Dr. Noureen Adnan Academic PhD (Financial Economics), University of Surrey, UK MSc (Financial Economics) Cardiff Business School, UK MBA (Finance) University Institute of Management Sciences, Pakistan GTA (Graduate Teaching Certificate) London School of Economics.

International Finance Lecture 1 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 Currency Boards 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

Covered Interest 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.

Diversification Argument Types of Exposure Transaction Economic Forecasting Error Forecasting Services Forecasting Bias Diversification Argument Types of Exposure Transaction Economic Translation Source: Adopted from South-Western/ Thomson Learning 2006

Hedging Techniques 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. Source: Adopted from South-Western/ Thomson Learning 2006

Management of Exposures Transaction Identify the degree Decision Hedging Economic Restructuring Translation

Direct Foreign Investment Motives Revenues Costs Issues