Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

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INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Fourth Edition
Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter Objectives:

Understand why it is important to study
international finance.

Distinguish international finance from domestic
finance.


1
Chapter One
Globalization & the
Multinational Firm
Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
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Whats Special about International
Finance?
Goals for International Financial Management
Globalization of the World Economy
Multinational Corporations
Organization of the Text
Summary
Chapter One Outline
Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
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Whats Special about
International Finance?
Foreign Exchange Risk
Political Risk
Market Imperfections
Expanded Opportunity Set
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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.
Suppose $1 = 100 and you buy 10 shares of Toyota at
10,000 per share.
One year later the investment is worth ten percent more
in yen: 110,000
But, if the yen has depreciated to $1 = 120, your
investment has actually lost money in dollar terms.
Copyright 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
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Whats Special about
International Finance?
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.
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Market Imperfections
Legal restrictions on movement of goods,
people, and money
Transactions costs
Shipping costs
Tax arbitrage
Whats Special about
International Finance?
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The Example of Nestls Market
Imperfection
Nestl used to issue two different classes of
common stock bearer shares and registered shares.
Foreigners were only allowed to buy bearer shares.
Swiss citizens could buy registered shares.
The bearer stock was more expensive.
On November 18, 1988, Nestl lifted restrictions
imposed on foreigners, allowing them to hold
registered shares as well as bearer shares.
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Nestls Foreign Ownership Restrictions
12,000
10,000
8,000
6,000
4,000
2,000
0
11 20 31 9 18 24
Source: Financial Times, November 26, 1988 p.1. Adapted with permission.
S
F

Bearer share
Registered share
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The Example of Nestls Market
Imperfection
Following this, the price spread between the two
types of shares narrowed dramatically.
This implies that there was a major transfer of wealth
from foreign shareholders to Swiss shareholders.
Foreigners holding Nestl bearer shares were
exposed to political risk in a country that is widely
viewed as a haven from such risk.
The Nestl episode illustrates both the importance
of considering market imperfections and the peril
of political risk.
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Expanded Opportunity Set
It doesnt make sense to play in only one
corner of the sandbox.
True for corporations as well as individual
investors.
Whats Special about
International Finance?
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The focus of the text is to equip the reader 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?
Goals for International Financial
Management
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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?
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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.
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Other Goals
As shown by a series of recent corporate scandals
at companies like Enron, WorldCom, and Global
Crossing, managers may pursue their own private
interests at the expense of shareholders when they
are not closely monitored.
These calamities have painfully reinforced the
importance of corporate governance i.e. the
financial and legal framework for regulating the
relationship between a firms management and
its shareholders.
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Other Goals
These types of issues can be much more serious in
many other parts of the world, especially emerging
and transitional economies, such as Indonesia,
Korea, and Russia, where legal protection of
shareholders is weak or virtually non-existing.
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.
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Globalization of the World Economy:
Major Trends

Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
Privatization

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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
Emergence of Globalized
Financial Markets
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Emergence of the Euro as a Global Currency
A momentous event in the history of world
financial systems.
Currently more than 300 million Europeans in 22
countries are using the common currency on a
daily basis.
In May 2004, 10 more countries joined the
European Union and adopt the euro.
The transaction domain of the euro may
become larger than the U.S. dollars in the near
future.
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Euro Area
Austria
Belgium
Cyprus
Czech Republic
Estonia
Finland
France
Germany
Greece
Hungary
Ireland
22 Countries participating in the euro:
Italy
Latvia
Lithuania
Luxembourg
Malta
Poland
Portugal
Slovak Republic
Slovenia
Spain
The Netherlands
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Value of the Euro in U.S. Dollars
January 1999 to Dec 2004
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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.
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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.
On January 1, 2005 the end of the era of quotas
on imported textiles ended.
This is an event of historic proportions.
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NAFTA
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.
For Mexico, the ratio of export to GDP has
increased dramatically from 2.2% in 1973 to
28.7% in 2001.
The increased trade will result in increased
numbers of jobs and a higher standard of living
for all member nations.
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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.

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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.
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Top 10 MNCs
1 General Electric United States
2 Vodafone Group PLC United Kingdom
3 Ford Motor Company United States
4 British Petroleum Co. PLC United Kingdom
5 General Motors United States
6 Royal Dutch/Shell Group UK/Netherlands
7 Toyota Motor Corporation Japan
8 Total Fina Elf France
9 France Telecom France
10 ExxonMobile Corporation United States
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End Chapter One