Multinational Financial Management – Corporate Finance
RSM Erasmus University
Department of Finance
Almost tautologically, international finance selects from the broad field of finance those issues that have to do with the existence of many distinct countries. The fact that firms operate in countries which operate as separate entities severely complicates a CFO’s life. Some, but by no means all, of the issues that arise due to multinational operations are:
National currencies, exchange rates and exchange rate risks; The segmentation of goods markets along national lines, which in combination with price stickiness leads to the use of ‘real’ exchange rates;
The fragmentation of equity markets between different countries, but also market providers;
Differences in national judicial systems which complicates bankruptcy, default proceedings and risk management in a unified framework; The political autonomy of countries, which gives rise to political risk; Separate and incompatible tax systems which give rise to double or triple taxation.
All these issues bring to bear in the decision making process of a CFO while handling the tasks of funding, evaluation, and risk. The CFO is required to acquire or have knowledge about international financial markets (equity, bond, and currency markets, as well as the markets for derivatives such as options and futures).
Internationally operating companies are exposed to specific risks that have to be dealt with by financial management. Therefore, the focus of this part of the course will be currency risk management: the measurement and control of international financial risks. Understanding international financial markets and financial risks provides a basis for important financial decisions: investment and finance decisions. The corporate finance part of the course contains the following topics: foreign exchange markets, parity conditions, currency risk management, and international financing.
Course design in a nutshell
The course consists of a combination of lectures and one assignment. The lectures are intended to deal with the practice and theory of the above concepts. In addition, there will be one case study in which students write a report on a firm, which is similar to the research papers and case studies discussed in lectures 3 and 4. The group is divided into teams of 2 students that write the project together. In addition, there will be 10 bonus points for
the project, for the team that will practically manage risk better using an online trading game (more details will be given in Lecture 1). Course objectives
After this course you should understand the key elements of corporate finance and their applications in an international setting. You would have gained knowledge about the available options of CFOs in international financial markets. In addition you should know and be able to apply the theory of financing and investing decisions in an international context. You should be able to set up a risk management program for a firm. Finally you will learn to read articles in finance journals, which allows you to follow future developments in the field.
This course assumes that you have sufficient background in finance, for example at the level of the book by Ross, Westerfield and Jaffe (2005), Corporate Finance. In particular, basic knowledge on currency price determination and derivative instruments is assumed.
The literature list below is a guide to the materials that will be used and discussed during the lectures. You are required to know and understand all the material in the lectures, while the extent to which you read the articles is up to you. All readings will be referenced at the end of the lecture notes and can be found via the electronic library.
The time table for corporate finance is as follows:
Introduction, Foreign Exchange
Markets and Exposure
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