.

FALL 2011

INTERNATIONAL FINANCIAL MANAGEMENT

Fourth Edition EUN / RESNICK

INTERNATIONAL FINANCIAL MANAGEMENT

Lecture Time: Thursday and Friday, 8:30 pm 10:00 pm Texts: Eun, Cheol S. and Bruce G. Resnick (2007), International Financial Management (Fourth Edition), McGraw-Hill. Instructor: Amir Rafique

Course Outline
Part 1: Introduction to International Finance
 Globalization and the multinational firm  International monetary system  Balance of payments

Part 2: Foreign Exchange and Derivatives

 FX market  FX determination and forecasting  FX futures and options

Course Outline
Part 3: Foreign Exchange Exposure and Management
 Transaction exposure  Economic exposure  Translation exposure

Part 4: World Financial Markets and Institutions

 Banking and money market  Bond market  Equity market  Interest rate and currency swaps  International portfolio investment

Course Outline
Part 5: Multinational Financial Management
 FDI and cross-border acquisition  International capital structure and the cost of capital  International capital budgeting  International trade finance  International tax environment  Corporate governance around the world

Course Overview


Course Objective  To provide a framework for making corporate financial decisions in an international context Why study International Financial Management?  We live in a highly globalized and integrated world
 Consumption,

production of goods and services have become

globalized  Financial markets have also become highly integrated

 Diversification of portfolio internationally  Shares cross listed on foreign stock exchanges

Course Overview
Foreign Exchange Markets Sourcing Capital in Global Markets

International Financial Management

Synthesis

Managing FOREX Exposure

Foreign Investment Decisions

Globalization & the Multinational Firm

Chapter Objectives:

Chapter

Understand why it is important to study international finance. Distinguish international finance from domestic finance.

Chapter One Outline

    

Whats Special about International Finance? Goals for International Financial Management Globalization of the World Economy Multinational Corporations Summary

Whats Special about International Finance?

 

 

Foreign Exchange Risk Political Risk (Rules of the Game Changes) Market Imperfections Expanded Opportunity Set

What is special about international finance?



Foreign exchange risk

 E.g.,

an unexpected devaluation adversely affects your export market an unexpected overturn of the government that jeopardizes existing negotiated contracts trade barriers and tax incentives may affect location of production raise funds in global markets, gains from economies of scale

Political risk
 E.g.,

Market imperfections
 E.g.,

Expanded opportunity sets

 E.g.,

Whats Special about International Finance?

Foreign Exchange Risk


The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.

Suppose an American invests in a Thai stock:

Buy 1 share
in 2010 Price of the stock Exchange rate

Sell 1 share
in 2011

330 Increased to Pay $ 10

340

33/$ depreciated to 35/$ Receive $ 9.7

Whats Special about International Finance?

Political Risk


Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways. Political uncertainty also affects investor confidence about the direction of the economic and investment policy.

Whats Special about International Finance?

Market Imperfections  Legal restrictions on movement of goods, people, and money  Transactions costs  Shipping costs  Discriminatory taxes  Information irregularity

Whats Special about International Finance?

Expanded Opportunity Set  By expanding business internationally, firms can benefit from greater economies of scale, lower cost of capital, cheaper labor and raw materials, lower risks and higher potential returns from diversification. It doesnt make sense to play in only one corner of the sandbox.  True for corporations as well as individual investors.

Goals for International Financial Management



International financial management is designed to provide financial managers with an understanding of the fundamental concepts and the tools necessary to reach the goal of shareholder wealth maximization, i.e. firm value maximization.

Other Goals


In other countries shareholders are viewed as merely one among many stakeholders of the firm including:
  

Employees Suppliers Customers

In Japan, managers have typically sought to maximize the value of the keiretsua family of firms to which the individual firms belongs.

Other Goals


No matter what the other goals, they cannot be achieved in the long term, if the maximization of shareholder wealth is not given due consideration. A firm that
    

Treats employees poorly, Produces shoddy merchandise Wastes raw materials Operates inefficiently Fails to satisfy customers

Cannot maximize shareholders wealth

Other Goals


As shown by a series of recent corporate scandals at companies like Enron and WorldCom managers may pursue their own private interests at the expense of shareholders when they are not closely monitored. These calamities have painfully reinforced the importance of corporate governance (CG) i.e. the financial and legal framework for regulating the relationship between a firms management and its shareholders.

Globalization of the World Economy: Major Trends

 

 

Emergence of globalized financial markets. Emergence of the Euro as a global currency (in the beginning of 1999). Trade liberalization (GATT and WTO) and economic integration (EU,SAFTA) Privatization Multinational corporations (GE, Vodaphone, Toyota, Siemens, TATA)

Emergence of Globalized Financial Markets



Deregulation of Financial Markets coupled with Advances in Technology have greatly reduced information and transactions costs, which has led to: Financial Innovations, such as
   

Currency futures and options Multi-currency bonds Cross-border stock listings International mutual funds

Emergence of the Euro as a Global Currency



A momentous event in the history of world financial systems (1st January, 1999). Currently more than 350 million Europeans in 15 (Eurozone) + 5 (w/ formal agreement) + 6 (w/o formal agreement) countries are using the common currency. The transaction domain of the euro may become larger than the U.S. dollars in the near future.

Trade Liberalization & Economic Integration



The virtue of international trade is based on the theory of comparative advantage (David Ricardo, 1817) Over the past 50 years, international trade increased about twice as fast as world GDP. There has been a sea change in the attitudes of many of the worlds governments who have abandoned protectionist views and embraced free trade as the surest route to prosperity for their country.

Liberalization of Protectionist Legislation



The General Agreement on Tariffs and Trade (GATT) (1947) a multilateral agreement among member countries has reduced many barriers to trade. The World Trade Organization (WTO) has the power to enforce the rules of international trade. (Replaced GATT) China and India implemented market-oriented economic reforms. The huge supplies of labor in these countries together with their demands for natural resources, capital goods, technologieswill profoundly alter the pattern of international trade and investment.

Privatization
 

Beginning in late 80s and geared up in early 90s The selling of state-run enterprises to investors is also known as Denationalization. Often seen in socialist economies in transition to market economies. By most estimates this increases the efficiency of the enterprise. Often spurs a tremendous increase in cross-border investment.

What is a Multinational Corporation?



A firm that has incorporated in one country and has production and sales operations in several other countries. There are more than 70,000 MNCs in the world. FDI by MNCs is also a major force driving globalization of the world economy.

What is a Multinational Corporation?



Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in. Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets.

GLOBALISATION


What is Globalization?
 Globalization refers to the shift toward a more integrated and interdependent world economy  Globalization has two main components: Globalization of Markets - refers to the merging of historically distinct and separate national markets into one huge global marketplace

GLOBALISATION


- multinational enterprises emerge as an important driver of the convergence of different national markets into a single, and increasingly homogenous, global marketplace. Globalization of Production - refers to sourcing of goods and services from different locations around the globe to take advantage of national differences in the cost and quality of factors of production.

GLOBALISATION


- the outsourcing of different productive activities to different suppliers results in the creation of global products Note: In sum, we are travelling down the road toward a future characterized by the globalization of markets, production, ownership, and management.

Why do firms go global?

      

To benefit from economies of scale To broaden their markets To seek raw materials To seek new technology To seek production efficiency To avoid political and regulatory hurdles To diversify

Types of Multinational Enterprises



Raw Material Seekers

  

First type of MNEs Exploit raw materials found overseas Trading, mining and oil companies Post-WWII MNEs Expand production and sales into foreign markets Big name companies IBM, McDonalds etc. More recent MNEs Seek out lowest production cost countries Manufacturing and service companies

Market Seekers
  

Cost Minimisers
  

Theories of International Business

Why are firms motivated to expand their business internationally?

 Theory of Comparative Advantage  Imperfect Markets Theory  Product Cycle Theory

International Business Methods

There are several methods by which firms can conduct international business.
      

International trade Licensing Franchising Joint venture Acquisitions of existing operations Establishing new foreign subsidiaries Direct Foreign Investment (DFI)

Who else might need to know international financial management?

 

  

Exporters/Importers Individuals or corporations that borrow or lend in foreign currencies (through banks or bond market) International portfolio investors Financial service providers (mainly banks) Financial regulators

End Chapter One

DISCUSSION