Introduction to International Finance Management

Globalization
The removal of barriers to free trade and the closer integration of national economies
Multinational corporation
A business firm that operates in more than one country but it headquartered or based in its home country. Ex. Walmart, most of the stock is in America.
Transnational corporation
Regardless of the location of their headquarters, are managed from a global perspective rather than the perspective of a firm residing in a particular country. Ex. Oil companies, which are dispersed throughout the world globally.
Factors affecting International Financial Management
1. Uncertainty of future exchange rate movements
2. Differences in legal systems and tax codes
3. English is not the the world’s social language
4. Cultural views shape biz practices and people’s attitudes toward biz
5. An economic system determines how a country mobilizes its resources to produce goods and services needed by society
6. Country risk refers to a political uncertainty associated with a particular country
Country risk
Political uncertainty associated with a particular country. A country’s government may even expropriate business’s assets within the country, change in tax laws, restrictive labour laws, etc.
Stockholder value maximization
The accepted goal for firms in Canada, the UK and US
Maximizing corporate wealth
The goal for continental Europe, countries like France and Germany
Increase the wealth and growth of the group
The goal in Japan, interlocking business groups. Might focus on maximizing market share rather than stockholder wealth.
Transition from command economy to market-based economy
The pattern in China and Soviet Union
Foreign exchange market
A group of international markets connected electronically where currencies are bought and sold in wholesale amounts
Factors affecting currency exchange rates
Supply and demand relationships, relative inflation rates, relative interest rates, others factors (political risk and economic risk)
Benefits of foreign exchange market
1. A mechanism to transfer purchasing power from individuals who deal in one currency to people who deal in a different country
2. A way for corporations to pass the risk associated with foreign exchange price fluctuations to professional risk-takers
3. A channel for importers and exporters to acquire credit for international business transactions
Major participants in the foreign exchange market
Multinational commercial banks, large investment banking firms, small currency boutiques
Spot rate
The rate at which one agrees to buy or sell a currency today
Forward rate
The rate at which one agrees to buy or sell a currency on some future rate. Established at the date on which the agreement is made and defines the exchange rate to be used when the transaction is completed in the future.
Currency exchange rate
Value of one currency relative to another currency
Direct quotation method
Indicates the amount of a home country’s currency needed to purchase one unit of a foreign currency. Ex. how many CAN$ can buy US$
Indirect quotation method
Indicates the amount of a foreign currency needed to purchase one unit of the home country’s currency. Ex. how man US$ can buy CAN$
Exchange rate risk
Convert the project’s future cash flows into another currency, need to come up with projected or forecast exchange rates.