Introduction

Objective of Financial Management is to make optimal

financial decisions to achieve corporate objectives.
Corporate Objectives?
Why we Study International Finance
Integrated economies
US import oil from Saudi Arabia and Nigeria
Pakistan import TV sets from Japan
Pakistan import software and aircrafts from USA

Integrated financial markets
US investor in other markets
Japanese investors in US
IBM, Daimler and Sony in foreign Markets


Why we study internationalization
Rapid Internationalization
Increased in demand of goods and services
Requirement of capital and technology
Lack of self-sufficiency
Consumption, production and investment are
highly globalized
Post WTO (1999) regime
Countries are with different resources and skills
International competitiveness
Nature and Scope of International
Finance
There are two functions of finance
Treasury: financial planning, financing, cash management, investment , risk management
Control: reporting, tax planning, financial & management accounting, budget planning and control etc.
Maximizing return and minimizing cost through
portfolio
What we will learn
Forex rates, volatility in capital market, interest rate
fluctuation,
Saving, consumption pattern, investment behavior of
investors, export and import trends, banking
performance, demand and supply conditions etc
Distinguished Features of International
Finance
Foreign Exchange Rate
When different national currencies are exchanged,
there is a risk of volatility in foreign exchange rates
International Monetary System
Provided exchange rate policies
Post 1970s era
The fixed exchange rates were abandoned after 1970s
Exchange rate variation effect the profitability of
firm
Continue.
Political Risk
Risk of loss from unforeseen government action
and other political characters such as terrorism.
MNCs must to asses the political risk in the
countries
Examples
Enron Development corporation 1992
Nandipur power project
Continue
Expanded opportunity sets
Firms tends to benefit from expanded
opportunities. Raise funds in capital markets
where cost of capital is low.
Firms can gain from economies of scale
Market Imperfections
There are profound differences among nations
law, tax systems, business practices and cultural
environment.
Goal for International Financial
Management
Understanding and managing forex and
political risks and coping with market
imperfections.
How to deal with exchange risk and market
imperfections using instruments and tools.
Maximizing the benefits from global
opportunity set.
Effective financial management
Maximizing the shareholders wealth

Emergence of Globalized Financial
Markets and MNCS
Deregulation of foreign exchange and financial markets
In 1980 Japan deregulate its foreign exchange market
In 1985 Tokyo stock exchange foreign brokerage firms
In 1986 London stock exchange began admitting foreign firms
Methods to conduct international activities
Licensing:
A firm in one country licenses the use of some or all of its
intellectual property (patents, trademarks, copyrights, brand
names) to a firm of some other country in exchange for fees or
some royalty payment. Licensing enables a firm to use its
technology in foreign markets without a substantial investment in
foreign countries.


Continue..
Franchising:
A firm in one country authorising a firm in another
country to utilise its brand names, logos etc. in
return for royalty payment.
Joint ventures:
A corporate entity or partnership that is jointly
owned and operated by two or more firms is
known as a joint venture. Joint ventures allow two
firms to apply their respective comparative
advantage in a given project.
Continue..
Establishing new foreign subsidiaries:
A firm can also penetrate foreign markets by
establishing new operations in foreign countries to
produce and sell their products. The advantage
here is that the working and operation of the firm
can be tailored exactly to the firms needs.
However, a large amount of investment is required
in this method.
Continue..
Management contracts:
A firms in one country agrees to operate facilities
or provide other management services to a firm in
another country for an agreed upon fee.
Foreign Investment Flows to Pakistan
and other developing Countries
There are two types of foreign investment
flows
FDI
Indirect Investment (portfolio investment)

Reasons for growing importance of
international trade
Liberalization of trade
Shrinkage of economic space

Trade Liberalization agreements
European Union
Consists of more then two dozen countries
North America Free Trade Agreement
In 1993 signed among USA, Canada and Maxico
Association of South East Asia Nations (ASEAN)