fina521-1810-international financial management-wi11-lebischak.docx

FINA521 – International Financial Management(FINA521LEC1810)Prerequisite: None

Administrative Information:

Class Duration: January 5 to March 29, 2011Day/Time: Friday / 1:30 p.m. - 5:15 p.m.Location: Annandale1 Campus

Room AN1-G110Campus Phone: (703) 941-0949 ext. 12

Instructor Contact Information:

Instructor: Steve Lebischak, Adjunct ProfessorOffice Hour Location: Annandale1E-mail: [email protected]

Telephone: 202 213 9373

Instructional Material:

Jeff Madura, International Financial Management, 10th Edition, ISBN -13:978-1-4390-3833-8

Course Description and Learning Outcome:

Businesses evolve into Multinational Corporations (MNC) to capitalize on international opportunities. Their financial managers must be able to assess the international environment, recognize opportunities, implement strategies, evaluate exposure to risk, and manage that risk. The MNCs that are most capable of responding to changes in the international financial environment will be rewarded. The same can be said for the students who may become the future managers of MNCs.

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Teaching Method:

This class will mainly rely on lecture with problems and exercises worked outside of class by the student. The instructor’s role is to supplement and enrich the information provided in the textbook. To that end, current events and practical applications will be presented to reinforce concepts presented in the text. Class discussion is highly encouraged and time will be allocated to answer questions, discuss, and reflect on information in the text. Student’s role is to read the chapter in advance of the lecture and study the textbook and the various readings provided during class.

This course emphasizes the importance of relating theory to real world applications so the project will be an integral part of this course.

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Course Schedule and Outline:

Week Date Lecture TopicAssignment

GivenAssignment Due Textbook Reading

1 Jan 07Overview, International Flow of Funds

HW 1 Ch.1, 2

2 Jan 14International Financial Markets, Exchange Rate Determination

HW 2 HW 1 Ch.3, 4

3 Jan 21Currency Derivatives, Government Influence on Exchange Rates

HW 3 HW 2 Ch.5, 6

4 Jan 28

International Arbitrage and Interest Rate Parity, Among Inflation, Interest Rates, and Exchange Rates

HW 4Presentation - 1

HW3Ch.7, 8

5 Feb 04Forecasting Exchange Rates, Measuring Exposure to Exchange Rate Fluctuations


HW 4Ch.9, 10

6 Feb 11

Managing Transaction Exposure, Managing Economic Exposure and Translation Exposure

HW 6Presentation – 3

HW 5Ch.11, 12

7 Feb 18 Mid Term Exam Ch 1 to Ch 10

8 Feb 25Direct Foreign Investment, Multinational Capital Budgeting


HW6Ch.13, 14

9 Mar 04International Corporate Governance and Control, Country Risk Analysis


HW 7Ch.15, 16

10 Mar 11Multinational Cost of Capital and Capital Structure, Long-Term Financing

HW 9Presentation -6

HW 8Ch.17, 18

11 Mar 18Financing International Trade, Short Term Financing


HW 9Ch. 19, 20

12 Mar 25 Final Exam HW 10

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Course Requirement and Evaluation:

Evaluation will occur via quizzes, exams, homework assignments, presentation, in-class exercises, case analyses, class participation, class attendance, etc.

Homework Assignments: Homework is designed to give you an opportunity to practice the decision-making techniques and analytical skills we discuss in class. They are the best way to prepare for midterm and final exams and succeed in this class. Late assignments will not be accepted without a valid excuse.

In-class participation and attendance: The instructor wil occasionally give you in-class problems/questions to work on and will ask you to discuss your answers in class. The more you participate, the higher points you will receive. Attending class is extremely important. If you failed to meet the attendance requirement set by UNVA, you will not pass this course. The class attendance will be checked after each class ends.

Quizzes: The first 30 minutes of most classes will be time for an open book quiz – usually a multiple choice question and a calculation question. Students arriving late to class will likely not do well on the quiz for the week.

Exams: There will be two exams; midterm and final problems will be similar to that of homework.

Project - Term Paper and Group presentation: Teams (if there is less than 10 students in the class the project will be completed individually) will be expected to produce a graduate level paper that includes critical thinking regarding an international finance topic. An in class presentation is also required. The instructor will suggest topics that relate to the chapters in the text. Topics need to be submitted for approval. The paper requires students to develop a point, counter-point and conclusion regarding a topic such as “Should an MNC Reduce its ethical standards to compete Internationally?”

The presentation should be delivered in the form of MS PowerPoint. Grading will be based upon individual and group performance in the presentation and the paper. Team members will also evaluate one another’s contribution to the effort. (Upon student’s request, a student may work alone in a final project for special cases).

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The deliverables will entail 1,000 possible points, broken down as follows:

200 points Assignments

100 points Class Participation, quizzes and Attendance

200 points Final Project and Presentation

250 points Midterm Exam

250 points Final Exam

1000 points Total

The numerical score is then converted to a letter grade using the following scale:Above 900 - AAbove 800 - BAbove 700 - CBelow 700 - F

Supporting Material:

Professional Journals and Magazines: The Economist The Financial Times Wall Street Journal (Note: Moodle now provides on line access to WSJ.com) Knowledge@Wharton The Journal of Economics and Management Strategy American Economic Journal

Academic Integrity:

Academic honesty is non-negotiable. All assignments submitted in fulfillment of course requirements must be the student's own work. Plagiarism and/or any other form of academic dishonesty will not be tolerated and will result in a grade of zero on the assignment. Students should consult the Student’s Handbook on the University web-site or in the University catalog.

Attendance, Absence, Lateness, Incomplete:

International students in the US on F-1 visas, and Students receiving Veteran’s benefits are reminded that regular attendance is required. The university is required by law to report excessive absenteeism by students in these two categories.

In accordance with the policies of the University of Northern Virginia, class attendance is required. If a student has more than three absences in consecutive weeks, he or she will

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be asked to meet with the International Student Advisor. It is the student's responsibility to inform the instructor prior to an absence from class. Messages can be left at the instructor’s e-mail or phone. Students are responsible for work missed during an absence.

Each class will start promptly at the scheduled time. A course grade of “incomplete” will be given only under very unusual circumstances, and

only if the student has completed at least 75% of the assigned work by the last day of class and only when an incomplete contract is signed and approved.

Learning Resources/Library:

Utilization of library resources is an indispensible part of your education at the UNVA. Our librarians are available to assist you from 9:00 a.m. to 10 p.m. seven days a week. Please take advantage of this opportunity for assistance to your success while you are here at UNVA.

The UNVA library offers an extensive range of resources, particularly online, for student use. Our library subscription journal databases include:

• ABI/INFORM Complete o ABI Dateline o ABI Global o ABI T&I

• Academic OneFile • Business & Company Resource Center • Business ASAP • Business Source Complete • Computer Database • Dissertations & Theses • EconLit with Full Text • Education Research Complete • ERIC • Expanded Academic ASAP • General Business File ASAP • General OneFile • Health and Wellness Resource Center • Health Reference Center Academic • IBISWorld • InfoTrac Custom Newspapers • LegalTrac • Library, Information Science & Technology Abstracts • Literature Resource Center • Newsletters ASAP • ProQuest Psychology Journals • ProQuest Research Library • Student Resource Center Gold Edition • Teacher Reference Center • ...and other article databases

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The library also provides access to thousands of electronic books, including:• ebrary • EBL Books • Safari Business & Tech Books • ...and other e-book collections

Chapter Learning Outcomes:

Chapter 1 – OverviewThis chapter introduces the multinational corporation as having similar goals to the purely domestic corporation, but a wider variety of opportunities. With additional opportunities come potential increased returns and other forms of risk to consider. The potential benefits and risks are introduced.Learning Objectives:1. What is the appropriate definition of an MNC?

2. Why does an MNC expand internationally?

3. What are the risks of an MNC which expands internationally?

4. Why do you think European countries attract U.S. firms?

5. Why must purely domestic firms be concerned about the international environment?

Chapter 2 – International Flow of FundsThis chapter provides an overview of the international environment surrounding MNCs. The chapter is macro-oriented in that it discusses international payments on a country-by-country basis. This macro discussion is useful information for an MNC since the MNC can be affected by changes in a country’s current account and capital account positions.Learning Objectives:

1. Is a current account deficit something to worry about?

2. If a government wants to correct a current account deficit, why can’t it simply enforce restrictions on imports?

3. Why don’t exchange rates always adjust to correct current account deficits?

Chapter 3 – International Financial MarketsThis chapter identifies and discusses the various international financial markets used by MNCs. These markets facilitate day-to-day operations of MNCs, including foreign exchange transactions, investing in foreign markets, and borrowing in foreign markets.

1. Why do international financial markets exist?

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2. How do banks serve international financial markets?

3. Which international financial markets are most important to a firm that consistently needs short-term funds? What about a firm that needs long-term funds?

Chapter 4 – Exchange Rate DeterminationThis chapter provides an overview of the foreign exchange market. It is designed to illustrate (1) why a market exists, and (2) why exchange rates change over time.

1. Why do exchange rates change?

Chapter 5 – Currency DerivativesThis chapter provides an overview of currency derivatives, which are sometimes referred to as “speculative.” Yet, firms are increasing their use of these instruments for hedging purposes. The chapter does give speculation some attention, since this is a good way to illustrate the use of a particular instrument based on certain expectations. However, the key is an understanding of why firms would consider using these instruments and under what conditions they would use them.

1. What advantage do currency options offer that are not available with futures or forward contracts?

2. What are some disadvantages of currency option contracts?

3. Why do currency futures prices change over time?

4. Why do currency options prices change over time?

Chapter 6 – Government Influence on Exchange RatesThis chapter introduces the various exchange rate systems. In addition, it stresses the manner by which governments can influence exchange rates. Since exchange rate move-ments are critical to an MNC’s performance, and the government has much influence over these exchange rates, the MNC is affected by government intervention.

1. If you were elected to choose between a fixed, freely floating, or a dirty float exchange rate system, which would you choose for your home country? Why?

2. Assume that both the U.S. and Europe experience high unemployment. How can the U.S. central bank attempt to adjust the dollar value to reduce this problem? Is the European central bank likely to go along with the U.S. central bank’s strategy or retaliate? Why?

Chapter 7 – International Arbitrage and Interest Rate ParityThis chapter illustrates how three types of arbitrage (locational, triangular, and covered interest) are executed. Emphasize that the key to arbitrage from an MNC's perspective is

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not the potential profits, but the relationships that should exist due to arbitrage. The linkage between covered interest arbitrage and interest rate parity is critical.

1. Why are quoted spot rates very similar across all banks?

2. Why don't arbitrage opportunities exist for long periods of time?

3. Present a scenario and ask whether any type of international arbitrage is possible. If so, how would it be executed and how would market forces be affected?

Chapter 8 – Relationships Among Inflation, Interest Rates, and Exchange Rates

This chapter discusses the relationship between inflation and exchange rates according to the purchasing power parity (PPP) theory. While PPP is a relevant theory, it should be emphasized that PPP will not always hold in reality. However, it provides a foundation in understanding how inflation can affect exchange rates. The international Fisher effect (IFE) is also discussed in this chapter. This theory is also very important. Yet, it should again be emphasized that this theory does not always hold. If the PPP and IFE theories held consistently, decision making by MNCs would be much easier. Because these theories do not hold consistently, an MNC’s decision making is very challenging.

1. Provide reasoning for why highly inflated countries tend to have weak home currencies.

2. Provide a simple explanation of the difference between interest rate parity (from the previous chapter), PPP (from this chapter), and IFE (from this chapter).

Chapter 9 – Forecasting Exchange RatesThis chapter stresses the value of reliable forecasts, but suggests that reliable forecasts can’t always be obtained. Because no single forecast technique has been singled out as superior, various techniques are mentioned. Whatever techniques the MNC chooses, it should monitor performance over time. This chapter illustrates how this evaluation can be accomplished.

1. Which forecast technique would you use if you were hired by an MNC to forecast exchange rates?

2. Do you think there will ever be a published technical forecasting model that you could use in the future to most accurately forecast exchange rates? Why or why not?

3. Recall the theories of purchasing power parity (PPP) and international Fisher effect (IFE) in Chapter 8. If these theories were used to forecast exchange rates, which techniques would they be classified as? Why?

4. Assume there is a regression model that was able to identify the factors which affected exchange rate movements in a recent four-year period. Also, suppose that

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the sensitivity of the exchange rate’s movements to each factor was precisely quantified. Is there any reason not to expect superior forecasting results from this method in the future? Elaborate.

5. What is the use of detecting a forecast bias?

Chapter 10 – Measuring Exposure to Exchange Rate FluctuationsThis chapter distinguishes among three forms by which MNCs are exposed to exchange rate risk: (1) transaction exposure, (2) economic exposure, and (3) translation exposure. Each firm differs in degree of exposure. A firm should be able to measure its degree of each type of exposure as described in this chapter. Then, it can decide how to cover that exposure using methods described in the following two chapters.

1. Describe in general terms how you would measure the transaction exposure of a particular MNC.

2. What is the relationship between transaction exposure and economic exposure?

Chapter 11 – Managing Transaction Exposure A primary objective of the chapter is to provide an overview of hedging techniques. Yet, transaction exposure cannot always be hedged in all cases. Even when it can be hedged, the firm must decide whether a hedge is feasible. While a firm will only know for sure whether hedging is worthwhile after the period of concern, it can incorporate its expectations about future exchange rates, future inflows and outflows, as well as its degree of risk aversion to make hedging decisions.

1. Is transaction exposure relevant?

2. Why should a firm bother identifying net transaction exposure?

3. Should management of transaction exposure be conducted at the subsidiary level or at the centralized level? Why?

Chapter 12 – Managing Economic Exposure and Translation ExposureThis chapter shows how an MNC can restructure its operations to reduce economic exposure. Such a strategy is related to the firm's long-run operations, unlike transaction exposure. This chapter also briefly describes how translation exposure can be reduced. Yet, the limitations of hedging translation exposure should receive as much attention as the hedging strategy itself.

1. Describe the economic exposure of a specific local small business in your city.

2. Even if you believe translation exposure is relevant, is it worthwhile to hedge it? Explain.

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3. Compare the degree of translation exposure between a small firm whose foreign subsidiary generates 50% of its business versus a huge exporting company with no subsidiaries.

Chapter 13 – Direct Foreign InvestmentThe main purpose of this chapter is to illustrate why MNCs often use DFI and to suggest the various factors involved in the DFI decision. The specifics involved in quantifying costs and benefits of DFI are discussed in the following chapter. Thus, this chapter should be covered in general terms as to the costs and benefits of DFI. The chapter implicitly suggests that each firm may benefit from DFI by capitalizing on some unique perceived advantages of the foreign market. Yet, all DFI decisions relate to the MNC’s overall risk and return objectives.

1. Why would a large advanced MNC consider DFI in some less developed country?

2. Assume that you produce plastic computer pieces for computer companies. The pieces require very little technology. Where would you like to establish DFI?

3. What factors would be considered when deciding whether a subsidiary should reinvest earnings or remit them to the parent?

4. The DFI decision is related to marketing, finance, and management. What is the role of each area in the DFI decision?

5. Do you think DFI is primarily intended to reduce production costs or increase sales? Discuss.

Chapter 14 – Multinational Capital BudgetingThis chapter identifies additional considerations in multinational capital budgeting versus domestic capital budgeting. These considerations can either be explained briefly or illustrated with the use of an example.

1. Create an idea for a firm to expand its operations overseas. Provide the industry of the firm. Given this information, students should be requested to list all information that needs to be gathered in order to conduct a capital budgeting analysis.

2. How should a firm adjust the capital budgeting analysis for investment in a country where the currency is extremely volatile?

3. How should a firm adjust the capital budgeting for investment in a country where the chance of a government takeover is relatively high?

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Chapter 15 – International Corporate Governance and ControlThis chapter emphasizes how an MNC can be subject to governance. The potential for corporate control can encourage MNC managers to maximize value for their shareholders.

1. Why are MNCs subject to corporate control?

2. How should MNCs determine whether multinational restructuring is worthwhile?

3. What role does valuation play in the multinational restructuring process?

Chapter 16 – Country Risk AnalysisThis chapter attempts to acquaint the student with various forms of risk that must be considered by a multinational corporation. Methods used to assess country risk are defined. It should be emphasized that country risk is often difficult to assess. Furthermore, it may change over time. A firm should incorporate the country risk assessment in its decision of whether to begin (or continue) business in a particular country. If it decides to conduct business there, it should continue to assess country risk as it decides whether to expand in that country.

1. How would you rate the country risk of the U.S.? Would your rating change if you lived in a foreign country? Why?

2. Some people say that you cannot separate the political and financial risk of a country. What does this mean?

Chapter 17 – Multinational Cost of Capital and Capital StructureThis chapter explains why the capital structure and the cost of capital of MNCs may vary with those of domestic firms. It also explains why the cost of capital varies across countries. The disparity in the cost of capital across countries is important because it can influence the MNC’s decisions on where to establish subsidiaries and where to obtain funds.

1. Why don’t all MNCs attempt to obtain funds in countries where the cost of capital is very low?

2. The cost of capital is very high in Latin American countries. Yet, many MNCs continue to establish subsidiaries there. What underlying factor that causes a high cost of capital can also enhance the revenues of subsidiaries over time?

3. Explain why a firm’s capital structure may be dependent on the countries in which it operates.

Chapter 18 – Long-Term FinancingThis chapter introduces the long-term sources of funds available to MNCs. Should the MNC choose bonds as a medium to attract long-term funds, a currency for denomination

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must be chosen. This is a critical decision for the MNC. While there is no clear-cut solution, this chapter illustrates how such a problem can be analyzed.

1. Why would U.S. firms consider issuing bonds denominated in a foreign currency?

3. What are the desirable characteristics related to a currency’s interest rate (high or low) and value (strong or weak) that would make the currency attractive from a borrower’s perspective?

Chapter 19 - Financing International TradeThis chapter first suggests why international trade can be difficult. Then, it explains the various ways in which banking institutions can facilitate international trade by resolving problems faced by the exporter and importer.

1. Assume that you receive a call from an old friend who has set up a computer parts store. He says that he plans to begin exporting these parts soon. What potential complications should he consider?

2. Why do exporters sometimes sell off their banker’s acceptances? Would they be better off obtaining a short term loan instead? What information is necessary to answer this question?

3. What is the common role of a banking institution in international trade besides financing?

Chapter 20 - Short Term FinancingThis chapter explains short term liability management of MNCs. From this chapter, students should learn that correct financing decisions can reduce the firm’s costs. While foreign financing costs cannot usually be perfectly forecasted, firms should evaluate the probability of reducing costs through foreign financing.

1. If a firm consistently exports to a country with low interest rates and needs to consistently borrow funds, explain how it could coordinate its invoicing and financing to reduce its financing costs.

2. What is the risk of borrowing a low interest rate currency?

3. Assume that foreign currencies X, Y, and Z are highly correlated. If a firm diversifies its financing among these three currencies, will it substantially reduce its exchange rate exposure (as opposed to borrowing all funds from one of these foreign currencies)?

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fina521-1810-international financial management-wi11-lebischak.docx

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