Ch 0: Introduction

Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA ( Banking, Financial Institution Banking, Financial Institution –Commercial Banking, Investment Banking Insurance Insurance Real estate finance Real estate finance International finance International finance Derivatives (e.g., futures, options, swaps, etc) Derivatives (e.g., futures, options, swaps, etc) Risk management Risk management –Financial Risk Manager or FRM –Global Association of Risk Professionals ( Financial planning and personal finance Financial planning and personal finance –Certified Financial Planner or CFP ( …… ……

Topics covered in this course TopicClass Coverage Balance of Payment, International Monetary System 10-15% Foreign Exchange Markets15-20% International Parity Relationships10-15% International Banking and Capital Markets5-10% Risk Management (Forwards, Futures, Options, Swaps) 15-20% Applications to Foreign Economies15-20%

Why we learn international finance? The rest of world is fast growing, so we can expand our opportunity in international markets. The rest of world is fast growing, so we can expand our opportunity in international markets. –The emerging markets such as far-eastern Asia and South America countries experience a higher growth rates than U.S. economy. U.S. corporations find international markets lucrative source of cash. U.S. corporations find international markets lucrative source of cash. –Coca Cola earn 60 percent revenue from overseas. –U.S. is the largest trading partner.

Why we learn international finance? The world is getting integrated as before, but not perfectly integrated. The world is getting integrated as before, but not perfectly integrated. –The Hyundai made cars that carries GM engines, but we view Hyundai and GM differently. –Comparative Advantage

Axis of Power

GNP

World Stock Market Capitalization 9

Distribution of U.S. Exports and Imports (exports, imports) in Billions of $ for the Year of 2000 Source: U.S. Census Bureau

What’s Special about “International” Finance? Foreign Exchange Risk Foreign Exchange Risk Political Risk Political Risk Market Imperfections Market Imperfections Expanded Opportunity Set Expanded Opportunity Set

What’s Special about “International” Finance? Foreign Exchange Risk Foreign Exchange Risk –The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. –Suppose $1 = ¥100 and you buy 10 shares of Toyota for ¥100,000 (i.e. $100 per share = ¥10,000 per share). –One year later the investment is worth ten percent more in yen: ¥110,000 –But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms.

Geographical Distribution of Global Traditional Foreign Exchange Market Activity Average Daily Turnover in billions of US dollars April 1998

Currency Distribution of Global Traditional Foreign Exchange Market Activity Percentage Shares of Average Daily Turnover (Total = 200) April 1998 US dollar Deutsche mark Japanese yen Pound sterling French franc Swiss franc Canadian dollar Australian dollar ECU & other EMS currencies Other currencies

What’s Special about “International” Finance? Political Risk Political Risk –Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways.

Market Imperfections Market Imperfections –Legal restrictions on movement of goods, people, and money –Transactions costs –Shipping costs Expanded Opportunity Set Expanded Opportunity Set –It doesn’t make sense to play in only one corner of the sandbox. –True for corporations as well as individual investors. What’s Special about “International” Finance?

The Rise of the Multinational Corporation RAW MATERIAL SEEKERS RAW MATERIAL SEEKERS –exploit markets in other countries Copper Copper Oil Oil

The Rise of the Multinational Corporation MARKET SEEKERS MARKET SEEKERS –produce and sell in foreign markets –heavy foreign direct investors –representative firms: IBM IBM MacDonald’s MacDonald’s Nestle Nestle Levi Strauss Levi Strauss

The Rise of the Multinational Corporation COST MINIMIZERS COST MINIMIZERS –seek lower-cost production abroad –motive: to remain cost competitive –representative firms: Texas Instruments Texas Instruments Zenith Zenith Nike Nike

Multinational Corporations A firm that has incorporated on one country and has production and sales operations in other countries. A firm that has incorporated on one country and has production and sales operations in other countries. There are about 60,000 MNCs in the world. There are about 60,000 MNCs in the world. Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets. Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets.

The Organization of the Course Macroeconomic Environment The Financial Environment Management of the Multinational Firm