Summary
Summary International Financial Management
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Summary of International Financial Management of 33 pages. Includes chapter 1-17 except 10 (not in course).
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Summary of International Finance the 7th Global Edition by Eun and Resnick
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Summary chapter 1 Globalization and the Multinational FirmFinancial management is mainly concerned with how to optimally make various corporate financial
decisions.
What’s special about international finance?
Four major dimensions set international finance apart from domestic finance:
1. Foreign exchange risk (currency risk)
2. Political risk (sanctions or any law against foreign companies)
3. Market imperfections (lack of information)
4. Expanded opportunity set (opportunities/benefits of going abroad)
1. WHEN firms and individuals are engaged in cross-border transactions, they are potentially exposed
to foreign exchange risks. There are unanticipated movements in the exchange rate that can hurt
foreign currency profits or investment returns. E.g. if you produce in China and the Yen drops, it’s
beneficial for you and the other way around.
2. POLITICAL risk ranges from unexpected changes in law (tax rules to outright assets held by
foreigners). This risk arise from the fact that a sovereign country can change the rules of the game. As
an investor you have to comply with all these rules. E.g. TNT example: one company wanted to raise
the minimum wage in order to raise to cost level of competitors. Government raised the minimum
wage and 9 post order companies went bankrupt.
3. THERE could be frictions in the market for goods and services and for capital markets. Market
imperfections are frictions preventing markets from functioning perfectly. Market frictions: legal
restrictions to movement of goods and people across borders (tariffs, visa) (tariffs are for protecting
the industries in the home country and are always beneficial for the home country), cultural barriers
and transaction/transportation costs (MasterCard example). Market frictions are information
asymmetries, taxation, regulations; Nestle example bearer and registered shares (disadvantage for
foreign investors).
4. FIRMS can locate production in any country of the world to maximize their performance and raise
funds in any capital market where the costs of capital is the lowest. Furthermore a company can
create economics of scale/scope. Individuals can also benefit greatly if they invest internationally
because there are inter alia more diversification opportunities.
Goals for International Financial Management
The primary goal of managers/financial management is to maximize shareholder value/wealth. This
means that the firm makes all business decisions and investments with an eye towards the owners of
the firm (shareholders) (Anglo-Saxon markets). In other countries shareholders are just one kind
among many stakeholders (suppliers, employees, etc.). Most of the times there is cohesion between
the interests of both parties because that’s a requirement to function well. There is actually no
guarantee that the managers will run the company for the interest of shareholders (agency problem).
Therefore corporate governance, the financial and legal framework for regulating the relationship
between a company’s management and its shareholders, is of great importance. In many countries
where shareholders do not have strong legal rights, corporate ownership tend to be concentrated.
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