MAIN TOPICS FOR DISCUSSION

ENVIRONMENT OF INTERNATIONAL FINANCIAL MANAGEMENT DETERMINATION OF EXCHANGE RATES INTERNATIONAL MONETARY SYSTEM PARITY CONDITIONS IN INTERNATIONAL FINANCE FORECASTING AND CURRENCY

BALANCE OF PAYMENTS AND INTERNATIONAL ECONOMIC LINKAGES FOREX MARKET

CURRENCY FUTURES AND OPTIONS MARKETS

Current Trends
Indias exports dip 4.2% in May on account of Euro crises. Drop in gold and silver imports Record NRI deposits just not enough to stem Rs fall BOP implications. Choking of FDI FLOWS Eurozone crises has eliminated the benefits of a weak Rs .India has about a sixth of its total exports in textiles. What are the domestic and global factors which will drive up gold prices.(weakness of rs gainst $ ,curbs on imports, international macro events, chinese demand)

Bilateral trade between Brazil and India is targeted to grow At 30%. Investment climate is conducive as they dont require special Government authorisation for local businesses in Brazil Oil &gas, minerals, software services and outsourcing, cements and Automobiles Problems Local language Legal system Affiliation of workers to unions, Buracracy Social security cost Brazil- financial transaction tax to control of fund to financial markets Bilateral investment promotions are underway Elgi equipments in the air compressor market aim to make it 10%

Foreign Exchange Markets

Sourcing Capital in Global Markets

International Financial Management

Synthesis

Managing FOREX Exposure

Foreign Investment Decisions

Exchange Rate Cross-border Barriers that include

Financing Opportunities in Global Market

Economic barriers Cultural barriers Political and Legal barriers Ethical Issues

Changing value of U.S. dollar versus other currencies since 1973 Declining dollar good for U.S. exporters, but bad for imports Rising dollar good for U.S. imports/outsourcing, but bad for exports

Tariffs, Import Duties, Quota Restrictions Restrictions on remittance of profits and repatriation of capital Restrictions on foreign equity participation Trading blocks

Hand Gestures Religion

Significance of Religion and Values Customs/Traditions

Hinduism Islam Judaism Christianity Buddhism

Political Ideology Opinions of Political Leadership Civil disorder External relations Attitude towards foreign capital Legal System

Definition of Ethics in your country versus definition of Ethics in a foreign country Ethics and the society

Firms role in education Firms role in health care

Ethics and the environment

A company that engages in global business A pure domestic company

To maximize shareholder wealth through maximization of market value by maximizing the cash flows of the firm

To seek raw material To seek new markets To minimize cost

Overall goal, shareholder wealth maximization Separation of ownership from management and Corporate Governance

Meaning Goal of Corporate Governance Comparative Corporate Governance Corporate Governance and Emerging Markets Corporate Governance and MultinationalFinancial Management

Corporate governance is about the exercise of power over corporate entities. Governance issues arise when a corporate entity acquires a life of its ownWhenever ownership of an enterprise is separated from its management The relationship among stakeholders used to determine and control the strategic direction and performance of an organization is termed corporate governance

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

17

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

Global Financial Crisis

Bailouts and Bans Can a country go bankrupt

CURRENT TRENDS 36 major currencies, such as the U.S. dollar, the Japanese yen, the Euro, and the British pound are determined largely by market forces. 50 countries, including the China, India, Russia, and Singapore, adopt some forms of Managed Floating system. 41 countries do not have their own national currencies 40 countries, including many islands in the Caribbean, many African nations, UAE and Venezuela, do have their own currencies, but they maintain a peg to another currency such as the U.S. dollar. The remaining countries have some mixture of fixed and

Product of the desire to create a more integrated European economy.

Eleven European countries adopted the Euro on January 1, 1999:

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.

The following countries opted out initially:

Denmark, Greece, Sweden, and the U.K.

Euro notes and coins were introduced in 2002 Greece adopted the Euro in 2001 Slovenia adopted the Euro in 2007

The FX market encompasses:

Conversion of purchasing power from one currency to another; bank deposits of foreign currency; credit denominated in foreign currency; foreign trade financing; trading in foreign currency options & futures, and currency swaps

No central market place

World-wide linkage of bank currency traders, non-bank dealers (IBanks, insurance companies, etc.), and FX brokerslike an international OTC market Daily trading is estimated to be US$3.21 trillion Trading occurs 24 hours a day London is the largest FX trading center

Largest financial market in the world

US dollar price of 1 unit of foreign currency$ are in the numerator (foreign currency is priced in terms of dollars) $/ = 1.5000 (1 costs $1.5000) $/ = 2.0000 (1 costs $2.0000) Currency changes Suppose that today, $/ = 1.5000 and in 1 month, $/ = 1.5050
The $ has depreciated in value Alternatively, the has appreciated in value

Suppose that today, $/ = 2.0000 and in 1 month, $/ =

1.9950

The $ has appreciated in value Alternatively, the has depreciated in value

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Foreign currency price of $1$ are in the denominator (US dollar is priced in terms of foreign currency) /$ = 0.6667 ($1costs 0.6667) /$ = 0.5000 ($1 costs 0.5000) Currency changes Suppose that today, /$ = 0.6667 and in 1 month, /$ = 0.6600
The $ has depreciated in value Alternatively, the has appreciated in value

Suppose that today, /$ = 0.5000 and in 1 week, /$ =

0.5050.

The $ has appreciated in value Alternatively, the has depreciated in value

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Currency U.S. $ equiv. per U.S. $ Country Wed. Tues. Wed. Tues. Japan (Yen) .008639 .008681 115.75 115.20 30-Day Forward .008676 .008718 115.26 114.71 T he New York foreign exc hange s elling rates below apply to .008750 .008791 114.28 113.76 trading among banks in amounts of $1 million and more , as quoted 90-Day Forward 180-Day Forward .008865 .008907 112.80 112.28 at 4 p.m. Eas tern time by Dow J ones T elerate Inc . and other s ourc es . Jordan (Dinar) 1.4075 1.4075 .7105 .7105 Retail trans ac tions provide fewer units of foreign c urrenc y per Kuwait (Dinar) 3.3367 3.3389 .2997 .2995 dollar. Lebanon (Pound) .0006445 .0006445 1551.50 1551.50 Currency Malaysia (Ringgit) .4018 .4002 2.4885 2.4990 per U.S. $ U.S. $ equiv. Malta (Lira) 2.7624 2.7701 .3620 .3610 Country Wed. Tues. Wed. Tues. Mexico (Peso) .... .... .... .... Argentina (Peso) 1.0012 1.0012 .9988 .9988 Floating rate .1278 .1277 7.8220 7.8330 Australia (Dollar) .7805 .7902 1.2812 1.2655 Netherland (Guilder) .5655 .5699 1.7685 1.7547 Austria (Schilling) .09043 .09101 11.058 10.988 New Zealand (Dollar) .7072 .7106 1.4140 1.4073 Bahrain (Dinar) 2.6525 2.6525 .3770 .3770 Norway (Krone) .1540 .1548 6.4926 6.4599 Belgium (Franc) .03080 .03105 32.470 32.205 Pakistan (Rupee) .02529 .02529 39.540 39.540 Brazil (Real) .9607 .9615 1.0409 1.0401 Peru (new Sol) .3814 .3840 2.6218 2.6039 Britain (Pound) 1.6880 1.6946 .5924 .5901 Philippines (Peso) .03800 .03802 26.318 26.300 30-Day Forward 1.6869 1.6935 .5928 .5905 Poland (Zloty) .3460 .3475 2.8900 2.8780 90-Day Forward 1.6843 1.6910 .5937 .5914 Portugal (Escudo) .006307 .006369 158.55 157.02 180-Day Forward 1.6802 1.6867 .5952 .5929 Russia (Ruble) (a) .0001787 .0001788 5595.00 5594.00 Canada (Dollar) .7399 .7370 1.3516 1.3568 Saudi Arabia (Riyal) .2666 .2667 3.7503 3.7502 30-Day Forward .7414 .7386 1.3488 1.3539 Singapore (Dollar) .7116 .7124 1.4053 1.4037 90-Day Forward .7442 .7413 1.3437 1.3489 Slovak Rep. (Koruna) .03259 .03259 30.688 30.688 180-Day Forward .7479 .7450 1.3370 1.3422 South Africa (Rand) .2141 .2142 4.6705 4.6690 Chile (Peso) .002352 .002356 425.25 424.40 South Korea (Won) .001184 .001184 844.75 844.65 China (Renminbi) .1201 .1201 8.3272 8.3276 Spain (Peseta) .007546 .007603 132.52 131.53 Colombia (Peso) .0009985 .0009985 1001.50 1001.50 Sweden (Krona) .1431 .1435 6.9865 6.9697 Czech. Rep (Krouna) .... .... .... .... Switzerland (Franc) .7334 .7387 1.3635 1.3537 Commercial rate .03662 .03677 27.307 27.194 30-Day Forward .7357 .7411 1.3593 1.3494 Denmark (Krone) .1663 .1677 6.0118 5.9633 90-Day Forward .7401 .7454 1.3511 1.3416 Ecuador (Sucre) .... .... .... .... 180-Day Forward .7470 .7523 1.3386 1.3293 Floating rate .0002766 .0002787 3615.00 3587.50 Taiwan (Dollar) .03638 .03637 27.489 27.493 Finland (Markka) .2121 .2135 4.7150 4.6841 Thailand (Baht) .03902 .03906 25.625 25.605 France (Franc) .1879 .1893 5.3220 5.2838 Turkey (Lira) .00000911 .00000915 109755.00 109235.00 30-Day Forward .1882 .1896 5.3126 5.2741 United Arab (Dirham) .2723 .2723 3.6720 3.6720 90-Day Forward .1889 .1903 5.2935 5.2558 Uruguay (New Peso) .... .... .... .... 180-Day Forward .1901 .1914 5.2617 5.2243 Financial .1145 .1145 8.7300 8.7300 Germany (Mark) .6352 .6394 1.5744 1.5639 Venezuela (Bolivar) .002098 .002096 476.70 477.12 30-Day Forward .6364 .6407 1.5714 1.5607 --90-Day Forward .6389 .6432 1.5652 1.5547 SDR 1.4315 1.4326 .6986 .6980 180-Day Forward .6430 .6472 1.5552 1.5450 ECU 1.2308 1.2404 .......... ........... Greece (Drachma) .004049 .004068 246.98 245.80 Hong Kong (Dollar) .1292 .1292 7.7390 7.7390 Special Drawing Rights (SDR) are based on exchange rates for Hungary (Forint) .006139 .006164 162.89 162.23 the U.S., German, British, French, and Japanese currencies. Source: India (Rupee) .02787 .02786 35.875 35.890 International Monetary Fund. Indonesia (Rupiah) .0004233 .0004233 2362.15 2362.63 European Currency Unit (ECU) is based on a basket of community Ireland (Punt) 1.6664 1.6714 .6001 .5983 currencies. Israel (Shekel) .3079 .3085 3.2474 3.2412 a-fixing, Moscow Interbank Currency Exchange. Italy (Lira) .0006483 .0006510 1542.50 1536.00

W ednes day, J anuary 8, 1997

EXCHANGE RAT ES

US dollar price: S($/)=1.6880 1 costs $1.6880 UK pound price: S(/$)=0.5924 $1 costs 0.5924

And note that 1 S ($ / ) S (/$)

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CROSS RATES

The exchange rate between 2 currencies where neither currency is the US dollar We know the dollar rates. What if we want to know other rates, i.e. S(/) ?
Calculate cross-rates from dollar rates S($/)=1.5000 and S($/)=2.0000. What is S(/), i.e. the price of ?

$ 1 1.3333 2.0000 $ 1.5000 1 S ( / ) 1.3333

Forward market involves contracting today for the future purchase or sale of foreign exchange Forward prices are quoted the same way as spot prices
Denote the forward price maturing in N days as FN
i.e. F30($/), F180($/), F90(/ ), etc

The forward dollar price of the euro can be:

Same as the spot price Higher than the spot price (euro at a premium) Lower than the spot price (euro at a discount)

The foreign exchange market

the currency of country A with the currency of country B

Is the market where one buys or sells

A currency exchange rate

Is simply the ratio of

a unit of currency of country A to a unit of the currency of country B at the time of the buy or sell transaction

Currency conversion in the foreign exchange market

Is necessary to complete private and

commercial transactions across borders A tourist needs to pay expenses on the road in local currency A firm
Buys/sells goods and services in the other countrys

Is used to speculate on currency movements

local currency Uses the foreign exchange market to invest excess funds

Minimizes foreign exchange risk (unpredictable rate swings) To do so there are different ways to trade currencies
date Usually quoted 30, 90, 120 days in advance

Spot exchange rates: the days rate offered by a dealer/bank Forward exchange rates: Agreed in advance rates to buy/sell a currency on a future

The market is open 24 hours. Arbitrage is the process of buying low and selling high given slightly different exchange rate quotes in one location vs another (e.g., London vs Tokyo)

The law of one price:

Identical products sold in different countries must sell

for one price if their price is expressed in one currency Assumptions:

Competitive markets
No transportation costs; no trade barriers

Purchasing Power Parity (PPP):

If the law of one price holds for all goods / services,

the PPP exchange rate is found by comparing prices of identical products in different countries

Inflation occurs when the quantity of money in circulation rises faster than the stock of goods and services Money supply growth is related to currency value

Relative inflation rates and trends can predict relative exchange rate movements
When changes in relative prices in two countries change their currencies exchange rate, then the currency of the country with the highest inflation should decline in value

Interest rates reflect expectations of inflation rates;

high interest rates reflect high inflation expectation Fisher Effect: i = r + I i: nominal interest rate in a country r: real interest rate I: inflation over the period the funds are to be lent International Fisher Effect: (S1-S2)/S2 X 100 = i$ - i For any two countries the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries S1: spot rate at time 1, S2 : spot rate at time 1; i$, i: nominal interest rates in the US and Japan

The efficient market school

Prices reflect all available public information Prices do not reflect all available public

The inefficient market school

information

Approaches to forecasting
Fundamental analysis Technical analysis
Econometric models draw on economic theory to

forecast future movements

Extrapolation/interpretation of past trends assuming

they predict future movements

Currency convertibility and government policy

Freely convertible: residents/non-residents allowed to purchase unlimited amounts of a foreign currency with the local currency Not freely convertible: residents/non-residents not allowed to purchase unlimited amounts of a foreign currency with the local currency

Countertrade

Barter agreements by which goods and services can

be traded for other goods and services Used to get around the non-convertibility of currencies