Professional Documents
Culture Documents
01 Introduction
01 Introduction
Todays Objectives
Understand the syllabus and how it works Understand my goals for this course (teaching and learning objectives) Understand my philosophy of teaching Understand the focus of the course Understand FOREX transactions and the role of arbitrage.
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Our Focus
We will focus on the institutions and markets that connect nations economies, especially financial sector linkages. More specifically, we will concentrate on FOREIGN DIRECT INVESTMENT.
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True of Corp. Finance in general, so why study IFM? What makes it different?
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CAPM
Systematic (undiversifiable) risk Unsystematic (diversifiable) risk
Total risk You cannot create value with smoke and mirrors
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FOREX
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Multinational Policymaking
The International Financial Architecture
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Multilateral Policymaking
The two organizations at the center of efforts to stem international financial crises are: The International Monetary Fund: a multinational organization the promotes international monetary policy cooperation, exchange arrangements, and economic growth. The World Bank: A sister institution that specializes in making loans to developing nations to promote development and growth.
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Financial Inflow
Balance of Payments is a flow account, which consists of the current account and the capital and financial account A flow of capital, real and/or financial, into a country, takes the form of increased purchases of domestic assets by foreigners and/or reduced holdings positive, of foreign assets by domestic residents. Inflows are recorded as positive, or a credit, credit, in the capital and financial account. Each country also has an international balance sheet, which is a stock account which shows assets and liabilities abroad and foreign assets and liabilities at home -- Called the international investment positions accounts in the U.S. (the accumulated stocks of U.S.-owned assets abroad and of foreignU.S.foreignowned assets in the United States) . The net change in the international investment positions accounts from the beginning of one year to the end of the next is the net capital/financial flow for the year
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Sources of Foreign Exchange Uses of Foreign Exchange Exports of Goods and Services $43,142 Imports of Goods and Services $38,063 Remittances and Pensions $1,015 Balance on goods, services, remittances, and pensions +$4065 Foreign Capital Flow, net $2,532 U.S. Government grants, net $3,444 U.S. private Capital Flow, net $4,298 Errors and Omissions $210
Change in U.S. Reserve Assets $568 Change in Liquid Liabilities of Foreign Accounts $789
Source: Federal Reserve Bulletin, April 1969, pp A70-71
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Balance of Payments
System of accounts which is a subset of the National Income and Production Accounts
A double-entry bookkeeping system. Debit Entries: Transactions that generate a payment outflow (e.g., import). Credit Entries: Transactions that generate a payment inflow (e.g., export).
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Balance of Payments
The current account includes exports and imports of goods, services, income, and current transfers.
Goods Services Income Receipts and Payments Unilateral Transfers
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Balance of Payments
Goods: Exports and imports of tangible items. Services: Exports and imports of services, for example:
Typical business services such as banking and financial services, insurance, and consulting. Tourism
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Balance of Payments
Income Receipts: Includes items such as
Investment income on US-owned assets abroad. Receipts of income on US direct investment abroad. Government income receipts
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Balance of Payments
Income Payments: Includes items such as
Investment income on foreign-owned assets in the United States. Payments of income on foreign direct investment in the United States US Government income payments
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Balance of Payments
Unilateral Transfers: Includes items such as:
Government grants abroad Private remittances Private grants abroad
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Imports Goods Services Income Payments Unilateral Transfers Current Account Balance
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Balance of Payments
The Financial Sector
In June 1999, US capital account definitions were modified to bring them more in line with definitions recommended by the International Monetary Fund. Now there are two accounts:
The capital account includes capital transfers, such as debt forgiveness. The financial account includes transactions for official assets, for U.S. Government assets other than official reserve assets, for direct investment, for portfolio investment, and for other investment.
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Balance of Payments
The Financial Sector The new Capital Account includes items that were previously included in unilateral transfers, such as:
Debt forgiveness Migrants transfers (as they leave the country).
The new capital account is small for the US (< 0.1 percent of capital flows), but expected to grow.
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Balance of Payments
The Financial Sector The Financial Account
Records international transactions in the financial sector Includes portfolio and foreign direct investment Includes changes in banks and brokers cash deposits that arise from international transactions.
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Balance of Payments
The Financial Sector US-Owned Assets Abroad: Increase or decrease in US ownership of foreign financial assets. Foreign-Owned Assets in the US: Increase or decrease in foreign ownership of domestic assets. Reserve Assets: Primarily the assets of central banks.
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Balance of Payments
The Financial Sector Portfolio Investment: Individual or business purchase of stocks, bond, or other financial assets or deposits. (An income strategy) Foreign Direct Investment: Purchase of financial assets that results in a 10 percent or greater ownership share. (A financial control strategy)
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Feldstein - Horioka
Savings and Investment Relation Based on a closed economy income condition: y = c + i + g. Rearrange as: y - c - g = i.
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Feldstein - Horioka
Rearranged as: y - c - g = i. Note that y - c - g equals savings, s. Then: s = i. In a closed economy, domestic investment is equal to domestic saving by definition, but is also correlated in practice, i.e., correlation coefficient is necessarily close to 1 in value.
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US Balance of Payments
4%
2%
0%
C/A TB
-2%
-4%
-6% 46 50 54 58 62 66 70 74 78 82 86 90 94 98 2
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Basic Premise
A current account deficit must be financed by capital inflows, or it cannot be incurred in the first place
FACT Over 1982-2003, U.S. current 1982account deficits have averaged $183 billion per year. $4 trillion worth of assets have been transferred to foreign ownership.
QuickTime and a TIFF (Uncompressed) decompressor are needed to see this picture.
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Scale Variables I
U.S. monthly GDP: $1 trillion Monthly goods and services exports: $130 billion = 13% Monthly goods and services imports: $185 billion = 18.5% Balancing item: net capital flow: $55 billion = 5.5%
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Scale Variables II
U.S. GDP per worker: $84,000 per year Exports of $10,900 per year Imports of $15,500 per year
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Result: Result: Foreign claims on U.S. assets now exceed U.S. claims on foreign assets by about $2.7 trillion.
Storing up purchasing power for the future Private political risk insurance Public political risk insurance
International Investments
(market value, end-2003) endU.S. foreign investments: Foreign investments in U.S.: Net: $7.9 trn $10.5 trn -$2.7 trn
Much of this capital inflow has been portfolio investment. Some has been direct investment. investment.
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Ot her 2%
U.K. 18%
Europe 34%
UK 16%