International Financial

Management
Dr. Nelson Michael J.
 Course Overview

Course Objective
To provide a framework for making corporate
financial decisions in an international context.
 Course Overview
Foreign Sourcing
Exchange Capital in
Markets Global Markets

International
Financial Synthesis
Management

Managing Foreign
FOREX Investment
Exposure Decisions

3
 Course Overview
Introduction to international finance
Introduction and course overview
The foreign exchange market
Corporate governance
Parity conditions in international finance
Foreign exchange derivative contracts

International corporate finance issues

Transactions exposure to exchange rates
Translation exposure to exchange rates
Operating exposure to exchange rates

4
 Course Overview
International investment analysis
Cost of capital
International bond markets
International equity markets
Capital structure

Corporate strategy and foreign investment

analysis
Offshoring/Outsourcing
Project Finance
Cross-border Joint Ventures
Cross-border Mergers
5
 Course Overview
Global Financial Crisis
Bailouts and Bans
Can a country go bankrupt?

6
Globalization & the
Multinational Firm
 Objectives
Understand why it is important to study
international finance.

Distinguish international finance from

domestic finance.
 Outline

Whats Special about International Finance?

Goals for International Financial Management
Globalization of the World Economy
Multinational Corporations
Organization
Summary

1-9
 Whats Special about
International Finance?
Foreign Exchange Risk
Political Risk
Market Imperfections
Expanded Opportunity Set

1-10
 Whats Special about
International Finance?
Foreign Exchange Risk
The risk that foreign currency profits may evaporate in
dollar terms due to unanticipated unfavorable exchange
rate movements.
E.g., an unexpected devaluation adversely affects your
export market
Political Risk
Sovereign governments have the right to regulate the
movement of goods, capital, and people across their
borders. These laws sometimes change in unexpected
ways.
E.g., an unexpected overturn of the government that
jeopardizes existing negotiated contracts

1-11
 Whats Special about
International Finance?
Market Imperfections
Legal restrictions on movement of goods,
people, and money
Transactions costs
Shipping costs
Tax arbitrage
E.g., trade barriers and tax incentives may
affect location of production
1-12
 Whats Special about
International Finance?
Expanded Opportunity Set
It doesnt make sense to play in only one
corner of the sandbox.
True for corporations as well as individual
investors.
E.g., raise funds in global markets, gains from
economies of scale

1-13
 Goals for International Financial
Management
The focus of the IFM course is to equip
jayantians with the intellectual toolbox of
an effective global managerbut what goal
should this effective global manager be
working toward?
Maximization of shareholder wealth?
or
Other Goals?

1-14
 Maximize Shareholder Wealth

Long accepted as a goal in the Anglo-Saxon

countries, but complications arise.
Who are and where are the shareholders?
In what currency should we maximize their
wealth?

1-15
 Other Goals

In other countries shareholders are viewed as merely one

among many stakeholders of the firm including:
Employees
Suppliers
Customers
In Japan, managers have typically sought to maximize the
value of the keiretsua family of firms to which the
individual firms belongs.

1-16
 Other Goals

No matter what the other goals, they cannot be

achieved in the long term if the maximization of
shareholder wealth is not given due
consideration.

1-17
Globalization of the World Economy: Recent
Trends
Emergence of Globalized Financial Markets
Trade Liberalization and Economic Integration
Privatization

1-18
 Emergence of Globalized
Financial Markets

Deregulation of Financial Markets

coupled with
Advances in Technology
have greatly reduced information and
transactions costs, which has led to:
Financial Innovations, such as
Currency futures and options
Multi-currency bonds
Cross-border stock listings
International mutual funds

1-19
 Economic Integration
Over the past 50 years, international trade
increased about twice as fast as world GDP.
There has been a sea change in the attitudes
of many of the worlds governments who have
abandoned mercantilist views and embraced
free trade as the surest route to prosperity for
their citizenry.

1-20
 Liberalization of
Protectionist Legislation
The General Agreement on Tariffs and Trade
(GATT) a multilateral agreement among member
countries has reduced many barriers to trade.
The World Trade Organization has the power to
enforce the rules of international trade.
ASIA-PACIFIC TRADE AGREEMENT
ASEAN, SAARC
The North American Free Trade Agreement
(NAFTA) calls for phasing out impediments to
trade between Canada, Mexico and the United
States over a 15-year period.

1-21
 Privatization

The selling off state-run enterprises to

investors is also known as Denationalization.
Often seen in socialist economies in transition
to market economies.
By most estimates this increases the efficiency
of the enterprise.
Often spurs a tremendous increase in cross-
border investment.

1-22
 Multinational Corporations

A firm that has incorporated on one country

and has production and sales operations in
other countries.
There are about 60,000 MNCs in the world.
Many MNCs obtain raw materials from one
nation, financial capital from another,
produce goods with labor and capital
equipment in a third country and sell their
output in various other national markets.

1-23
 Top 10 MNCs
1 General Electric United States
2 Ford Motor Company United States
Netherlands/ UK
3 Royal Dutch/Shell Group
Netherlands/U.K.
4 General Motors United States
5 Exxon Corporation United States
6 Toyota Japan
7 IBM United States
8 Volkswagen Group Germany
9 Nestl SA Switzerland
10 Daimler-Benz AG Germany

1-24
 Reference
Eun & Resnick (2008). International Financial
Management. Tata McGraw Hill.
Reference