Dr. Salman A.

Qureshi
Assistant Professor, DBA, AIOU

Academic

PhD (Finance), Iqra University

MS (Finance) Iqra University

MBA (Finance) University Institute of Management Sciences,

Pakistan
Lecture 1

International Finance
Topics

• International Financial Management

• International Flow of Funds and BoP

• International Financial Markets

• Foreign Exchange Rate and Types

• Government Intervention in Exchange Rates

 Topics

• Inflation, Exchange and Interest Rate

• Risk Management of Exchange Rates

• Managing Economic, Transaction & Translation Exposure

• Direct Foreign Investment

MULTINATIONAL COMPANIES

 Goals of MNCs

 Agency Problems

 Centralized vs. Decentralized System

 Theories of International Business

Common methods to conduct international
business
 International trade,
 Licensing,
 Franchising,
 Joint ventures,
 Acquisitions of existing operations,
 Establishing new foreign subsidiaries

 Investment opportunities
 Financing opportunities
 Marginal Returns and Marginal Costs
 Capital Account (Flow of funds; one country to other)
 Direct Foreign Investment

 Portfolio Investment

 Capital Investment

 Trade volume is different

 Over all the World is developing

 Trade Agreements
 NAFTA, GATT, EU

 Trade Disagreements
 Tariffs, Quotas, Job loss

 Rules are different (Child labor, Bribe, etc)

 Outsourcing
 Economic Factors Affecting Trade

 Inflation

 Impact of National Income

 Government Restrictions

 Foreign Exchange Rates

 International Capital Flows

 Factors Affecting International Trade flows

 Factors affecting DFI

 Factors Affecting Portfolio Investment

 Agencies that Facilitate International Trade

 Motives to use International Market

 Economic Conditions

 Exchange Rate

 International Diversification

 Foreign exchange Market

 Gold Standard

 Fixed Exchange Rate

 Floating Exchange Rate

 Spot Market
 Bid/Ask Spread
 Direct & Indirect Quote
 Future Market
 Forward Market
 Attributes of Banks
 Options
 Put option
 Call Option

 Domestic Money Market

 Domestic & International Money Market
 Standardization of Banking Regulations
 Single European Act
 Basel Accord I
 Basel Accord II

• Syndicated Loans
 International Credit Market
 International Bond Markets
 International Stock Markets

 Transaction Costs

 Information Costs

 Exchange Rate Risk

 International Stock Diversification

 Exchange Rates

 Depreciation and Appreciation of Currency

 Exchange Rate Equilibrium

 Liquidity

 Factors that affect Exchange Rates

• Relative Interest Rate

• Relative Income Level

• Expectations

• Speculating on Anticipated Exchange Rates

 Exchange Rate System

 Fixed Exchange Rate

 Freely Floating
 Managed Float
 Pegged

 Currency Boards
 Investors Confidence
 Argentinean Economy and Currency Boards
 Dollarization (e.g. Ecuador)

 Single European currency

 Impact on Monetary & Fiscal Policy

 International trade

 International flows

 Impact on Exchange Rate Risk

 Government Intervention
 Reliance on Reserves

 Direct Intervention
 Sterilized

 Non Sterilized

• Indirect intervention

 Inflation, interest rates, income level, government controls, expectations

 Arbitrage

 Locational Arbitrage
 Banks/Individuals

 Triangular Arbitrage

 Covered Interest Arbitrage

 Interest Rate Parity

 Transaction Costs

 Political Risk

 Differential Tax Laws

 MNCs need exchange rate forecasts for their
 Hedging Decisions,

 Short-term Financing Decisions,

 Short-term Investment Decisions,

 Capital Budgeting Decisions,

 Earnings Assessments
 Long-term financing decisions

 Forecasting Techniques

 Technical,
 Fundamental,
 Market-based
 Mixed.
 Forecasting Error
 Forecasting Services
 Forecasting Bias
 Diversification Argument
 Types of Exposure
 Transaction
 Economic
 Translation
 Source: Adopted from South-Western/ Thomson Learning 2006
  Identify degree of transaction exposure.

 Decide whether to hedge this exposure.

 Choose a hedging technique if it decides to hedge part or all of the

exposure.

 Hedging Techniques

 Futures hedge,

 Forward hedge,

 Money market hedge, and

 Currency option hedge.

 Source: Adopted from South-Western/ Thomson Learning 2006

Management of Exposures

 Transaction
 Identify the degree

 Decision

 Hedging

 Economic
 Restructuring

 Translation
Direct Foreign Investment

 Motives

 Revenues
 Costs

 Issues