This is a summary of the course International Corporate Finance. It is a combination of the slides and lectures. The exam questions are highlighted throughout the summary based on what he stated multiple times in the lectures, learn these and (normally) you will pass the exam ;)
PART 1: ARCHITECTURE OF INTERNATIONAL MARKETS
CLASS 1: SPOT MARKETS FOR FOREIGN CURRENCY
Introduction
1. How fed rate cuts affect the global economy
The dollar is seen as the world’s reserve currency. Therefore the Federal Reserve is the largest
central bank of the world.
The Fed is followed international because its actions have a spill-over effect to
the rest of the world. Some countries are dollarized, which means that they use
the dollar as their own currency, and they will feel an even bigger impact.
Important topics:
Economic tightening The carry trade The world’s lender of last Other currencies
resort
The Federal Reserve Carry trade Swap lines Other countries have tried to
increased interest rates. = you borrow in a currency = temporary loans send from avoid the dollar, mostly in
that is cheaper (undervalued) 1 CB to another. China. This is because China
Consequences: and then you invest in a wants to internationalize the
The currency appreciates higher yielding currency. The Fed provides those loans renminbi.
because more people want Example: to a selected group of
it. An investor borrows international authorities to
in Japanese yen to ensure that disruptions
It is more difficult to get buy US assets. abroad don’t create
raises at work which can problems in the states.
wage-price spirals. Take note:
This can backfire if ECB and People’s bank of
the dollar China also offer swap lines.
depreciates. A small
shift in expectations
can become a big
move.
Implicit message = exchange rates and currencies are becoming strategic between China,
Europe and the US.
US dollar has always been and still is important. But the question is, is the dollar
still staying important in the future with China coming in because China might be
imposing a threat for the US.
Currencies are a strategic tool because if your currency depreciates you have
much less power on the international market.
, 2. Expectations are key
The stock market is about the future: we are talking about the expected ER and inflation. So the
whole stock market revolves around expectations and whether you meet these expectations.
This makes investing in the stock market hard because it depends upon news and information
today.
If you want to make money on the stock market there is 1 big season: earnings season.
Earnings season
= the period when publicly traded companies report their quarterly financial
results.
On the stock market, there is a fixation on the EPS.
This EPS is reported by financial intermediaries or financial analysists. They are
called intermediaries because they stand between the investor and the company.
Exam question
Financial analysists will process the information, put it together and provide you with a predicted
EPS. The whole stock market is driven by that expected EPS. We will compare the actual EPS
with the predicted EPS. This happens every year, every 3 months.
Actual EPS is better than expected (good news):
The stock price goes up. After this it keeps going up
significantly but decreasingly up until 6 months. After 6
months it will start to flatten.
So, you should by a stock that beats the expectation,
because you can predict with some accuracy that the
stock price going to go up after the release of the EPS.
Stock market efficiency hypothesis
Exam question
6 months
Stock market efficiency hypothesis = suggests that stock prices fully reflect all available
information and news at any given time.
If the actual EPS is released and it beats the prediction this is positive news.
Stock efficiency theory assumes that you should be reflecting that piece of
information in the stock price.
,Efficient stock market Stock market inefficiency
= stock prices always reflect all available It takes forever for the information to kick in the
information, this means that prices quickly stock market.
adjust when new information becomes
Post earnings announcement drift
available.
Underreaction
We underreacted to the news and it took
several months to get to the price that
we should be at.
An overreaction would be to go too far
up and then go down to the flat level.
This does not exist as much in the stock
market.
If you want to make money, you should look for
an underreaction.
- On the exam: highlight these key words in the answer on the exam because he will not
read the whole text.
, EPS is worse than expected (bad news):
The stock price goes down. After this it keeps going
down significantly but decreasingly up until 6 months.
After 6 months it will start to flatten.
Stock market inefficiency
We are in the situation where the stock price slowly
goes up and after 6 months gets there.
Post earnings announcement drift
Underreaction
We underreacted to the news and it took
several months to get to the price that we
6 months
should be at.
This is what happening around earnings season. There are other important aspects of this:
Financial managers focus on assessing the risk of not meeting the expectation: what is the
likelihood of not meeting or beating the expectations (MBE = meeting or beating expectations).
They focus on this because if the company does not meet or beat the expectation (= bad news),
the stock price goes down and the manger gets fired. If the financial manager feels that he
cannot meet or beat the expectation, he can do 2 things:
Option 1: lower the expectation Option 2: manipulate the result
Financial analysists provide us with the expected Financial managers can report wrong numbers
EPS, to be able to do this they need information. and it is allowed. The EPS could be manipulated
So financial managers could say that they have to up in order to appear more profitable than you are
lower the expectation otherwise they won’t give using accounting tricks: accruals management in
them accurate information to predict an accurate accounting. This is allowed by law to some extent.
EPS and get their bonus. EPS and get their bonus.
This is why you typically see a walk down pattern This is why you typically see a walk down pattern
of the expectations provided by financial of the expectations provided by financial
analysists throughout the semester. analysists throughout the semester.
Strategic manipulation of the - Earnings management
expectation.
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