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Summary International Financial Management

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Summary of the lectures of International Financial Management.

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  • 31 maart 2016
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gijstimmermans1
Summary International Financial Management
Lecture 1: Why and wherefores
Foreign exchange (FX) risk: An unanticipated movement in the exchange rate can hurt foreign
currency profits or investment returns.
Political risk: Unanticipated changes in laws (e.g. taxes).
Market imperfections: Frictions in the markets for goods and services or in capital markets.
Expanded opportunity set: Potential benefits for firm (markets) and individual investors (increased
investment and diversification opportunities).
Firm goals:
 Shareholder value view. (1) Maximization of shareholder value, (2) constrained shareholder value.
 Corporate governance

Globalization:
 Emergence of globalized markets  Emergence of the Euro
 Trade liberalization and economic integration  Privatization

Multinational corporation (MNC) A firm that is incorporated in one country, but has production and
sales in other countries.

Lecture 2: Some macro facts
 Gold standard (1875-1914)  Bretton Woods (1945-1973)
 Interwar period (1915-1944)  Flexible exchange rates (1973-today)

 Flexible exchange rates can be good because
o Automatic stabilization of trade imbalances
o National monetary policy remains autonomous
 Flexible exchange rates can be bad because
o Exchange rate uncertainty

Balance of payments (BoP): Statistical records of a country’s international
transactions over a certain period of time, presented in the form of
double-entry bookkeeping.
Difference between sales of assets to foreigners and purchases of
foreign assets. Example: foreign direct investment (FDI):
Imports > exports: trade deficit Imports < exports: trade surplus Total debits > total credits:
current account deficit
Current account
BCA + BKA + BRA = 0
Fixed exchange rates: BCA + BKA = - BRA (Therefore: positive BRA = reserves are run down)
Floating exchange rates: BCA + BKA = 0
Dirty floating rates: BCA + BKA ≈ 0




Summary IFM 2016 G. Timmermans 1

, Lecture 3: Governance around the world
Corporate governance: The economic, legal, and institutional framework in which corporate
control and cash flow rights are distributed among shareholders,
managers, and other stakeholders of the company.

1  Public corporation’s structure  2
A public corporation’s pros are (1)
efficient risk sharing, and (2) a major
organizational innovation.

Key objective of corporate governance: protect outside investors from
expropriation by controlling insiders (managers, controlling investors).
Two types of shareholders

Remedies to agency problems: governance mechanisms to alleviate the agency problems
1. Board of directors 4. Accounting transparency 7. Market for corporate
2. Incentive contracts 5. Debt control
3. Concentrated ownership 6. Cross-listing

Common law is formed by the discrete ruling of independent judges and judicial precedent. Civil law
tradition is based on codification of legal rules. Consequences of Law for Finance:
1. The pattern of corporate ownership and control
2. Capital markets development
3. Economic growth

Lecture 4: The FX market, part I
Interbank market is a network of correspondent banking relationships. Large commercial banks maintain
deposit accounts with each other, called correspondent banking accounts.
Spot FX market:
 Spot rate quotations
o Ex.: €1 = $1.2: direct quotation (American terms), indirect quotation (European terms)
 Bid-ask spreads = difference between:
o Bid price is the price a market maker is willing to pay for a currency
o Ask price is the amount the market maker wants the buyer to pay for the currency
 Cross rates
 (Triangular) arbitrage (Changing Yen to Dollars, could also do it through Pounds)

Forward FX market
A forward is an agreement to buy or sell an asset in the future at a price agreed upon today
 Forward rate quotations
 Long and short forward positions
o If you agree to sell (buy) dollars (spot or forward), you are short (long) “in the dollar”
 Forward cross exchange rates
o Recall, and note that: S(€/£) = S($/£) x S(€/$) = S($/£) / S($/€)
 Forward premium and discount
o Annualized relative deviation from the spot rate (N-O/O. If positive, premium. If negative,
discount).



Summary IFM 2016 G. Timmermans 2

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