Copyright ©2000 Ian H Giddy International Financial Management Ian Giddy Copyright ©2000 Ian H Giddy International Financial Management INTERNATIONAL FINANCIAL MANAGEMENT www.stern.nyu.edu www.stern.nyu.edu/~igiddy/ifmx.htm www.giddy.org International Financial Management Prof Ian Giddy Stern School of Business, New York University International Financial Management Management of international assets Management of international liabilities Management of cross-border financial risks Cross-border funds transfers These depend on the environmental features of international finance-notably, the global financial markets Copyright ©2000 Ian H Giddy International Financial Management Corporate Finance CORPORATE CORPORATEFINANCE FINANCE DECISONS DECISONS INVESTMENT INVESTMENT FINANCING FINANCING PORTFOLIO CAPITAL M&A Copyright ©2000 Ian H Giddy RISK RISKMGT MGT MEASUREMENT DEBT EQUITY TOOLS International Financial Management What is Special about Corporate Finance in the International Environment? Financial markets are partially linked, partially separated by national jurisdications Exchange rate fluctuations affect revenues, costs and valuation of firms The competitive international financial markets offer special tools, opportunities and risks Copyright ©2000 Ian H Giddy International Financial Management 10 REAL EXCHANGE RAT E Deviations from Purchasing Power Parity 140 JAPAN 130 GERMANY 120 110 FRANCE 100 ITALY 90 UK UNITED STATES 80 70 1996Q1 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 60 Source: JP Morgan Index of real effective exchange rate versus 18 industrial country currencies, adjusted for change in relative wholesale price of domestic manufactures A fall in the index indicates improved international competitiveness Copyright ©2000 Ian H Giddy International Financial Management 49 Inflation & Interest Rates US US Expected Expected Inflation Inflation Rate Rate 2% 2% Canadian Canadian Expected Expected Inflation Inflation Rate Rate 7% 7% US US Interest Interest Rate Rate 5% 5% Canadian Canadian Interest Interest Rate Rate 10% 10% Copyright ©2000 Ian H Giddy International Financial Management 50 Inflation & Interest Rates US US Expected Expected Inflation Inflation Rate Rate 2% 2% Canadian Canadian Expected Expected Inflation Inflation Rate Rate 7% 7% US US Interest Interest Rate Rate 5% 5% Canadian Canadian Interest Interest Rate Rate 10% 10% Expected Expected Rate Rate of of Change Change of of the the Exchange Exchange Rate Rate Copyright ©2000 Ian H Giddy International Financial Management 51 Inflation & Interest Rates Borrow Borrow at at US US Interest Interest Rate Rate 5% 5% Invest Invest at at Canadian Canadian Interest Interest Rate Rate 10% 10% Copyright ©2000 Ian H Giddy International Financial Management 52 Inflation & Interest Rates Borrow Borrow at at US US Interest Interest Rate Rate 5% 5% Invest Invest at at Canadian Canadian Interest Interest Rate Rate 10% 10% Buy Buy Canadian Canadian Dollars Dollars Forward Forward (at (at discount discount of of 5%) 5%) Copyright ©2000 Ian H Giddy International Financial Management 53 Inflation & Interest Rates Borrow Borrow at at US US Interest Interest Rate Rate 5% 5% Invest Invest at at Canadian Canadian Interest Interest Rate Rate 10% 10% Buy Buy Canadian Canadian Dollars Dollars Forward Forward (at (at discount discount of of 5%) 5%) Buy Buy Canadian Canadian Dollar Dollar Futures Futures (at (at discount discount of of 5%) 5%) Copyright ©2000 Ian H Giddy International Financial Management 54 The Linkages Again Relative excess money supply Relative interest rates Copyright ©2000 Ian H Giddy Relative inflation rates Forward exchange premium or discount Exchange rate change International Financial Management 55 A Framework Country A Country B DOMESTIC ECONOMIC POLICIES DOMESTIC ECONOMIC POLICIES INFLATION RATE INFLATION RATE EXCHANGE RATE INTEREST RATE INTEREST RATE FORWARD RATE Copyright ©2000 Ian H Giddy International Financial Management 56 Conclusion: Corporate Exchange Rate Risk Exchange Rate Risk is the risk arising from fluctuating exchange rates between two currencies Copyright ©2000 Ian H Giddy International Financial Management 57 Conclusion: Corporate Exchange Rate Risk Exchange Rate Risk is the risk arising from fluctuating exchange rates between two currencies; but it’s tied to prices and to business risk Relative Relative monetary monetary and and fiscal fiscal policies policies Copyright ©2000 Ian H Giddy Relative Relative inflation inflation Exchange Exchange rate rate change change International Financial Management 58 Turkey, 1995 Turkish Lira: Down 33.5% Copyright ©2000 Ian H Giddy International Financial Management 59 Turkey, 1995 Turkish prices: up 83.8%! Turkish Lira: Down 33.5% Copyright ©2000 Ian H Giddy International Financial Management 60 Copyright ©2000 Ian H Giddy International Financial Management 62 www.giddy.org Copyright ©2000 Ian H Giddy International Financial Management 63 Copyright ©2000 Ian H Giddy International Financial Management 64 ... Ian H Giddy International Financial Management INTERNATIONAL FINANCIAL MANAGEMENT www.stern.nyu.edu www.stern.nyu.edu/~igiddy/ifmx.htm www.giddy.org International Financial Management Prof... Business, New York University International Financial Management Management of international assets Management of international liabilities Management of cross-border financial risks Cross-border... Exchange rate rate change change International Financial Management 58 Turkey, 1995 Turkish Lira: Down 33 .5% Copyright ©2000 Ian H Giddy International Financial Management 59