International Financial

Management
Dr. Nelson Michael J.
 Course Overview

• Course Objective
• To provide a framework for making corporate
financial decisions in an international context.
 Course Overview
Foreign Sourcing
Exchange Capital in
Markets Global Markets

International
Financial Synthesis
Management

Managing Foreign
FOREX Investment
Exposure Decisions

3
 Course Overview
 Introduction to international finance
 Introduction and course overview
 The foreign exchange market
 Corporate governance
 Parity conditions in international finance
 Foreign exchange derivative contracts

 International corporate finance issues

 Transactions exposure to exchange rates
 Translation exposure to exchange rates
 Operating exposure to exchange rates

4
 Course Overview
 International investment analysis
 Cost of capital
 International bond markets
 International equity markets
 Capital structure

 Corporate strategy and foreign investment

analysis
 Offshoring/Outsourcing
 Project Finance
 Cross-border Joint Ventures
 Cross-border Mergers
5
 Course Overview
• Global Financial Crisis
– Bailouts and Bans
– Can a country go bankrupt?

6
Globalization & the
Multinational Firm
 Objectives
• Understand why it is important to study
international finance.

• Distinguish international finance from

domestic finance.
 Outline

• What’s Special about “International” Finance?

• Goals for International Financial Management
• Globalization of the World Economy
• Multinational Corporations
• Organization
• Summary

1-9
 What’s Special about
“International” Finance?
• Foreign Exchange Risk
• Political Risk
• Market Imperfections
• Expanded Opportunity Set

1-10
 What’s 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.
– E.g., an unexpected devaluation adversely affects your
export market…
• 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.
– E.g., an unexpected overturn of the government that
jeopardizes existing negotiated contracts…

1-11
 What’s Special about
“International” Finance?
• Market Imperfections
– Legal restrictions on movement of goods,
people, and money
– Transactions costs
– Shipping costs
– Tax arbitrage
E.g., trade barriers and tax incentives may
affect location of production…
1-12
 What’s Special about
“International” Finance?
• Expanded Opportunity Set
– It doesn’t make sense to play in only one
corner of the sandbox.
– True for corporations as well as individual
investors.
E.g., raise funds in global markets, gains from
economies of scale…

1-13
 Goals for International Financial
Management
• The focus of the IFM course is to equip
jayantians with the “intellectual toolbox” of
an effective global manager—but what goal
should this effective global manager be
working toward?
• Maximization of shareholder wealth?
or
• Other Goals?

1-14
 Maximize Shareholder Wealth

• Long accepted as a goal in the Anglo-Saxon

countries, but complications arise.
– Who are and where are the shareholders?
– In what currency should we maximize their
wealth?

1-15
 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 keiretsu—a family of firms to which the
individual firms belongs.

1-16
 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.

1-17
Globalization of the World Economy: Recent
Trends
• Emergence of Globalized Financial Markets
• Trade Liberalization and Economic Integration
• Privatization

1-18
 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

1-19
 Economic Integration
• 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 world’s governments who have
abandoned mercantilist views and embraced
free trade as the surest route to prosperity for
their citizenry.

1-20
 Liberalization of
Protectionist Legislation
• The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
• The World Trade Organization has the power to
enforce the rules of international trade.
• ASIA-PACIFIC TRADE AGREEMENT
• ASEAN, SAARC
• The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments to
trade between Canada, Mexico and the United
States over a 15-year period.

1-21
 Privatization

• The selling off 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.

1-22
 Multinational Corporations

• A firm that has incorporated on one country

and has production and sales operations in
other countries.
• There are about 60,000 MNCs in the world.
• 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.

1-23
 Top 10 MNCs
1 General Electric United States
2 Ford Motor Company United States
Netherlands/ UK
3 Royal Dutch/Shell Group
Netherlands/U.K.
4 General Motors United States
5 Exxon Corporation United States
6 Toyota Japan
7 IBM United States
8 Volkswagen Group Germany
9 Nestlé SA Switzerland
10 Daimler-Benz AG Germany

1-24
 Reference
• Eun & Resnick (2008). International Financial
Management. Tata McGraw Hill.
Reference