Week 1: Agency problem- manager use
power for their own benefit.
- Parent control of agency problem
- Corporate control of agency
- Sarbanes-oxley act
Style: Centralised/decentralised
Theory of comparative advantage:
Specialisation more productivity
Imperfect Market Theory: Factors of
production Immobile, seek foreign opp
Product Cycle Theory: Firm grow find
opportunity overseas.
How to INT trade: International trade,
Licensing, Franchising, Joint Ventures,
Acquisition of existing operations,
Establishing foreign Subsidiaries
MNC cash flow risk
- International economic conditions,
political risk, exchange rate risk, higher
cost of capital
Week 2 1. Current AccountPurchases of Goods/service/
provision of income on asset.
Import Negative Export Positive
Export<import=-VE
Export>Import=>VE
2.Capital Account- Sale of asset
between country over a period of
time. 3.Financial Account- Special
Investment in fixed Asset
Affect trade volume
1. International trade changes
2. Outsourcing
Affect TRADE FLOW
1. Cost of labor- cheaper more
trade
2. Inflation- Price up, less exports
more import(-CA)
3. National income- more
disposable, Imports up(CA-)
4. Credit conditions- More
exports
5. Government policies- Quota,
lower imports, subsidize export
6. Exchange rate- Price change.
Appreciate more, more
expensive(less export)
Exchange rate factor- weak
currency= other lower price to
remain competitive
Gov cannot weaken currency
simultaneously, one weaken
another strengthen.
Factors for direct foreign investment
1. Change in restriction
2. Privatisation
3. Potential economic growth
4. Tax rates
5. Exchange rates
Agencies:, International monetary
fund, World trade Org, International
bank for reconstruction and
development, International
development Association,
international financial corporation,
bank of international settlement,
economic cooperation and
development, Regional
Development agency
Week 3- foreign exchange market
Over the counter market- one
currency for another
Spot market- immediate exchange,
interbank market
Bid-Ask percentage spread
Week 4 exchange rate determination
Appreciation and depreciation
𝑠 𝑡+1
Change= 𝑡 (negative depreciate)
𝑠
Demand supply affected by inflation
(𝑨𝒔𝒌 𝒓𝒂𝒕𝒆−𝑩𝒊𝒅 𝒓𝒂𝒕𝒆)
=
𝑨𝒔𝒌 𝒓𝒂𝒕𝒆
Spread affected by: Order cost,
inventory cost, competition, volume,
currency risk.
Base: Dollar USD
Direct Quote= Value of foreign
currency in dollar (1.40USD per euro)
Indirect Quote= Number of units of a
foreign currency per dollar (0.7143
Euro/USD)
Exchange rate change direct and
indirect affected.( check change in
indirect and direct)
Cross exchange rate- one foreign
currency for another foreign
-(usd/peso) /(Usd/CND)
Forward contract- agreement MNC
and dealer to exchange at a specific
date and rate, Over the counter
Currency call- buy at specific strike
price in a specific period
Currency Put- Right to sell currency at
strike price within a specific period of
time.
International money market- grows
cus need funds to pay, borrow at
lower interest, borrow currency that
is expected to depreciate.
European Money market and Asian
money market
Interest rates depend on demand and
supply for short term funds.
Interest rate correlated.
International credit market- lend
currency (short term)
International bond market- Long term
funds( foreign bonds) Eurobond.
Risk of bonds- interest rate risk,
Liquidity rate risk, credit risk,
exchange rate risk.
International stock market issue
stocks
Week 5 Currency derivatives
Payoff depends on two or more
currencies
Forward contract- specific amount at
forward rate on specific date.
Hedge imports by locking in exchange
rate. 1 Million in 90 days ,spot rate= 0.5
USD/SGD, Future spot
rate=.6USD/SGD, hedge exchange rate
risk forward contract
Opportunity cost
𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒−𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒
Premium=
𝑆𝑝𝑜𝑡 𝑅𝑎𝑡𝑒
Increase in demand- exchange rate up.
Decrease in demand- rate down
Supply adjusted to suit amt demanded
Relative inflation rate- US inflation= dmd
for foreign goods, =dmd for foreign
currency and increase in exchange rate
Relative interest rate=US rates up,
demand for deposits up= more dmg for
dollar and higher exchange rate
Relative income level- Increase in US
income= increase in demand for foreign
goods and increase demand for foreign
currency and exchange rate
GOV control
1. Foreign exchange barriers
2. Foreign trade barriers
3. Intervening in foreign exchange
market
4. Affect macro variables, inflation, int
rate and income level
Arbitrage- forward=spot and int rate dif
Forward premium affected by int rate
Futures contract, standardized, traded
on exchange, more liquid, US base.
Brokers can sell and trade future
contracts.
Week 6 Int Arbitrage, IRP
Price will realign to have no arbitrage
Locational arbitrage, buy cheap sell high
at another location
POUND: B:1.6, A:1.61, Pound B:1.61,
A:1.62, buy at 1.61 and sell at 1.62
The prices will realign to no arbitrage.
Triangular Arbitrage. – use 3 currencies
: USD –MYR- Pound
Brute force: method 1: USD to MYR to
pound back to USD
Method 2: USD to pound to MYR to USD
Realign in different places to eliminate
discrepancies. Forces exchange rate to
equilibrium
Covered interest Arbitrage
Capitalize interest rate differential
1. Change to foreign currency
2. Lock in forward sales
3. Lend the money to other country of
higher interest
4. Exchange at forward rate
5. Earn difference
Timing of realignment slightly slower.
Forward rate will readjust most.
Must have margin for Futures,lock in
price to purchase currency, sell to
hedge receivables. Close out, sellers
buy identical futures contract, buyers
sell contracts.
Currency calls/put: OTC (specific price)
Call= buy at strike price within specific
time, sell at spot rate
Put=Sell at price within specific time,
Sell at Strike, buy at spot rate
Call earn- rise, put earn-fall
Out of money=lose, in the money earn
Premium always in, regardless exercise
Interest rate Parity: forward rate differ to
offset interest rate differential
𝐹𝑜𝑟𝑤𝑎𝑟𝑑ℎ/𝑓
P=
𝑆𝑝𝑜𝑡ℎ/𝑓
−1=
1+𝑖ℎ
1+𝑖𝑓
−1
If the point is on the right of the IRP line,
can use Covered interest Arbitrage.
Considerations: Transaction cost, political
risk, different tax laws
Week 7 Relationship, Inflation,
interest and exchange rates
Purchasing power parityconsumer go to where price
lower, exchange rate adjust for
purchasing power to be same
1+𝑖ℎ
1+𝑖𝑓
E=
− 1 (How much exchange
rate will shift by)
Low inflation- export increase,
local currency appreciate
High inflation , export decrease,
Currency depreciate.
PPP- limited if no substitute for
traded goods. Only driven if got
trade
International Fisher EffectNominal interest rate differ due to
the difference in expected
inflation between countries.
- Find expected inflation then
see if got ppp to see how the
rate change in response.
High Interest rate Country= Higher
expected inflation(FE), currency
will depreciate.(PPP)
Low interest rate- Low inflationexport increase import decreaselocal currency will appreciate by
differential (diff between outside
and inside interest rate)
High interest rate- High inflationimport increase- export decreaselocal currency depreciate by
inflation differential.
IFE relies on financial investments,
capital flow