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International Finance Wednesday 10 June 2009 1 International Finance: Today, 10.6.09 Lecture: 9:00 to 10:50 Break: 10:50 to 11:00 Lecture: 11:00 to 12:00 Break: 12:00 to 1:00 Lecture 1:00 to 3:00 2 International Finance: Tomorrow, 11.6.09 Lecture: 9:00 to 10:50 Break: 10:50 to 11:00 Lecture: 11:00 to 12:00 Break: 12:00 to 1:00 Lecture 1:00 to 3:00 3 International Finance Current Events: • FT, 9.6.09, In April German exports: 4.8 % lower than March, 28.7 % below a year ago. Steepest since records began in 1950 • The eurozone needs to do more to shore up its banking system in the wake of the financial crisis, the International Monetary Fund has warned in its annual health check of the European economy. 4 International Finance Current Events: • Tawain: Bloomberg, 9.6.09: Overseas shipments fell 31.4% y/y in May, following a 34.3% drop in April, the ninth month of contraction. As imports fell even more (39.1%). • Tawain: Bloomberg, 9.6.09: Shipments to China fell 32.4% y/y, narrowing slightly from April. Exports to the U.S. declined 28% (33% in April). Sales to Europe fell 36.3% (37% in April). 5 International Finance Current Events: • FT, 9.6.09: China is “actively considering” buying up to $50bn of International Monetary Fund bonds, the country’s State Administration of Foreign Exchange has said. • NYTimes, 9.6.09: Arcandor (German Retail Group) had said it would file for bankruptcy if it was denied state aid. The retailer needed government backing to renew credit lines worth up to 710 million euros ($985 million) by Friday. 6 International Finance Review •Contagion versus Contago (normal backwardation). •Buying a CDS is like buying what type of option? •Why is notional value of CDS suspect? •What is difference between hedging and speculating? •What is a perfect hedge? Is it possible? •How can CDS impact bankruptcy? •Why would supplier to GM (in 08) buy a CDS? 7 International Finance Review •Contagion versus Contago (normal backwardation). 8 International Finance Video •Yale •14 April 2009 •Richard Levin (President, Yale, Economic forecast) •Robert Shiller (Book: Animal Spirits) •John Geanakoplos (Leverage Cycle) •http://www.youtube.com/watch?v=ilApxQjhs_s 9 International Finance Financial Institutions, Future: •Forces for larger size •Forces for smaller •Walmart in United States 10 International Finance Financial Institutions, Future: •Role of technology •Examples of technology •Total number of people in the industry •Effect of expansion in BRIC Countries 11 International Finance Innovation: •That make our lives easier (Credit & Debit cards, ATM) •Extending access to credit (CDS) •Bernanke speech on innovation •Relate to regulation – similar to type of loans. 12 International Finance Innovation (past): • Video • Start of Credit cards (MasterCard and Visa) • Kalamazoo, Michigan, USA • James A. Duncan Sr. • 1950s • Minutes: 22:30 to 31:00 discuss the creation of MasterCard and Visa. • Link to video (may need to choose continue without plugin) 13 International Finance: Trade True/False questions, 1 Trade on open account, with payment after or on delivery, is the standard way of doing business internationally among unrelated parties without an established business relationship, because this method of payment has proven its value in domestic trade. 14 International Finance: Trade True/False questions, 1 Trade on open account, with payment after or on delivery, is the standard way of doing business internationally among unrelated parties without an established business relationship, because this method of payment has proven its value in domestic trade. Answer: False 15 International Finance: Trade True/False questions, 2 Under payment on or after delivery, most of the risks are borne by the exporter. 16 International Finance: Trade True/False questions, 2 Under payment on or after delivery, most of the risks are borne by the exporter. Answer: True 17 International Finance: Trade True/False questions, 3 Under payment before shipment, the exporter bears only the risk of contract cancellation prior to shipment. 18 International Finance: Trade True/False questions, 3 Under payment before shipment, the exporter bears only the risk of contract cancellation prior to shipment. Answer: True 19 International Finance: Trade True/False questions, 4 Suppose that, under payment upon delivery, the importer does not accept the goods. Then the exporter has no problem whatsoever, as he still is in possession of the goods. 20 International Finance: Trade True/False questions, 4 Suppose that, under payment upon delivery, the importer does not accept the goods. Then the exporter has no problem whatsoever, as he still is in possession of the goods. Answer: False 21 International Finance: Trade True/False questions, 5 In international trade, there often is a relatively long time gap between production outlays and payment by the final customer. However, it does not generally matter who provides this working capital. In addition, this issue of how to finance working capital is entirely separable from the issue of how the payment is structured. 22 International Finance: Trade True/False questions, 5 In international trade, there often is a relatively long time gap between production outlays and payment by the final customer. However, it does not generally matter who provides this working capital. In addition, this issue of how to finance working capital is entirely separable from the issue of how the payment is structured. Answer: False, shipping goods back is expensive. 23 International Finance: Trade True/False questions, 6 If a firm does not have a hedging policy, the managers may insist on higher wages to compensate them for the risk they bear because part of their lifetime future wealth is exposed to exchange rate risk. 24 International Finance: Trade True/False questions, 6 If a firm does not have a hedging policy, the managers may insist on higher wages to compensate them for the risk they bear because part of their lifetime future wealth is exposed to exchange rate risk. Answer: True 25 International Finance General: •Web site •Incentives •Economic Forecast, end of year •Excel best practices •Job at financial institution •Evaluate portfolio of loans not 2 or 3 that are bad. •Rating agencies (conflict of interest) •Regulation: transparency and education 26