International Finance Midterm Review

Topics: Foreign exchange market, International economics, Balance of payments Pages: 8 (1012 words) Published: April 3, 2013

International Finance Mid-Term Exam Guide

Below is an outline of what is included in your test. Class notes, exercises and discussion along with homework problems should be enough. Reading book chapters will provide additional info if you feel you need it.

1. Globalization and the Multinational Firm

• What’s special about international finance

o Foreign Exchange Risk

▪ The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.

o 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.

o Market Imperfections

▪ Legal restrictions on the movement of goods, people, and money

▪ Transactions costs

▪ Shipping costs

▪ Tax arbitrage

o Expanded Opportunity Set-maximization of shareholder wealth (the corporate objective continues to be maximization of existing shareholder wealth)

• Globalization of the World Economy Major Trends

o Emergence of Globalized Financial Markets

▪ 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

o Emergence of the Euro as a Global Currency

▪ The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future.

o Trade Liberalization and Economic Integration

o 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.

3. Balance of Payments-

Understand whether an action should be recorded as an inflow or outflow and into which BP account.

o Current account and its components

▪ Includes all imports and exports of goods and services.

▪ Includes unilateral transfers of foreign aid.

▪ If the debits exceed the credits, then a country is running a trade deficit.

▪ If the credits exceed the debits, then a country is running a trade surplus.

▪ Merchandise trade- exports and imports of tangible goods (oil, wheat, cars, computers, etc.).

▪ Services-includes payment and receipts for legal, consulting and engineering services, royalties for patents and intellectual property, insurance premiums, shipping fees, tourist expenditures.

▪ Factor Income- payments and receipts of interest, dividends and other income on foreign investments previously made.

▪ Unilateral transfers- foreign aid, official and private grants and gifts.

▪ The capital account has been changed to separate it from the financial account.

▪ Capital Account- includes value of financial assets transferred across country borders by people who move to a different country. Also includes value of non-produced non-financial assets transferred across borders such as patents and trademarks.

▪ Capital account items are relatively minor compared to financial account items.

o Financial Account and its components

▪ Divided into 3 categories:

▪ Direct investment (FDI)- when investors acquire a measure of control of the foreign business ( in US BP 10% or more of voting shares is considered a measure of control), establishing facilities in foreign country, etc.

▪ Portfolio Investment- sales and purchases of foreign financial assets such as stocks and bonds, that do not involve a transfer of control.

▪ Other investments-...
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