Transcript LECTURE 32.ppt

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