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Course Description

• This course examines the principles and theories of the international aspects of corporate finance and investing and operating multinational organizations in a global economy and environment.

• This course will cover Multinational financing and investment

decisions, currency risk management international capital markets and portfolio

investment.

• Emphasis will be placed on theories and strategic management of the organization in the global marketplace.

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Course Outline

• Understanding international financial markets, international parity conditions, currency futures and futures markets.

• The major international monetary systems and their historical evolution.

• Understand foreign exchange forecasting and analyze various hedging methods to reduce foreign exchange risks.

• Analyze cross-border capital budgeting and multinational capital structure and cost of capital.

• Understand taxes and multinational business strategy options.

• Assess and analyze the past and present international financial institutions and relate this information to trade, finance, and investments.

• Develop an appreciation for the pitfalls and benefits of diversifying international portfolios.

• Understand international bond markets and international equity markets and how they impact the global economy.

• Analyze spot and futures foreign exchange markets and how international organizations operate and integrate the spot and futures in international trade and financial transactions.

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Learning Outcomes

By the end of this course, you will have done, or be able to:

• Understand why firms and nations seek out and benefit from international business activities.

• Analyze and identify factors that cause exchange rates to change.

• Identify the linkages between international financial prices.

• Understand the costs and benefits of different monetary systems.

• Identify and measure political risk associated with a sovereign nation.

• Measure the impact of exchange rate movements on the cash flows of a firm.

• Understand the basic mechanics of currency forwards, futures and options.

• Identify and implement a variety of different strategies to manage exchange rate risk.

• Implement strategies to manage a multinational corporation’s ongoing global operations

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An Introduction to International Finance

• International financial management is financial management conducted in more than one cultural, social, economic, or political environment

• We’ll develop a framework for evaluating the opportunities, costs and risks of operating in the world’s markets for goods, services, and financial assets and liabilities

• Challenges facing themultinational manager The gentle reader will never, never know what

a consummate ass he can become, until he goes abroad.

Mark Twain• Vivé la difference•

- Language & culture - Human resource management

- Accounting - Marketing - Distribution - Logistics- Financial markets - Corporate governance- Other business conventions

(legal, accounting, taxation, regulation, etc.)

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International financial management

• International finance is interdisciplinary within the field of finance

• International financial managers must be familiar with Foreign exchange and Eurocurrency markets Derivatives securities International financial (debt & equity) markets International markets for real assets International portfolio investment

- The MNC’s opportunities Multinational investment policy

- Higher returns from existing investments- New investment opportunities

Multinational financial policy- Reduced capital costs through access to international

capital markets

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International Finance as a field of study.

• International Finance: Decomposition. a. Areas of research and study

• International Corporate Financial Management• International Capital markets• International Portfolio markets• International Banking

b. New Developments • Pricing International financial assets • Globalization of transactions • Control of international operations

c. International Finance in Practice • Domestic financial management vs. International

financial management. Similarities

• Emphasis on cash flows rather than earnings• Time value of money• Tax factors• Function of financial managers

Differences• Multiple currencies• Differential taxation• Barriers to capital mobility• Multiple capital markets• Structure of internal transfers

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What is so special about International Finance?

Foreign exchange and political risk

Market imperfections

Expanded opportunity set

• International Financial management Managerial Decisions Passive and active decision choices Considerations:

• Time• Value• Risk

• Motivation for International Business/Evolution of the MNC Doctrine of comparative advantage International mobility of factors of production Imperfect markets theory Product life cycle

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Overview of International Financial Management and the Multinational

Corporation

• What is the Goal of International Financial Management Corporate Goals

• Shareholder Wealth Maximization• Corporate Wealth Maximization

Operational Goals• Maximizing consolidated profits after taxes• Minimizing the firm’s effective global tax burden• Correct positioning of the firm’s income, cash

flows, and available funds• Conflict and Constraints with the MNC’s Goal

Agency problem Environmental constraints Regulatory constraints Ethical constraints

• Recent developments Arbitrage Market efficiency Systematic vs. unsystematic risk Total risk

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Growth in International Trade

• Globalization of the World Economy Emergence of Globalized Financial Markets Trade Liberalization and Economic Integration Privatization

• Growth in International Trade Consistently lower for the U.S. Generally much larger for Canada and European

countries. Has increased over time.

• Growth in Foreign Direct Investment In the 1990s, annual growth rate of 10%, compared

to 3.5% in international trade. In 1998, MNCs’ worldwide sales reached $11

trillion, compared to about $7 trillion of world exports

In 2000, FDI reached $1.27 trillion

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What are the Characteristics of the MNC?

What is a MNC?• The MNC is a firm engaged in producing and selling goods or services in more than

one country.• Characteristics of a MNC

Controls Subsidiaries in Several Host Countries Derives a Significant Proportion of its Revenues from

Foreign Subsidiary Sales Makes Financial Decisions that Reflect its Multinational

Orientation• Types of MNCs

Raw Material Seekers

Market Seekers

Cost Minimizers

Knowledge Seekers

Political Safety Seekers• What Are the Benefits to MNCs?

Economies of scale• Costs• Purchasing power• Know-how

Access to under priced labor services and special R&D capabilities

Global presence will boost profit margins and create shareholder value

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Basic Concepts for the Study of International Finance

• Currency value and terminology Fixed vs. flexible exchange rates b. Appreciation vs. depreciation c. Strengthening vs. weakening d. Soft vs. hard

• International financial markets The foreign exchange market Eurocurrency market Euro credit market Eurobond market International stock markets Derivatives Markets

• Liquidity is a financial market’smost important characteristic Liquidity - the ease of capturing an asset’s value

• Reflects a market’s operational efficiency

• Impacts a market’s informational and allocational efficiency

• The interbank foreign exchange market for large transactions is the world’s most liquid market

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Other market characteristics

• Maturity Short-term money markets Long-term capital markets

• Regulatory jurisdiction Single-country internal markets Multi-country external markets

• Middlemen Intermediated through a commercial bank Non-intermediated or direct to the public, through a

broker or investment bank

• Foreign exchange marketsconducted through commercial banks Spot market

• Cash market with delivery in two business days

Forward market• Trade at a prearranged date and price

Volume• More than $1 trillion per day• 75% is in the interbank market

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Intermediated marketsin bank deposits and loans

Money markets Capital markets

Internal markets

Short term accounts with domestic clients

Long term accounts with domestic clients

External Markets

Eurocurrency deposits and loans

Long term accounts with foreign clients

Money markets Capital markets

Internal markets

Short term commercial paper

Stocks & bonds issued in the domestic market

External Markets

Eurocommercial paper

Global equity Foreign bonds Eurobonds

Non-intermediated (direct) marketsNon-intermediated (direct) markets

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Eurocurrency markets

• Eurocurrencies Bank deposits and loans residing outside any single country

Floating rate pricingusually with maturities less than five years

Few regulatory restrictions because they are outside the jurisdiction of any single government

Competitive pricingmore than $2.5 trillion outstanding

• The Eurocurrency market has few regulations Typically, there are

- No reserve requirements- No interest rate regulations or caps- No withholding taxes- No deposit insurance requirements- No credit allocation regulations- Less stringent disclosure requirements

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Public debt markets

• Domestic markets

Domestic bonds are issued and traded domestically and denominated in the domestic currency

• Major domestic debt markets(billions)

Source: Bank for International Settlements (June 2002)

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Public debt markets

• International markets

Foreign bonds are issued in a domestic market by a foreign borrower

Toronto Dominion 6.45 09 trade OTC in the U.S.

Eurobonds are placed outside the borders of the country issuing a currency

FNMA 7.25 30 traded OTC outside the U.S.

Global bonds trade in the Eurobond market as well as in one or more internal bond markets

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Major international debt markets(billions)

Source: Bank for International Settlements (December 2002)

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Major stock markets(billions)

Source: Compiled from FTSE and MSCI Indices (December 2002)

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Global equity offerings

• Cross-listing shares on more than one stock exchange can increase demand and enhance share price U.S. companies listing abroad experience less of an adverse price

reaction than similar companies issuing equity in the United States

Non-U.S. companies listing in the United States often increase in value

• Derivatives The price of a derivative contract is derived from some underlying

instrument- Derivatives contracts are traded on derivatives exchanges and through

commercial and investment banks

Derivatives are traded on a wide variety of financial prices- Interest rates, currency values, commodity prices, stock prices, stock

price indexes, and other financial prices

• Types of derivatives contracts Futures - A commitment to exchange one asset for another asset

at a specified time in the future

Options - A contract giving the option holder the right to buy or sell an underlying asset at a specified price and on a specified date

Swaps - An agreement to exchange two assets or liabilities and, after a prearranged length of time, to re-exchange the assets or liabilities