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FINS3616

International Business Finance


Week 1 Introduction

1-1

Bohui Zhang
Education: NTU, Singapore, Ph.D. Finance; HKUST, M.Sc. Economics;
Tsinghua, B.Eng. Engineering Mechanics.
Academic experience: UNSW Australia, Professor of Finance; Tsinghua
University, Visiting Professor (2014-2015); University of Wisconsin,
Milwaukee, Visiting Professor (2011-2012)
Research interests: International capital markets (empirical asset
pricing, institutional investors, market microstructure, financial
accounting, and corporate governance)
Others: https://www.business.unsw.edu.au/our-people/bohuizhang
Phone: 9385 5834
Office: ASB 314 (west lobby)
Email: bohui.zhang@unsw.edu.au
Consultation time: Wednesday 14:00 to 15:00
Teaching: weeks 1-6
1-2

The objective of this course


This

course is concerned
corporations (MNCs)

with

multinational

It

takes the perspective of a financial manager in a


multinational corporation

It

develops framework for evaluating the


opportunities, costs, and risks of operating in the
worlds markets for goods, services, and financial
assets

1-3

Top ten MNCs around the world (2016)


Rank

Brand

Name

Walmart, general merchandiser, the U.S.

Sinopec Group, petroleum refining, China

Royal Dutch Shell, petroleum refining, Netherlands

China National Petroleum, petroleum refining, China

Exxon Mobil, petroleum refining, the U.S.

BP, petroleum refining, the U.K.

State Grid, utilities, China

Volkswagen, motor vehicles, Germany

Toyota Motor, motor vehicles, Japan

10

Glencore, mining, Switzerland

1-4

Textbook and Reference


Textbook:

Bekaert, Geert, and Robert Hodrick, 2012, International


Financial Management, 2nd ed., Pearson

Reference:

Butler, Kirt, 2012, Multinational Finance, 5th ed., Wiley

1-5

Coverage
Week
1
2
3
4
5
6
7
8
9
10
11
12

Topic
Introduction
Exchange Rate Systems
The Foreign Exchange Market
Transaction Exchange Risk and Forward Contracts
Transaction Exchange Risk and International Trade Risk
International Debt Financing and Interest Rate Parity
Purchasing Power Parity
Managing Real Exchange Risk
Exchange Rate Forecast
International Capital Budgeting
Additional Topics in International Capital Budgeting
Foreign Currency Futures and Options

Readings
Ch. 1
Ch. 5
Ch. 2
Ch. 3 & 17
Ch. 6 & 18
Ch. 6 & 11
Ch. 8
Ch. 9
Ch. 10
Ch. 15
Ch. 16
Ch. 20

1-6

Assessment
Tutorials

- Attendance
- Participation
Mid

10%
5%
5%

Session
- Week 7 Saturday morning (Sep. 10th)
- Coverage: Week 1 to 6

Group

project

Examination
- Formal exam period
- Coverage: Week 7-12

30%

25%

Final

35%

Total

100%

1-7

Mid-session Exam
It

includes 50 multiple choice questions

Closed
One

book

and a half hours

Details

will be discussed in week 6

1-8

Study Tools
Stock exchanges:
ASX (http://www.asx.com.au/) SHSE (http://www.sse.com.cn/)
NYSE (https://www.nyse.com/index)
Central banks:
RBA (http://www.rba.gov.au/) PBC (http://www.pbc.gov.cn/)
FRB(http://www.federalreserve.gov/)
World map
Google (http://maps.google.com/)
Economic and financial news:
Bloomberg.com (http://www.bloomberg.com/news/)
Economist.com (http://www.economist.com/)

Research data:
WRDS (http://wrds-web.wharton.upenn.edu/wrds/)
Fama-French factors (http://mba.tuck.dartmouth.edu/pages/faculty/ken.french
/data_library.html)
NBSPRC (http://www.stats.gov.cn/) World Bank (http://data.worldbank.org/ )
Journals:
Economics: QJE, AER, JPE, RES, and Econometrica
Finance: JF, JFE, RFS
Accounting: JAR, JAE, and TAR
1-9

1. Australia

1-10

GDP ranking (2015)


Rank

Country

GDP (Mn.)

U.S.

17,946,996

China

10,866,444

Japan

4,123,258

Germany

3,355,772

U.K.

2,848,755

France

2,421,682

India

2,073,543

Italy

1,814,763

Brazil

1,774,725

10

Canada

1,550,537

11

Korea

1,377,873

12

Australia

1,339,539

1-11

GDP per capita (2014)

1-12

Australian dollar and Iron ore price (2016)


Australian dollar (US$/A$)

Iron ore price(US$/ton)

1-13

Australia's top 10 goods and services exports (2014)


Rank

Commodity

Share (%)

Iron ores

20.2

Coal

11.6

Natural gas

5.4

Education

5.2

Personal travel

4.4

Gold

4.1

Petroleum

3.2

Beef

2.4

Aluminium

1.9

10

Wheat

1.8

Mining
Agriculture
Education
Tourism
Wealth
Management

1-14

Australia's top 10 trading partners (2014)


Korean

5%
Singapore

4%

U.S.

9%

China
24%

Japan

11%

Malaysia

3%

New
Zealand

Thailand

3%

3%

UK

3%

Germany

3%

1-15

The new normal of China

A shift from high speed growth to medium speed growth


A shift from quantity to quality
A shift from expansion to improving current production

1-16

2. Introduction of multinational corporations

1-17

Three phases of business


Three broad phases in the evolution of a firm
Domestic phase: operations are confined within the
boundaries of one country

International trade phase: the firm imports materials


or export its product or both
Trade

Multinational phase: the firm establishes operations


overseas

1-18

Top ten MNCs in Australia(2014)


Rank

Name

Industry

Size

BHP Billiton

Mining

$72.1bn

Rio Tinto

Mining

$59.8bn

Wesfarmers

Retail

$58.4bn

Woolworths

Retail

$55.5bn

NAB

Financial

$48.5bn

Commonwealth

Financial

$47.1bn

Westpac

Financial

$42.3bn

ANZ

Financial

$40.0bn

Telstra

Telecom.

$25.6bn

10

Xstrata
Holdings

Mining

$23.1bn
1-19

Structure of a multinational corporation


Board of directors

Managers
Shareholders

Debt
Assets

Equity
1-20

The goal of a multinational corporation


Goal

of a MNC
Maximize shareholder wealth (US, UK, Australia)
Maximize stakeholder wealth (Europe and Asia)

Conflict

of

interest

between

shareholders

and

managers
Independent board of directors
Concentrated ownership
Executive compensation
Shareholder activism and litigation
Hostile takeovers
1-21

3. Opportunities of multinational operations

1-22

Theoretical support for multinational


operations
Theory

of comparative advantage: a country


should produce and export goods if it can
produce with relative efficiency and import goods
from other nations which can produce more
efficiently.

For

example:
Australia: mining and agricultural industries
India: IT industry
Japan/Germany: manufacturing
Saudi Arabia: oil-based industries
1-24

How do MNCs enter foreign markets?

Four methods
Licensing: gives local firms right to manufacture their
products in exchange for fees
Brand
Profits (10%)

Franchising: provides specialized sales or service strategies


in exchange for fees
Brand+rules
Profits (20%)

A local supermarket
in India

A local supermarket
in India

Joint venture: jointly invest and operate a business with a


foreign company
Investment

Profits (100%)

A new supermarket
in India

Foreign direct investment: starts a company from scratch


Investment
Profits (100%)

A new supermarket
in India

1-26

4. Challenges of multinational operations

1-27

Political

risk
The risk that a host government will change the
rules of the game under which business is
conducted.
Due to unexpected political changes within a host
country or to the hosts relationship with other
governments.

Financial

risk
Foreign exchange risk: the risk of an unexpected
change in the value of the firm due to an unexpected
change in exchange rates
Financial crises

Cultural

culture

risk is the risk of dealing with an unfamiliar

1-28

Example:
Political

risk
The dispute between US and Iranian governments in
1970s
Financial

Jul. 2008
Nov. 2008
Nov. 2011

risk
1A$=0.97 US$
1A$=0.61 US$
1A$=1.09 US$

Culture

risk
Does everyone around the world like Starbucks coffee?
Alcohol in Dubai?
1-29

5. International partners of MNCs

1-30

International

Banks
e.g. BGI, Citibank, ANZ, and Commonwealth

International

Institutions
--The International Monetary Fund (IMF)
--The World Bank
--Regional development banks e.g. The Asian Development
Bank (ADB)
--The World Trade Organization (WTO)
--The Organization for Economic Cooperation and
Development (OECD)
--The Bank for International Settlements (BIS)
--The European Union (EU)
Governments
Individual

and Institutional Investors


e.g. hedge funds, private equity firms, and sovereign wealth
funds
1-31

6. The impact of MNCs

1-32

Globalization
Definition:

increasing connectivity and integration


of countries and corporations and the people within
them in terms of their economic, political, and social
activities

Implication:

Integration of the markets for goods and services


Integration of international financial markets

1-33

Recent integration of global markets for goods &


services:

1960s only 20% of countries were open; By 2000,


over 70% of countries were open
Free trade agreements: 1995 creation of the World
Trade Organization (WTO)
1999 creation of the euro and its adoption by an
expanding set of European countries
Outsourcing shifting of non-strategic functions
to specialist firms

1-34

WTO
members in
January
2012

Brexit
The EU is a politico-economic
UK European Union membership referendum
union of 28 European countries:
Announced on the morning of June 24, 2016
Ensure the movement of people,
Choice
Votes
%
goods, services, and capital
Maintain common policies on
Leave
17,410,742
51.89
trade, agriculture, fisheries, and
regional development
Remain
16,141,241
48.11
Enact legislation in justice

1-36

Recent integration of financial markets:

Financial market liberalization in both developed


and emerging markets in 1980s and 1990s
Increasingly interdependent national financial
markets, including cooperative linkages among
securities exchanges
Derivative contracts and securitization techniques
become more popular

1-37

Stock exchanges around the world (2015)


Rank

Exchange

Country

Headquarters Market
cap. (bn.)

Trading
vol. (bn.)

NYSE

U.S.

New York

19,223

1,520

NASDAQ

U.S.

New York

6,831

1,183

LSE

U.K.

London

6,187

165

TSE

Japan

Tokyo

4,485

402

SHSE

China

Shanghai

3,986

1,278

HKSE

Hong Kong

Hong Kong

3,325

155

Euronext

N.B.P.F.

A.B.L.P.

3,321

184

SZSE

China

Shenzhen

2,285

800

TMX Group

Canada

Toronto

1,939

120

10

Deutsche Brse Germany

Frankfurt

1,762

142

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