THE OPEN UNIVERSITY OF TANZANIA
FACULTY OF BUSINESS MANAGEMENT
OAF 322: INTERNATIONAL FINANCE
MODULE OUTLINE 2010/2011
1.0 INTRDUCTION TO THE COURSE
International finance is a level III module for finance students. It is the study of
the macroeconomic aspects of trade in goods, services and financial securities. It
explores the complexities of international transactions and businesses in relation
to the process of planning for, acquisition and utilization of funds, and returning
funds to the providers on an international basis. The course is developed with
the intention to develop an understanding of the major trends and management
of the international institutions and markets- e.g. the MNCs, IMF, Stock markets
etc. The module provides an insight into the operation of the international capital
budgeting process, portfolio management, international financial management,
and risk management.
2.0 COURSE AIM
The module aims at providing students with the international dimensions of the
corporate finance, exposing them to financial decision making process. It is
intended to provide students with an understanding of the development and
operations of the MNCs, international monetary systems, and international
financial markets. The module builds skills to enable him/her to analyze the roles
of the international monetary systems, evaluate international projects, financing
options, and synthesize various issues related to international financial
management. On completion of this module, a student will have developed
competency in managing foreign investment projects, sources of financing,
portfolio diversifications and risks. Be able to calculate returns on futures
transactions, options, and forward contracts. It also exposes students to the interrelationships between international finance and other disciplines such as
corporate finance, theory of finance, economics, financial institutions etc.
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3.0 COURSE LEARNING OUTCOMES
After completion of this course, you will be able to:
•
Identify the underlying factors that contribute to the process of
globalization and the expansion of the multinational companies.
•
Describe the foreign exchange markets operations and its applications to
international business and apply the necessary techniques to hedge and
protect international investments
•
Explain the concepts of international parity relations, such as interest rate
parity, purchasing power parity, and the international fisher effects and
how they are used to determine the interest rates
•
Identify the multinational sources of capital and investment appraisal
techniques in an international perspective.
•
Apply international financial techniques to assist companies to diversify
their international operations.
•
Measure and manage foreign exchange risk exposure from the point of
view of multinational corporations.
4.0 COURSE PRE-REQUISITES
The course builds from the assumption of students having basic knowledge of
finance, accounting, and macroeconomics. Students should understand the
concepts of discount rate, risk premium, expected return and risk, and CAPM,
prior to enroll in this course. Possession of critical analytical skills as well as
reasonable quantitative skills such as algebra and statistics are required. The
student will need either a calculator or financial tables.
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5.0 COURSE CONTENT
5.1 Lecture 1:
Overview of Multinational Corporation and
international finance
5.1.1 Introduction
The development in modern communications and transportation technologies
has accelerated the evolution and expansion of multinational corporations
(MNCs). These corporations engage in production and selling goods or services
in more than one country. International finance is concerned with the financial
transactions of MNCs across borders of nations. This lecture, therefore, provides
a basis for the study of international finance by looking at the meaning,
importance and characteristics of international business. It also examines the
factors for evolution and expansion of MNCs. Lastly; it discusses the functions
and challenges of an international finance manager.
5.1.2 Key Learning Objectives
At the end of this lecture you will be able to:
•
•
•
Explain the meaning and importance of International Business
Distinguish between domestic and international business
Discuss the factors for evolution and expansion of MNCs
•
Define international finance and explain the principles of global
finance
•
Describe the function of the International Financial Manager
•
Discuss the challenges facing an international financial manager
5.1 Content
•
•
•
•
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Meaning and nature of international business
Evolution and expansion of the Multinational Corporation (MNC)
Roles of MNCs in the socio- economic environment
International finance management
Functions of the international financial manager
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5.2 Lecture 2:
5.2.1
International
institutions
monetary
agreement
and
Introduction
This topic looks at the development of International monetary agreement and
Institutions. It starts by providing a historical background of the International
monetary system which is an essential element for the study of international
finance. It then looks at the different exchange rate regimes- flexible, fixed, and
managed regimes.
5.2.2
Key Learning Objectives
Upon completing this lecture, you will be able to:
5.2.3
•
Define and explain the history of the international monetary
system.
•
Discuss the functions and role of the International Monetary Fund
•
Identify and discuss the advantages and disadvantages of each of
the exchange rate regime
Content
•
•
•
Background to the International Monetary System
- The Gold Standard
- The Bretton Woods Agreement
The International Monetary Fund (IMF)
Exchange Rate Regimes:
- Flexible Regime
- Fixed Regime
- Managed Regime
- Central Bank Interventions
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5.3
Lecture 3: The balance of payments
5.3.1
Introduction
The Balance of Payment is one of the most important economic indicators for
policy makers in an open economy. This topic presents the financial and real
linkage between the domestic and the rest of the world economies and their
economic effects to respective countries.
5.3.2
Key Learning Objectives
Upon completing this topic, a student should be able to:
5.3.3
•
Explain the basic forces underlying the flow of goods, services and
capital between countries.
•
Describe the types of balance of payment accounts and be
able to collect report and present the balance of payments
accounts.
•
Understand the concepts of surplus and deficits balances and
explain their effect in the economy
•
Identify and discuss ways to cope with govern ment budgets
deficits.
Content
•
•
•
•
Meaning and uses of the balance of payment
International flow of goods, services and capital
The Balance of Payment Accounts
Government budget deficits
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5.4
Lecture 4: The foreign exchange market
5.4.1
Introduction
The foreign exchange market is the largest and most liquid financial market in
the world. Traders include large banks, central banks, currency speculators,
corporations, governments, and other financial institutions. The average daily
volume in the global foreign exchange and related markets is continuously
growing. The primary purpose of the foreign exchange market is to assist
international trade and investment, by allowing businesses to convert one
currency to another currency. This topic discusses the organization of the foreign
exchange market- including the spot market, the forward market, and the links
between the spot and forward market.
5.4.2
Key Learning Objectives
After completing this lecture, you should be able to:
Explain the nature and characteristics of the foreign exchange market
Identify the participants of the foreign exchange market
Distinguish between spot and forward markets
Solve problems related to foreign exchange currencies and arbitrages.
5.4.3
Content
•
•
•
•
•
Meaning, Tiers, and Dimensions of Foreign Exchange Market
Participants in the Foreign Exchange Market
Characteristics of Foreign Exchange Markets
The Spot Market
- Spot Quotations
- Transaction Costs and the Bid- Ask Spread
- Cross- Rates
- Currency Arbitrage
The Forward Market
- Fixed Quotations
- Premium and Discount in Forward Market
- Forward Cross exchange Rates
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-
5.5
Forward Rate Vs Future Rate.
Lecture 5: International parity conditions
5.5.1 Introduction
In the foregoing lecture, we looked at the foreign exchange market. Among other
issues, exchange rates were discusses. This lecture introduces you to the earliest
and simplest models (theory) of exchange rate determination- the purchasing
power parity (PPP). The lecture will provide you with the parity relationships,
their use, and measurements in PPP
5.5.2 Key Learning Objectives
After completing this lecture, you should be able to:
•
•
•
Describe the law of one price
Define purchasing power parity, fisher effect, and the international
fisher effect
Apply this theory (relationship) to solve problems related to spot
rate, inflation rate and interest rate in different currencies.
5.5.3 Content
•
•
•
•
The law of one price
Purchasing Power parity (PPP)
Fisher Effect (FE)
International Fisher Effect (IFE)
5.6 Lecture 6:
Foreign exchange exposures (Risks)
5.6.1 Introduction
In the course of their operations, companies are affected by the fluctuations in
exchange rates. What are these exposures and their associated risks? How do
firms then cope with currency changes? This chapter identifies the different
types of exposures (transaction, translation and operating) and discusses the
measures used to cope with the associated risks.
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5.6.2 Objectives
After completing this lecture, you should be able to:
•
•
•
Define and identify different types of foreign exchange risks
Measure foreign exchange risks
Manage foreign exchange risks
5.6.3 Content
•
•
•
•
Currency Exposure and Risks- Overview
Transaction Exposure:
Translation Exposure
Operating Exposure
5.7 Lecture 7:
Derivative markets and Instruments
5.7.1 Introduction
Derivative markets are markets for financial investments that derive their value from the
underlying financial assets. In this module, we will deal with three types of derivative
markets - futures, swaps and options markets. We will discuss the characteristics and
hedging strategies of these markets. Distinguishing features between futures and forward
contracts will be explained at the end of the lecture.
5.7.2 Objectives
After completing this lecture, you should be able to:
•
Define and explain the characteristics of futures, swaps, and option currency
•
Describe the alternative hedging and speculative mechanisms offered by these
derivatives.
•
Distinguish between futures and forward contracts.
5.7.3 Content
•
•
•
•
•
Meaning, types and characteristics of derivative markets
Currency and interest rate futures
Currency and Interest rate swaps
Currency and Interest rate options
Futures contracts Vs forward contracts
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5.8 Lecture 8:
Foreign Direct Investment (FDI)
5.8.1 Introduction
In lecture one we saw that the rise of the multinational is influenced by a variety
of market imperfections such as government regulations and control,
contracting, transactions, and coordinating costs. The existence of imperfect
markets explains for the firms to opt for foreign direct investment. In this lecture
you will be introduced to the trend and motives of FDI, the types of market
imperfection, and the advantages and disadvantages of FDI to a host country.
Finally, the lecture will discuss the impact of FDI to third word countries.
5.8.2 Objectives
After completing this lecture, you should be able to:
•
Define and discuss the current trend on FDI
•
Discuss various types of market imperfection and discuss how they lead firm to
become multinational
•
Discuss the advantages and disadvantages of FDI to a host country
5.8.3 Content
•
•
•
•
Overview of FDI
Market imperfection and Multinationals
Advantages and Disadvantages of FDI to Host Countries
FDI in Less Developed Countries
5.9 Lecture 9:
International Capital Budgeting Decisions
5.9.1 Introduction
One of the distinguishing features between a domestic and foreign firm is the
fact that evaluation and analysis of foreign investment is complicated by a
number of problems such as changes in exchange rates and inflation, foreign tax
regulations, differences between project and company cash flows, etc. This
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lecture intends to provide you with an understanding and skills on how to adjust
cash flows of the multinational firm for capital budgeting.
5.9.2 Objectives
After completing this lecture, you should be able to:
•
Recall the basic capital budgeting techniques
•
Explain how cash flows can be treated/adjusted in foreign projects
•
Use the net present value technique to appraise projects in foreign investments
5.9.3 Content
•
•
Capital Budgeting Techniques- Overview
Foreign Project Appraisal
- Domestic Vs Foreign Perspectives
- Parent Vs Subsidiary Perspectives
- NPV Approach to International Capital Budgeting
5.10 Lecture 10: International Portfolio management
5.10.1 Introduction
The basic rule of portfolio diversification states that: The broader the diversification,
the more stable the returns and the more diffuse the risks. Investors know that in order
to reduce the level of risks, one has to diversify investment across industries.
And that through international diversification, one reduce further the variability
of their returns. The purpose of this lecture is to provide you with the basic
knowledge on portfolio management. It explains on the benefits of portfolio
investments and highlights the elements of return on foreign investment.
Further, it introduces you on how to calculate returns on equity and bonds.
5.10.2 Objectives
After completing this lecture, you should be able to:
•
•
•
Define and explain the benefits of portfolio investment
Discus the elements of return on a foreign investment
Calculate total returns on a foreign investment
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5.10.3 Content
•
•
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Meaning advantages of portfolio investment
Measuring total return from foreign investing
Investing equity and bond
5.11 Lecture 11: International Financing Decisions
5.11.1Introduction
In lecture 9 we saw how a firm can make decisions on investments. This lecture
intends to provide you with the techniques which will enable international
financial managers to make decisions on where and how to get funds for
investments. This kind of decision is influenced by a number of factors. One of
such factors is the cost of capital- which is dealt with in this lecture. The lecture
will cover the sources of capital (equity and debt), cost of capital (with emphasis
on the weighted average cost of capital), and discount rates.
5.11.2 Objectives
After completing this lecture, you should be able to:
•
•
Identify the sources of both equity and debt capital for foreign projects
Calculate the cost of capital for foreign projects
5.11.3 Content
•
•
International source of capital
The Cost of Capital for Foreign Investments
- The Weighted Average Cost of Capital (WACC)
- Discount Rates for Foreign Investments
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5.12 Lecture 12: International financial markets
5.12.1 Introduction
The expansion and growth of multinational activities has necessitated the use of
a wide range of external source of funds. Thus more firms are going directly to
the financial markets for funds. In This lecture will provide you with the types
and operations of the international financial markets. It will look at the
international money and capital markets- types, securities, and operations.
5.12.2Objectives
After completing this lecture, you should be able to:
•
•
•
•
Distinguish between domestic and foreign financing
Explain the payment terms in foreign trade
Identify the different types markets and securities in the
international money and capital markets.
Discuss the development of the DSE in cross listing of companies.
5.12.3 Content
•
•
The International Money Market
- Internal Vs External Financing- Overview
- The Need for Foreign Currency
- The Euro currency Markets
The International Capital Market
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•
National Capital Markets as International Financial Centers
Foreign Bonds and Euro Bonds
International Equity Markets
Cross Listing
The Dar es Salaam Stock Exchange (DSE)
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5.13 Lecture 13: Multinational working capital management
5.13.1 Introduction
The purpose of this lecture is to introduce you to elementary principles and
management of working capital of the multinational firm. It looks at the different
types of short term financing objectives and options. Financing foreign trade and
current asset management is dealt. The lecture also deals with some types of
documentations, settlement terms, and financing techniques as applied in
international trade perspectives. Government sources of export financing are
also considered.
5.13.2 Objectives
After completing this lecture, you should be able to:
•
Explain objectives that can guide a firm in deciding where and in which
currencies to borrow
•
Identify the various short- term financing options
•
Discuss how cash, accounts receivable and inventories of a multinational
firm can be managed.
•
Identify the payment terms, settlement terms, and financing techniques as
used in international finance.
•
Discuss the various government sources of export financing.
5.13.3 Content
•
•
•
Managing short- term financing
- Short-term financing objectives
- Short-term financing options
Current Asset Management
- International cash management
- Accounts receivable management
- Inventory management
Financing foreign trade
Payment terms in foreign trade
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-
Documentations
Settlement terms
Financing techniques
Counter trade
Government sources of export financing
5.14 Lecture 14: International tax management
Introduction
Taxes affect most of the financial decisions in an international context. It has an
impact on the management of exchange risks, determining the cost of capital,
capital structure, etc. In this lecture, you will be introduced to the concept of
international taxation. It will cover meaning of international taxation, decisions
for international tax planning, and effects of international taxation.
5.14.1 Objectives
At the end of this lecture, you should be able to:
•
•
•
Define international taxation
Define and discuss the effects of international taxation
Discuss tax incentives for foreign investors in Tanzania
5.14.3 Content
•
•
•
Meaning of international taxation
Effects of international taxation
Tax incentives for foreign trade
5.15 Lecture 15: Political risks in international trade
5.15.1Introduction
Quotas, currency controls, and change in tax laws are some of the more visible
forms of political risks. It therefore requires for foreign investors to understand
the political environment of the host country. This lecture therefore provides a
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framework aimed to facilitate an assessment of political risks for corporate
decision making. It looks at the meaning and general concepts, approaches, and
effects of political risks. It concludes by identifying the ways of managing
political risks.
5.15.2 Objectives
At the end of this lecture, you should be able to:
• Define and explain the concepts of political risks
• Describe the approaches for measuring political risks
• Discuss the effects of political risks on multinational foreign trade
• Identify and discuss the ways for managing political risks
5.15.3 Content
•
•
•
•
General Concept and Theory of Political Risk
Measuring political risks
Effects of Political Risks on Multinational Foreign Trade
Management of Political Risks
Assessment Strategy
Compulsory Student Progress Portfolio, timed test and final examination
Assessment Criteria
One timed Test
30%
Final Examination
70%
Total
100%
Pass mark shall be
40%
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Recommended Readings
Gallagher, T. (2003) Financial management and mastering finance. 3rd edition: Prentice
Hall.
Lessard D. R. (1984) International financial management. 2nd edition: John Wiley and
Sons
Rivera, F. (1994) International finance and open economy macroeconomics. 2nd edition:
Prentice Hall.
*Shapiro A. C. (2002) Multinational financial management. 4th edition. New Delhi
Prentice- Hall
NB:
*Recommended main text
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