page 1 international finance lecture 1 page 2 international finance course topics –foundations of...
TRANSCRIPT
Page 1
International Finance
Lecture 1
Page 2
International Finance• Course topics
– Foundations of International Financial Management
– World Financial Markets and Institutions
– Foreign Exchange Exposure– Financial Management for a
Multinational Firm
Page 3
Foundations of International Financial Management
• Globalization and the Multinational Firm
• International Monetary System• Balance of Payments• The Market for Foreign Exchange• International Parity Relationships
Page 4
Globalization and the Multinational Firm
• International vs __________ finance• Goals for international financial
management• __________• Multinationals• Comparative advantage
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International vs Domestic Finance
• Foreign __________ and Political Risk
• Differences in regulations, tax laws, __________ policies
• Greater opportunity set for production and/or __________
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Additional Risks
• Foreign Exchange Risk– Cost of __________ goods changes for you,
price of your product changes for foreign customers as FX changes
• Political Risk: Macro, Micro– Changes in foreign laws/taxes, __________
• Additional risks increase cost of capital of multinational firms, __________ the required rate of return by investors and third parties.
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Additional Opportunities
• __________ opportunities• __________ costs for resources• New product __________
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Managerial objectives• Consensus in North America
– Long-run __________ wealth maximization• In other countries
– Shareholder wealth– __________ wealth– Corporate wealth– Market share, et c.
• Long-term owner wealth maximization is the only sustainable _______ for running a business– Who are the owners? Are home country owners’
interests superior to those of foreign country owners?
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Managerial objectives• The goal of MNE should be shareholder
wealth maximization.• However in Europe and Asia some
companies follow __________ wealth maximization rule.
• In France, Germany and Italy banks are the major shareholders, also generally companies are private __________.
• In Japan Keiretsus are important. • All multinationals’ main operating
objective should be to maximize consolidated after tax __________.
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Recent Trends in the World Economy
• Globalization• Introduction of __________• Trade liberalization• __________
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Multinational Enterprise• MNE: Multinational firm is a company that
has operating branches, subsidiaries and affiliates located in __________ countries.
• It has both domestic and foreign __________
• Go to World Investment Report and look for the list of largest transnational corporations (Largest TNCs).
• Multinationals face two __________ of risks in addition to normal risks faced by domestic companies. (Fx and political)
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Why do firms become multinational?
• __________ Seekers• Raw __________ Seekers• Production __________ Seekers• __________ Seekers• Political __________ Seekers
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Comparative advantage• A brief overview of the theory is here• Idea:
– Situation 1: countries try __________ by themselves all products they need, no international trade occurs
– Situation 2: countries produce only what they can produce __________ (efficiently as compared with the other countries), sell their products, and buy what they need but do not produce
– According to the theory of comparative advantage, in Situation 2 all participating countries are _________ than in Situation 1, under a set of assumptions
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Comparative advantageWorkers, Productivity, # items / worker per daymillions Food Clothing
US 200 2 1Japan 50 3 9
Output per day if only 1 product producedUS 400 200Japan 150 450
Clothing Food0 400
200 00 150
450 0
USA
Japan
Constructing production possibilities frontier
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No trade existsProduction Possibilities
0
50
100
150
200
250
300
350
400
450
500
0 100 200 300 400 500
Food (millions of units)
Clo
thin
g (
mill
ion
s o
f u
nit
s)
USA Japan
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Terms of trade1 unit of food = 2
unit of clothing
USA Maximum food produced = 400Equivalent amount of clothing = 800Maximum clothing produced = 200Equivalent amount of food = 100
Japan Maximum food produced = 150Equivalent amount of clothing = 300Maximum clothing produced = 450Equivalent amount of food = 225
Clothing Food0 400
800 00 225
450 0
USA
Japan
Consumption possibilities
Terms of trade:
Exchange possibilities
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Comparative advantageProduction and Counsumption Possibilities
for USA with Trade
0
100
200
300
400
500
600
700
800
900
0 100 200 300 400 500
Food (millions of units)
Clo
thin
g (
mill
ion
s o
f u
nit
s)
Production and Trade Consumption
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Comparative advantageProduction and Consumption Possibilities
for Japan with Trade
0
50
100
150
200
250
300
350
400
450
500
0 50 100 150 200 250
Food (millions of units)
Clo
thin
g (
mill
ion
s o
f u
nit
s)
Consumption Production and Trade
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Comparative advantage• If countries specialize in producing certain goods
because they can do it more ___________ than the others, they use their comparative advantage over the other countries
• In general, countries that specialize and trade are ___________ than those that do not– This effect is ___________ automatic, all depends
on the terms of trade (open the spreadsheet and see if dashed lines are always ___________ the solid lines for each country)
• A constant need for international transactions = constant need for / interest in international finance
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Foundations of International Financial Management
• Globalization and the Multinational Firm
• International Monetary System• Balance of Payments• The Market for Foreign Exchange• International Parity Relationships
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International Monetary System
• … is the institutional __________ within which international payments are made, movements of __________ are accommodated and exchange rates among currencies are determined.
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International Monetary System
• History of the international monetary system
• Current currency __________• Major events
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History of the International Monetary System
• Bimetalism: Before __________ • The Gold Standard, __________• The Interwar Years and World War II,
__________ • Bretton Woods and the International
Monetary Fund, __________• Fixed Exchange Rates, 1945-1973• 1973- Present
Page 24
Current Currency Regimes
• Exchange Arrangements with no separate legal tender
• Currency Board Arrangements• Fixed __________ • Pegged Rate within Horizontal Bands• Crawling Pegs• Crawling __________• Managed Float• Independent Float
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Fixed versus Flexible Exchange Rate
• Fixed exchange rate brings foreign exchange, trade, and investment __________, may be very expensive to implement, creates currency arbitrage __________.
• Flexible exchange rate allows to conduct __________ monetary policy, is cheaper for the government to implement, eliminates arbitrage opportunities, but introduces __________ that may adversely affect trade and investment.
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Major Events after 1973
• Oil Crisis• Asian __________• European __________ and the Euro• Russian Crisis• Emerging __________ Crisis
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The Economics and Currencies of Asia, July–Nov 1997
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Daily Exchange Rates: Russian Rubles per U.S. Dollar
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The European Union, 1999
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Financial Markets in the Brazilian Crisis, January 11–15, 1999
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Daily Exchange Rates: Brazilian Real per U.S. Dollar