and Fiscal Policies and the BOP

Global Financial Markets (euromarkets)

GLOBAL ECONOMIC CRISIS

Key issues

bull Why is the exchange rate xxx Euros per $US

(PPP IFE other factors)

(currency crises)

bull What are key financial flows and why do they occur

(forex transactions international lending lsquohot

moneyrsquo flows)

Key issues

bull What is the Sub-prime Mortgage Crisis And what can you do about it

bull How can you deal with exchange risk (derivatives operational hedging diversifying)

bull Who cares about the balance of payments (impact on XR government policies) (foreign debt problem tequila crisis Asia crisis)

bull How do national economic policies affect the BOP and international firms

(D Ms D G)

Challenge to studentshellip

While we are in Europe togetherhellip

bull Think critically

bull Challenge accepted assumptions

bull Look for trends (not facts amp figures)

bull Educational journeyhellip

Questions

Finance1 How many econ finance majors 2 Taken ldquointernational financerdquo before3 Studied Currencies

Global Crisis1 How many ldquounderstandrdquo more or less what

happened so far (ask volunteer)2 In US (ask volunteer)3 In Europe4 Predictions of what will happen in 6 months

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Introduction to International Finance

bull Topics we will cover

The Balance of Payments

National Income and the BOP

Monetary and Fiscal Policies and the BOP

Global Financial Markets (euromarkets)

GLOBAL ECONOMIC CRISIS

Key issues

bull Why is the exchange rate xxx Euros per $US

(PPP IFE other factors)

(currency crises)

bull What are key financial flows and why do they occur

(forex transactions international lending lsquohot

moneyrsquo flows)

Key issues

bull What is the Sub-prime Mortgage Crisis And what can you do about it

bull How can you deal with exchange risk (derivatives operational hedging diversifying)

bull Who cares about the balance of payments (impact on XR government policies) (foreign debt problem tequila crisis Asia crisis)

bull How do national economic policies affect the BOP and international firms

(D Ms D G)

Challenge to studentshellip

While we are in Europe togetherhellip

bull Think critically

bull Challenge accepted assumptions

bull Look for trends (not facts amp figures)

bull Educational journeyhellip

Questions

Finance1 How many econ finance majors 2 Taken ldquointernational financerdquo before3 Studied Currencies

Global Crisis1 How many ldquounderstandrdquo more or less what

happened so far (ask volunteer)2 In US (ask volunteer)3 In Europe4 Predictions of what will happen in 6 months

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Key issues

bull Why is the exchange rate xxx Euros per $US

(PPP IFE other factors)

(currency crises)

bull What are key financial flows and why do they occur

(forex transactions international lending lsquohot

moneyrsquo flows)

Key issues

bull What is the Sub-prime Mortgage Crisis And what can you do about it

bull How can you deal with exchange risk (derivatives operational hedging diversifying)

bull Who cares about the balance of payments (impact on XR government policies) (foreign debt problem tequila crisis Asia crisis)

bull How do national economic policies affect the BOP and international firms

(D Ms D G)

Challenge to studentshellip

While we are in Europe togetherhellip

bull Think critically

bull Challenge accepted assumptions

bull Look for trends (not facts amp figures)

bull Educational journeyhellip

Questions

Finance1 How many econ finance majors 2 Taken ldquointernational financerdquo before3 Studied Currencies

Global Crisis1 How many ldquounderstandrdquo more or less what

happened so far (ask volunteer)2 In US (ask volunteer)3 In Europe4 Predictions of what will happen in 6 months

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Key issues

bull What is the Sub-prime Mortgage Crisis And what can you do about it

bull How can you deal with exchange risk (derivatives operational hedging diversifying)

bull Who cares about the balance of payments (impact on XR government policies) (foreign debt problem tequila crisis Asia crisis)

bull How do national economic policies affect the BOP and international firms

(D Ms D G)

Challenge to studentshellip

While we are in Europe togetherhellip

bull Think critically

bull Challenge accepted assumptions

bull Look for trends (not facts amp figures)

bull Educational journeyhellip

Questions

Finance1 How many econ finance majors 2 Taken ldquointernational financerdquo before3 Studied Currencies

Global Crisis1 How many ldquounderstandrdquo more or less what

happened so far (ask volunteer)2 In US (ask volunteer)3 In Europe4 Predictions of what will happen in 6 months

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Challenge to studentshellip

While we are in Europe togetherhellip

bull Think critically

bull Challenge accepted assumptions

bull Look for trends (not facts amp figures)

bull Educational journeyhellip

Questions

Finance1 How many econ finance majors 2 Taken ldquointernational financerdquo before3 Studied Currencies

Global Crisis1 How many ldquounderstandrdquo more or less what

happened so far (ask volunteer)2 In US (ask volunteer)3 In Europe4 Predictions of what will happen in 6 months

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Questions

Finance1 How many econ finance majors 2 Taken ldquointernational financerdquo before3 Studied Currencies

Global Crisis1 How many ldquounderstandrdquo more or less what

happened so far (ask volunteer)2 In US (ask volunteer)3 In Europe4 Predictions of what will happen in 6 months

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Failure of ldquoeconomic forecastingrdquo

profession

bull Why didnrsquot predict worst crisis since Great Depression

bull Some exceptions (Nouriel Roubini others)

bull But in general a few lone voices does not equal a profession (dismissed as quack ldquoDr Doomrdquo etchellip)

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Mis-diagnosis of the problem

bull Globally during much of 2008 economic growth appeared to be holding up in general and inflation particularly in commodity prices was still rising

bull IMF Projection In April 2008 eight months into the global crisis if we date its

start as August 2007 the IMF (2008) was forecasting only a mild slowdown in global growth in 2008 and 2009 to 37 and 38 percent respectively from the 49 percent that then was estimated for 2007

Median consumer price inflation in the advanced countries was projected to rise to 29 percent in 2008 from 21 percent in 2007 In fact median inflation rose to 32 percent

bull ECB Recall that the European Central Bank (ECB) raised the target

for its key refinancing rate on July 3 2008 and the ECB was not alone in its inflation concerns at that time

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

As late as 2008 the IMF forecasted

growth in 2009

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Failure of ldquoeconomic forecastingrdquo

profession

Conclusion highest trained most respected most influential did not predict collapse

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Repeat challenge to students

bull Think critically donrsquot accept ldquoexpertrdquo forecasts challenge accepted assumptions

bull With critical analysis any one can learn to spot macro trends

bull GET AHEAD OF THE TRENDS

Tools for investors

Business leaders ndash position for threats opportunities

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

First critical thinking challenge

bull Question

ldquoWhy is it ldquoexpensiverdquo to come to Europe and travel (shop stay enjoy)

Compared to US Mexico Brazil etchellip

Why does it ldquoseemrdquo expensive here

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Global travelhellip

How about if you went to Argentinabull at about 4-1 USDhellip Everything SEEMS

cheaphelliphotels restaurants clothes shopping

Watch from China = $10bull is that ldquocheaprdquobull how about if you lived in China Is it still

cheap

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Question

Why is the Euro more valuable than the US dollar

Example back in 2000 ndash dollar was more valuable and it was CHEAP to come to Europe

Why no more What happened What is happening

Note in Sept-December 2008 (height of crisis) the Dollar appreciated v Eurohellip Why

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Impossible to Predict

bull Currencies when flexible are impossible to predict

Donrsquot believe anyone that tells you other wise

Note in this class we will review PPP IFE

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Effectshellip

Effect on companies

Liabilities in Foreign currency ndash (account receivable 1 mm euros in 6 monthshellipwhat will it be worth

Effect on countries

Currency appreciates can factories still produce

Effect on Exporters (example Brazil 4-1 to 2-1 and exports stop)

ldquode-industrializationrdquo ldquoDutch-diseaserdquo

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Core of our class

bull Tools to protect

bull Hedging techniques

Forward Futures options etchellip

We will teach tools to PROTECT (and potentially speculate)

bull But firsthellip today- some Finance Basicshellip

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

20

1

2

3

Foreign Exchange

Market

Domestic Financial

Markets in Other

CountriesmdashShort-Term

Domestic Financial

Markets in Other

CountriesmdashLong-Term

Deposits Cash

Forwards Futures

T-Bills Deposits

Commercial Paper

Money Market Funds

Bonds Stocks

ADRs Deposits

CMOs

Banks Companies

Brokers

Banks Companies

Brokers

Banks Companies

Brokers

International Financial Markets

MARKET INSTRUMENTS PARTICIPANTS

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

21

4

5

6

7

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits Euro CPEuroloans

Eurobonds FloatingRate NotesEuro-Equities

SDRs $US [Gold]Position in the Fund

Banks Clients

Investment Banks Companies Brokers

Central BanksThe Fund

International Financial Markets (cont)

MARKET INSTRUMENTS PARTICIPANTS

Goods amp Services Consumers amp Firms

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Benefits of Global Finance

bull Question for class what are the Benefits of Finance Of ldquoGLOBALIZEDrdquo finance

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Benefits of Global Finance

1 Serve international companies Citi bank in Sao Paulo HSBC everwhere

2 Some countries donrsquot have DEEP enough capital markets

Needs of companies Bigger than Depth of capital markets

3 Efficiency 4 Best practices (international competition forces

local monopolies to offer better rates)

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Benefits of Global Finance

bull ldquoremember the remarkable prosperity of the past 25 years Finance deserves some of the credit for thatrdquo

source httpwwweconomistcomprinteditiondisplayStorycfmStory_ID=12957709

Pyramid of Promises

bull ldquoCentral feature of the financial system it is a Pyramid of promises- often promises of long or even indefinite duration This makes it remarkable that sophisticated finance systems existrdquo

bull Promises may not be kept

bull Interest of those who make promises NOT to keep them

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

What ldquopromisesrdquo

bull Financial assets represents ldquopromises of future often contingent receipts in return for current paymentsrdquo

bull Bonds Represent PROMISES of fixed payment (in time) plus

PROMISE of regular payments in betweenbull Equity (stocks)

Represent PROMISES a share in future corporate profits

bull Pensions Represent PROMISES for a stream of income in

retirement

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

What ldquopromisesrdquo

bull Life Insurance Policy Represent PROMISES of payment after some fixed

date or deathbull Accident Health Insurance Policy

Represent PROMISES of payment if something happens

bull Mutual Fund Promises to return to investors the proceeds from

mutual funds purchase of promises from corporationsbull Options

Is a promise to hand over a claim to a certain promise under specific conditions

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Pyramid of ldquopromisesrdquo

bull ldquoAs the financial system grows more complexhellip it piles PROMISES on PROMISESrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Just how big is the MOUNTAIN of

promiseshellip

bull Amazinghellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

bull Size of the Financial sector data from McKinsey report 2005 Mapping the global capital

market and httpwwwfederalreservegovreleases

bull What is amazing is that the financial sector ballooned to the size that it haswith a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 20089)

bull Of that total the US was the prime holder of promises (assets) The US household sector held about $39 trillion (28 of world total) and with the US as a whole holding nearly $52 trillion (37 of all world financial assets or promises)

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

What ldquopromisesrdquo

bull Financial assets represents ldquopromises of future often contingent receipts in return for current paymentsrdquo

bull Bonds Represent PROMISES of fixed payment (in time) plus

PROMISE of regular payments in betweenbull Equity (stocks)

Represent PROMISES a share in future corporate profits

bull Pensions Represent PROMISES for a stream of income in

retirement

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

What ldquopromisesrdquo

bull Life Insurance Policy Represent PROMISES of payment after some fixed

date or deathbull Accident Health Insurance Policy

Represent PROMISES of payment if something happens

bull Mutual Fund Promises to return to investors the proceeds from

mutual funds purchase of promises from corporationsbull Options

Is a promise to hand over a claim to a certain promise under specific conditions

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Pyramid of ldquopromisesrdquo

bull ldquoAs the financial system grows more complexhellip it piles PROMISES on PROMISESrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Just how big is the MOUNTAIN of

promiseshellip

bull Amazinghellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

bull Size of the Financial sector data from McKinsey report 2005 Mapping the global capital

market and httpwwwfederalreservegovreleases

bull What is amazing is that the financial sector ballooned to the size that it haswith a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 20089)

bull Of that total the US was the prime holder of promises (assets) The US household sector held about $39 trillion (28 of world total) and with the US as a whole holding nearly $52 trillion (37 of all world financial assets or promises)

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

What ldquopromisesrdquo

bull Life Insurance Policy Represent PROMISES of payment after some fixed

date or deathbull Accident Health Insurance Policy

Represent PROMISES of payment if something happens

bull Mutual Fund Promises to return to investors the proceeds from

mutual funds purchase of promises from corporationsbull Options

Is a promise to hand over a claim to a certain promise under specific conditions

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Pyramid of ldquopromisesrdquo

bull ldquoAs the financial system grows more complexhellip it piles PROMISES on PROMISESrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Just how big is the MOUNTAIN of

promiseshellip

bull Amazinghellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

bull Size of the Financial sector data from McKinsey report 2005 Mapping the global capital

market and httpwwwfederalreservegovreleases

bull What is amazing is that the financial sector ballooned to the size that it haswith a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 20089)

bull Of that total the US was the prime holder of promises (assets) The US household sector held about $39 trillion (28 of world total) and with the US as a whole holding nearly $52 trillion (37 of all world financial assets or promises)

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Pyramid of ldquopromisesrdquo

bull ldquoAs the financial system grows more complexhellip it piles PROMISES on PROMISESrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Just how big is the MOUNTAIN of

promiseshellip

bull Amazinghellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

bull Size of the Financial sector data from McKinsey report 2005 Mapping the global capital

market and httpwwwfederalreservegovreleases

bull What is amazing is that the financial sector ballooned to the size that it haswith a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 20089)

bull Of that total the US was the prime holder of promises (assets) The US household sector held about $39 trillion (28 of world total) and with the US as a whole holding nearly $52 trillion (37 of all world financial assets or promises)

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Just how big is the MOUNTAIN of

promiseshellip

bull Amazinghellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

bull Size of the Financial sector data from McKinsey report 2005 Mapping the global capital

market and httpwwwfederalreservegovreleases

bull What is amazing is that the financial sector ballooned to the size that it haswith a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 20089)

bull Of that total the US was the prime holder of promises (assets) The US household sector held about $39 trillion (28 of world total) and with the US as a whole holding nearly $52 trillion (37 of all world financial assets or promises)

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

bull Size of the Financial sector data from McKinsey report 2005 Mapping the global capital

market and httpwwwfederalreservegovreleases

bull What is amazing is that the financial sector ballooned to the size that it haswith a worldwide total of $140 trillion in promises outstanding in 2005 (surely more in 20089)

bull Of that total the US was the prime holder of promises (assets) The US household sector held about $39 trillion (28 of world total) and with the US as a whole holding nearly $52 trillion (37 of all world financial assets or promises)

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

ldquoPYRAMID of Promisesrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull Modern economies depend on pyramids of promises far more impressive and complex than those of stone constructed almost 5 thousand years agordquo

bull But the system is extremely FRAGILEbull Confidence that sustains them could be

misplacedbull People would end up with promises NOT

WORTH the paper (they used to be) printed upon

Underneath that ldquoPYRAMIDrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull The ldquoFoundationrdquo of all of these PROMISES is = title to real assets

Housing land property factories machines etc

Need to BELIEVE the original owner really owneswhat they say they own

So key = property rights law institutions ndash for trust and development of financial system

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

ldquoPYRAMID of Promisesrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull Modern economies depend on pyramids of promises far more impressive and complex than those of stone constructed almost 5 thousand years agordquo

bull But the system is extremely FRAGILEbull Confidence that sustains them could be

misplacedbull People would end up with promises NOT

WORTH the paper (they used to be) printed upon

Underneath that ldquoPYRAMIDrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull The ldquoFoundationrdquo of all of these PROMISES is = title to real assets

Housing land property factories machines etc

Need to BELIEVE the original owner really owneswhat they say they own

So key = property rights law institutions ndash for trust and development of financial system

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

ldquoPYRAMID of Promisesrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull Modern economies depend on pyramids of promises far more impressive and complex than those of stone constructed almost 5 thousand years agordquo

bull But the system is extremely FRAGILEbull Confidence that sustains them could be

misplacedbull People would end up with promises NOT

WORTH the paper (they used to be) printed upon

Underneath that ldquoPYRAMIDrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull The ldquoFoundationrdquo of all of these PROMISES is = title to real assets

Housing land property factories machines etc

Need to BELIEVE the original owner really owneswhat they say they own

So key = property rights law institutions ndash for trust and development of financial system

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Size of Financehellip

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

ldquoPYRAMID of Promisesrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull Modern economies depend on pyramids of promises far more impressive and complex than those of stone constructed almost 5 thousand years agordquo

bull But the system is extremely FRAGILEbull Confidence that sustains them could be

misplacedbull People would end up with promises NOT

WORTH the paper (they used to be) printed upon

Underneath that ldquoPYRAMIDrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull The ldquoFoundationrdquo of all of these PROMISES is = title to real assets

Housing land property factories machines etc

Need to BELIEVE the original owner really owneswhat they say they own

So key = property rights law institutions ndash for trust and development of financial system

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

ldquoPYRAMID of Promisesrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull Modern economies depend on pyramids of promises far more impressive and complex than those of stone constructed almost 5 thousand years agordquo

bull But the system is extremely FRAGILEbull Confidence that sustains them could be

misplacedbull People would end up with promises NOT

WORTH the paper (they used to be) printed upon

Underneath that ldquoPYRAMIDrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull The ldquoFoundationrdquo of all of these PROMISES is = title to real assets

Housing land property factories machines etc

Need to BELIEVE the original owner really owneswhat they say they own

So key = property rights law institutions ndash for trust and development of financial system

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Underneath that ldquoPYRAMIDrdquo

Martin Wolf ldquoFixing Global Financerdquohellip based on McKinsey ldquoMapping Global Capital Marketsrdquo 2005

bull The ldquoFoundationrdquo of all of these PROMISES is = title to real assets

Housing land property factories machines etc

Need to BELIEVE the original owner really owneswhat they say they own

So key = property rights law institutions ndash for trust and development of financial system

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Forum-NexusInternational Finance Class ndashLecture 2

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Foreign exchange risk management example

Germany importing Brazilian furniturebull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last resort Cause crisis Make crises more likely

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Risk - in foreign currency

bull Example Lets assumehellip you are a German companyhellip

buying a container of furniture from Brazil (to resell at a fixed price in Germany)

You agree to pay 100000 Reais (Brazilian currency) in 6 months to the Brazilian company for delivery

Assume the currency exchange rate is currently 21

What is your risk

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Risk - in foreign currency

bull Example ndash Brazilian furniture You fear that What happens if the exchange rate goes from 21 to

11 Instead of needing 50000 Euros to pay that

R$100000 billhellip You now need 100000 Euroshellip ouch

Question how could you have avoided that risk

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)

2 Negotiate contract so currency is based in YOUR currency (transfer risk)

3 How else

Guesshellip

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Avoiding Risk

1 Donrsquot buy foreign goods (avoid risk)2 Negotiate contract so currency is based in YOUR

currency (transfer risk)3 How else You couldhellip

1 Convert your money to R$ todayhellipand deposit that money in a Brazilian bank account (deposit hedge)

2 Contract with your bank to buy $R in 6 months at a fixed rate (21) for a fee (forward contract)

3 Buy a Future contract (similar) on exchange (if you can find one)

4 Morehellip (next class)

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Themes to cover todaybull Review

Key theme ndash borrowing in foreign currency = riskybull Fragility of Bankingbull Bank Business Model

Borrow short Lend longbull Liquidity v Solvency

Stages of crisis Money markets Transmission to Europe Paulson Plan Geitner Plan

bull Moral Hazard Reserve requirements + regulation amp lender of last

resort Cause crisis Make crises more likely

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Commercial Banking (business model)

bull Simplified

Borrow short lend long

bull Who can explain what that means

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Borrow Short

bull Deposits are LIABILITIES for banks

bull They are BORROWING money from clients

bull But deposits can be withdrawn at any time

bull Sohellip their Liabilities are short term (might owe money tomorrow)

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Lend Long

bull Banks invest in Long term Assetsbull Mortgages for examplehellip 30 years duration

bull So money is borrowed short (term) but lent out long (term)

bull What is the riskbull Is this ldquosolvencyrdquo or ldquoliquidityrdquo risk

(answer Liquidity) why (answer soonhellip)

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Overcoming Banking Weakness (trying)

Federal Insurancebull As a result of this inherent weakness banks are offered

federal insurance for the deposits The government is forced to federally protect (guarantee) depositors that their money will be there if they want it Or else people would not trust the banks and would not deposit their money

Regulationbull In exchange for this federal guarantee (that they receive) the

banks (give up) are subject to stiff regulation One of the main requirements for deposit-taking banks is that they have to maintain a certain level of money on reserve at the (Federal Reserve) In the US this reserve requirement is 10

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Getting around Regulationshellip

Innovationbull Wherever you see regulation you will see

innovation (to get around the regulation) Banks are some of the most creative organizations when it comes to developing products to get around regulation For example there has been massive Innovation in the financial sector when it comes to the securitization of mortgages(which partly is to blame for the subprime lending crisis)

httpglobotrendspbworkscomCommercial-Banking

Discussion

bull Law of unintended consequences

bull Moral Hazard

Ex fire insurancehellip less likely to smoke

Health insurancehellip Less likely to be safe

Solvency v Liquidity ndash QUIZ (extra

credit)bull Extra credit ndash 1 point in final grade

bull In 20 words or less ndash what is a ldquoSolvencyrdquo problem (for banks)

bull In 20 words or less ndash what is a ldquoLiquidityrdquo problem (for banks)

bull think of the business model

bull remember the video

In additionfor those of you who have time amp interest I am also sending you links to highly recommended videos from the Khan Academy httpwwwkhanacademyorg They are free to watch and are an excellent way to understand the financial crisis These additional videos are not a requirement for this course but if you do watch them you will really understand the economic crisis from a very advanced level

Paulson Bailoutbull Bailout 1 Liquidity vs Solvencybull Bailout 2 Book Valuebull etc 13 videos in seriesGeithner Planbull Geithner Plan Ibull Geithner Plan IIbull etc 5 videos in serieshellip

Solvency v Liquidity ndash QUIZ (extra

credit)bull Extra credit ndash 1 point in final grade

bull In 20 words or less ndash what is a ldquoSolvencyrdquo problem (for banks)

bull In 20 words or less ndash what is a ldquoLiquidityrdquo problem (for banks)

bull think of the business model

bull remember the video

In additionfor those of you who have time amp interest I am also sending you links to highly recommended videos from the Khan Academy httpwwwkhanacademyorg They are free to watch and are an excellent way to understand the financial crisis These additional videos are not a requirement for this course but if you do watch them you will really understand the economic crisis from a very advanced level

Paulson Bailoutbull Bailout 1 Liquidity vs Solvencybull Bailout 2 Book Valuebull etc 13 videos in seriesGeithner Planbull Geithner Plan Ibull Geithner Plan IIbull etc 5 videos in serieshellip

In additionfor those of you who have time amp interest I am also sending you links to highly recommended videos from the Khan Academy httpwwwkhanacademyorg They are free to watch and are an excellent way to understand the financial crisis These additional videos are not a requirement for this course but if you do watch them you will really understand the economic crisis from a very advanced level

Paulson Bailoutbull Bailout 1 Liquidity vs Solvencybull Bailout 2 Book Valuebull etc 13 videos in seriesGeithner Planbull Geithner Plan Ibull Geithner Plan IIbull etc 5 videos in serieshellip

In additionfor those of you who have time amp interest I am also sending you links to highly recommended videos from the Khan Academy httpwwwkhanacademyorg They are free to watch and are an excellent way to understand the financial crisis These additional videos are not a requirement for this course but if you do watch them you will really understand the economic crisis from a very advanced level

Credit Crisisbull The housing price conundrumbull Mortgage-Backed Securities Ibull Collateralized Debt Obligation (CDO)bull Credit Default Swapsbull Wealth Destruction 1bull etc 15 videos in seriesBanking and Moneybull Banking 1bull Banking 2 A banks income statementbull Banking 3 Fractional Reserve Bankingbull Banking 4 Multiplier effect and the money supplybull etc more than 15 videos in series

Solvent not Solvent

bull Ok NOT OK

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Solvency v Liquidity

bull Insolvent liabilities gt assets (equity = 0) Person I owe more than Im worth Bank assets loose value (subprime mortgages) Country cant pay debtshellipdefault

bull Illiquidity long term asset short term liability I owe money NOW but have money tied up in my

house car etchellip Bank lend long term borrow short term Country cant access credit markets to pay imports

Solvency v Liquidity

bull How does this relate to the Global Financial Crisis

discuss Solvency first

Then Liquidityhellip

bull Examples

Solvency v Liquidity Timeline

bull 2007 ndash September 2008

Mortgages (assets on Banks balance sheet) worth less than anticipatedhellip write down

Hedge funds Funds go under

(Bear Stearns)

Bankruptcy threat

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Question

If Banks have SOLVENCY troubles What should the government do

Bail out

Why Why not

discuss

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Key issues

Moral Hazard ndash does one bailout lead to future risky behaviour

Fairness ndash is it fair to privatize gains but socialize losses

Risks

Systematic risks

Counter party risks

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Solvency v Liquidity

bull Insolvent liabilities gt assets (equity = 0) Person I owe more than Im worth Bank assets loose value (subprime mortgages) Country cant pay debtshellipdefault

bull Illiquidity long term asset short term liability I owe money NOW but have money tied up in my

house car etchellip Bank lend long term borrow short term Country cant access credit markets to pay imports

Solvency v Liquidity

bull How does this relate to the Global Financial Crisis

discuss Solvency first

Then Liquidityhellip

bull Examples

Solvency v Liquidity Timeline

bull 2007 ndash September 2008

Mortgages (assets on Banks balance sheet) worth less than anticipatedhellip write down

Hedge funds Funds go under

(Bear Stearns)

Bankruptcy threat

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Question

If Banks have SOLVENCY troubles What should the government do

Bail out

Why Why not

discuss

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Key issues

Moral Hazard ndash does one bailout lead to future risky behaviour

Fairness ndash is it fair to privatize gains but socialize losses

Risks

Systematic risks

Counter party risks

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Solvency v Liquidity

bull How does this relate to the Global Financial Crisis

discuss Solvency first

Then Liquidityhellip

bull Examples

Solvency v Liquidity Timeline

bull 2007 ndash September 2008

Mortgages (assets on Banks balance sheet) worth less than anticipatedhellip write down

Hedge funds Funds go under

(Bear Stearns)

Bankruptcy threat

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Question

If Banks have SOLVENCY troubles What should the government do

Bail out

Why Why not

discuss

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Key issues

Moral Hazard ndash does one bailout lead to future risky behaviour

Fairness ndash is it fair to privatize gains but socialize losses

Risks

Systematic risks

Counter party risks

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Solvency v Liquidity Timeline

bull 2007 ndash September 2008

Mortgages (assets on Banks balance sheet) worth less than anticipatedhellip write down

Hedge funds Funds go under

(Bear Stearns)

Bankruptcy threat

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Question

If Banks have SOLVENCY troubles What should the government do

Bail out

Why Why not

discuss

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Key issues

Moral Hazard ndash does one bailout lead to future risky behaviour

Fairness ndash is it fair to privatize gains but socialize losses

Risks

Systematic risks

Counter party risks

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Policy Response

bull Question

If Banks have SOLVENCY troubles What should the government do

Bail out

Why Why not

discuss

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Policy Response

bull Key issues

Moral Hazard ndash does one bailout lead to future risky behaviour

Fairness ndash is it fair to privatize gains but socialize losses

Risks

Systematic risks

Counter party risks

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Policy Response

bull Key issues

Moral Hazard ndash does one bailout lead to future risky behaviour

Fairness ndash is it fair to privatize gains but socialize losses

Risks

Systematic risks

Counter party risks

ASSETS-Include home mortgages-subprime

Liabilities (Borrowing debt)

Equity

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Credit Crisis timeline ndash key dates in

September

September 7 2008 Federal takeover of Fannie Mae and Freddie Mac[25][26]

September 14 2008 Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse[27]

September 15 2008 Lehman Brothers files for bankruptcy protection[28]

September 16 2008 Moodys and Standard and Poors downgrade ratings on AIGs credit on concerns over continuing losses to mortgage-backed securities sending the company into fears of insolvency[29][30]

September 17 2008 The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy

September 19 2008 Paulson financial rescue plan unveiled after a volatile week in stock and debt markets

September 25 2008 Washington Mutual was seized by the Federal Deposit Insurance Corporation and its banking assets were sold to JP MorganChase for $19bn

Solvency v Liquidity Timeline

bull September 2008 - now

Crisis CHANGED

No longer just a SOLVENCY CRISIS

Became a MIXED crisis of BOTH solvency and liquidity

How Why What does that mean

Someone tell me againhellipwhat is ldquoliquidityrdquo

NY times article 1999hellip

bull Fannie Mae Eases Credit To Aid Mortgage LendingBy STEVEN A HOLMES

Published Thursday September 30 1999

bull ldquoIn a move that could help increase home ownership rates among minorities and low-income consumers the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lendersrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull ldquoThe actionhellipwill encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loansrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull ldquoFannie Maehelliphas been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people

bull hellip and felt pressure from stock holders to maintain its phenomenal growth in profitsrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In addition banks thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers

bull These borrowers whose incomes credit ratings and savings are not good enough to qualify for conventional loans can only get loans from finance companies that charge much higher interest rates --anywhere from three to four percentage points higher than conventional loans

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In moving into this new area of lending Fannie Mae is taking on significantly more risk which may not pose any difficulties during flush economic times But the government-subsidized corporation may run into trouble in an economic downturn prompting a government rescue similar to that of the savings and loan industry in the 1980s

bull If they fail the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

NY times article 1999hellip

bull Fannie Mae Eases Credit To Aid Mortgage LendingBy STEVEN A HOLMES

Published Thursday September 30 1999

bull ldquoIn a move that could help increase home ownership rates among minorities and low-income consumers the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lendersrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull ldquoThe actionhellipwill encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loansrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull ldquoFannie Maehelliphas been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people

bull hellip and felt pressure from stock holders to maintain its phenomenal growth in profitsrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In addition banks thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers

bull These borrowers whose incomes credit ratings and savings are not good enough to qualify for conventional loans can only get loans from finance companies that charge much higher interest rates --anywhere from three to four percentage points higher than conventional loans

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In moving into this new area of lending Fannie Mae is taking on significantly more risk which may not pose any difficulties during flush economic times But the government-subsidized corporation may run into trouble in an economic downturn prompting a government rescue similar to that of the savings and loan industry in the 1980s

bull If they fail the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

NY times article 1999hellip

bull ldquoThe actionhellipwill encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loansrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull ldquoFannie Maehelliphas been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people

bull hellip and felt pressure from stock holders to maintain its phenomenal growth in profitsrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In addition banks thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers

bull These borrowers whose incomes credit ratings and savings are not good enough to qualify for conventional loans can only get loans from finance companies that charge much higher interest rates --anywhere from three to four percentage points higher than conventional loans

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In moving into this new area of lending Fannie Mae is taking on significantly more risk which may not pose any difficulties during flush economic times But the government-subsidized corporation may run into trouble in an economic downturn prompting a government rescue similar to that of the savings and loan industry in the 1980s

bull If they fail the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

NY times article 1999hellip

bull ldquoFannie Maehelliphas been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people

bull hellip and felt pressure from stock holders to maintain its phenomenal growth in profitsrdquo

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In addition banks thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers

bull These borrowers whose incomes credit ratings and savings are not good enough to qualify for conventional loans can only get loans from finance companies that charge much higher interest rates --anywhere from three to four percentage points higher than conventional loans

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In moving into this new area of lending Fannie Mae is taking on significantly more risk which may not pose any difficulties during flush economic times But the government-subsidized corporation may run into trouble in an economic downturn prompting a government rescue similar to that of the savings and loan industry in the 1980s

bull If they fail the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

NY times article 1999hellip

bull In addition banks thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers

bull These borrowers whose incomes credit ratings and savings are not good enough to qualify for conventional loans can only get loans from finance companies that charge much higher interest rates --anywhere from three to four percentage points higher than conventional loans

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull In moving into this new area of lending Fannie Mae is taking on significantly more risk which may not pose any difficulties during flush economic times But the government-subsidized corporation may run into trouble in an economic downturn prompting a government rescue similar to that of the savings and loan industry in the 1980s

bull If they fail the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

NY times article 1999hellip

bull In moving into this new area of lending Fannie Mae is taking on significantly more risk which may not pose any difficulties during flush economic times But the government-subsidized corporation may run into trouble in an economic downturn prompting a government rescue similar to that of the savings and loan industry in the 1980s

bull If they fail the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

NY times article 1999hellip

bull Fannie Mae the nations biggest underwriter of home mortgages does not lend money directly to consumers Instead it purchases loans that banks make on what is called the secondary market By expanding the type of loans that it will buy Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings

bull Fannie Mae officials hellipadd that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings

NY Times ldquoFannie Mae Eases Credit To Aid Mortgage Lendingrdquo By STEVEN A HOLMES September 30 1999

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Homework

bull Find 1 example of Spain amp the economic crisis

bull Observation ok

bull News story ok

bull Due ndash BEGINNING of next class (Tuesday)

bull Have a great weekend

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Forum-NexusInternational Finance Class ndashLecture 3 ndash Wednesday

SPAIN

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Spain

httpwwweconomistcomcountriesSpain

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Spain amp the crisis ndash

- Review student comments

- discuss

- quick summary (what you

absolutely need to know)

bull Homework was

bull ldquoFind 1 example of Spain amp the economic crisis Observation News story classhellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Spain amp the Crisis

bull Comment

Each student what is your observation

How has Spain been effected by the crisis

What have you seen

Read

What Questions do you have

What risks do you see going forward

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Key points to highlighthellip

1 Dual structure ndash labor market Who can explain Why important for crisis

2 Dual structure ndash banking market Banks cajas (caixas) Who can explain Why important for crisis

EXAM material

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Dual Labor Market

bull Temp

High unemployment

Young

Immigrants

University grads

bull The rest enjoy a high level of job protection which politicians dare not dismantle

bull Risk = political backlash if crisis is LONG (if recovery takes YEARS not months)

Economistcom A special report on the euro area Jun 11th 2009

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Temp workers ndashduring the boom

bull The spread of fixed-term employment contracts in Spain (from the mid-1980s) helped make hiring and firing more responsive to the business cycle

bull Benefits

Immediate pay-off it created jobs

Firms were content to take on temporary workers often immigrants because they knew they could easily lay them off again

bull Growth

Before the crisis hit temporary jobs accounted for more than a third of Spainrsquos total the largest share in the EU

Economistcom A special report on the euro area Jun 11th 2009

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Temp workers - crisis

bull Unfair

ldquoThe downturn has highlighted the gross unfairness of the dual labour market

It puts the burden of adjustment on groups with no tenure (women immigrants and the young)

bull Future

Firms have little incentive to train tomorrowrsquos workforce Instead they are stuck with older tenured workers heading for retirement

bull less than 5 are converted into permanent jobs

Economistcom A special report on the euro area Jun 11th 2009

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Spain ndash Banking

bull ldquoSpainrsquos financial sector has weathered the crisis well so far thanks to strong and forward-looking prudential regulation Dynamic loan-loss provisioning saw banks build up significant cushions during the expansion and rigorous consolidation rules discouraged the development of off-balance sheet vehicles And because they mainly cater to retail customers Spainrsquos banks were not directly affected by US subprime lossesrdquo

Source IMF ldquoHard Landing for Spainrdquo IMF Survey online April 24 2009

1 After visiting Sabadell yesterdayhellip2 Everything seemed alrighthellipright3 But whats wrong hellip

Cajas

bull Prediction

bull the banking crisis will hit Spain but not with the Big 2 banks of BBVA amp Santander but rather with the many small cajas or regional banks that lent heavily to the construction sector

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Banking troubles loominghellip

bull ldquoTrouble on the SMALL side The bail-out on March 29th of a small savings bank Caja CastillaLa Mancha could change that perception The governmentrsquos liquidity package of up to euro9 billion ($12 billion) which will probably be bolstered with equity is a reminder that many of Spainrsquos bad debts fester outside the listed banks

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull Spainrsquos cajas are mutually owned and controlled by a mix of depositors employees and local politicians and they distribute a big chunk of their profits to local causes

bull Since the 1960s they have increased their market share of loans from about 10 to 50 by opening branches in smaller cities and by extending credit to people and businesses ignored by the market leaders

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull When the big two banks put the brakes on in 2006-07 the cajas continued lending more keenly tapping wholesale debt markets to fund themselves

bull That alone makes them higher risk

bull But the savings banks also supplied about half of the euro318 billion borrowed by Spainrsquos property developers These loans now represent about a fifth of the cajasrsquo assets according to Santiago LoacutepezDiacuteaz an analyst at Credit Suisse

bull They are deteriorating fastThe Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull Mr Loacutepez Diacuteaz (analyst at Credit Suisse) reckons that 9 of the cajasrsquo total loans could become non-performing and within that a fifth of the loans made to property developers

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull The pace of deterioration (see chart) threatens to overwhelm the scope of reserves capital and ongoing profits to absorb losses

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Banking troubles loominghellip

bull ldquoTrouble on the SMALL side The bail-out on March 29th of a small savings bank Caja CastillaLa Mancha could change that perception The governmentrsquos liquidity package of up to euro9 billion ($12 billion) which will probably be bolstered with equity is a reminder that many of Spainrsquos bad debts fester outside the listed banks

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull Spainrsquos cajas are mutually owned and controlled by a mix of depositors employees and local politicians and they distribute a big chunk of their profits to local causes

bull Since the 1960s they have increased their market share of loans from about 10 to 50 by opening branches in smaller cities and by extending credit to people and businesses ignored by the market leaders

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull When the big two banks put the brakes on in 2006-07 the cajas continued lending more keenly tapping wholesale debt markets to fund themselves

bull That alone makes them higher risk

bull But the savings banks also supplied about half of the euro318 billion borrowed by Spainrsquos property developers These loans now represent about a fifth of the cajasrsquo assets according to Santiago LoacutepezDiacuteaz an analyst at Credit Suisse

bull They are deteriorating fastThe Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull Mr Loacutepez Diacuteaz (analyst at Credit Suisse) reckons that 9 of the cajasrsquo total loans could become non-performing and within that a fifth of the loans made to property developers

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull The pace of deterioration (see chart) threatens to overwhelm the scope of reserves capital and ongoing profits to absorb losses

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Cajas

bull Spainrsquos cajas are mutually owned and controlled by a mix of depositors employees and local politicians and they distribute a big chunk of their profits to local causes

bull Since the 1960s they have increased their market share of loans from about 10 to 50 by opening branches in smaller cities and by extending credit to people and businesses ignored by the market leaders

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull When the big two banks put the brakes on in 2006-07 the cajas continued lending more keenly tapping wholesale debt markets to fund themselves

bull That alone makes them higher risk

bull But the savings banks also supplied about half of the euro318 billion borrowed by Spainrsquos property developers These loans now represent about a fifth of the cajasrsquo assets according to Santiago LoacutepezDiacuteaz an analyst at Credit Suisse

bull They are deteriorating fastThe Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull Mr Loacutepez Diacuteaz (analyst at Credit Suisse) reckons that 9 of the cajasrsquo total loans could become non-performing and within that a fifth of the loans made to property developers

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull The pace of deterioration (see chart) threatens to overwhelm the scope of reserves capital and ongoing profits to absorb losses

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Cajas amp the crisis (housing)

bull When the big two banks put the brakes on in 2006-07 the cajas continued lending more keenly tapping wholesale debt markets to fund themselves

bull That alone makes them higher risk

bull But the savings banks also supplied about half of the euro318 billion borrowed by Spainrsquos property developers These loans now represent about a fifth of the cajasrsquo assets according to Santiago LoacutepezDiacuteaz an analyst at Credit Suisse

bull They are deteriorating fastThe Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas amp the crisis (housing)

bull Mr Loacutepez Diacuteaz (analyst at Credit Suisse) reckons that 9 of the cajasrsquo total loans could become non-performing and within that a fifth of the loans made to property developers

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull The pace of deterioration (see chart) threatens to overwhelm the scope of reserves capital and ongoing profits to absorb losses

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Cajas amp the crisis (housing)

bull Mr Loacutepez Diacuteaz (analyst at Credit Suisse) reckons that 9 of the cajasrsquo total loans could become non-performing and within that a fifth of the loans made to property developers

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas

bull The pace of deterioration (see chart) threatens to overwhelm the scope of reserves capital and ongoing profits to absorb losses

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Cajas

bull The pace of deterioration (see chart) threatens to overwhelm the scope of reserves capital and ongoing profits to absorb losses

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Cajas bull ldquoThe cajas could need euro60 billion of new equity on top of the euro64 billion they already have

bull ldquothe government would probably be on the hook for most of it

The Economist ldquoSpanish banks The mess in La Manchardquo Apr 2nd 2009

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Themes to cover Today

1 Spain amp the crisis ndash

Review student comments

discuss

quick summary (what you absolutely need to know)

2 Hedging Example

3 Interest rates amp Exchange rates

Group assignment ndash in class

Presentation

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Question

If you were a US based bank with dollars to invest for 12 monthshellipwhere would you choose to deposit your money (to make the most return)

Note You can assume you have an account with a bank in London (HSBC etc)hellip and its easy to switch from one account to the other (click of a button)

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 32 60 53 32 11

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

International Money Market

Rates (Bid Side)

United States

dollar

England

sterling

Europe

euro

Switzerland

franc

Japan

yen

Eurocurrency Rate

LIBOR 12 months 3 60 5 35 11

Expected appreciation

depreciation vs US Dollar to

EQUATE choiceshellip

x -3 -2 -05 +19

Answer it DEPENDS not just on the interest rate but also on the expected change in foreign exchange rate as well

You might be temped to choose the England (sterling) option of 599 because itrsquos the highesthellipbut that currency might be expected to lose value (depreciate) over the next yearhellipwiping out the expected gains

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Interest Rate Parity

bullFX market in equilibrium ONLY when interest rate parity exists

bullWhen deposits of all currencies offer the same EXPECTED rate of return

bullRate + expected (appreciation depreciation) = rate

bullExample bullUS Euro If US interest = 5 EU = 10 but US dollar is expected to appreciate +5 = balance

Prof Grosse Financial Markets (p323-5)

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Foreign Currency

Exchange Rates (Bid)

Canada

dollar

UK

sterling

Europe

euro

Switzerland

franc

Japan

yen

Spot Ratemdash (Closing Foreign

currency units per US dollar)

10625 17863 14522 11090 10884

Forward Ratemdash

Closing Rates

1 month

outright

10630 17822 14498 11086 108652

3 months

outright

10636 17749 14454 11080 108281

6 months

outright

10639 17638 14391 11066 107716

12 months

outright

10642 17493 14283 11043 106453

(US dollars per

foreign currency

unit)

Market Exch Rates as of Sept 2 2008

CDN depreciate

UK sterling depreciate

Euro depreciate

Swiss F appreciate

JPN yen appreciate

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

New examplehellip

bull Team calculationhellip

bull Form groups of 2

bull Be prepared to answer the followinghellip

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Borrowing in Foreign Currencieshellip

Where would you prefer to borrow

You have a factory in Brazil and want to borrow money to expand You couldhellip

1 Borrow money locally at 102 Borrow money abroad (in US) at 5

bull Which would you choosebull What is the risk of borrowing abroad (in the US) ndash

general comment 20 words or less

Note fictional data based on current loan rates Brazilhellipbull LIBOR + 15 for US = 25+15 = 4bull CDI + 2 for Brazil = 975 +2 = 1175

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Questions

1 Assume you borrow R$2mm for 1 year and assume exchange rate is 21 todayhellip But moves to 41

2 How much will you owe in 1 year (in local currency)

Local borrow (Brazil)

Foreign borrow (US)

Compute (teams)

3 Which is better By how much

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mm

bull Foreign USA = $105 mm = R$21 mm

bull Difference = $50000 USD (100000R$)

bull (tempting to borrow abroad

But

What if FX rate goes from 21 to 41hellip

How much will you owe (in local currency)

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Where would you prefer to borrow

bull Local Brazil = $11 mm = R$22 mmbull Foreign USA = $105 mm = R$21 mmbull Difference = $50000 USD (100000R$)bull (tempting to borrow abroad

But What if FX rate goes from 21 to 41hellip How much will you owe (in local currency)

Answer Locally ndash still just owe R22mm But Foreign ndash would owe R42mm hellip Double

Conclusion Borrowing Abroad = MUCH more RISK

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Avoiding Risk

1 Assignment

2 Group

1 way of avoiding reducing riskhellip

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Avoiding Risk

1 Donrsquot borrow in foreign currency (avoid risk)

2 How else

You couldhellip

1 Contract with your bank to buy $US in 12 months at a fixed rate (21) for a fee (forward contract)

2 Buy a Future contract (similar) on exchange (if you can find one)

3 Morehellip (next class)

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Forum-NexusInternational Finance Class ndash Lecture 5

France - (American Business School)

ndash guest lecture ndash careers in Finance

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Financial careers

bull Commercial Banking

bull Investment Banking

bull Private Banking

bull Top US Private Banks ndash list amp discuss

bull Top Global Private Banks ndash list amp discuss

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Forum-NexusInternational Finance Class ndashLecture 6

France ndash

Monday July 13th 2009

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Themes to cover Today

1 France ndash Discuss amp review meeting notes and observation

from the meeting Credit Agricole on Saturday Observations Student comments amp Discussion

2 Exam preview Previewhellip Extra credit essays

3 OECD meeting in the afternoon Causes implications current issues of the

Global Economic Crisis

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Exam Overview 1 frac12 hours

bull 1 hedging problem

bull 1 interest rate problem

bull 5 ndash 10 multiple choice

bull 2-3 short answer (20 words or less)

bull (extra credit) essays

bull Note

all material on exam comes from Lectures (Prof Brian Butler) guest lectures and from professional visits (Sabadell Credit Agricole Stock exchange OECD)

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

To answer the essayshellip

bull While at the OECD ask questions to help you with the (extra credit) essay questions on the midterm exam

bull Martin Wolf book ldquoFixing Global Financerdquo

bull Internet search

OECD website

OECD youtube videos (search for OECD on youtube)

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Extra Credit Essays ndash 5 points each

1 East Europe amp the Global Economic Crisis many economists now talk about a potential debt and currency crisis in Eastern Europe In 1 page or less explain what are the key issues and which countries are involved How does this topic relate to our class discussion of the ldquorisks of borrowing abroadrdquo

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Extra Credit Essays

2 China ndash USA (global imbalances) In one page or less explain how why the relationship between China amp USA is important to global finance and how the ldquoglobal imbalancesrdquo (Breton Woods II) is often discussed among economists as contributing to the global economic crisis

Hint focus on ldquocheap creditrdquo from China note this issue is hotly debated and controversial

For a great summary see the Martin Wolf ldquoFixing Global Financerdquo book

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions

Extra Credit Essays

3 Anglo-Saxon style finance many economists in main-land Europe (France Germany etc) discuss the ldquofailure of Anglo-Saxon financerdquo during the global economic crisis In 1 page or less tell me ldquoWhat do they meanrdquo What differences are they referring to What changes would they recommend for the future How do the US UK respond to these suggestions