Đang tải... (xem toàn văn)
international finance by jeff madura
OUTLINE Module 1: The World of International Finance and the Multinational Corporation I. The World of International Finance and the Globalization of International Financial Markets: A. The World of International Finance B. Globalization of Capital Markets II. The Multinational Corporation A. The Multinational Corporation and its Goal B. Conflicts and Constraints in Implementing the Goal III. Theories of International Business A. Theory of Comparative Advantage B. Imperfect Markets Theory C. Product Cycle Theory IV. Methods of International Business A. International Trade B. Direct Foreign Investment C. Licensing D. Franchising E. Joint Ventures V. Multinational Firm versus Domestic Firm A. Marginal Return on Projects B. Marginal Cost of Capital C. Size of the Firm VI. Risks of International Business A. Exchange Rate Risk B. Business Risk C. Political Risk VII. Answers to Questions Raised in the Lecture Module 2: Foreign Exchange Markets I. Introduction II. Need for Foreign Currencies III. Spot Markets versus Forward Markets IV. Direct Quotes versus Indirect Quotes V. Computing Percent Change for a Foreign Currency VI. Bid, Ask Prices and Bid/Ask Percent Spread VII. Cross Exchange Rates VIII. Currency Forward Contracts and Forward Premium/Discount IX. Currency Futures X. Currency Options XI. Questions and Problems Module 3: Arbitrage and the Theory of Interest Rate Parity I. International Arbitrage and Interest Parity A. International Arbitrage 1. Locational Arbitrage 2. Triangular Arbitrage 3. Covered Interest Arbitrage B. Theory of Interest Rate Parity II. Purchasing Power Parity III. International Fisher Effect Module 4: Forecasting Exchange Rates I. Why Multinationals Forecast Exchange Rates? II. Forecasting Techniques A. Technical Forecasting B. Fundamental Forecasting: Regression Approach C. Market Based Forecasting D. Mixed Forecasting III. Forecast Performance of Consulting Firms IV. Assessment of Forecast Accuracy Over Time V. A Comprehensive Regression Example VI. Forecasting Performance and Market Efficiency VII. Questions and Problems Module 5: Currency Futures, Forward Contracts, and Options I. Currency Futures A. Interpreting Currency Futures Quotes B. Speculating with Currency Futures C. Hedging with Currency Futures II. Forward Contracts and Hedging III. Currency Options A. Call Options 1. Interpreting Currency Call Option Information 2. Speculating with Call Options 3. Hedging Payables with Call Options 4. Factors Affecting Call Option Premium B. Put Options 1. Interpreting Currency Put Option Information 2. Speculating with Put Options 3. Hedging Receivables with Put Options 4. Factors Affecting Put Option Premium Module 6: The Nature and Control of Foreign Exchange Risk I. Foreign Exchange Risk and Types of Foreign Exchange Risk II. Relevance of Exchange Rate Risk III. Types of Foreign Exchange Risk IV. Managing Transaction Exposure A. Identification of Net Transaction Exposure B. Forecast of Exchange Rates and the Decision to Hedge or not to Hedge C. Techniques for Managing Transaction Exposure D. Comprehensive Examples of Hedging Transaction Exposure 1. Hedging Payables a. Forward Contract Hedge b. Money Market Hedge c. Currency Call Option Hedge d. No Hedge 2. Hedging Receivables a. Forward Contract Hedge b. Money Market Hedge c. Currency Put Option Hedge d. No Hedge E. Managing Long-term Transaction Exposure F. Other techniques to Manage Transaction Exposure V. Managing Economic Exposure A. Diversifying Operations B. Diversifying Financing Globally VI. Questions and Problems Module 7: Case Analysis of Foreign Exchange Risk Management: Lufthansa I. Evaluation of Hedging Alternatives A. Remaining Uncovered B. Full Forward Cover C. Partial Forward Cover D. Foreign Currency Options E. Buy Dollars Now II. The Decision A. The Rise of DM B. The Fall of DM C. How It Came Out? D. Questions Module 8: Corporate Use of Innovative Foreign Exchange Risk Management Products I. Characteristics of Respondent Corporations II. Use of Foreign Exchange Risk Management Products III. Differences Across Industries IV. Influence of Firm Size and Degree of International Involvement V. Summary VI. Questions for Fxrisk News Group Discussion Module 1 : The World of International Finance and Multinational Corporations "What is prudence in the conduct of every private family can scarcely be folly in that of great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in way in which we have some advantage" (Smith, The Wealth of Nations, 1776). Objectives and Theme: Our first objective is to discuss the exciting world of Global Financial Markets; our second objective is to learn the Characteristics of the Multinational Corporation (MNC); we find that MNCs have goals similar to that of the purely Domestic Corporation (DC); however, they have a wider variety of opportunities around the globe. With additional opportunities come increased potential returns and other forms of risk to consider. The potential benefits and risks are introduced and explained Globalization of Financial Markets For more than 25 years, there has been an increasing globalization of the world financial markets. A worldwide financial network of financial centers consisting of London, New York, Tokyo, Frankfurt, Zurich, Hong-Kong, Paris, Amsterdam etc., has evolved. This has led to the global presence of international financial institutions, increased financial integration, and a rapid evolution of innovative new financial products. Increased flows of world capital intensifies competition among nations, leading to deregulation of domestic financial markets and further liberalization of capital movements around the globe. Financial integration refers to the elimination of barriers between domestic and international financial markets and the development of many linkages between these market sectors. As a result, financial capital flows unrestricted between the two markets, enhancing various borrowing, lending, and investing activities. On the innovative side, there has been the creation of new financial instruments and technologies. Some of these instruments include Eurodollar CDs, zero-coupon Eurobonds, syndicated Eurocurrency loans, interest and currency swaps, and floating rate notes. Technological innovations in telecommunications, information dissemination, and computers have accelerated and reinforced this trend toward globalization The Multinational Corporation Multinational Corporation (MNC) and its goal: We can define an MNC simply as a corporation operating in more than one country. The goal or objective of the MNC should be the maximization of stockholders' wealth or the stock price. This objective is the same for purely domestic corporations as well. Stockholder Wealth equals Stock Price * # of Shares Outstanding. Maximizing the Shareholders' Wealth confers the following Advantages: 1. It considers the Time Value of Money. How does the stock price maximization objective consider the time value of money ? The answer to this question is at the end of this Module. 2. It also considers the riskiness of the cash flows of the MNC. How does maximizing stock price consider the riskiness of cash flows ? The answer to this question is at the end of this Module as well. An idea of the biggest Fortune 500 global industrial and service companies ranked by various criteria can be obtained from visiting Fortune. The global 500 corporations have been ranked by revenues; there is also a country wide ranking available using various criteria. Based on the information from the Fortune list of Global 500, please check your knowledge by answering the following questions. 1. Can you name the company that recorded the highest profit increase within the lastest year or quarter? 2. Which company headed the list in terms of revenues? And how much was the revenue of that company? 3. Which US company had the highest revenue within the lastest year or quarter? What was its rank in terms of revenue in the previous year or quarter? 4. In the Pharmaceuticals industry, which company led the list in terms of revenues for the latest year or quarter? And what was its revenue? Conflicts and Constraints in Implementing the Goal Conflicts: In the corporate form of organization, stockholders are the true owners of the corporation. There are often millions of stockholders for a given corporation, and, therefore, stockholders select managers to operate and manage the corporation from day-to-day. In this setup, the stockholders are the principals, and the managers are the agents. Thus, there is an agency relationship between the stockholders and the managers. Sometimes the managers, instead of acting in the best interests of stockholders, may act to maximize their own interests. For example, the top manager may go for a corporate jet, install his office in a penthouse suite overlooking the Hudson river, install plush carpeting, or hire a pretty secretary. These problems are called agency problems, and the costs are called agency costs. These agency costs affect the cash flows and, therefore, the stock price. Because MNCs have subsidiaries around the globe and often have several layers of management, the agency costs of an MNC are higher than for purely domestic corporations. Constraints: The constraints in implementing the goal of the MNC are: 1. Environmental: Each country imposes its own environmental regulations, 2. Regulatory: Each host country can enforce taxes, earnings remittance restriction, job protection, and 3. Ethical: There is no consensus standard of business conduct that applies to all countries. A business practice that is considered to be unethical in the U.S. may be totally ethical in another country. All of these constraints add additional costs to the MNC and increase the cost of doing business. These constraints can act as a drag on the goal of maximizing stockholder wealth. Theories of International Business Theory of Comparative Advantage - Specialization: Specialization of products and services can increase both individual and global efficiency. Since specialization in some products may result in no production of some goods in a given country, there is a need for international business or trade. For example, consider a two country world of the USA and Japan. Let us assume that Japan can produce television sets of comparable quality at a cheaper price than the US. Let us also assume that the US has cost advantages in the production of automobiles. In this setup, the US will import television sets from Japan, while Japan will import automobiles from the US. Since both products are produced at the lowest possible cost, global efficiency is enhanced. Imperfect Markets Theory: Due to imperfect markets and the resulting immobility of resources, resources cannot be easily and freely retrieved by the MNC. Consequently, the MNC must sometimes go to the resources rather than retrieve resources such as low cost land, labor etc. An example would be US auto manufactures setting-up factories in Mexico to take advantage of the low- cost labor there. Product Cycle Theory: A firm is likely to market its product first in the home country due to the ready availability of information about markets and competitors. As the market in the home country matures, the corporation, seeking foreign demand, initially exports its product. After learning more about the foreign country and how to gain advantage over competitors in foreign countries, the firm opens production facilities overseas. Figure # 1 provides a flow chart of Product Cycle Theory. Note: This Figure is reproduced from permission from International Financial Management, Sixth Edition, Jeff Madura. Copyright © 2000 by West Publishing Company. All Rights Reserved. Question: Do you think that the three theories of international business, Theory of Comparative Advantage, Imperfect Markets Theory, and Product Cycle Theory, are complementary or competitive? Provide justification for your answer. Methods of International Business International Trade: Exporting: A business firm may maintain its production facilities within the territory of its home nation and export its products to foreign countries. Exporting is a safer way to break into a new market since there is less to lose if the strategy fails. The advantage of this approach is lower fixed production costs; but, the disadvantage is higher transportation costs. Direct Foreign Investment (DFI): A business firm located in one country may acquire facilities that enable it to produce a product or render a business service within the territory of another country. An MNC may initiate DFI by either establishing a new subsidiary, opening a factory or purchasing an existing company in that country. An essential element of DFI is the investor's involvement in the management of the productive assets. The investor has total managerial control. Licensing: In a licensing arrangement, one business firm, the licensor, makes certain resources or "inputs" available to another business firm, the licensee. The availability of these inputs makes it possible for the licensee to produce and market a product or service similar to that which the licensor has been producing. As the goods are sold, or services rendered, a portion of the revenues, as specified by the agreement, are sent to the licensor. Franchising is a form of licensing that has spread rapidly throughout the world in recent years. The best-known and most successful international franchisors have been the fast-food chains such as Kentucky Fried Chicken, Burger King, and McDonald's. Advantages: 1) Low cost and 2) low risk. Disadvantages: 1) The local firm in the host country may attempt to export the goods to another country, which may reduce sales of the licensing corporation, 2) It is difficult to ensure quality control of the local firm's production process, and 3) Technology secrets provided to the local firm may leak out to competitive firms in that country. Joint Venture: In the case of joint venture, two or many firms combine to create a subsidiary. Usually, each firm provides the resources in which it has the advantage. For example, a corporation in a developing country can combine with a US based MNC to gain technological advantages. The US firm, in turn, gains a foothold in the country and gains a market share. Impact of Foreign Opportunities on Firm Size MNCs have cost advantages over domestic corporations, and, therefore, the cost of capital for MNCs is cheaper than that for domestic corporations (DCs). Also, MNCs have greater opportunities for more profitable projects; that is, the marginal rate of return from a project is higher for the MNC as opposed to the DC. Besides, MNCs have additional opportunities. With higher return, lower cost, and additional opportunities, an MNC is likely to attain a larger size compared to a DC. Figure # 2 provides information on the marginal return and marginal cost for MNC and DC. FIGURE 2 Note: This Figure is reproduced from permission from International Financial Management, Sixth Edition, Jeff Madura. Copyright © 2000 by West Publishing Company. All Rights Reserved. Note that the marginal return (MR) is higher, but the marginal cost of capital (MCC) is lower for a MNC compared to a DC. The intersection of the MR and MCC curves determines the projects that will get accepted. As long as the MR is greater than or equal to the MCC, the projects will be accepted. Question: Do you know why the marginal cost of capital curve (MCC) is upward sloping? The optimal size of an MNC will be determined by a variety of factors, such as the economic and political environment of the foreign governments, MNC's product line, operating characteristics, risk-return preference, and industry type, etc. Risks of International Business Exchange Rate Risk: Exchange Rate Risk is defined as the variability in home-country cash flows due to the fluctuations in the host-country exchange rates. This risk can affect both the revenues and costs of an MNC negatively. For example, consider the following example: ABC Corporation (US based MNC) has DM 100 million in 90-day payables owed to a German firm for imports from the firm. Suppose, the exchange rate right now (t=0) = $0.661 per DM. Based on this exchange rate, ABC anticipated an outflow of $66.1 million. The exchange rate at t=+90 days when the payable bill was paid, turned out to be $0.75 per DM. Given: ABC Corporation (US-based MNC) has DM 100 million in 90-day Payables 90-day Payables DM 100 Million Time=t 0 Plus 90 days Extra Cost Spot Exchange Rate $/DM 0.661 0.75 $ Cost 66.1 75 8.9 In this case, ABC Corporation paid $ 8.9 million more than it anticipated to pay at time=0; the DM appreciated, thereby increasing the $ cost of the payables in DM. This is the exchange rate risk that the MNCs face in handling their foreign currency flows. This risk arises from the need to convert the cash flows from one currency to another. If there is no need to convert the currency, MNCs will not face exchange rate risk. Question for interactive table above Please change the t=+90 days exchange rate from $0.75 per DM to: 1. $0.50 per DM 2. $1.00 per DM What happens to the $ outflow cost in 1 and 2 above? Does what unfolds in scenario #1 above constitute an exchange rate risk? Question: If there were a single Currency through out the globe, MNCs would not face the daunting problem of exchange rate risk. What do you think of this idea? Is it feasible? Could it create other problems? Political Risk: Some examples of political risk include: 1) nationalization or being taken-over without receiving adequate compensation 2) Restrictions by host country governments on remittances to the parent company, 3) Change in taxation policies in mid-stream. In addition, the form of the government, its stability and the form of the legal system etc. will affect the political risk of a country. Business Risk: Business risk arises from host country business and economic conditions. Slowing or weakening Japanese and European markets often leads to reduced demand for products of U.S. MNCs in these markets, thereby, contributing to the business risk of the U. S. MNCs. Summary In this module, we learned about some features of the World of International Finance and we noted the increasing globalization trend sweeping the markets. In addition, we looked at the characteristics of the Multinational Corporation and its objective; in the context of the MNC, we discussed the theories of international business: Theory of Comparative Advantage, Imperfect Markets Theory, and Product Cycle Theory. In addition, we also compared and contrasted multinational corporations with purely domestic corporations with regard to return and risk; it turns out that multinational corporations enjoy higher possible returns, but they also face more risks. Answers to Questions Raised in the Lecture 1. How does the objective of stock price or stockholder wealth maximization consider the time value of money? Stock price is the present value of all expected future cash flows of the corporation. Therefore, maximizing stock price automatically considers the time value of money. 2. How does the objective of stock price or stockholder wealth maximization consider the riskiness of cash flows as well? In finding the present value of the cash flows to arrive at the stock price of the corporation, depending on the riskiness of the cash flows, one can use different discount rates: if the risk is higher, one can use a higher discount rate, and if the risk is lower, one can use a lower discount rate. Thus, the objective of stock price maximization considers the riskiness of cash flows as well. 3. Are the three theories of international business complementary or competitive? The three theories are more complementary rather than competitive. The three theories address different dimensions of international business. 4. If there were a single currency throughout the globe, there would not be exchange rate risk. What do you think about its feasibility ? What other problems could that create? If we had a single currency, the sovereignty of each country as we know it today would be violated. The ability of the Central Bank of each country to control monetary policy and affect exchange rates, and inflation etc. would be affected as well. We are already witnessing these kinds of problems with the European integration and its single currency ECU evolution. 5. Why is the marginal cost of capital (MCC) upward sloping? If a corporation has debt in its capital structure, it is inherently risky, and, therefore, the banks will be willing to lend additional money only at higher interest rates. That is why the MCC is upward sloping. END OF MODULE 1 Module 2: Foreign Exchange Markets [...]... investors have an advantage in investing in Germany by CIA The concept of IRP is further explained in Figure # 3 Note: This Figure is reproduced by permission from International Financial Management, Sixth Edition, Jeff Madura Copyright © 2000 by West Publishing Company All Rights Reserved On the horizontal axis, the Forward premium or discount is given On the vertical axis, (Home Interest Rate - Foreign... Marks being bought = US $ 46.64 The Bid/Ask Percent Spread is given by: [ (Ask - Bid) / Ask ] * 100 = [(0.4724 - 0.4664)/0.4724] * 100 = 1.2701 percent This should be read as the Ask price being at a premium of 1.2701 percent with respect to the Bid price Obviously, one can compute the discount with respect to the Ask price, by dividing by the Bid price It is customary to express the Bid/Ask Percent spread... interest rate and foreign interest rate is not off-set by the forward premium or discount of the foreign currency in the forward market Covered interest arbitrage involves converting the home currency to the foreign currency, investing in foreign currency and covering against exchange rate risk by selling forward the maturity value of the investment thereby locking-in a rate Covered interest arbitrage then... offset by the forward discount In scenario #4 above, US investors earn 2% return regardless of where they choose to invest Note that IRP does not imply that all country investors earn the same return at the point of IRP In scenarios 1 through 3, US investors have an advantage in investing in Germany by CIA The concept of IRP is further explained in Figure # 3 Note: This Figure is reproduced by permission... on a 24-hour basis According to Zaheer (1995), the foreign exchange market consists of: 1 a primary network of about 150 major international banks with 1000 affiliates spread around the globe; these major banks act as market makers by buying and selling various currencies, and by quoting two-way bid-ask prices all the time These banks also do speculative trading based on "privately informed opinion about... country's goods Inflation differentials are offset by exchange rate change The approximate version of PPP equation is given by, If - Ih = E f Where, If = Inflation rate in the foreign country, Ih = Inflation rate in the home country, Ef = % Change in the Spot Rate of the Foreign Currency Thus, currencies of countries with high inflation will depreciate by the inflation differential, while currencies of... Forecasting accuracy can be further analyzed by plotting the bias over time and also looking at the positive (+) and negative (-) deviations of forecasted rates from the actual rates If we observe consistent over or under forecasting, we can correct our forecast suitably If for example, we consistently overforecast on an average by 5%, we can improve our forecast accuracy by subtracting 5% from our forecast... Loosely, arbitrage can be defined as capitalizing on market discrepancies in the prices quoted in the foreign exchange markets by simultaneous buying and selling It can also involve simultaneous lending and borrowing in different currencies to take advantage of the higher interest rates International Arbitrage Types of Arbitrage Variables in the Discrepencies Locational Foreign exchange rate among banks Triangular... quotes for the Won by taking the reciprocals of the indirect quotes in this table Further, take a few minutes to read and learn the currencies of the countries around the globe! Do you know the name of the Currency for Reunion, Ille de la? Or for that matter, can you name the currencies for Algeria, Bolivia, Chile, Denmark, Egypt, Finland, Germany, Holland, India, Jordan, Kenya, Libya, Madagascar, Nepal,... Tokyo dominate the currency markets The US dollar accounts for 83 percent of all global foreign exchange transactions, followed by the German mark, which accounts for 30 percent of all transactions, and the Japanese yen with a share of 24 percent of all transactions 1 Bank for International Settlements: Central Bank Summary of Foreign Exchange and Derivatives Market Activity, 1998 Need for Foreign Currencies . World of International Finance and the Multinational Corporation I. The World of International Finance and the Globalization of International Financial Markets: A. The World of International Finance. from International Financial Management, Sixth Edition, Jeff Madura. Copyright © 2000 by West Publishing Company. All Rights Reserved. Question: Do you think that the three theories of international. 2 Note: This Figure is reproduced from permission from International Financial Management, Sixth Edition, Jeff Madura. Copyright © 2000 by West Publishing Company. All Rights Reserved. Note