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FN 313: International Financial Management

Semester 1/2008

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FN 313

Lecture Time: Saturdays, 13:00 – 16:00

Texts:

Eun, Cheol S. and Bruce G. Resnick (2007), International Financial Management (Fourth Edition), McGraw-Hill.

Instructor: Aj. Nasha Ananchotikul

bo.nasha@gmail.com

Course website: http://ajnasha.wordpress.com/

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FN 313

Grading Policy:

Midterm Examination 30% (Saturday, October 4)Final Examination 50%

(Tuesday, December 2) Attendance & Participation 10%

Assignments & Quizzes 10%

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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

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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

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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

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INTERNATIONALFINANCIAL

MANAGEMENT

EUN / RESNICK

Fourth Edition

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Chapter Objectives:

Understand why it is important to study international finance.

Distinguish international finance from domestic finance.

1Chapter One

Globalization & the Multinational Firm

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What’s Special about “International” Finance? Goals for International Financial Management Globalization of the World Economy Multinational Corporations

Chapter One Outline

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What’s Special about “International” Finance?

Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set

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What’s Special about “International” Finance?

Foreign Exchange RiskForeign Exchange Risk The risk that foreign currency profits may evaporate in dollar

terms due to unanticipated unfavorable exchange rate movements.

Buy 1 sharein 2007

Sell 1 sharein 2008

Price of the stock ฿ 330 ฿ 340Exchange rate ฿ 33/$ ฿ 35/$

Suppose an American invests in a Thai stock:

Increased to

฿ depreciated to

Pay $ 10 Receive $ 9.7

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What’s Special about “International” Finance?

Political RiskPolitical 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.

Political uncertainty also affects investor confidence about the direction of the economic and investment policy.

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Market ImperfectionsMarket Imperfections Legal restrictions Transactions costs Shipping costs Discriminatory taxes Information asymmetry

What’s Special about “International” Finance?

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Expanded Opportunity SetExpanded Opportunity Set By expanding business internationally, firms

can benefit from greater economies of scale, lower cost of capital, cheaper labor and raw materials, lower risks and higher potential returns from diversification.

True for corporations as well as individual investors.

What’s Special about “International” Finance?

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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, i.e. firm value maximization.

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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.

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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.

These calamities have painfully reinforced the importance of corporate governance (CG) i.e. the financial and legal framework for regulating the relationship between a firm’s management and its shareholders.

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Other Goals

These types of issues can be much more serious in many other parts of the world, especially emerging and transitional economies, such as Indonesia, Korea, and Russia, where legal protection of shareholders is weak or virtually non-existing.

Shareholders are the owners of the business. It is important to strengthen CG so that shareholders receive fair returns on their investments.

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Globalization of the World Economy: Major Trends

Emergence of Globalized Financial Markets Emergence of the Euro as a Global Currency Trade Liberalization and Economic Integration Privatization

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Factors contributing to increased financial globalization: Deregulation of Financial Markets 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

Emergence of Globalized Financial Markets

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Emergence of the Euro as a Global Currency

A momentous event in the history of world financial systems.

Currently more than 320 million Europeans in 15 (Eurozone) + 5 (w/ formal agreement) + 6 (w/o formal agreement) countries are using the common currency.

The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future.

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Euro Area

Eurozone Austria Belgium Cyprus Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovenia Spain

Countries participating in the euro:With formal agreements: Mayotte Monaco Saint Pierre and Miquelon San Marino

Vatican City Without formal agreements: Akrotiri and Dhekelia Andorra Kosovo Montenegro Saint-Martin

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Value of the Euro in U.S. Dollars

Jan 4, 1999 to Aug 11, 2008 USD/Euro

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

min = 0.8252(Oct 26, 2000)

max = 1.599(Jul 15, 2008)

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The US dollar as the dominant global currency

Key factors:- dominant size of the U.S. economy- mature and open capital markets- price stability- political and military power of the U.S.

Advantages to the U.S.:- can run large trade deficits without having to hold large reserves- little exchange rate risk in int’l transactions

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Economic Integration

The virtue of international trade is based on the theory of comparative advantage

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 protectionist views and embraced free trade as the surest route to prosperity for their country.

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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 (WTO) has the power to enforce the rules of international trade.

China and India implemented market-oriented economic reforms. The huge supplies of labor in these countries– together with their demands for natural resources, capital goods, technologies—will profoundly alter the pattern of international trade and investment.

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Privatization

The selling of 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.

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What is a Multinational Corporation?

A firm that has incorporated on one country and has production and sales operations in several other countries.

There are about 60,000 MNCs in the world.

FDI by MNCs is also a major force driving globalization of the world economy.

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Top 10 MNCs by foreign assets (2007)

1 General Electric US Electrical & electronic equipment

2 Vodafone Group PLC UK Telecommunications

3 General Motors US Motor vehicles

4 British Petroleum Co. PLC UK Petroleum expl/ref/distr

5 Royal Dutch/Shell Group UK Petroleum expl/ref/distr

6 ExxonMobil US Petroleum expl/ref/distr

7 Toyota Motor Corporation Japan Motor vehicles

8 Ford Motor US Motor vehicles

9 Total France Petroleum expl/ref/distr

10 Electricite de France France Electricity, gas and water

Source: United Nations Conference on Trade and Development (UNCTAD)

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Top 10 MNCs by market cap (June 2008)

Source: Financial Times

1 Exxon Mobil US Oil and gas

2 Petrochina China Oil and gas

3 Gazprom Russia Oil and gas

4 Petrobras Brazil Oil and gas

5 China Mobile China Telecom

6 General Electric US Conglomerate

7 Royal Dutch Shell Netherlands Oil and gas

8 Microsoft US Software industry

9 Industrial and Commercial Bank of China China Banking

10 BHP Billiton Australia Mining

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Why do firms “go 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

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MNCs vs. Domestic firms

What makes financial management of MNCs more complicated than that of domestic firms?

Currency denominations Role of governments Economic and legal systems

Political risk

Language and culture Corporate governance

Because of the differences in:

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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

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End Chapter One

Homework: - Read Chapter 1 - Write your info on the provided sheet