Dr. Noureen AdnanAcademic

PhD (Financial Economics), University of Surrey, UK

MSc (Financial Economics) Cardiff Business School, UK

MBA (Finance) University Institute of Management Sciences, Pakistan

GTA (Graduate Teaching Certificate) London School of Economics.

Lecture 1

International Finance

Topics

• International Financial Management

• International Flow of Funds and BoP

• International Financial Markets

• Foreign Exchange Rate and Types

• Government Intervention in Exchange Rates

Topics

•  Inflation, Exchange and Interest Rate

• Risk Management of Exchange Rates

• Managing Economic, Transaction & Translation

Exposure

• Direct Foreign Investment

MULTINATIONAL COMPANIES

• Goals of MNCs

• Agency Problems

• Centralized vs. Decentralized System

• Theories of International Business

Common methods to conduct international business– International trade, – Licensing, – Franchising, – Joint ventures, – Acquisitions of existing operations, – Establishing new foreign subsidiaries

Investment opportunities Financing opportunities Marginal Returns and Marginal Costs

• Capital Account (Flow of funds; one country to

other)

– Direct Foreign Investment

– Portfolio Investment

– Capital Investment

• Trade volume is different

• Over all the World is developing

• Trade Agreements

– NAFTA, GATT, EU

• Trade Disagreements

– Tariffs, Quotas, Job loss

– Rules are different (Child labor, Bribe, etc)

– Outsourcing

• Economic Factors Affecting Trade

– Inflation

– Impact of National Income

– Government Restrictions

– Foreign Exchange Rates

• International Capital Flows

• Factors Affecting International Trade flows

• Factors affecting DFI

• Factors Affecting Portfolio Investment

• Agencies that Facilitate International Trade

Motives to use International Market

• Economic Conditions

• Exchange Rate

• International Diversification

Foreign exchange Market

Gold Standard

Fixed Exchange Rate

Floating Exchange Rate

• Spot Market• Bid/Ask Spread• Direct & Indirect Quote• Future Market • Forward Market • Attributes of Banks• Options– Put option – Call Option

• Domestic Money Market

• Domestic & International Money Market• Standardization of Banking Regulations• Single European Act

– Basel Accord I– Basel Accord II

• Syndicated Loans• International Credit Market

– International Bond Markets

• International Stock Markets

– Transaction Costs

– Information Costs

– Exchange Rate Risk

• International Stock Diversification

• Exchange Rates

• Depreciation and Appreciation of Currency

• Exchange Rate Equilibrium

• Liquidity

• Factors that affect Exchange Rates

• Relative Interest Rate

• Relative Income Level

• Expectations

• Speculating on Anticipated Exchange

Rates

• Exchange Rate System

– Fixed Exchange Rate – Freely Floating – Managed Float– Pegged

• Currency Boards– Investors Confidence– Argentinean Economy and Currency Boards

• Dollarization (e.g. Ecuador)

• Single European currency

– Impact on Monetary & Fiscal Policy

– International trade

– International flows

– Impact on Exchange Rate Risk

– Government Intervention

• Reliance on Reserves

• Direct Intervention

– Sterilized

– Non Sterilized

• Indirect intervention

– Inflation, interest rates, income level,

government controls, expectations

• Arbitrage

• Locational Arbitrage

– Banks/Individuals

• Triangular Arbitrage

• Covered Interest Arbitrage

• Interest Rate Parity

• Transaction Costs

• Political Risk

• Differential Tax Laws

• MNCs need exchange rate forecasts for their

– Hedging Decisions,

– Short-term Financing Decisions,

– Short-term Investment Decisions,

– Capital Budgeting Decisions,

– Earnings Assessments

• Long-term financing decisions

• Forecasting Techniques

Technical, Fundamental, Market-based Mixed.

• Forecasting Error• Forecasting Services• Forecasting Bias• Diversification Argument• Types of Exposure– Transaction – Economic – Translation– Source: Adopted from South-Western/ Thomson Learning 2006

– Identify degree of transaction exposure.

– Decide whether to hedge this exposure.

– Choose a hedging technique if it decides to

hedge part or all of the exposure.

• Hedging Techniques– Futures hedge,

– Forward hedge,

– Money market hedge, and

– Currency option hedge.• Source: Adopted from South-Western/ Thomson Learning 2006

Management of Exposures

• Transaction

– Identify the degree

– Decision

– Hedging

• Economic

– Restructuring

• Translation

Direct Foreign Investment

• Motives

– Revenues– Costs

– Issues