International Finance International Finance IntroductionIntroduction

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Today’s Objectives

• Understand the syllabus and how it works• Understand my goals for this course

(teaching and learning objectives)• Understand my philosophy of teaching• Understand the focus of the course

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Learning Objectives and Philosophy

• I want you to learn how to DO things– Perform codified practices such as calculating

cross-exchange rates, currency and intertemporal arbitrage, currency hedging

– Understand when and why to perform them, as well as how

• Watch, Do, Teach

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Meaning of FinanceMeaning of Finance

• Finance is about the bottom line of business activities.

• Every business is a process of acquiring and disposing assets:

– Real assets - tangible and intangible.

– Financial assets.

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Objectives of business

– Grow wealth (create value).

– Use wealth (assets) to best meet economic needs.

• Financially, a business decision reduces to:

– Valuation of assets.

– Management of assets.

A financial manager tries to maximize the shareholders

wealth; he has to find sources of finances with low costs.

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Types of Business Ownership

1. Sole Proprietorship 2. Partnership 3. Corporation

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Sole Proprietorship (1owner):

• The sole proprietorship is the oldest, most common, and simplest form of business organization.

• A sole proprietorship is a business entity owned and managed by one person. It can be organized very informally, also, it is not subject to much federal or state regulation, and is relatively simple to manage and control.

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Advantages of the Sole Proprietorship

• Simple to create

• Least costly form to begin

• Profit incentive

• Total decision-making authority

• No special legal restrictions

• Easy to discontinue

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Disadvantages of the Sole Proprietorship

• Limited access to capital ” Limited resources”

• Unlimited personal liability,

• the Lender evaluate the credit worthiness of the owner and not the company,

• High liquidation Risk.

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Partnership• An association of two or more people who co-own a

business for the purpose of making a profit.Types of Partners• General partners

– Take an active role in managing a business.– Have unlimited liability for the partnership’s debts.– Every partnership must have at least one general partner.

• Limited partners– Cannot participate in the day-to-day management of a

company.

– Have limited liability for the partnership’s debts.

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Advantages versus Disadvantages of the Partnership

• Easy to establish

• Complementary skills of partners

• Larger pool of capital

•Unlimited liability of at least one partner•Capital accumulation•Difficulty in disposing of partnership interest•Potential for personality and authority conflicts

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Corporation

• A separate legal entity from its owners.• Types of corporations:

– Domestic – a corporation doing business in the state in which it is incorporated.

– Foreign – a corporation doing business in a state other than the state in which it is incorporated.

– Publicly held – a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges.

– Closely held – a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends.

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Advantages of the CooperationLimited liability of stockholders

Ability to attract capital “large amount of fund”Ability to continue indefinitely

Very low liquidation risk especially if listed.

Disadvantages of the CooperationCost and time of incorporating

Double taxationPotential for diminished managerial incentivesLegal requirements and regulatory “red tape”

Potential loss of control by founder(s)

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When we raise fund for the first time we talk about the ‘primary

market’

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Primary market

• It is a Market in which new security issues are first sold to investors; issuers receive the proceeds from the sale.

• Any existing shareholder may sell 2another “a second hand :

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Secondary Market

• It is a Market in which existing security issues are bought and sold by investors.

• You can easily liquidate your Investment by selling to any one based on the D& S the price will be determined.

• Without a sound secondary market , they will not be a primary Market.

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Real and Financial Sectors

• Real Sector: Production and sale of goods and services; acquisition and divestiture of capital assets.

• Financial Sector: Transactions in financial assets: currency, bank deposits, bonds, stocks, futures and options, etc.

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International Economic Integration

International economic integration refers to the extent and strength of real- sector and financial-sector linkages among national economies. Real-sector linkages occur through the international transactions in goods and services while the financial-sector linkages occur through international transactions in financial assets.

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The Rise of Multinational Firms

• Changes our definition of comparative Advantage– Relative value-added -- product development, design, logistics,

assembly, marketing -- depends less on national differences and more on firm-specific competencies and investments, although these latter reflect national differences in factor endowments

– The range of a nation’s exports is equivalent to the range of its exports

• Comparative Advantage in a world of multinationals– Most cross-border trade involves intermediate products, much of

it takes place within the boundaries of a single firm (a single Barbie doll is made in 12 countries)

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International Financial Management: Why?

• Financing & investment decisions that maximize value added by firm

• Asset deployment & utilization to increase PV future cash flows– You must create value first before you can

distribute it

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International Financial Management: Why?

• Borders, different currenciescurrencies• BUT, if financial markets were completely

integrated, different currencies wouldn’t matter. (Of course, if there were no real exchanges, you wouldn’t need financial markets.) IN NEITHER CASE WOULD WE BOTHER TO STUDY IFM!

• IFM deserves a special course only because integration has gone far enough to give it meaning, but not far enough to make it just like domestic finance.

Multinational PolicymakingMultinational Policymaking

The International Financial Architecture

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International Financial Architecture

• The international financial architecture is comprised of the institutions, governmental and non-government organizations, and the policies that govern activity in the international monetary and financial markets.

• Since the collapse of the Bretton Woods system that most important aspect of the international financial system is the growth of capital flows among nations.

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Capital Market Liberalization

• Advocates of liberalized capital flows argue that unhindered capital flows allow savings to flow to their most productive use, resulting in the development of real resources and higher productivity.

• Financial market imperfections may result in capital misallocations and financial instability.

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Financial Instability and Financial Crisis

• Financial instability occurs when the financial sector is unable to allocate funds to their most productive use.

• A financial crisis is a situation where a nation’s financial system is no longer able to function. A financial crisis typically involves– a banking crisis,

– a currency crisis, and

– a foreign debt crisis.

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Capital Flows and Financial Crisis

• International capital flows consists of short-term (primarily portfolio) capital flows, and long-term (primarily foreign direct investment) flows.

• An excessive reliance on portfolio capital can be destabilizing and may contribute to financial crises.

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Multilateral Policymaking

• The two organizations at the center of efforts to stem international financial crises are:

• The International Monetary Fund: a multinational organization the promotes international monetary policy cooperation, exchange arrangements, and economic growth.

• The World Bank: A sister institution that specializes in making loans to developing nations to promote development and growth.

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Thank You