FINC3240
International Finance
Chapter 2
International Flow of Funds
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
Financial managers of MNCs care
about the flows of funds between
countries. Why?
International fund flows may cause changes in
currency exchange rates
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Chapter Overview
A. Balance of Payments
B. Factors Affecting International
Trade Flows
C. Factors Affecting DFI
D. Factors Affecting International
Portfolio Investment
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Balance of Payments
-- a measure of international money flow
A summary of transactions between
domestic and foreign residents for a
specific country over a period of time. It
accounts for transactions by businesses,
individuals, and the government.


Transactions that reflect fund inflows generate
positive numbers (credits)
Transactions that reflect fund outflows generate
negative numbers (debits)
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Balance of Payments
1. Current Account:
a. Payments for merchandise and
services
export - import = balance of trade
b. Factor income payments
interest and dividend payment on financial assets
c. Transfer payments
aid, grants, gifts
a summary of fund flows due to purchases of goods or
services, or the income on financial assets. A large current
account deficit indicates sending more cash abroad than
receiving money
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Exhibit 2.2 Summary of U.S. Current Account in
the Year 2006 (in billions of $)
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2006 Distribution of U.S. Exports and Imports
Insert Exhibit 2.4 from page 28
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Balance of Payments
2. Capital Accounts includes
a. Value of financial assets transferred across
country borders by people who move to a
different country.
b. Value of nonproduced nonfinancial assets
that are transferred across country borders (such
as trades of patents and trademark)
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Balance of Payments
3. Financial Accounts
a. Direct foreign investment (DFI)
also includes transaction of long-term financial assets such as
stocks and bonds between countries that affect the transfer
of control
b. Portfolio investment
transaction of long-term financial assets such as stocks and
bonds between countries that do not affect the transfer of
control
c. Other capital investment
transaction of short-term financial assets such as
money market securities between countries
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Factors Affecting
International Trade Flows
A. Inflation
US inflation increase
US import ; US export
rise
drop
B. National income
higher demand for foreign goods
C. Government policy
subsidizing exporters; restrictions on imports
D. Exchange Rates
stronger US dollar
US import ; US export
rise
drop
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Factors Affecting
Direct Foreign Investment (DFI)
A. Restrictions
B. Privatization
C. Potential Economic Growth
D. Tax Rates
E. Exchange Rates
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Factors Affecting
International Portfolio Investment
A. Foreign tax Rates on Interest or
Dividends
B. Interest Rates
C. Exchange Rates
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Agencies that Facilitate
International Flows
1. International Monetary Funds (IMF)
2. World Bank
3. World Trade Organization (WTO)
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Example 1
Assume a simple world in which the United States
exports soft drinks and beer to France and imports
wine from France. If the U.S. imposes large tariffs
on the French wine, explain the likely impact on the
values of the U.S. beverage firms, U.S. wine
producers, the French beverage firms, and the
French wine producers.
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Example 2
a. Assume that US dollar is presently weak and
is expected to strengthen over time. How will
these expectation affect the tendency of US
investors to invest in foreign securities? How
will these expectation affect the tendency of
foreign investors to invest in US?
b. Explain whether low interest rates in US can
affect the tendency of US-based MNCs to
invest abroad.
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Homework 2
Homework 2: Q&A 2,9,13 a
Next in-class discussion topic: chapter
2, Q&A, 15 a.
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