Mba Financial Management

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International Financial Management

International Financial Management
INTRODUCTION

Halil Kiymaz, Ph.D., CFA Bank of America Chair and Professor of Finance

ROAD MAP TO INT FINANCE
KEY ISSUES

ROAD MAP TO INT FINANCE
CASES

Global Financial Environment

-Why to study Int. Finance?
-Int. Monetary System -The Balance of Payments

Foreign Exchange Market

-Foreign Exchange Market
-How do we determine FX? Any risk? -International Parity Conditions -FX Derivatives

Foreign Exchange Market

1. Hedging Currency Risk at AIFS

Foreign Exchange Risk Management

-Transaction Exposure
-Operating Exposure -Accounting Exposure

Foreign Exchange Exposure and Management

2. Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures

Financing Global Firms Foreign Investment Decisions

-How to raise money internationally?
-Global Cost of Capital -Interest Rate and Currency Swaps

Financing Global Firms Foreign Investment Decisions

3. Costs of Capital and Capital Budgeting at AES

-Political Risk Management
-Multinational Capital Budgeting

4. Nestle and Alcon—The Value of Listing

Introduction
Why is it important to study international finance?  Distinguish international finance from domestic finance  Multinational Corporation?  What’s special about “International” Finance?  What are the goals?  

Why do we study international finance?

Globalization has changed the scope and activities of firms of any size  Share of corporate profits attributable to foreign operations increased from 4% 1950s to 24% in 2000s. 

Similar trends are observed in sales and investments



Firms increasingly rely on integrated foreign operations

1

Growing Importance of Foreign Profits to Corporate Profits, 1950-2004 .2 4 .2 0 .1 6 .1 2 .0 8 .0 4 .0 0 55 60 65 70 75 80 85 90 95 00

A recent article from WSJ… Divided by a Two-Track Economy
September 7, 2010

PERC ENT
Source: NIPA tables available at www.bea.gov

Years WSJ Divided by Two Economy

A recent article from WSJ… Divided by a Two-Track Economy
September 7, 2010

Why do we study international finance?
 Change

Ten firms largest share of their sales abroad---- 8.3% revenue growth

in the nature of foreign operations of autonomous subsidiaries serving local markets (horizontal) vs. integrated production process (vertical).

Ten firms with least business outside US--- only 1.6% revenue growth

 Web

Horizontal Foreign Direct Investment
U.S. MNC

Vertical Foreign Direct Investment
U.S. MNC
Intellectual Property

Capital

French Sub
Intermediate G&S

British Sub

Mexican Sub

Canadian Sub

Brazilian Sub

British Customers

Mexican Customers

Canadian Customers

Worldwide Customers

-Local customers are served through locally produced goods and services

-Subsidiaries are part of global production process

2

How is it different from domestic finance?
Questions
FIRM 1 Capital Markets How should firms finance themselves? How should firms make dividends decision? How should firms analyze investment decisions? How should information be communicated to capital providers? Sub 1A Sub 1B Sub 1C Sub 2A Sub 2B Sub 2C Sub 3A Sub 3B

How is it different from domestic finance?
Questions FIRM 1
How should subsidiaries be financed? How should repatriation policies be designed? Capital Markets How should investment opportunities in different countries be analyzed? How should information be communicated inside the firm? When should ownership be shared? With whom? FIRM 3

FIRM 2

FIRM 2

FIRM 3

Traditional Finance Setting

Sub 3C

International Finance Setting

Exhibit 1.1 Creating Firm Value in Global Markets

Why do firms become multinational?

What is the rational for international trade?
The theory of comparative advantage provides a basis for explaining and justifying international trade  Assumptions: 
    

New Markets Raw Materials...
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