International financial management International finance is interdisciplinary within the field of finance International financial managers must be familiar

ar with Foreign exchange and Eurocurrency markets Derivatives securities International financial (debt & equity) markets International markets for real assets International portfolio investment The MNCs opportunities Multinational investment policy Higher returns from existing investments New investment opportunities

Multinational financial policy Reduced capital costs through access to international capital markets

What is so special about International Finance? Foreign exchange and political risk Market imperfections Expanded opportunity set International Financial management Managerial Decisions Passive and active decision choices Considerations: Time Value Risk

Motivation for International Business/Evolution of the MNC Doctrine of comparative advantage International mobility of factors of production Imperfect markets theory Product life cycle

Overview of International Financial Management and the Multinational Corporation What is the Goal of International Financial Management Corporate Goals Shareholder Wealth Maximization Corporate Wealth Maximization

Operational Goals Maximizing consolidated profits after taxes Minimizing the firms effective global tax burden Correct positioning of the firms income, cash flows, and available funds

Conflict and Constraints with the MNCs Goal Agency problem Environmental constraints Regulatory constraints Ethical constraints

Recent developments Arbitrage Market efficiency Systematic vs. unsystematic risk Total risk

Growth in International Trade Globalization of the World Economy Emergence of Globalized Financial Markets Trade Liberalization and Economic Integration Privatization Growth in International Trade Consistently lower for the U.S. Generally much larger for Canada and European countries. Has increased over time. Growth in Foreign Direct Investment In the 1990s, annual growth rate of 10%, compared to 3.5% in international trade. In 1998, MNCs worldwide sales reached $11 trillion, compared to about $7 trillion of world exports In 2000, FDI reached $1.27 trillion What are the Characteristics of the MNC? What is a MNC? The MNC is a firm engaged in producing and selling goods or services in more than one country. Characteristics of a MNC Controls Subsidiaries in Several Host Countries Derives a Significant Proportion of its Revenues from Foreign Subsidiary Sales Makes Financial Decisions that Reflect its Multinational Orientation Types of MNCs Raw Material Seekers Market Seekers Cost Minimizers Knowledge Seekers

 Political Safety Seekers What Are the Benefits to MNCs? Economies of scale Costs Purchasing power Know-how

Access to under priced labor services and special R&D capabilities Global presence will boost profit margins and create shareholder value Basic Concepts for the Study of International Finance Currency value and terminology Fixed vs. flexible exchange rates b. Appreciation vs. depreciation c. Strengthening vs. weakening d. Soft vs. hard International financial markets The foreign exchange market Eurocurrency market Euro credit market Eurobond market International stock markets Derivatives Markets Liquidity is a financial markets most important characteristic Liquidity - the ease of capturing an assets value Reflects a markets operational efficiency Impacts a markets informational and allocational efficiency

The interbank foreign exchange market for large transactions is the worlds most liquid market

Other market characteristics Maturity Short-term money markets Long-term capital markets Regulatory jurisdiction Single-country internal markets Multi-country external markets Middlemen Intermediated through a commercial bank Non-intermediated or direct to the public, through a broker or investment bank Foreign exchange markets conducted through commercial banks Spot market Cash market with delivery in two business days

Forward market Volume More than $1 trillion per day 75% is in the interbank market Trade at a prearranged date and price

Intermediated markets in bank deposits and loans

Eurocurrency markets Eurocurrencies Bank deposits and loans residing outside any single country Floating rate pricing usually with maturities less than five years Few regulatory restrictions because they are outside the jurisdiction of any single government Competitive pricing more than $2.5 trillion outstanding The Eurocurrency market has few regulations Typically, there are Public debt markets International markets Foreign bonds are issued in a domestic market by a foreign borrower Toronto Dominion 6.45 09 trade OTC in the U.S. No reserve requirements No interest rate regulations or caps No withholding taxes No deposit insurance requirements No credit allocation regulations Less stringent disclosure requirements

Eurobonds are placed outside the borders of the country issuing a currency FNMA 7.25 30 traded OTC outside the U.S.

Global bonds trade in the Eurobond market as well as in one or more internal bond markets

Global equity offerings Cross-listing shares on more than one stock exchange can increase demand and enhance share price U.S. companies listing abroad experience less of an adverse price reaction than similar companies issuing equity in the United States Non-U.S. companies listing in the United States often increase in value Derivatives The price of a derivative contract is derived from some underlying instrument Derivatives contracts are traded on derivatives exchanges and through commercial and investment banks

Derivatives are traded on a wide variety of financial prices Interest rates, currency values, commodity prices, stock prices, stock price indexes, and other financial prices

Types of derivatives contracts Futures - A commitment to exchange one asset for another asset at a specified time in the future Options - A contract giving the option holder the right to buy or sell an underlying asset at a specified price and on a specified date Swaps - An agreement to exchange two assets or liabilities and, after a prearranged length of time, to re-exchange the assets or liabilities