International Financial
Management
C45.0030.001
T & R, 9:30 – 10:45 am
Tisch Hall, UC-59
Lubomir P. Litov
1
The instructor
•Fourth year Ph.D. in finance & economics @ Stern.
•Spent 2 years as investment banker in Bulgaria, Austria, & UK
working on privatization deals for major European industrial firms,
banks, & investment companies.
•Interests in int’l corporate governance, int’l mergers & acquisitions,
cross-border valuation.
2
Today’s Agenda
1. Overview of syllabus & forms.
2. Important Deadlines.
3. Overview of the material we will cover this semester.
• Q: Why is important to study international finance?
• Q: How is it different from domestic finance?
4. Start with analysis of the global financial environment.
3
Objectives of the course
•Explore int’l financial markets
– Main players.
– Main instruments.
– Market structure.
•Multinational Companies
–distinct exposures multinationals face?
–available financial tools to address these risks?
–Capital budgeting?
–Managing capital internationally?
–Investment & Capital Structure Decisions?
•International investor
–cost & benefits of int’l diversification.
–Instruments for diversification.
4
Syllabus
•Blackboard – online software we will use.
•Textbook.
•Textbook website.
•Requirements:
– Course participation (10%)
– Case study team presentation (15%)
– Individual case study write-up (10%)
– Five Quizzes (35%)
– Final Exam (30%)
5
Syllabus
•Case studies (12): textbook or business
publications.
•One-minute memos.
•Problem sets
•Coming Deadlines
–09/04: 1. seating chart; 2. turn in info sheet.
–09/09: 1. Form/ change teams; 2. Presentation dates
lottery.
6
Important dates
-Case study presentations
#1
(9/25)
#5
(10/16)
#9
(11/11)
#2
(10/2)
#6
(10/23)
#10
(11/13)
#3
(10/9)
#7
(10/28)
#11
(11/18)
#4
(10/14)
#8
(10/30)
#12
(12/04)
-Quizzes
#1
(9/23)
#2
(10/7)
#3
(10/21)
#4
(11/6)
#5
(11/25)
7
Course topics
I
Globalization
History of Forex
Rates
Balance of
Payments
II
Parity
Conditions
Exchange ate
Determination
Forex Markets
III
Transaction
Exposure
Operating
Exposure
Translation
Exposure
IV
Global Cost of
Capital
Global Equity
Global Debt
Interest rate
Swaps
V
Foreign Direct
Investment
Capital Budgeting
Risk
Adjustments
Cross-border
M&A
VI
Tax
Management
Working Capital
Management
Forex
Derivatives
Int’l
Portfolio
8
Why study int’l finance?
•Globalization & integration of economies around
the globe.
•Consume products in country A, made in country
B, by company in country C, w/ financing from
country D.
–e.g. Canadian buys Phillips TV, made in Indonesia, w/
financing from a Dutch bank.
9
What is different about int’l finance?
•Presence of additional costs (think of risks)
– Foreign exchange risks
•profits may melt down when unexpected unfavorable
exchange rate movements.
–Venezuelan strike. Currency: -46 % 2002.
–Malaysia introduces capital controls, 1998. Fixed rate @ 3.8/US$ vs.
4+/US$ pre- announcement of capital controls.
– Country risks.
•Russia: bureaucrats don’t enforce law consistently.
–Q: what’s more important –law existence or enforcement?
– Credit risks
•Not easy to seize collateral abroad due to legal restrictions.
10
Political (or Country) Risk…
•Governments have right to regulate movement of goods, people, &
capital. Laws can change unexpectedly….
– E.g. Russian GKO Default triggered the August 1998 Russian crisis
– Venezuelan strike. Government forced some plants, e.g. Coca Cola, to reopen despite labor/ management opposition.
– Africa: AIDS concerned governments regulate pricing of AIDS treatment
medicines (Pfizer, Glaxo Welcome)
11
What is different about int’l finance?
•Presence of additional opportunities
– Arbitrage market imperfections
•Restrictions on flows of capital, people, merchandise.
•Transportation costs.
•Tax differences
–German car manufacturers in US.
–Chinese A- & B-shares. Chinese can purchase only A-shares,
foreigners, B-shares.
–Short-selling not allowed in many stock markets.
–Expand opportunity set
•Diversification (both company & investor)
•Source capital, work force, merchandise w/ lower cost.
12
Chinese A- & B- shares premium?
13
The Global Financial Environment
(or chapter 1)
14
Agenda:
•What is globalization process?
•How globalization moves a business from domestic to
global?
•What are the main risk exposures that arise in
multinational businesses?
•How globalization affects corporate governance and the
value creation for stakeholders?
15
Globalization process?
•The structural and managerial changes/challenges
experienced by a firm as it moves from domestic to
global.
16
The Globalization Process
Phase One: Domestic Trade
U.S. Suppliers
(domestic)
All payments in US dollars;
All credit risk under U.S. law
U.S. Buyers
(domestic)
Honeywell
(US)
Mexican Suppliers
Canadian Buyers
Are Mexican suppliers dependable?
Will Trident pay US$ or Mexican pesos?
Are Canadian buyers creditworthy?
Will payment be made in US$ or C$?
Phase Two: International Trade
17
Risk Exposures
Exchange rate changes
Accounting exposure
Changes in reported owners’ equity
in consolidated financial statements
caused by a change in exchange rates
Operating exposure
Changes in cash flows
due to
changes in exchange rates
Transaction exposure
Impact of settling outstanding obligations entered into before change
in exchange rates to be settled after change in exchange rates
Time
18
Foreign Direct Investment Sequence
Honeywell Intl
(US)
Enjoy Competitive Advantage
@ Home
Greater Foreign Presence
Explore Competitive Advantage
Abroad
Produce Home & Export
Produce Abroad
Licensing,
Managerial Contract
Greater
Foreign
Investment
Joint Venture
“Greenfield” Investment
Asset Acquisition Abroad
Subsidiary
Mergers & Acquisitions
19
FDI Strategies
•Greenfield Investment:
A long-term physical investment in productive capability in that
country
•Cross-Border Acquisition:
Identification, valuation, tender, and post-acquisition management of
an existing going-concern.
•Joint Venture Investment:
Combining investment capital and managerial know-how to reach
specific opportunities.
20
Multinational Enterprises (MNE)
•Incorporated in one country w/ production & sales
in other countries.
•More than 60,000 MNE w/ 500K + foreign
affiliates.
•Many MNE source raw materials in country A,
obtain financing in country B, produce w/ labor &
capital in country C, & sell output in various
national markets.
21
1999 Top MNE
1
2
3
4
5
6
7
8
9
10
General Electric
Exxon Mobil
Royal Dutch/ Shell Group
General Motors
Ford Motor
Toyota
Daimler Chrysler
TotalFina
IBM
BP
US
US
Holland/ UK
US
US
Japan
Germany
France
US
UK
22
How important multinationality can be?
Answer: ask Mr. Jurgen Schremmp…(DaimlerChrysler CEO)
12000
10000
8000
6000
4000
2000
0
-2000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
-4000
-6000
-8000
Pretax Income
Pretax Income (Domestic)
Pretax Income (Foreign)
23
(Divergent) Managerial Objectives
•What is the goal of management goal?
–Shareholder Wealth Maximization
•Max. shareholder value.
–Corporate Wealth Maximization
•Max. all stakeholders value .
•Cronysm
– Asset re-allocation to family related firms.
•Politically Connected Firms
– or the case of senator Agnelli
24
Corporate Governance
•Relationship among stakeholders used to
determine control the strategic directions of a
company.
•Failures
– “Rubber stamp” board of directors.
– Interlocking directorates.
– Dual classes vs. one-share-one-vote class of stock.
– Pyramidal Structures.
•Relevance in emerging markets (Russia & China).
25
Corporate Governance
Shareholder Value Max VS. Corporate Value Max.
Shareholders
Firm
(management)
Banks
Employees
The Anglo-American Model has been
frequently criticized as focusing on
short-term profitability rather than
long-term growth.
Shareholders
Main Bank
Firm
(management)
The Non-Anglo-American Model
has come under increasing criticism
for its lack of accountability to equity
investors – its shareholders – while
focusing on the demands of too
diffuse a group of stakeholders.
26
Be big and … politically
connected…
27
Think about it…
•SWM vs. CVM
•Leverage buyouts?
•Conglomerates?
•Interlocking directorates?
•High leverage?
•Stock options for the CEO?
28
Int’l finance from Investors’ Perspective
•Costs & Benefits of International Portfolio
Diversification
– as we discussed in the replies…
•Behavioral Biases
– home bias: even though there is a benefit to financial
diversification overseas, still US investors stick to their
own…
– melting pot or salad bowl: US foreign direct
investments are correlated with the countries of origin.
29