Transcript 3460.01 intro.ppt

3460.01
Notes: A.P. Palasvirta, Ph.D.
 David
Ricardo
 Factors of production


Labor
Fixed assets




Capital


Buildings
Land
resources
Ability to attract financing
Technology

Intellectual capital
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 Seeks

lowest relative cost factors
Alberta increases taxes on gas and oil

Production migrates to Saskatchewan (lower cost)
 Appendix
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Country A
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


1A
Food cost of textiles = 1.67 in inputs
Textile cost of food = 0.6 in inputs
Country A specializes in textiles
Country B



Food cost of textiles = 3.75 in inputs
Textile cost of food = 0.2667 in inputs
Country B specializes in food
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

Globalization
International financial system
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Foreign exchange exposure
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Exchange markets
Banking and money markets
Bond and equity markets
Derivative markets
transaction
Economic
Translation
Financial management of the multinational firm
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

Foreign direct investment
Capital structure & capital budgeting
Imports, exports
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 Exchange
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Trend
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Standard error of estimate of time-series regression
Low value - low risk
Affect on real exchange rates
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
e t
Slope of trend line of time-series regression
Positive- currency depreciating
Volatility


rates (linear regression)
Violation of purchasing power parity condition
Something real is changing

   t
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
Exists as a function of potential change in
rules (laws pertaining to business)
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Expropriation (Venezuela, Hugo Chavez)
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Quick compensation at fair market value
War (Iraq, Afghanistan)
Protectionism
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Increasing the barriers to trade
 Tariffs (U.S. import tariffs on Canadian lumber)
 Quotas (European restrictions on genetically modify
food)
 Subsidies (export subsidies to produce wheat, corn)
 Regulatory (including labor & environmental
standards in treaties)
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 Those
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redistribution of wealth and income
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


in power make the rules
Monetary policy
Fiscal policy
Regulatory policy
Corruption
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
Soft corruption - political contributions
Hard corruption - bribes
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 Inside
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Stockholders
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
Concerned about value maximization
Board of directors
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
governance
Subset of stockholders
 Hire managers
 Strategic decision making
Managers

Tactical decisions making (strategic)
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 Many
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No market power, thick markets
 Low
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buyers, many sellers
or no transactions costs (taxes)
Transactions costs and taxes distort
 Perfect
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information
Eliminates agency
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 U.S.,
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Canadian, British
Market failures
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Enron, etc.
 Failure of corporate governance structure
 Sarbanes
Oxley
CEO, CFO sign off on financial statements
 Audit, compensation committees external
 Corporate officers cannot take loans from firm
 Test their own financial controls against fraud

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 Protect
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Majority and minority
 Protect
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
shareholder rights
stakeholder rights
Customers deserve good products and reasonable
prices
Firms should be good citizens
 Disclosure
and transparency
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 other
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Government (privatized utilities)
Institutions
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arrangements internationally
Banks, hedge funds, insurance companies
Family enterprises
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Family conglomerates (France, South America)
Consortiums
 Keiretsus (Japan) chaebols (South Korea)
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
China, Russia, Arab Emirates

Increasingly have huge resources to spend due to
trade and/or oil (sovereign wealth funds)
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UAE
Norway
Singapore (GIC)
Saudi Arabia
Kuwait
China
Singapore (Temasek)
Libya
Quatar
Algeria
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$875,000,000,000
$360 billion
$330 billion
$300 billion
$250 billion
$200 billion
$59.2 billion
$50 billion
$50 billion
$42.6 billion
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 Governments
do not necessarily worry about
the bottom line (maximizing profits/value)

Governments have political agenda??
 How much of what Russia and China do is politically
motivated


Chinese exchange rate policy
Russian interrupting gas supplies to Europe
 Central

bank holdings
U.S. Dollar denominate t-bills

China approximately $1 trillion
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 Family
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South America, Asia, France
Families own a diversified portfolio of real assets
 Bank

owned conglomerates
ownership of equity stakes
Germany, Korea
 Government

ownership of equity stakes
Canada, China, Russia
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 Concentration
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Markets for equities and debt are thin
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
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Few buyers, few sellers
Stock price manipulation
Lack of transparency


of power
Highly asymmetric information
Government often complicit with firms
Goods and service markets manipulated
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 Equity

Analysis and trading (information)

Stock price moves on information
 Up means excess demand at current price
 Down means excess supply at current price
 Debt

markets ( concern Value)
markets (concern risk)
Analysis and trading (information)

Debt prices move on
 Inflationary pressures, exchange rate movements,
central bank mutterings
 Risk
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 Hired
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
guns
Accountants
Lawyers
 Regulators
 Stakeholders
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- Agency problems
Customers/management
Management/labor
Stock holders/management
Government/management
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 Cultural
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

differences
Corporate governance
Legal environment
Regulatory environment
 Different
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
currencies
Exchange rate risk
Hedging behavior

Forwards, futures, options, swaps
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 Simple
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

ratio
Canadian dollar (cd) price usd
usd price of cd
e cd , usd 
11371
.
cd
1 usd
e usd , cd 
0.8794 usd
1 cd
http://fx.sauder.ubc.ca/etc/CADpages.pdf
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 Complex
concept
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Equilibrium price at which supply equals demand
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Demand for USD (by Canadians)
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Canadians buying American
 Importing goods
 Buying U.S. securities
Supply of USD (by Canadians)
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Canadians selling to Americans
 Exporting goods
Attracting U.S. based investors
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 Deregulation
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Elimination of fixed brokerage fees
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Benefits
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U.S. 1975
England 1986
Lower transactions costs
Cross border listings
International financial market integration
More innovation
Disadvantages

More innovation
 More opacity (lack of information)
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 Disintegration
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Mortgage backed securities
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Tranches of mortgages bundled for sale in secondaryh
markets
Housing bubble
Viral effects
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Banking
 Lack of proper capital adequacy relative to risk
 Lack of oversight of new financial instruments
Other sectors
 Lack of liquidity led to failures
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 Reregulation
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Capital adequacy
Erection of walls to reduce conflicts of interest
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Commercial banking
 Deposits insured by government
Investment banking
 Reporting requirements
Insurance
Mutual funds
 Increasing oversight (Madoff)
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 1999
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Austria,Belgium, Finland,France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands,
Portugal, Spains
 Benefits
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
Reduce exposure
Financial market convergence
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
Lower costs of borrowing
More depth, more liquidity
 Disadvantages
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12 different fiscal policies
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 Implosion
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PIIGS (Portugal, Italy, Ireland, Greece, Spain)
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
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Running large deficits (more than 10% of GDP)
Increasing large government debtt (around 100% of
GDP)
No exchange rate depreciation to bail them out
to make their products cheaper
 Retrenchment
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
Germany & France bailing out the PIIGS
New regulations and enforcement
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 Trade



treaties
The European Union
North American Free Trade Association (NAFTA)
World Trade Organization (WTO)

Doho round trying to liberalize agricultural trade and
intellectual property
 Retrenchment

Protectionism


Labor regulations
Environmental regulations
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 Business
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


firms operating in multiple countries
Inputs (raw materials, intermediate goods
(engines)
Financing alternatives
Labor & capital (outsourcing)
Product markets
 Advantages



Economics of scale & scope
Purchasing power with suppliers
Research & development
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 Disadvantages
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Loss of control
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
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Different cultures
 Country & corporate
Distance
 Harder to supervise
Cost control
Quality control
Transportation costs
Different regulatory, political environments
Expropriation
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