Recommandé
Contenu connexe
Tendances
Tendances (20)
Similaire à 1- Introduction to International Finance.ppt
Similaire à 1- Introduction to International Finance.ppt (20)
Dernier
Dernier (20)
1- Introduction to International Finance.ppt
- 2. Learning Objectives: An Overview of International Finance Importance of International Finance Nature and Scope of International Finance Recent Changes and Challenges in International Finanacial Management
- 3. Overview/Scope of International Finance A Multinational Corporation (MNC) is a company engaged in producing and selling goods or services in more than one country. Usually, it consists of a parent company located in the home country and several foreign subsidiaries. A multinational is characterized more by attitude than the physical reality of an integrated system of marketing and production activities worldwide. “Where in the world should we build our plants, sell our products, raise capital, and hire personnel?” i.e. a global perspective, rather than the perspective of the home country, where the parent is located. 3
- 4. Overview/Scope of International Finance Objectives of MNC’s Maximizing shareholders wealth Environment is much more complex than a domestic firm Agency Conflict 4
- 5. Overview/Scope of International Finance Relevance/Knowledge of International Finance is crucial: International events that might affect the firm Movements of exchange rates, interest rates, inflation rates and asset values International environment: International Financial System: Public: International Monetary System Private: Multinational Financial Institutions 5
- 7. Reasons for Increasing Importance of International Finance 1. Specialization of nations and trade 2. Opening of economies 3. Globalization of firms 4. Emergence of new forms of business organizations 5. Growth of world trade 6. Need of development-process of nation
- 8. 1. Specialization of Nations and Trade a. Adam Smith’s theory of absolute advantage b. Ricardian Theory of Comparative Advantage c. Hecksher-Ohlin-Samuelson’s Model d. New explanations of comparative advantage e. Strategic Trade Theories
- 9. 9 US Germany Wheat/per man hour 6 1 Coal/per man hour 1 2 a. Adam Smith’s Doctrine of Absolute Advantage Nations are going to gain through trade, when each nation produces goods in which they have absolute advantage. Since the US is more efficient in the production of wheat, it will produce wheat; Germany is more efficient in the production of coal; hence it will produce coal. The US will export wheat to the Germany and import coal. Assumptions: 1) Factors of production cannot move freely across countries. 2) Factors of production are not specialized.
- 10. 10 b. Ricardian Doctrine of Comparative Advantage Even though countries might not have absolute advantage, they can still gain through comparative advantage. Even though the US is more efficient in the production of both wheat and coal, it has a comparative advantage in the production of wheat; hence, it will produce wheat; Moreover, Germany doesn’t have an absolute in advantage in producing wheat or coal, however it has a comparative advantage in producing coal; hence it will produce coal. The US will export wheat to the Germany and import coal. US Germany Wheat/per man hour 6 1 Coal/per man hour 4 2
- 11. c. Hecksher-Ohlin-Samuelson’s Model: emphasizes the role of factor abundance in determining the trade pattern. The theory states that the country that is relatively abundant in one factor, will export those products which use the abundant factor intensively. d. New Explanations of Comparative Advantage: Technological Progress Innovations in products Product life cycle e. Strategic Trade Theoies: Exchange rates, subsidies, tarrifs, quotas, etc.
- 12. 2. Opening of Economies 3. Globalization of firms Theory of Comparative Advantage Theory of Imperfect Markets Product Life Cycle Theory Firms may globalise as a raw material seeker, technology seeker, knowledge seeker or to gain comparative advantage over it domestic counterparts 4. Emergence of new forms of business organizations Licensing Franchising Joint Ventures Acquisition of existing business Establishing of new foreign subsidiaries 5. Growth of world trade 6. Need of development-process of nation
- 13. Challenges and Opportunities before an MNC’s Cross-Cultural Risk Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set 13
- 14. The essence of international financial management IFM- is a popular concept which means management of finance in an international business environment, it implies, doing of trade and making money through the exchange of foreign currency. The international financial activities help the organizations to connect with international dealings with overseas business partners- customers, suppliers, lenders. It is also used by government organization and non-profit institutions.
- 15. Cross-CulturalRisk •Differences in language, lifestyles, attitudes, customs, and religion, where a cultural miscommunication jeopardizes a culturally-valued mindset or behavior. •Cultural blunders- hinder the effectiveness of foreign managers. •Language- critical dimension of culture- a window to people’s values •Language differences impede effective communication. •Cultural differences may lead to suboptimal business strategies.
- 16. 16 • The risk that foreign currency profits may evaporate in home currency terms due to unanticipated unfavorable exchange rate movements. • Currency risk -arises from changes in the price of one currency relative to another→ complicates cross-border transactions → impacts firms with foreign currency obligations (one of the four types of risks in international business • If supplier’s currency appreciates; you may need to hand over a larger amount of your currency to pay for your purchase. • If buyer’s currency depreciates; you may receive a smaller payment amount in your currency (sales price was expressed in the customer’s currency). Foreign Exchange Risk
- 18. How Does Rupee FallAffect Stock Markets ????? Assume a Foreign Investor Having $10,000 Comes to Invest in Indian Stock Markets! Now He has to Convert his $ to Rs to invest in Indian Stock Markets!
- 19. How Does Rupee FallAffect Stock Markets ????? On 1-1-2011, 1$ = Rs.50 He Converts $10,000 to Rs. 1$ = Rs.50 Therefore, 10,000$ = Rs.5,00,000
- 20. How Does Rupee FallAffect Stock Markets ????? He Decides to Buy Shares of L&T which was trading at Rs.1,000/- For Rs.5,00,000/- he can Buy 500 Shares of L&T. (5,00,000/1000)
- 21. How Does Rupee FallAffect Stock Markets ????? On 22-5-2012, Assume L&T is trading at Rs.1050/- He is happy as his shares have gone up from Rs.1,000/- to Rs.1,050/-
- 22. How Does Rupee FallAffect Stock Markets ????? He Sells as his 500 Shares of L&T at Rs.1,050 and gets 500 x 1050 = Rs.5,25,000/- Now he Reconverts his Rs to $ On 22-5-2012, 1$ = Rs.55.39/-
- 23. How Does Rupee FallAffect Stock Markets ????? He Converts Rs.5,25,000 to $. 1$ = Rs.55.39 Therefore, Rs.5,25,000 = $.9,478.24 (5,25,000/55.39) 10,000$ Now worth only 9,478.24$
- 24. How Does Rupee FallAffect Stock Markets ????? LOSS OF 521.76$
- 25. How Does Rupee FallAffect Stock Markets ????? Imagine if Share prices have also come down from Rs.1,000/- To Rs.900/- ?????
- 26. How Does Rupee FallAffect Stock Markets ????? Then 500 Shares x 900Rs/Share = Rs.4,50,000/- Reconvert Rs to $ 4,50,000/55.39 = $8,124.21 LOSS = $1,875.79 Loss of 18.76%
- 27. 27
- 28. 28
- 29. • Legal restrictions on movement of goods, people, and money • Transactions costs • Shipping costs • Tax arbitrage 29 Market Imperfections
- 30. 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. •Political risk ranges from the risk of loss (or gain) from unforeseen government actions or other events of a political character such as acts of terrorism to outright expropriation of assets held by foreigners.
- 31. Expanded Opportunity Sets When firms go global, they also tend to benefit from expanded opportunities which are available now. It doesn’t make sense to play in only one market. True for corporations as well as individual investors. Investor’s perspective Risk reduction through international diversification. Corporation’s perspective Access to cheaper production inputs Access to consumers Access to capital
- 32. What’sSpecialabout“International” Finance? Diversity of Medium of Financing Political Risk Foreign Exchange Risk Currency and Institutional Diversity Diversity of Physical Environment Conflict with the host country’s environment Ethical Conflict Conflict with the Parent Conflict with the Home country Multiplicity and Complexity of Taxation system 32
- 34. Internationalfinance International finance is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade. International Finance is an area of financial economics that deals with monetary interactions between two or more countries, concerning itself with topics such as currency exchange rates, international monetary systems, foreign direct investment, and issues of international financial management including political risk and foreign exchange risk inherent in managing multinational corporations. 34