Course Introduction

Lectures – Monday, 13:00-14:50, C307 – Thursday, 14:00-14:50, C307 Instructor – Dr Sherry Zhou; Office: E407B-R2; Tel.: – TA – Miss Joyce Wu; Office: E409; Tel.: –

Objectives To provide students with a basic knowledge of how international financial markets work. To provide students with an understanding of exchange rates. To explore methods used to manage risk in the global markets. To support student learning through site visits to cultural and financial centers To provide an in-depth understanding of the process and techniques used in making international investment decisions

Course Content The balance of payments theory and policy – The foreign exchange market – Balance of payments The exchange rate theory and policy – Purchasing power parity and floating exchange-rate experience – The monetary models of exchange-rate determination The international monetary system – Currency Derivatives: Futures, Options and Swaps

Course Structure Chapter01 Introduction Chapter02 Exchange Rate Determination Chapter03 International Monetary System Chapter04 Parity Conditions Chapter05 Balance of Payments Chapter06 Foreign Exchange Market Chapter07 Options Contracts and Currency Futures Chapter08 Interest Rate Derivatives and Swaps Chapter09 Measuring and Managing Accounting Exposure Chapter10 Measuring and Managing Economic Exposure 5

Course Grading TasksAssessment DetailsWeighting Quizzes To assess students’ understanding of concepts, theories and models. 10% AssignmentsTo assess students’ ability to apply international finance theories and models to analyze related problems and phenomenon. 20% Projects and Case Studies Students’ ability to put theory into practice and do a project in analyzing some financial problems, individually or as a team. 20% Final ExamTo see how far students have achieved their intended leaning outcomes especially in the knowledge domain. 50%

Quiz A mid-term test will be given. – Chapters 1 – 7 (excluding Chapters 1 and 3) – Multiple choices, Work-out problems Closed book; Closed notes; No formula sheet provided No make-up test will be given (for those who cannot make it, your 10% will be moved to the final exam) If you cannot attend the test, inform me in advance; otherwise, 0 point will be given. 7

Assignment Individual and independent work No copying (copying classmates’ solution or solution manual) is allowed; if copying is found, minus double of points will be given Submission policy – Hard copy submission – Submission deadline: end of the class of the due date. – For late submission, 5% of the total marks will be deducted for each hour late. 8

Case studies and Project One project and one case – Group work of at most three students – Group members can be different for these two tasks Group project – Marks based on three parts Quality of the written report (70%) Oral presentation (30%) – Submission deadline: 5pm on 20 May (Friday) – Submission via Turnitin 9

Case studies and Project (con’t) Case: no oral presentation – Hard copy submission – Submission deadline: end of the class of the due date. For late submission, 5% of the total marks will be deducted for each hour late. Each group only needs one submission of a report. Please list your group members (name and ID) on the front page. 10

Textbook Shapiro, Alan C., Multinational Financial Management, 10th edition, 2013, John Intermediary, Wiley & Sons.. Textbook is not compulsory.

12 CHAPTER 1 Introduction to International Financial Management

13 THE RISE OF THE MULTINATIONAL CORPORATION The MNC: A Definition – a company with production and distribution facilities in more than one country. – with a parent company located in the home country – A number of foreign subsidiaries 13

14 THE RISE OF THE MULTINATIONAL CORPORATION The MNC’s Evolution Reasons to Go Global: 1. More raw materials 2. New markets 3. Minimize costs of production 14

15 THE RISE OF THE MULTINATIONAL CORPORATION RAW MATERIAL SEEKERS exploit markets in other countries historically first to appear modern-day counterparts British Petroleum Rio-Tinto 15

16 THE RISE OF THE MULTINATIONAL CORPORATION MARKET SEEKERS Produce and sell in foreign markets Have heavy foreign direct investors Represented today by firms such as: IBM. Louis Vuitton. Nestlé. Dior. 16

17 THE RISE OF THE MULTINATIONAL CORPORATION COST MINIMIZERS seek lower-cost production abroad Their motive: to remain cost competitive Represented today by firms such as: Texas Instruments. Intel. Volkswagen. 17

18 THE PROCESS OF OVERSEAS EXPANSION OVERVIEW: A.Informal Exporting B.Sales Subsidiary C. Licensing D.Creation of Distribution System E.Overseas Production 18

THE PROCESS OF OVERSEAS EXPANSION 19

20 THE PROCESS OF OVERSEAS EXPANSION A.Exporting 1.Minimal cost and risks 2.Low profits 3.Get to know the market

21 THE PROCESS OF OVERSEAS EXPANSION B.Sales Subsidiary 1.local office 2.greater customer service 3.increased communication

22 THE PROCESS OF OVERSEAS EXPANSION C.Licensing 1.Alternative to setting up local production 2.Less risk than setting up local production 3.Relatively lower cash flow 4.Faster market entry time 5.Maintaining quality standards may be a problem

23 THE PROCESS OF OVERSEAS EXPANSION D.Creation of a Distribution System 1.new service facilities set up 2.create a warehouse system 3.marketing activities within a company’s own distribution system

24 THE PROCESS OF OVERSEAS EXPANSION E.Overseas Production 1.realize full sales potential 2.keep abreast of market developments 3.fill orders faster 4.greatest risk to the company with greatest potential for profit

THE GLOBAL MANAGER Ability to adjust to change and volatility in the domestic and international business environment. Thinks and acts “globally” in making decisions. Decisions enhance firm’s prospects for survival, growth, and profitability. 25

INTERNATIONALIZATION OF BUSINESS AND FINANCE Current reality is global competition in goods, services, and capital. Affects all business, whether small, purely domestic or the largest of firms, operating globally. Firms need to adopt an “international perspective” on production, marketing, technological, and financial decisions. 26

ARGUMENTS AGAINST INTERNATIONALIZATION Loss of domestic jobs to cheaper locations. Lack of commitment by international businesses to a particular country. Adds to income inequality between emerging countries and developed countries. “Race to the bottom” for environmental and labor standards. 27

INTERNATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE Focus on shareholder value. – Favours strategies that enhance a company’s cash-flow generating ability. Arbitrage. Market efficiency. Capital asset pricing. Importance of total risk. Global financial marketplace. 28