international financech1.pptx

8/14/2019 INTERNATIONAL FINANCECh1.pptx

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INTERNATIONAL FINANCE

Dr. Sujatha Selvaraj

Department of Banking, Finance and Management

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Whats Special about International Finance?

Goals for International Financial Management

Globalization of the World Economy

Multinational Corporations

Summary

Chapter One Outline

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Why we need to study International

Financial Management?We are now living in a highly globalized and integrated

world economy.Internationalization of consumption patterns around

the world.

Production of goods and services has become highly

globalized.Financial markets have also become highly

integrated.

-Allows investors to diversify their investmentportfolios internationally.

Undoubtedly, we are now living in a world whereall the major economic functions are highlyglobalized.

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h i l b i l


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Whats special about International

Finance?Three major dimensions set international finance apart

from domestic finance. They are:

1. Foreign exchange and political risks.

2. Market imperfections.

3. Expanded opportunity set.

These major dimensions of international finance

largely stem from the fact that sovereign nations have

the right and power to issue currencies, formulate theirown economic policies, impose taxes and regulate

movements of people, goods, and capital across their

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Whats Special about

International Finance?

Foreign Exchange Risk

The risk that foreign currency profits may evaporate

in dollar terms due to unanticipated unfavorable

exchange rate movements. Suppose $1 = 100 and you buy 10 shares of Toyota

at 10,000 per share.

One year later the investment is worth ten percent

more in yen: 110,000

But, if the yen has depreciated to $1 = 120, your

investment has actually lostmoney in dollar terms.

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1. Foreign Exchange and Political Risks

When firms and individuals are engaged in cross

border transactions, they are potentially exposedto Foreign exchange risk. That would not

encounter in pure domestic transactions.

- Exchange rate uncertainty will have a pervasiveinfluence on all the major economic fluctuations

i.e con., pro. and inv.

Another risk that a firm/individual mayencounter in an international setting is political

risk

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Monthly Percentage change in Japanese YenUS Dollar

Exchange Rate

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Whats Special about


Political Risk

Sovereign governments have the right to regulate

the movement of goods, capital, and people

across their borders. These laws sometimeschange in unexpected ways.

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Political risk arises from the fact that a

sovereign country can change the rulesof thegameand the affected parties may not have

effective recourse. Eg. Enron, Yuoks

Multinational firms and investors should beparticularly aware of political risk, when they

invest in those countries without a tradition of

the rule of law.

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2. Market Imperfections

Legal restrictions on the movement of

goods, people, and money

Transactions costs

Shipping costs

Tax arbitrage

Whats Special about


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2.Market Imperfections The world economy is much more integrated

today than was the case of 10/20 years ago, avariety of barriers still hamper free movementsof people, goods, services and capital acrossnational boundaries.

The world markets are thus highly imperfect, thismotivates the MNCs to locate productionoverseas.

Imperfection in the world financial markets tendto restrict the extent to which investors candiversify their portfolios.

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The Example of Nestls Market Imperfection

Nestl used to issue two different classes of

common stock bearer shares and registered

shares.

Foreigners were only allowed to buy bearer shares.

Swiss citizens could buy registered shares.

The bearer stock was more expensive.

On November 18, 1988, Nestl lifted restrictionsimposed on foreigners, allowing them to hold

registered shares as well as bearer shares.

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Daily Prices of NestlesBearer and Registered Shares

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The Example of Nestls Market Imperfection

Following this, the price spread between thetwo types of shares narrowed dramatically. This implies that there was a major transfer of

wealth from foreign shareholders to Swissshareholders.

Foreigners holding Nestl bearer shares wereexposed to political risk in a country that iswidely viewed as a haven from such risk.

The Nestl episode illustrates both theimportance of considering marketimperfections and the peril of political risk.

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3.Expanded Opportunity Set

As mentioned earlier, firms can locate production

in any country or region of the world to maximizetheir performance and raise funds in any capital

market where the cost of capital is the lowest.

In addition, firms can gain from greater economiesof scale when their tangible and intangible assets

are deployed in a global basis.

Individual investors can also benefit greatly if theyinvest internationally rather than domestically.

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The focus of the text is to equip the reader with

the intellectual toolbox of an effective global

managerbut what goal should this effective

global manager be working toward?

Maximization of shareholder wealth?

or Other Goals?

Goals for International Financial

Management

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Goals of International Finance

International finance is designed to provide

todays financial managers with an understandingthe fundamental concepts and the toolsnecessary to e effective global managers.

-The fundamental goal of sound financial

management is shareholder wealthmaximization.

Share holder wealth maximization means that thefirm makes all business decisions andinvestments with an eye toward making theowner of the firmthe shareholdersbetter offfinancially, or more wealthy, than they werebefore.

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Whereas shareholder wealth maximization isgenerally accepted as the ultimate goal of the

financial management in Anglo-saxon countries

such as Aus, Can and UK.

Especially US is notwidely embraced a goal in other

parts of the world.

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Other Goals

In other countries shareholders are viewed as merely one

among many stakeholders of the firm including:

Employees

Suppliers

Customers

In Japan, managers have typically sought to maximize the

value of the keiretsua family of firms to which the

individual firms belongs.

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European managers tend to consider thepromotion of the firm stakeholders, overall welfare

as the most important corporate goal.

However, capital markets are becoming more

liberalized and internationally integrated in recent

years, even managers in France, Germany, Japan

and other non Anglo Saxon countries are beginning

to pay more attention to shareholders wealthmaximization.

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I G f C i ll d


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In Germany, for ex. Companies are now allowed to

repurchase stocks, for the benefit of shareholders.

Shareholder wealth maximization is a long run goal.

- A firm cannot stay in business to maximize

shareholder wealth if it treats employees poorly,

produces shoddy merchandise, wastes raw

materials and natural resources, operates

inefficiently or fails to satisfy customers.

- Only a well managed business firm that profitability

produces , only if it operates efficiently and expectto stay in business in the long run and there by

provide employment opportunities.

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The Board of Directors the ultimate guardians of the


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The Board of Directors, the ultimate guardians of theinterest of shareholders.

If they fail to perform their duties- scandals leads tofinancial distress and bankruptcy, devastatingshareholders and employees alike. Ex, CEO scandals

In the wake of these calamities, the society haspainfully learned the importance of CorporateGovernance.

_ CG is the financial and legal framework for regulatingthe relationship between a cos management and itsshareholders.

- CG can be defined as the economic, legal and

institutional framework in which corporate controland cash flow rights are distributed amongshareholders, managers and other stakeholders of thecompany.

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CG varies across the countries, reflecting cultural,

legal, economic and political environment in

different countries.

In many countries where shareholder do not have

strong legal rights, corporate ownership tends to be

concentrated.

The concentrated ownership of the firm in turn,

may give rise to the conflicts of interest between

dominant shareholders and small outsideshareholders. Eg. ParmalatItalian co. case.

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Shareholders are the owners of the business;itstheir capital that is at risk.

It is equitable that they receive a fair return on

their investments. If they vitally important to strengthen

corporate governance so that shareholders

receive fair returns on their investments.

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Other Goals

These types of issues can be much more serious in

many other parts of the world, especially emerging

and transitional economies, such as Indonesia,

Korea, and Russia, where legal protection of

shareholders is weak or virtually non-existing.

No matter what the other goals, they cannot be

achieved in the long term if the maximization ofshareholder wealth is not given due consideration.

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Globalization of the World Economy: Major Trends

In this section, we review a few key trends of

the world economy:

Emergence of globalized financial markets,

Emergence of the euro as a global currency,

Continued trade liberalization and economic

integration, and

Large scale privatization of state-owned

enterprise.

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Deregulation of Financial Markets

coupled with

Advances in Technology

have greatly reduced information andtransactions costs, which has led to:

Financial Innovations, such as Currency futures and options

Multi-currency bonds Cross-border stock listings

International mutual funds

Emergence of Globalized Financial Markets

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Emergence of the Euro as a Global Currency

A momentous event in the history of worldfinancial systems.

Currently more than 300 million Europeans in 15

countries are using the common currency on adaily basis.

In May 2004, 10 more countries joined theEuropean Union and adopted the euro.

The transaction domain of the euro may becomelarger than the U.S. dollars in the near future.

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Euro Area

Austria,

Belgium,

Cyprus, Finland,

France,

Germany,

Greece,

Ireland,

Italy,

Luxembourg, Malta,

The Netherlands,

Portugal,

Slovenia, Spain

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Value of the Euro in U.S. Dollars

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http://www.advfn.com/p.php?pid=charts&symbol=FX^EURUSD


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Economic Integration

Over the past 50 years, international trade

increased about twice as fast as world GDP.

There has been a sea change in the attitudes

of many of the worlds governments who have

abandoned mercantilist views and embraced

free trade as the surest route to prosperity for

their citizenry.

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Merchandise Exports/GDP in percent

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Liberalization of Protectionist Legislation

The General Agreement on Tariffs and Trade(GATT) a multilateral agreement amongmember countries has reduced many barriers

to trade. The World Trade Organization has the power

to enforce the rules of international trade.

On January 1, 2005 the end of the era ofquotas on imported textiles ended.

This is an event of historic proportions.

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NAFTA

The North American Free Trade Agreement(NAFTA) calls for phasing out impediments totrade between Canada, Mexico and the UnitedStates over a 15-year period beginning in 1994.

For Mexico, the ratio of export to GDP hasincreased dramatically from 2.2% in 1973 to 29%in 2006.

The increased trade has resulted in increasednumbers of jobs and a higher standard of livingfor all member nations.

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Privatization

The selling off state-run enterprises to

investors is also known as Denationalization.

Often seen in socialist economies in transition

to market economies.

By most estimates this increases the efficiency

of the enterprise.

Often spurs a tremendous increase in cross-

border investment.

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Multinational Corporations

A firm that has incorporated on one countryand has production and sales operations inother countries.

There are about 60,000 MNCs in the world. Many MNCs obtain raw materials from one

nation, financial capital from another,produce goods with labor and capitalequipment in a third country and sell theiroutput in various other national markets.

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Top 10 MNCs

1 General Electric United States

2 Vodafone Group PLC United Kingdom

3 General Motors United States

4 British Petroleum Co. PLC United Kingdom

5 Royal Dutch/Shell Group UK/Netherlands

6 ExxonMobile Corporation United States

7 Toyota Motor Corporation Japan8 Ford Motor Company United States

9 Total France

10 Elctricit de France France

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hank You

international financech1.pptx

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