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FALL 2011

INTERNATIONAL FINANCIAL MANAGEMENT
Fourth Edition EUN / RESNICK

INTERNATIONAL FINANCIAL MANAGEMENT
Lecture Time: Thursday and Friday, 8:30 pm ± 10:00 pm Texts: Eun, Cheol S. and Bruce G. Resnick (2007), International Financial Management (Fourth Edition), McGraw-Hill. Instructor: Amir Rafique

Course Outline
Part 1: Introduction to International Finance 
Globalization and the multinational firm  International monetary system  Balance of payments

Part 2: Foreign Exchange and Derivatives 
FX market  FX determination and forecasting  FX futures and options

Course Outline Part 3: Foreign Exchange Exposure and Management  Transaction exposure  Economic exposure  Translation exposure Part 4: World Financial Markets and Institutions  Banking and money market  Bond market  Equity market  Interest rate and currency swaps  International portfolio investment .

Course Outline Part 5: Multinational Financial Management  FDI and cross-border acquisition  International capital structure and the cost of capital  International capital budgeting  International trade finance  International tax environment  Corporate governance around the world .

Course Overview   Course Objective  To provide a framework for making corporate financial decisions in an international context Why study International Financial Management?  We live in a highly globalized and integrated world  Consumption. production of goods and services have become globalized  Financial markets have also become highly integrated  Diversification of portfolio internationally  Shares cross listed on foreign stock exchanges .

Course Overview Foreign Exchange Markets Sourcing Capital in Global Markets International Financial Management Synthesis Managing FOREX Exposure Foreign Investment Decisions .

Globalization & the Multinational Firm Chapter Objectives: Chapter 1 Understand why it is important to study international finance. . Distinguish international finance from domestic finance.

Chapter One Outline      What¶s Special about ³International´ Finance? Goals for International Financial Management Globalization of the World Economy Multinational Corporations Summary .

What¶s Special about ³International´ Finance?     Foreign Exchange Risk Political Risk (Rules of the Game Changes) Market Imperfections Expanded Opportunity Set .

.  Expanded opportunity sets  E.g. gains from economies of scale«  Political risk  E.g..What is special about international finance?  Foreign exchange risk  E. an unexpected devaluation adversely affects your export market« an unexpected overturn of the government that jeopardizes existing negotiated contracts« trade barriers and tax incentives may affect location of production« raise funds in global markets...  Market imperfections  E..g.g.

7 .What¶s Special about ³International´ Finance? Foreign Exchange Risk  The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. Suppose an American invests in a Thai stock: Buy 1 share in 2010 Price of the stock Exchange rate Sell 1 share in 2011 330 Increased to Pay $ 10 340 33/$ depreciated to 35/$ Receive $ 9.

and people across their borders.What¶s Special about ³International´ Finance? Political Risk   Sovereign governments have the right to regulate the movement of goods. . capital. Political uncertainty also affects investor confidence about the direction of the economic and investment policy. These laws sometimes change in unexpected ways.

What¶s Special about ³International´ Finance? Market Imperfections  Legal restrictions on movement of goods. and money  Transactions costs  Shipping costs  Discriminatory taxes  Information irregularity . people.

cheaper labor and raw materials. lower risks and higher potential returns from diversification.What¶s Special about ³International´ Finance? Expanded Opportunity Set  By expanding business internationally. .  True for corporations as well as individual investors. It doesn¶t make sense to play in only one corner of the sandbox. lower cost of capital. firms can benefit from greater economies of scale.

i. .Goals for International Financial Management  International financial management is designed to provide financial managers with an understanding of the fundamental concepts and the tools necessary to reach the goal of shareholder wealth maximization.e. firm value maximization.

.Other Goals  In other countries shareholders are viewed as merely one among many ³stakeholders´ of the firm including:    Employees Suppliers Customers  In Japan. managers have typically sought to maximize the value of the keiretsu²a family of firms to which the individual firms belongs.

they cannot be achieved in the long term. A firm that      Treats employees poorly.Other Goals   No matter what the other goals. if the maximization of shareholder wealth is not given due consideration. Produces shoddy merchandise Wastes raw materials Operates inefficiently Fails to satisfy customers Cannot maximize shareholders wealth .

e. These calamities have painfully reinforced the importance of corporate governance (CG) i. the financial and legal framework for regulating the relationship between a firm¶s management and its shareholders.  .Other Goals  As shown by a series of recent corporate scandals at companies like Enron and WorldCom managers may pursue their own private interests at the expense of shareholders when they are not closely monitored.

TATA) .SAFTA) Privatization Multinational corporations (GE. Vodaphone.Globalization of the World Economy: Major Trends      Emergence of globalized financial markets. Trade liberalization (GATT and WTO) and economic integration (EU. Toyota. Siemens. Emergence of the Euro as a global currency (in the beginning of 1999).

such as     Currency futures and options Multi-currency bonds Cross-border stock listings International mutual funds . which has led to: Financial Innovations.Emergence of Globalized Financial Markets    Deregulation of Financial Markets coupled with Advances in Technology have greatly reduced information and transactions costs.

1999). The ³transaction domain´ of the euro may become larger than the U. Currently more than 350 million Europeans in 15 (Eurozone) + 5 (w/ formal agreement) + 6 (w/o formal agreement) countries are using the common currency.   .Emergence of the Euro as a Global Currency  A momentous event in the history of world financial systems (1st January.S. dollar¶s in the near future.

1817) Over the past 50 years. There has been a sea change in the attitudes of many of the world¶s governments who have abandoned protectionist views and embraced free trade as the surest route to prosperity for their country. international trade increased about twice as fast as world GDP.Trade Liberalization & Economic Integration  The virtue of international trade is based on the theory of comparative advantage (David Ricardo.   .

Liberalization of Protectionist Legislation  The General Agreement on Tariffs and Trade (GATT) (1947) a multilateral agreement among member countries has reduced many barriers to trade. (Replaced GATT) China and India implemented market-oriented economic reforms. technologies²will profoundly alter the pattern of international trade and investment. The World Trade Organization (WTO) has the power to enforce the rules of international trade. capital goods.   . The huge supplies of labor in these countries± together with their demands for natural resources.

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.Privatization      Beginning in late 80¶s and geared up in early 90¶s The selling of state-run enterprises to investors is also known as ³Denationalization´. .

What is a Multinational Corporation?  A firm that has incorporated in one country and has production and sales operations in several other countries. FDI by MNCs is also a major force driving globalization of the world economy. There are more than 70.000 MNCs in the world.   .

Many MNCs obtain raw materials from one nation. financial capital from another. . or may be decentralized across the countries the corporation does business in. produce goods with labor and capital equipment in a third country and sell their output in various other national markets.What is a Multinational Corporation?   Decision making within the corporation may be centralized in the home country.

refers to the merging of historically distinct and separate national markets into one huge global marketplace   ‡  .GLOBALISATION  What is Globalization?  Globalization refers to the shift toward a more integrated and interdependent world economy  Globalization has two main components: Globalization of Markets .

refers to sourcing of goods and services from different locations around the globe to take advantage of national differences in the cost and quality of factors of production. global marketplace.GLOBALISATION  . and increasingly homogenous. Globalization of Production .multinational enterprises emerge as an important driver of the convergence of different national markets into a single. ‡  .

and management. production. ownership.the outsourcing of different productive activities to different suppliers results in the creation of ³global products´ Note: In sum.GLOBALISATION  . we are travelling down the road toward a future characterized by the globalization of markets.  .

Why do firms ³go global´?        To benefit from economies of scale To broaden their markets To seek raw materials To seek new technology To seek production efficiency To avoid political and regulatory hurdles To diversify .

McDonalds etc.Types of Multinational Enterprises  Raw Material Seekers    First type of MNEs Exploit raw materials found overseas Trading. mining and oil companies Post-WWII MNEs Expand production and sales into foreign markets Big name companies ± IBM. More recent MNEs Seek out lowest production cost countries Manufacturing and service companies  Market Seekers     Cost Minimisers    .

Theories of International Business Why are firms motivated to expand their business internationally?  Theory of Comparative Advantage  Imperfect Markets Theory  Product Cycle Theory .

International Business Methods There are several methods by which firms can conduct international business.        International trade Licensing Franchising Joint venture Acquisitions of existing operations Establishing new foreign subsidiaries Direct Foreign Investment (DFI) .

Who else might need to know international financial management?      Exporters/Importers Individuals or corporations that borrow or lend in foreign currencies (through banks or bond market) International portfolio investors Financial service providers (mainly banks) Financial regulators .

End Chapter One DISCUSSION .