Multinational Financial Management – Corporate Finance

CEMS

Elvira Sojli

RSM Erasmus University

Department of Finance
esojli@rsm.nl

Almost tautologically, international finance selects from the broad field of

finance those issues that have to do with the existence of many distinct
countries. The fact that firms operate in countries which operate as separate
entities severely complicates a CFO’s life. Some, but by no means all, of the
issues that arise due to multinational operations are:

 National currencies, exchange rates and exchange rate risks;

 The segmentation of goods markets along national lines, which in
combination with price stickiness leads to the use of ‘real’ exchange
rates;
 The fragmentation of equity markets between different countries, but
also market providers;
 Differences in national judicial systems which complicates bankruptcy,
default proceedings and risk management in a unified framework;
 The political autonomy of countries, which gives rise to political risk;
 Separate and incompatible tax systems which give rise to double or
triple taxation.

All these issues bring to bear in the decision making process of a CFO while
handling the tasks of funding, evaluation, and risk. The CFO is required to
acquire or have knowledge about international financial markets (equity, bond,
and currency markets, as well as the markets for derivatives such as options
and futures).

Internationally operating companies are exposed to specific risks that have to

be dealt with by financial management. Therefore, the focus of this part of the
course will be currency risk management: the measurement and control of
international financial risks. Understanding international financial markets and
financial risks provides a basis for important financial decisions: investment
and finance decisions. The corporate finance part of the course contains the
following topics: foreign exchange markets, parity conditions, currency risk
management, and international financing.

Course design in a nutshell

The finance part of the course consists of a combination of lectures and one
assignment. The lectures are intended to deal with the theory of the above
concepts. In addition, there will be one case study in which students write a
report on a firm, which is similar to the research papers and case studies
discussed in lectures 3 and 4. The group is divided into teams of 2 students. In
addition, there will be 10 bonus points for the project, for the team that will

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practically manage risk better using an online trading game (more details will
be given in Lecture 1).

Course objectives
After this course you should understand the key elements of corporate finance
and their applications in an international setting. You should have gained
knowledge about the available options of CFOs in international financial
markets. You should know and be able to apply the theory of financing and
investing decisions in an international context. You should be able to set up a
risk management program for a firm. You will learn about the before-
mentioned topics through theory and real-life case studies. You will learn to
read articles in finance journals, which allows you to follow future
developments in the field.

This course assumes that you have sufficient background in finance,

for example at the level of the book by Ross, Westerfield and Jaffe (2005),
Corporate Finance. In particular, basic knowledge on currency price
determination and derivative instruments is assumed.

The literature list below is a guide to the materials that will be used and
discussed during the lectures. You are required to know and understand all the
material in the lectures, while the extent to which you read the articles is up to
you. All readings will be referenced at the end of the lecture notes and can be
found via the electronic library.

The time table for corporate finance is as follows:

Date Topics Literature

Oct 26 Introduction, Globalization, Foreign 1. Stulz (2007)
Exchange Markets, Exposure 2. Sercu Ch. 3 and 4 (2009)*
Measurement 3. Sarno (2008)
4. Pritamani et al. (2004)
Nov 1 Risk Management Theory 5. Nocco and Stulz (2006)
6. Stulz (1996)
7. Ch. 12 and 13 Sercu (2009)
Nov 9 CFO Perspective on International Shell Presentation
Debt Markets
Nov 16 Risk Management Empirics and 8. Smithson and Simkins (2005)
Practices 9. Tufano (1996)
10. Carter et al. (2006)
11. Brown (2001)
Nov 30 International Equity Financing 12. Ch. 16, 17 and 21 Sercu
(2009)
13. Karolyi (2006)
14. Gozzi et al. (2006)
Dec 1 New Financial Instruments and 14. Brunnerneier (2009)
Crisis 15. Gorton (2008)
Dec 7 Presentations n.a.

*Sercu (2009) refers to the book: “International Finance: Theory into

Practice”.

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1. Stulz, R. 2007. The limits of financial globalization. Journal of Applied
Corporate Finance 19, 8-16.
2. Sarno, L. 2008. Purchasing power parity. In Durlauf, Steven N. and
Lawrence E. Blume, (eds.), The New Palgrave Dictionary of Economics,
2nd revised edition (online), Palgrave MacMillan, London, 2008.
3. Pritamani, M., Shome, D., and Singal, V. 2004. Foreign exchange
exposure of exporting and importing firms. Journal of Applied Corporate
Finance 17, 87-94.
4. Nocco, B and Stulz, R. 2006. Enterprise risk management: theory and
practice. Journal of Applied Corporate Finance 18, 8-21.
5. Stulz, R. 1996. Rethinking risk management. Journal of Applied
Corporate Finance 8, 8-24.
6. Smithson, C. and Simkins, B. 2005. Does risk management add value?
A survey of the evidence. Journal of Applied Corporate Finance 17, 8-17.
7. Tufano, P. 1996. Who manages risk? An empirical examination of risk
management practices in the gold mining industry. Journal of Finance
51, 1097-1137.
8. Carter, D., Rogers, D. and Simkins, B. 2006. Hedging and Value in the
U.S. airline industry. Journal of Applied Corporate Finance 18, 8-21.
9. Brown, G. 2001. Managing foreign exchange risk with derivatives.
Journal of Financial Economics 60, 401-448.
10. Karolyi, A. 2006. The World of cross-listings and cross-listings of the
world: challenging conventional wisdom. Review of Finance 10, 99-152.
11. Gozzi, J., Levine, R., Schmukler, S. 2008. Internationalization and the
evolution of corporate valuation. Journal of Financial Economics 88, 607-
632.
12. Brunnerneier, M. 2009. Deciphering the liquidity and credit crunch
2007-2008. Journal of Economic Perspectives 23, 77-100.
13. Gorton, B. 2008. The subprime panic.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1276047