Ch 0: Introduction
Finance


Corporate finance
Investment
– Chartered Financial Analyst or CFA (www.cfainstitute.org)

Banking, Financial Institution
– Commercial Banking, Investment Banking





Insurance
Real estate finance
International finance
Derivatives (e.g., futures, options, swaps, etc)
Risk management
– Financial Risk Manager or FRM
– Global Association of Risk Professionals (www.garp.com)

Financial planning and personal finance
– Certified Financial Planner or CFP (www.cfp.net)

……
Topics covered in this
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%
Why we learn
international finance?

The rest of world is fast growing, so we can
expand our opportunity in international
markets.
– The emerging markets such as far-eastern Asia
and South America countries experience a higher
growth rates than U.S. economy.

U.S. corporations find international markets
lucrative source of cash.
– Coca Cola earn 60 percent revenue from
overseas.
– U.S. is the largest trading partner.
Why we learn
international finance?

The world is getting integrated as
before, but not perfectly integrated.
– The Hyundai made cars that carries GM
engines, but we view Hyundai and GM
differently.
– Comparative Advantage
Axis of Power
GNP
World Stock Market
Capitalization
9
Distribution of U.S. Exports and Imports
(exports, imports) in Billions of $ for the Year of 2000
Sweden Poland
Finland (2,3)
Norway (2,6) (5,10)
(1,1)
Denmark (2,3)
Russia (2,8)
Germany (29,59)
Czech Republic
Netherlands
(1,1)
(22,10)
Austria (3,3)
Ireland (8,16)
Hungary
United Kingdom
(1,3)
(42,43)
Italy
Belgium
(11,25)
(14,10)
Portugal
(1,2) Spain France
Turkey (4,3)
(6,6) (20,30) Switzerland Greece (1,1)
(10,10)
Source: U.S. Census Bureau
What’s Special about
“International” Finance?
Foreign Exchange Risk
 Political Risk
 Market Imperfections
 Expanded Opportunity Set

What’s 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 for ¥100,000 (i.e. $100 per share =
¥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 lost money in dollar
terms.
Geographical Distribution of Global
Traditional Foreign Exchange
Market Activity
Average Daily Turnover in billions of US dollars
April 1998
Others
18%
United
Kingdom
32%
Switzerland
4%
Hong Kong
4%
France
4%
Germany
5%
Singapore
7%
Japan
8%
United States
18%
Currency Distribution of Global
Traditional Foreign Exchange Market
Activity
Percentage Shares of Average Daily Turnover (Total = 200)
April 1998
Australian
dollar 3
Canadian
dollar 4
Swiss franc 7
ECU &
other EMS
currencies 15 Other currencies
17
US dollar
87
French franc 5
Pound 11
sterling
Japanese yen 21
30 Deutsche mark
What’s Special about
“International” Finance?

Political Risk
– Sovereign governments have the right to
regulate the movement of goods, capital,
and people across their borders. These
laws sometimes change in unexpected
ways.
What’s Special about
“International” Finance?


Market Imperfections
– Legal restrictions on movement of goods,
people, and money
– Transactions costs
– Shipping costs
Expanded Opportunity Set
– It doesn’t make sense to play in only one
corner of the sandbox.
– True for corporations as well as individual
investors.
The Rise of the Multinational
Corporation

RAW MATERIAL SEEKERS
– exploit markets in other countries

Copper

Oil
The Rise of the Multinational
Corporation
 MARKET SEEKERS
– produce and sell in foreign markets
– heavy foreign direct investors
– representative firms:
 IBM
 MacDonald’s
 Nestle
 Levi Strauss
The Rise of the Multinational
Corporation

COST MINIMIZERS
– seek lower-cost production abroad
– motive: to remain cost competitive
– representative firms:
 Texas Instruments
 Zenith
 Nike
Multinational
Corporations



A firm that has incorporated on one country
and has production and sales operations in
other 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 capital
equipment in a third country and sell their
output in various other national markets.
The Organization of the
Course
Macroeconomic
Environment
The Financial
Environment
Management of
the Multinational
Firm