Course introduction for 723G33
Risk Management and derivatives
(former 723g14 International Finance)
Yinghong.chen@liu.se
PhD in Financial Economics
yinghong.chen@liu.se
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Contents
1. Couse introduction for 723G33
2. Main Book, Other Reference books, extra reading
list.
3. Detailed schedule.
4. Theories of international trade: comparative
advantage and competitive advantage
5. Homework: lab 1
6. Assignment: class preparation of Case Porsche
changes tack
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LiU:
Campus Valla
Library
Class location
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Exam
place
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Main book: Multinational Business Finance
by Eiteman, Stonehill and Moffett
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Main text book, other Reference books
1. Main Textbook:
Multinational Business Finance (Global ed. 13th. ed.
ISBN:
9780273765530. ) David K. Eiteman, Arthur I. Stonehill and Michael H.
Moffett
2. Complemetary book: (optional)
International Business: Competing in the Global
Market Place. ISBN: 9780077140656
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Extra reading list:
1.
2.
3.
4.
5.
The big Mac Index.
http://www.economist.com/markets/Bigmac/Index.cfm
Irrational Exuberance, 2000, Princeton University Press, Robert J. Shiller
John C. Hull, Options, Futures and other Derivatives, 8E. ISBN-10:
0132777428 • ISBN-13: 9780132777421©2012 Prentice Hall. (obs: for
those who wants to get more on option pricing, this is the source,
earlier version will do too)
International Business: Environment and Operations, John D. Daniels, Lee
H. Radebaugh & Daniel P. Sullivan; 12th edition, for cultural aspect of
International business of MNEs
International Economics: Theory and Policy, 8/E, Paul R. Krugman
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5 May, 2014
Moment Location
Contents
Week 19
Monday
May 5
13:1515:00
L1
P26
Course Outline, Important Topics In International
Corporate Finance, chapter 1
Tuesday
May 6
13:1517:00
L2
T27
ESM:chapter 2-3, Prepare Case: Porsche Changes
Tack
Thursday May 8
13:1515:00
L3
T27
ESM: Chapter 5, 6, 7 Foreign Exchange Market and
parity conditions
Week
10:15May 12
20
12:00
monday
L4
T27
ESM:chapter 8, 9 currency derivatives, Exchange rate
13:1515:00
L5
T27
ESM: Chapter 10, 11, 12: exposure management
Group A
08:15(am)
May 14
15: 00
Group B
(pm)
Using
Reuters
3000
Börssal in CLab 1. Exchange Rate Theory Test. Instructions on
hus: instructor course website.
10:1512:00
Seminar
T11
Tuesday
May 13
Thursday May 15
Exercise 4-12, Questions session
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T11
Risk management: an integrated risk approach.
Financial risk, operational risk, macroeconomic risk,
country risk, etc
Prepare for options.
T19
Workshop: options, derivatives
T23
GROUP STUDY: QUESTIONS, DISCUSSIONS
Week 22
May 27 10:15-12:00 L7
Tuesday
T11
Options, derivatives
Wed.
T11
Friday
May 16 10:15-12:00 L 6
Week 21
May 19 10:15-12:00 Workshop
Wed.
May19 13:15-15:00
May 28 13:15-15:00 L8
May
30
exam
5 June
Final
10:15-12:00
Seminar:
A37
13:15:15:00
presentation
08:00-12:00
Review. Old exam questions, etc
Project presentation (by group)
Group A, B, C, D
Discussant group (E, F, G, H)
Project presentation (by group)
Group E, F, G, H discussant group (A, B, C, D)
Terra
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Grading principle
Grading principle:
1.
2.
3.
Presentation and lab 40%
Final exam
60%
Obligatory lectures and seminars.
Obligatory Lab exercise on testing the Equilibrium Theory of
Exchange Rate (Exercise to be handed in before 25 of May,
according to lab instructions) (10% of the final)
Group presentation on 30th of May is obligatory (30% of the final).
Topic choices: Risk management of global firms. Case studies. etc
Deadline, 27th of May. Send to both your discussant group and
yinghong.chen@liu.se Instructions on website.
4. The exam is set on the 5th of June. (60% of the total points)
Grade A: 90-100%, Grade B: 80-90%, Grade C: 70-80%, and so on.
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Introduction: importance of risk
management of MNEs
1.
Definition of Globalization.
I define globalization as producing where it
is most cost-effective, selling where it is
most profitable, and sourcing capital where
it is cheapest, without worrying about
national boundaries.
—Narayana Murthy, President and CEO, Infosys
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Importance of risk management of
MNEs
2.
3.
There are unique risks and opportunities
involved in running international firms
compared to purely domestic firms. They are
foreign exchange risk, operating risk, country
specific risk, laws and regulations, cultural
aspect of multinational firms, etc.
Derivative securities such as options and
futures are used by corporate financial
managers of MNEs for hedging activities. Case
in point: Porsche changes tack.
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Various aspects of International
Business
• The Cultural Environments Facing Business
• The Political and Legal Environments Facing
Business
• The Economic Environments Facing Businesses
• Globalization and Society
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Theories of international trade
• Theory of Comparative advantage (Factor
Endowment: land, labor, location, natural
resources, population)
• International Trade and Factor-Mobility
Theory
• Porter´s theory of competitive advantages of
nations of International trade (chapter 17)
• Rationales of Foreign direct investment, FDIs
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The theory of comparative advantage
• The theory of comparative advantage provides a basis for explaining
and justifying international trade in a model world assumed to enjoy:
– free trade;
– perfect competition;
– no uncertainty;
– costless information; and
– no government interference.
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The theory of comparative advantage
– Absolute advantage and comparative advantage, opportunity costs
– Firms in Country A specialize in making products that can be produced
relatively efficiently, given Country A’s endowment of factors of
production, that is, land, labor, capital, and technology
– Firms in Country B do likewise, given the factors of production found in
Country B
– In this way the total combined output of A and B is maximized
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Exhibit 1.3 Global Outsourcing of
Comparative Advantage
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Comparative advantage vs.
Competitive advantage
• Although international trade might have approached the
comparative advantage model during the nineteenth century,
it certainly does not today, for the following reasons:
– Countries do not appear to specialize only in those products that could
be most efficiently produced by that country’s particular factors of
production (as a result of government interference and ulterior
motivations)
– At least two factors of production – capital and technology – now flow
directly and easily between countries
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The Porter's Diamond model for the
competitive advantage of nations (chapter 17)
Sources of competitive advantage:
• Factor Conditions: nation's position in factors of
production, such as natural resources, climate,
skilled labors, infrastructure, technology, etc
• Demand Conditions: of home buyers needs their sophistication
• Suppliers and Related Industries: clusters of
related/supervising industries.
• Firm Strategy, Structure and Rivalry: attitude,
willingness to succeed, domestic rivary.
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Four Determinants of National
Competitive Advantage
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Pricing of foreign exchange
• International parity conditions: Relationship
between Interest Rates and, spot and forward
exchange rates, inflation, changes in spot rate
• Arbitrage principle: The law of one price, normally
we use home currency value per dollar, direct
quote.
• Indirect quote: 1 £= 1,5 $
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The law of one price and Exchange
Rates
• If the identical product or service can be:
– sold in two different markets; and
– no restrictions exist on the sale; and
– transportation costs of moving the product
between markets are equal, then
– the products price should be the same in both
markets.
• This is called the law of one price.
7-21
Exhibit 7.11 International Parity Conditions in Equilibrium
(Approximate Form)
7-22
Exhibit 1.1 Global Capital Markets
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What is Different About International Financial
Management of MNEs?
• Exhibit 1.4 summarizes the differences.
– Culture and history differ among countries
– Corporate governance
– Greater levels of foreign exchange and political
risks
– Financial theory and applications are modified in
the global versus domestic marketplace
– Specialized and complicated financial instruments
become tools of the trade
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Exhibit 1.4 What Is Different About International
Financial Management?
ESM: 13th edition
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Market Imperfections: A Rationale for the Existence of
the Multinational Firm
• MNEs strive to take advantage of imperfections in national
markets for products, factors of production, and financial
assets.
• Imperfections in the market for products translate into market
opportunities for MNEs.
• Large international firms are better able to exploit such
competitive factors as economies of scale, managerial and
technological expertise, product differentiation, and financial
strength than their local competitors.
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Market Imperfections: A Rationale for
the Existence of the Multinational Firm
• Strategic motives drive the decision to invest abroad and
become a MNE and can be summarized under the following
categories:
– Market seekers
– Raw material seekers
– Production efficiency seekers
– Knowledge seekers
– Political safety seekers
• These categories are not mutually exclusive.
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The Globalization Process
• Stage I: early domestic phase growing into the
international trade phase (Exhibit 1.5)
• Stage II: A successful firm will continue to
grow from simple international trade to the
multinational phase characterized by
production and investment both at home and
abroad (Exhibit 1.6)
• Growth may be limited by the twin agency
problems of corporate insiders and the rulers
of sovereign states (Exhibit 1.7)
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Exhibit 1.5 Trident Corp: Initiation of the Globalization
Process
ESM: 13th edition
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Exhibit 1.6 Trident’s Foreign Direct
Investment Sequence
ESM 13th edition
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Exhibit 1.7 Potential Limits of Financial
Globalization
ESM: 13th edition
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Exercise
Exercise Chapter 1:
To warm up to the later assignment, I strongly
suggest you do this.
Problems 1 to 5. Recardian theory of
Comparative advantages : China and France,
Hand in by group or individually no later than
14th of May.
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Assignment: Prepare the Porsche case
before thursday
• Form two groups A and B: one will present the Porsche
Changes Tack case. The other asks questions, Preparation
needed.
• The Case is to be found on course homepage under course
notes. http://www.iei.liu.se/fek/frist/723G33?l=en
• Discussion of the class follows:
1. Various risk management aspects of Porsche.
2. Ownership, management style, synergies, financial risks,
performance, etc.
3. Update of the case.
• Other info: Porsche Homepage http://www.porschese.com/pho/en/
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The holding structure of Porsche SE as
of May 3rd, 2012.
¹ voting rights
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Some concepts before the case of
Porsche Changes Tack
• Ownership structure and corporate governance
Owner control vs. Management control
• Family ownership (concentrated ownership: common
in Continental Europe
• Shareholder oriented governance structure, or
stakeholder oriented governance structure
• The conflicts of interests: shareholders verses other
constituents (stakeholders: debt holders, labor
unions, governments, etc),
• Performance measures, ROA, ROE
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Mini-Case Questions: Porsche Changes
Tack
1. What strategic decisions made by Porsche over the years
1999 to 2004 had given rise to its extremely high return on
invested capital?
2. Vesilina D. wondered if she might have to distinguish
between the Porsche’s ability to generate results for
stockholders versus its willingness to do so. What do you
think?
3. Is pursuing the interest of Porsche’s controlling families
different from maximizing the returns to its public share
owners?
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Exhibit 1 Porsche’s Growth in Sales,
Income, and Operating Margin
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Exhibit 2 Return on Invested Capital
(ROIC) for European Automakers, 2004
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Exhibit 3 Porsche’s Velocity (capital
turnover), Margin, and ROIC
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Useful links for today
Main Book homepage for Multinational Business Finance , 13th,
12th ed. Both are ok.
http://wps.pearsoned.co.uk/ema_ge_eiteman_mbf_13/
http://wps.pearsoned.co.uk/ema_ge_eiteman_mbf_12/
Corporate Finance Foundations: Global Edition, by Hirt, Block
and Danielsen, 14E, McGraw-Hill. Chapter 19 and 21
http://highered.mcgrawhill.com/sites/0073530727/student_view0/index.html
http://highered.mcgrawhill.com/sites/0073530727/student_view0/video_clips.html
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Practical help
How to get around Linköping University?
1. English version of the University:
http://www.liu.se/?l=en
2. Need help? book a Librarian for information
searching and database, etc.
http://www.bibl.liu.se/?l=en
3. School map:
http://www.liu.se/om-liu/till-liu/kartor?l=en
Search a location, reserve a room etc.
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