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Course Description
• This course examines the principles and
theories of the international aspects of
corporate finance and investing and
operating multinational organizations in a
global economy and environment.
• This course will cover
 Multinational financing and investment
decisions,
 currency risk management
 international capital markets and portfolio
investment.
• Emphasis will be placed on theories and
strategic management of the organization
in the global marketplace.
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Course Outline
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Understanding international financial markets,
international parity conditions, currency futures and
futures markets.
The major international monetary systems and their
historical evolution.
Understand foreign exchange forecasting and
analyze various hedging methods to reduce foreign
exchange risks.
Analyze cross-border capital budgeting and
multinational capital structure and cost of capital.
Understand taxes and multinational business
strategy options.
Assess and analyze the past and present
international financial institutions and relate this
information to trade, finance, and investments.
Develop an appreciation for the pitfalls and benefits
of diversifying international portfolios.
Understand international bond markets and
international equity markets and how they impact the
global economy.
Analyze spot and futures foreign exchange markets
and how international organizations operate and
integrate the spot and futures in international trade
and financial transactions.
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Learning Outcomes
By the end of this course, you will have done, or be
able to:
• Understand why firms and nations seek out and
benefit from international business activities.
• Analyze and identify factors that cause exchange
rates to change.
• Identify the linkages between international
financial prices.
• Understand the costs and benefits of different
monetary systems.
• Identify and measure political risk associated with
a sovereign nation.
• Measure the impact of exchange rate movements
on the cash flows of a firm.
• Understand the basic mechanics of currency
forwards, futures and options.
• Identify and implement a variety of different
strategies to manage exchange rate risk.
• Implement strategies to manage a multinational
corporation’s ongoing global operations
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An Introduction to International
Finance
• International financial management is financial
management conducted in more than one
cultural, social, economic, or political environment
• We’ll develop a framework for evaluating the
opportunities, costs and risks of operating in the
world’s markets for goods, services, and financial
assets and liabilities
• Challenges facing the
multinational manager
 The gentle reader will never, never know what
a consummate ass he can become,
until he goes abroad.
 Mark Twain
• Vivé la difference
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- Language & culture - Human resource
management
- Accounting
- Marketing
- Distribution
- Logistics
- Financial markets
- Corporate governance
- Other business conventions
(legal, accounting, taxation, regulation, etc.)
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International financial
management
• International finance is interdisciplinary
within the field of finance
• International financial managers must be
familiar with
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Foreign exchange and Eurocurrency markets
Derivatives securities
International financial (debt & equity) markets
International markets for real assets
International portfolio investment
The MNC’s opportunities
 Multinational investment policy
- Higher returns from existing investments
- New investment opportunities
 Multinational financial policy
- Reduced capital costs through access to international
capital markets
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International Finance as a field of
study.
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International Finance: Decomposition.
 a. Areas of research and study
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International Corporate Financial Management
International Capital markets
International Portfolio markets
International Banking
 b. New Developments
• Pricing International financial assets
• Globalization of transactions
• Control of international operations
 c. International Finance in Practice
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Domestic financial management vs. International
financial management.
 Similarities
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Emphasis on cash flows rather than earnings
Time value of money
Tax factors
Function of financial managers
 Differences
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Multiple currencies
Differential taxation
Barriers to capital mobility
Multiple capital markets
Structure of internal transfers
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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
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Doctrine of comparative advantage
International mobility of factors of production
Imperfect markets theory
Product life cycle
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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 firm’s effective global tax burden
• Correct positioning of the firm’s income, cash
flows, and available funds
• Conflict and Constraints with the MNC’s Goal
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Agency problem
Environmental constraints
Regulatory constraints
Ethical constraints
• Recent developments
 Arbitrage
 Market efficiency
 Systematic vs. unsystematic risk
 Total risk
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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
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What are the Characteristics of
the MNC?
What is a MNC?
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The MNC is a firm engaged in producing and selling goods or services
in more than one country.
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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
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Types of MNCs
 Raw Material Seekers
 Market Seekers
 Cost Minimizers
 Knowledge Seekers
 Political Safety Seekers
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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
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Basic Concepts for the Study
of International Finance
• Currency value and terminology
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Fixed vs. flexible exchange rates
b. Appreciation vs. depreciation
c. Strengthening vs. weakening
d. Soft vs. hard
• International financial markets
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The foreign exchange market
Eurocurrency market
Euro credit market
Eurobond market
International stock markets
Derivatives Markets
• Liquidity is a financial market’s
most important characteristic
 Liquidity - the ease of capturing an asset’s value
• Reflects a market’s operational efficiency
• Impacts a market’s informational and allocational
efficiency
• The interbank foreign exchange market for large
transactions is the world’s most liquid market
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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
• Trade at a prearranged date and price
 Volume
• More than $1 trillion per day
• 75% is in the interbank market
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Intermediated markets
in bank deposits and loans
Money markets
Capital markets
Internal
markets
Short term
accounts with
domestic clients
Long term
accounts with
domestic clients
External
Markets
Eurocurrency
deposits and
loans
Long term
accounts with
foreign clients
Non-intermediated (direct) markets
Money markets
Capital markets
Internal
markets
Short term
commercial paper
Stocks & bonds
issued in the
domestic market
External
Markets
Eurocommercial
paper
Global equity
Foreign bonds
Eurobonds
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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
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No reserve requirements
No interest rate regulations or caps
No withholding taxes
No deposit insurance requirements
No credit allocation regulations
Less stringent disclosure requirements
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Public debt markets
• Domestic markets
 Domestic bonds are issued and traded domestically and
denominated in the domestic currency
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Major domestic debt markets
(billions)
Source: Bank for International Settlements (June 2002)
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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.
 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
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Major international debt markets
(billions)
Source: Bank for International Settlements (December 2002)
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Major stock markets
(billions)
Source: Compiled from FTSE and MSCI Indices (December
2002)
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Global equity offerings
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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
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Derivatives
 The price of a derivative contract is derived from some underlying
instrument
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Derivatives contracts are traded on derivatives exchanges and through
commercial and investment banks
 Derivatives are traded on a wide variety of financial prices
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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
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