MULTINATIONAL
FINANCE
Barry Topf
1
April 2014
INTRODUCTION
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2
Course Goals
Methodology
Organization
Background
Course Outline
COURSE GOALS
• Acquire analytical tools
• Obtain necessary knowledge and perspective
• Familiarity with basic concepts and their uses and their limitations
• Basic quantitative and computational skills
3
Multinational Finance
• Multinational financial management is
financial management conducted in more
than one cultural, social, economic, or political
environment
• However, in today’s world important to
everyone regardless of nature of operations
• Especially clear in Israel
4
Methodology
• 3 six hour sessions – trial by ordeal
• + 3 six hour sessions With Kobi
• Textbook –Multinational Finance, Kirt C. Butler,
5th edition
• Additional Readings
• Some audiovisual enrichment
• Open format, questions, comments and
discussions- and feedback- welcomed.
• Relevance from an Israeli viewpoint
5
Organization
• Schedule: Today; May 8th, May 15th
• Quizes: May 8th and May 15th at 7:30 pm;
Final Quiz May 22
• Grades: Simple average of best two out of
three quiz grades
• Bonus possibility for participation
6
Organization
• Session Schedule (tentative):
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7
4:00-5:20
5:20-5:40 Break
5:40-7:00
7:00-7:30 Break
7:30-8:40
8:40-8:50 Break
8:50- 9:45
‫‪My Background‬‬
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‫•‬
‫•‬
‫מנהל חדר עסקות בבנק ישראל‬
‫מנהל מחלקת מט"ח בב"י‬
‫מנהל חטיבת השווקים בב"י‬
‫חבר בועדה המוניטארית בבנק ישראל‬
‫היום‪:‬‬
‫חבר ועדת השקעות של משקיעה מוסדי‬
‫יועץ לקרן המטבע הבינלאומי (‪) IMF‬‬
‫‪8‬‬
Course Outline
• The International Financial Environment
• The Multinational Enterprise
• The International Capital Market and Investment
Management
• Along the way:
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9
Efficient Markets
Agency theory
Behavioral Finance
Regulation and macro risk
Monetary Policy and Operations
The Crisis
The International Financial
Environment
• Chapters 1-4
Integration of the world’s markets for goods, services, and
financial instruments
 Balance-of-payments statistics
 Exchange rate systems
– Fixed versus floating, and everything in between
Recent history of international exchange rates
– Recent currency crises
– The evolving role of the IMF
Regulatory environment
10
Integration of global markets for goods
and services
• Global trend toward free-market economies;
particularly the industrialization of the Pacific Rim
• 1991 breakup of the Soviet Union; the reunification of
Germany; and the migration of central and eastern
European countries toward the European Union
• 1995 creation of the World Trade Organization (WTO)
• China’s emergence in international markets, Hong
Kong’s 1997 return to China, and China’s 2001 entry
into the WTO
• 1999 creation of the euro and its adoption by an
expanding set of European countries
11
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
U.S. Merchandise Trade ($ billions)
Imports
Exports
Trade
deficit
The Impossible Trinity
•
MONETARY INDEPENDENCE
•
•
•
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•
•
•
•
•
•
FIXED EXCHANGE RATE
13
OPEN CAPITAL
ACCOUNT
•
•
Capital Flows
• Open Trade Account – no restrictions on
imports and exports
• Open Current Account – no restrictions on
services
• Open Capital Account - no restrictions on
financial flows
• Convertible Currency
• Reserve Currency
14
Capital Flows
• Foreign Exchange Controls
– Outward/Inward
– FDI /Portfolio
– Residents/nonresidents
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•
•
•
•
15
Taxes
Reserve Requirements
Minimum Holding Periods
Repatriation Limitations
Administrative Measures
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
• Integration of financial markets
• An increase in cross-border financing
• Increasingly interdependent national financial markets,
including cooperative linkages among securities
exchanges
• An increasing number of cross-border mergers,
acquisitions, and joint ventures
• Increased international regulation
The Bretton Woods Agreement
• World Bank - which now includes
–International Bank for Reconstruction and Development
–International Development Association
–International Finance Corporation
–Multilateral Investment Guarantee Agency
–Int’l Centre for Settlement of Investment Disputes
• International Monetary Fund (IMF)
–Responsible for ensuring the stability of the international financial
system
–Compiles balance-of-payments statistics
• GATT/WTO
Integration of World Markets
• GATT/WTO
• Multilateral
–Mercosur
–Caricom
–Asean
–Efta
–Nafta
• Bilateral
–US-Israel
–Australia-New Zealand
18
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
The U.S. Balance of Payments
2010 2000
1293
772
-1937 -1224
-644 -452
541
292
-393 -219
-496 -379
662
353
-499 -331
-333 -357
-137
-53
-470 -410
Goods: Exports
Goods: Imports
Trade Balance
Services: Credit
Services: Debit
Balance on Goods & Services
Income: Credit
Income: Debit
Balance on Goods, Servs, & Income
Current transfers: Net
Current Account
Source: IMF (www.imf.org).
2010
0
-346
194
-144
757
-533
293
237
235
20
2000
1
-178
308
-278
552
-150
156
409
0
The U.S. balance of payments
Capital account: Net
Direct Investment Abroad
Direct Invest from Abroad
Portfolio Investment Assets
Portfolio Invest Liabilities
Other Investment Assets
Other Investment Liabilities
Financial Account
Net Errors and Omissions
BOP: International Comparisons
Trade surplus per
GDP per
GDP in
capita
GDP
capita
billions
$2,506
6.6% $37,900
$3,085
$1,320
3.2% $40,800
$918
$685
2.2% $31,700
$1,554
$173
2.1% $8,400
$11,300
$158
1.4% $11,600
$2,284
$48
0.1% $34,300
$4,389
-$127
-3.4% $3,700
$4,463
-$261
-0.6% $40,300
$1,389
-$2,545
-7.1% $35,900
$2,250
-$2,568
-5.3% $48,100
$15,040
-$3,536
-12.8% $27,600
$306
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Germany
Australia
Korea
China
Brazil
Japan
India
Canada
U.K.
U.S.
Greece
‫‪ISRAEL CURRENT ACCOUNT‬‬
‫‪BALANCE‬‬
‫‪%‬‬
‫)‪% OF GDP1995-2012‬‬
‫‪6‬‬
‫‪4.7‬‬
‫‪3.8‬‬
‫‪4‬‬
‫‪3.2‬‬
‫‪3.1‬‬
‫‪2.9‬‬
‫‪1.6‬‬
‫‪1.4‬‬
‫‪1.3‬‬
‫‪2‬‬
‫‪0.5‬‬
‫‪0.3‬‬
‫‪0‬‬
‫‪-0.9‬‬
‫‪-1.1‬‬
‫‪-1.6‬‬
‫‪-1.6‬‬
‫‪-1.6‬‬
‫‪2001‬‬
‫‪2000‬‬
‫‪1999‬‬
‫‪-2‬‬
‫‪-2.9‬‬
‫‪-4‬‬
‫‪-4.7‬‬
‫‪-4.8‬‬
‫‪1996‬‬
‫‪1995‬‬
‫‪-6‬‬
‫‪2012‬‬
‫‪2011‬‬
‫‪2010‬‬
‫‪2009‬‬
‫‪2008‬‬
‫‪2007‬‬
‫‪2006‬‬
‫‪2005‬‬
‫‪2004‬‬
‫‪2003‬‬
‫‪2002‬‬
‫‪1998‬‬
‫‪1997‬‬
‫מקור‪ :‬הלשכה המרכזית לסטטיסטיקה ועיבודי בנק ישראל‬
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Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Exchange rate systems
Recent history of international exchange rates
Pegged or fixed exchange rate systems
Forges a direct link between inflation differentials and
employment levels
Can result in large adjustments
Floating exchange rate systems
Allows exchange rates to adjust for inflation differences
Allows employment levels and wages to equalize through
the exchange rate mechanism
Hard peg
Soft Peg
Floating
AFRICA
Djibouti
Burundi, WAEMU
Nigeria, S. Africa
ASIA
Hong Kong
Nepal
India, Australia,
Malaysia
MIDDLE EAST
-
Saudi Arabia
Israel, Turkey
AMERICAS
Ecuador
Argentina
Chile
Sweden, UK,
Eurozone
Hard pegs: Exchange arrangements with no separate legal tender, and currency board
arrangements
Soft pegs: Conventional peg arrangements, stabilized arrangements, crawling pegs,
crawl-like arrangements, and pegs within horizontal bands
Floating arrangements: 'Floating' (largely market determined and without exchange
rate targets) 'Free floating' (market determined with very infrequent intervention)
EUROPE
24
Bulgaria
Russia,Denmark
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
Major events in the history of FX rates
Bretton Woods Conference 1946
IMF and World Bank created
Exchange rate turmoil begins the modern era of floating 1971
exchange rates
Jamaica Agreement (1976)
European Exchange Rate Mechanism (1979)
Treaty of Maastricht1991
Introduction of the euro (1999)
Euro begins public circulation (2002)
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
Major events in the history of FX rates
• 1946
Bretton Woods Conference
– Dollar is convertible into gold at $35/ounce
– Other currencies are pegged to the dollar
– The IMF and the World Bank also were created
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
Major events in the history of FX rates
• 1971—Exchange rate turmoil
– U.S. dollar falls off the gold standard
– Most currencies float on world markets
• 1976—Jamaica Agreement
– Floating rates are declared “acceptable”
• 1979—European Monetary System (EMS)
– European Exchange Rate Mechanism (ERM) established to
maintain EEC currencies within a 2.25% band around
central rates
– European currency unit (ECU) created
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
Major events in the history of FX rates
• 1991—Treaty of Maastricht
– EC members agree to a broad agenda of economic, financial
and monetary reforms
– A single European currency is proposed as the ultimate goal
of monetary union
• 1999—Introduction of the euro
– Emu-zone currencies pegged to the euro
– European bonds convert to the euro
• 2002—Euro begins public circulation
– The euro is now a major international currency
Israel’s ER Regimes
• 1985 – Peg to dollar
• 1986 –Peg to basket
•
1989-1991 Horizontal Bands
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•
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1991-present – Crawling Bands
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•
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•
•
29
Adjustments of central rate
Adjustments of width
Adjustments of central rate
Adjustments of width
Adjustments of slope
Asymmetric slopes
“internal Bands”
Chronology of the Transition





30
After a few years the Band became
irrelevant
Formally eliminated in 2005
Ten years of non-intervention
During crisis of 2008, resumed
intervention
2010 – Discretionary policy introduced
Israel’s Transition
The FX Regime and the FX
Market
Exchange-Rate Regime
• 1985-1989: Fixed Exchange
Rates
• 1989-1991: Horizontal
Exchange-Rate Band
• 1991-2001: Crawling
Exchange-Rate Band
• 2005: Band eliminated
• 2008: Resume Intervention
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Trading System
 1985-1990: Fixing
 1990-1995: Multilateral
Trade
 1995-2001: Continuous
Bilateral Trade
Ingredients of Transition
4-The Foreign Exchange Market: Interbank Trading
Surplus
Environment: Regime, Supervision, Authorities
Bank
Deficit
Bank
Broker
Units
Bank
Units
Bank
Infrastructure: Communications, Computer
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Systems, Clearing Systems
Surplus
Units
Israel’s Transition
The FX Regime
NIS
shekels
(July 85 - May 89)
2.20
2.10
2.00
3%
8%
3%
1.90
Peg to Basket
1.80
5%
basket
10%
Peg to USD
1.70
1.60
1.50
USdollar
1.40
1.30
1.20
III
1985
33
IV
I
II
III
1986
IV
I
II
III
1987
IV
I
II
III
1988
IV
I
II
1989
Israel’s Transition
The FX Regime
(Jan 89-Mar 92)
NISshekels
/Basket
2.90
2.80
2.70
5%
Multilateral
Trade
2.60
2.50
6%
5%
10%
2.40
5%
5%
artificial
2.30
5%
6%
2.20
6%
2.10
5%
3%
3%
2.00
3%
1.90
1.80
I
34
Hurt the specs
3%
II
III
1989
IV
adjustm
ent
I
II
III
1990
IV
I
II
III
1991
IV
I
II
1992
Israel’s Transition
The FX Regime
(Oct91 - May01)
6 .5 0
6 .0 0
Broker
Bilateral
Trade
5 .5 0
6% slope
6% slope
5 .0 0
14%
4 .5 0
6% slope
7%
4 .0 0
6% slope
14%
7%
2% slope
4% slope
3 .5 0
8% slope
9% slope
5%
3 .0 0
6% slope
5%
5%
Differential
slopes
07/08/98
5%
5%
5%
Internal
band
2 .5 0
End of Intervention
08
/01
02
/01
08
/00
02
/00
08
/99
02
/99
08
/98
02
/98
08
/97
03
/97
09
/96
03
/96
09
/95
03
/95
09
/94
03
/94
09
/93
03
/93
35
09
/92
03
/92
10
/91
2 .0 0
Israel’s Transition
The FX Regime
6 .5 0
6 .0 0
6% slope
5 .5 0
6% slope
5 .0 0
14%
4 .5 0
6% slope
7%
4 .0 0
6% slope
14%
7%
2% slope
4% slope
3 .5 0
8% slope
9% slope
5%
3 .0 0
6% slope
5%
5%
5%
5%
5%
07/08/98
2 .5 0
08
/01
02
/01
08
/00
02
/00
08
/99
02
/99
08
/98
02
/98
08
/97
03
/97
09
/96
03
/96
09
/95
03
/95
09
/94
03
/94
09
/93
03
/93
09
/92
36
03
/92
10
/91
2 .0 0
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
✓ Recent history of international exchange rates
Recent currency crises ✓
Causes and consequences
Countries in crisis
Currency crises and the IMF
Recent currency crises
Mexican peso crisis of 1995 •
Asian contagion of 1997 •
Korea, Indonesia, and Thailand–
Russian ruble crisis in 1998 •
Brazilian real crisis in 1998 •
Argentinian peso crisis of 2002 •
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange
rates
Currency crises
• Contributing factors in each crisis
–A fixed or pegged exchange rate system that overvalued
the local currency
–A large amount of foreign currency debt
• Consequences of currency crises
–Currency crises have a pronounced negative short-term
impact on the local economy
–A market-based exchange rate can have an invigorating
long-term impact on the local economy and on the local
stock market
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
Indonesia’s 1997 currency crisis
Stock market
(Dec 1995 = 1.00; in rupiah)
Indonesian rupiah
($/rupiah)
International Regulatory Regime
• Bank Supervision :Basel I, II, III
– ECB Supervision
• Anti-Money Laundering (AML), anti-terrorist,
sanctions
• IOSCO
• Insurance
40