2. Page 1 International Finance Lecture 1

3. Page 2 International Finance Course topics –Foundations of International Financial Management –World Financial Markets and Institutions –Foreign Exchange Exposure –Financial Management for a Multinational Firm

4. Page 3 Foundations of International Financial Management Globalization and the Multinational Firm International Monetary System Balance of Payments The Market for Foreign Exchange International Parity Relationships

5. Page 4 Globalization and the Multinational Firm International vs __________ finance Goals for international financial management __________ Multinationals Comparative advantage

6. Page 5 International vs Domestic Finance Foreign __________ and Political Risk Differences in regulations, tax laws, __________ policies Greater opportunity set for production and/or __________

7. Page 6 Additional Risks Foreign Exchange Risk –Cost of __________ goods changes for you, price of your product changes for foreign customers as FX changes Political Risk: Macro, Micro –Changes in foreign laws/taxes, __________ Additional risks increase cost of capital of multinational firms, __________ the required rate of return by investors and third parties.

8. Page 7 Additional Opportunities __________ opportunities __________ costs for resources New product __________

9. Page 8 Managerial objectives Consensus in North America –Long-run __________ wealth maximization In other countries –Shareholder wealth –__________ wealth –Corporate wealth –Market share, et c. Long-term owner wealth maximization is the only sustainable _______ for running a business –Who are the owners? Are home country owners’ interests superior to those of foreign country owners?

10. Page 9 Managerial objectives The goal of MNE should be shareholder wealth maximization. However in Europe and Asia some companies follow __________ wealth maximization rule. In France, Germany and Italy banks are the major shareholders, also generally companies are private __________. In Japan Keiretsus are important. All multinationals’ main operating objective should be to maximize consolidated after tax __________.

11. Page 10 Recent Trends in the World Economy Globalization Introduction of __________ Trade liberalization __________

12. Page 11 Multinational Enterprise MNE: Multinational firm is a company that has operating branches, subsidiaries and affiliates located in __________ countries. It has both domestic and foreign __________ Go to World Investment Report and look for the list of largest transnational corporations (Largest TNCs).World Investment Report Multinationals face two __________ of risks in addition to normal risks faced by domestic companies. (Fx and political)

13. Page 12 Why do firms become multinational? __________ Seekers Raw __________ Seekers Production __________ Seekers __________ Seekers Political __________ Seekers

14. Page 13 Comparative advantage A brief overview of the theory is herehere Idea: –Situation 1: countries try __________ by themselves all products they need, no international trade occurs –Situation 2: countries produce only what they can produce __________ (efficiently as compared with the other countries), sell their products, and buy what they need but do not produce –According to the theory of comparative advantage, in Situation 2 all participating countries are _________ than in Situation 1, under a set of assumptions

15. Page 14 Comparative advantage

16. Page 15 No trade exists

17. Page 16 Terms of trade

18. Page 17 Comparative advantage

19. Page 18 Comparative advantage

20. Page 19 Comparative advantage If countries specialize in producing certain goods because they can do it more ___________ than the others, they use their comparative advantage over the other countries In general, countries that specialize and trade are ___________ than those that do not –This effect is ___________ automatic, all depends on the terms of trade (open the spreadsheet and see if dashed lines are always ___________ the solid lines for each country) A constant need for international transactions = constant need for / interest in international finance

21. Page 20 Foundations of International Financial Management Globalization and the Multinational Firm International Monetary System Balance of Payments The Market for Foreign Exchange International Parity Relationships

22. Page 21 International Monetary System … is the institutional __________ within which international payments are made, movements of __________ are accommodated and exchange rates among currencies are determined.

23. Page 22 International Monetary System History of the international monetary system Current currency __________ Major events

24. Page 23 History of the International Monetary System Bimetalism: Before __________ The Gold Standard, __________ The Interwar Years and World War II, __________ Bretton Woods and the International Monetary Fund, __________ Fixed Exchange Rates, 1945-1973 1973- Present

25. Page 24 Current Currency Regimes Exchange Arrangements with no separate legal tender Currency Board Arrangements Fixed __________ Pegged Rate within Horizontal Bands Crawling Pegs Crawling __________ Managed Float Independent Float

26. Page 25 Fixed versus Flexible Exchange Rate Fixed exchange rate brings foreign exchange, trade, and investment __________, may be very expensive to implement, creates currency arbitrage __________. Flexible exchange rate allows to conduct __________ monetary policy, is cheaper for the government to implement, eliminates arbitrage opportunities, but introduces __________ that may adversely affect trade and investment.

27. Page 26 Major Events after 1973 Oil Crisis Asian __________ European __________ and the Euro Russian Crisis Emerging __________ Crisis

28. Page 27 The Economics and Currencies of Asia, July–Nov 1997

29. Page 28 Daily Exchange Rates: Russian Rubles per U.S. Dollar

30. Page 29 The European Union, 1999

31. Page 30 Financial Markets in the Brazilian Crisis, January 11–15, 1999

32. Page 31 Daily Exchange Rates: Brazilian Real per U.S. Dollar