lecture 32 review of international finance. topics international financial management international...
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Lecture 32
Review of 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.
Management of Exposures
• Transaction
– Identify the degree
– Decision
– Hedging
• Economic
– Restructuring
• Translation
Direct Foreign Investment
• Motives
– Revenues– Costs
– Issues
•Source: Adopted from South-Western/ Thomson Learning 2006
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