International finance 2

International Finance Lecture Page International Finance • Course topics – Foundations of International Financial Management – World Financial Markets and Institutions – Foreign Exchange Exposure – Financial Management for a Multinational Firm Page 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 Globalization and the Multinational Firm • International vs finance • Goals for international financial management • • Multinationals • Comparative advantage Page International vs Domestic Finance • Foreign and Political Risk • Differences in regulations, tax laws, policies • Greater opportunity set for production and/or Page 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 Page Additional Opportunities • opportunities • costs for resources • New product Page 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? Page 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 Page Recent Trends in the World Economy • Globalization • Introduction of • Trade liberalization • Page 10 Comparative advantage Page 17 Comparative advantage Page 18 Comparative advantage • If countries specialize in producing certain goods because they can 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 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 Page 19 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 20 International Monetary System • … is the institutional within which international payments are made, movements of are accommodated and exchange rates among currencies are determined Page 21 International Monetary System • History of the international monetary system • Current currency • Major events Page 22 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 23 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 Page 24 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 Page 25 Major Events after 1973 • Oil Crisis • Asian • European and the Euro • Russian Crisis • Emerging Crisis Page 26 The Economics and Currencies of Asia, July–Nov 1997 Page 27 Daily Exchange Rates: Russian Rubles per U.S Dollar Page 28 The European Union, 1999 Page 29 Financial Markets in the Brazilian Crisis, January 11–15, 1999 Page 30 Daily Exchange Rates: Brazilian Real per U.S Dollar Page 31 ... Multinational Firm • International vs finance • Goals for international financial management • • Multinationals • Comparative advantage Page International vs Domestic Finance • Foreign... lines for each country) • A constant need for international transactions = constant need for / interest in international finance Page 19 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 20 International Monetary System • …