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Page 1: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Ch 0: IntroductionCh 0: Introduction

Page 2: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

FinanceFinance

Corporate financeCorporate finance Investment Investment

– Chartered Financial Analyst or CFA Chartered Financial Analyst or CFA (www.cfainstitute.org)(www.cfainstitute.org)

Banking, Financial InstitutionBanking, Financial Institution– Commercial Banking, Investment BankingCommercial Banking, Investment Banking

InsuranceInsurance Real estate financeReal estate finance International financeInternational finance Derivatives (e.g., futures, options, swaps, Derivatives (e.g., futures, options, swaps,

etc)etc) Risk managementRisk management

– Financial Risk Manager or FRMFinancial Risk Manager or FRM– Global Association of Risk Professionals Global Association of Risk Professionals

(www.garp.com)(www.garp.com) Financial planning and personal financeFinancial planning and personal finance

– Certified Financial Planner or CFP (www.cfp.net)Certified Financial Planner or CFP (www.cfp.net) …………

Page 3: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Topics covered in Topics covered in this coursethis course

Topic Class Coverage

Balance of Payment, International Monetary System

10-15%

Foreign Exchange Markets 15-20%

International Parity Relationships 10-15%

International Banking and Capital Markets 5-10%

Risk Management (Forwards, Futures, Options, Swaps)

15-20%

Applications to Foreign Economies 15-20%

Page 4: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Why we learn Why we learn international international finance?finance? The rest of world is fast growing, The rest of world is fast growing, so we can expand our opportunity in so we can expand our opportunity in international markets.international markets.– The emerging markets such as far-The emerging markets such as far-eastern Asia and South America eastern Asia and South America countries experience a higher growth countries experience a higher growth rates than U.S. economy.rates than U.S. economy.

U.S. corporations find international U.S. corporations find international markets lucrative source of cash.markets lucrative source of cash.– Coca Cola earn 60 percent revenue from Coca Cola earn 60 percent revenue from overseas.overseas.

– U.S. is the largest trading partner.U.S. is the largest trading partner.

Page 5: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

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

– Comparative AdvantageComparative Advantage

Page 6: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Axis of PowerAxis of Power

Page 7: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,
Page 8: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

GNPGNP

Page 9: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

World Stock Market World Stock Market CapitalizationCapitalization

99

Page 10: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Distribution of U.S. Exports and Distribution of U.S. Exports and ImportsImports

(exports, imports) in Billions of $ for the Year of 2000

Austria (3,3)

Belgium(14,10)

Czech Republic(1,1)

Denmark (2,3)Germany (29,59)

Italy(11,25)

Ireland (8,16)

United Kingdom(42,43)

Russia (2,8)

Finland (2,3)Sweden(5,10)Norway (2,6)

Netherlands(22,10)

Poland(1,1)

Portugal(1,2) Spain

(6,6)

Hungary(1,3)

France(20,30) Switzerland

(10,10)

Turkey (4,3)Greece (1,1)

Source: U.S. Census Bureau

Page 11: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

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

Page 12: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

What’s Special about What’s Special about “International” “International” Finance?Finance?

Foreign Exchange RiskForeign Exchange Risk– The risk that foreign currency profits The risk that foreign currency profits may evaporate in dollar terms due to may evaporate in dollar terms due to unanticipated unfavorable exchange rate unanticipated unfavorable exchange rate movements.movements.

– Suppose $1 = Suppose $1 = ¥100 and you buy 10 shares ¥100 and you buy 10 shares of Toyota for ¥100,000 (of Toyota for ¥100,000 (i.e. i.e. $100 per $100 per share = ¥10,000 per share). share = ¥10,000 per share).

– One year later the investment is worth One year later the investment is worth ten percent more in yen: ¥110,000 ten percent more in yen: ¥110,000

– But, if the yen has depreciated to But, if the yen has depreciated to $1 = $1 = ¥120, your investment has actually ¥120, your investment has actually lostlost money in dollar terms.money in dollar terms.

Page 13: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Geographical Distribution of Geographical Distribution of Global Traditional Foreign Global Traditional Foreign Exchange Market ActivityExchange Market Activity

Average Daily Turnover in billions of US dollarsApril 1998

United Kingdom

32%

United States18%Japan

8%

Hong Kong4%

Switzerland4%

Others18%

France4%

Germany5%

Singapore7%

Page 14: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Currency Distribution of GlobalCurrency Distribution of GlobalTraditional Foreign Exchange Traditional Foreign Exchange Market ActivityMarket ActivityPercentage Shares of Average Daily Turnover (Total = 200)

April 1998

87

30

21

11

5

7

4

317

15

US dollar

Deutsche mark

Japanese yen

Poundsterling

French franc

Swiss franc

Canadiandollar

Australiandollar

ECU &other EMScurrencies Other currencies

Page 15: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

What’s Special about What’s Special about “International” “International” Finance?Finance? Political RiskPolitical Risk

– Sovereign governments have the Sovereign governments have the right to regulate the movement right to regulate the movement of goods, capital, and people of goods, capital, and people across their borders. These across their borders. These laws sometimes change in laws sometimes change in unexpected ways.unexpected ways.

Page 16: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Market ImperfectionsMarket Imperfections–Legal restrictions on movement Legal restrictions on movement of goods, people, and moneyof goods, people, and money

–Transactions costsTransactions costs–Shipping costsShipping costs

Expanded Opportunity SetExpanded Opportunity Set–It doesn’t make sense to play in It doesn’t make sense to play in only one corner of the sandbox.only one corner of the sandbox.

–True for corporations as well as True for corporations as well as individual investors.individual investors.

What’s Special about What’s Special about “International” “International” Finance?Finance?

Page 17: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

The Rise of the The Rise of the Multinational Multinational CorporationCorporation RAW MATERIAL SEEKERSRAW MATERIAL SEEKERS

– exploit markets in other exploit markets in other countriescountries CopperCopper OilOil

Page 18: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

The Rise of the The Rise of the Multinational Multinational CorporationCorporation MARKET SEEKERSMARKET SEEKERS

– produce and sell in foreign produce and sell in foreign marketsmarkets

– heavy foreign direct investorsheavy foreign direct investors– representative firms:representative firms:

IBM IBM MacDonald’sMacDonald’s NestleNestle Levi StraussLevi Strauss

Page 19: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

The Rise of the The Rise of the Multinational Multinational CorporationCorporation COST MINIMIZERSCOST MINIMIZERS

– seek lower-cost production seek lower-cost production abroadabroad

– motive: to remain cost motive: to remain cost competitivecompetitive

– representative firms:representative firms: Texas InstrumentsTexas Instruments Zenith Zenith NikeNike

Page 20: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

Multinational Multinational Corporations Corporations

A firm that has incorporated on one A firm that has incorporated on one country and has production and sales country and has production and sales operations in other countries.operations in other countries.

There are about 60,000 MNCs in the There are about 60,000 MNCs in the world.world.

Many MNCs obtain raw materials from one Many MNCs obtain raw materials from one nation, financial capital from another, nation, financial capital from another, produce goods with labor and capital produce goods with labor and capital equipment in a third country and sell equipment in a third country and sell their output in various other national their output in various other national markets.markets.

Page 21: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,
Page 22: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,
Page 23: Ch 0: Introduction. Finance Corporate finance Corporate finance Investment Investment –Chartered Financial Analyst or CFA () Banking,

The Organization of The Organization of the Coursethe Course

Macroeconomic Environment

The Financial Environment

Management of the Multinational

Firm