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1、Multinational Financial Management Alan Shapiro8th Edition J.Wiley&Sons,Power Points byJoseph F.Greco,Ph.D.California State University,Fullerton,CHAPTER 1,Introduction,3,PART 1 THE RISE OF THE MULTINATIONAL CORPORATION,I.The MNC:A Definitiona company with production and distribution facilities in mo
2、re than one country.with a parent company located in the home country at least five or six foreign subsidiaries,4,THE RISE OF THE MULTINATIONAL CORPORATION,A.Forces Changing Global MarketsMassive deregulationCollapse of communismPrivatizations of state-owned industriesRevolution in information techn
3、ologyWave of M&AEmergence of free market policies in Third World NationsCountless nations accepting the standards of free market capitalism,5,THE RISE OF THE MULTINATIONAL CORPORATION,The Rise of China as a Global Competitorthe most dramatic change in the international economy over the last decadeth
4、e number one destination for foreign direct investment(FDI)Note:FDI is the acquisition abroad of companies,property,or physical assets,6,THE RISE OF THE MULTINATIONAL CORPORATION,B.Who is the Prime Transmitter of Competitive Forces in the Global Economy:The MNC emphasizes group performance such asGl
5、obal coordinated allocation of resources Market entry strategyOwnership of foreign operationsProduction,marketing and financial activities,7,THE RISE OF THE MULTINATIONAL CORPORATION,C.The MNCs EvolutionReasons to Go Global:1.More raw materials2.New markets3.Minimize costs of production,8,THE RISE O
6、F THE MULTINATIONAL CORPORATION,RAW MATERIAL SEEKERSexploit markets in other countrieshistorically first to appearmodern-day counterpartsBritish PetroleumExxon,9,THE RISE OF THE MULTINATIONAL CORPORATION,MARKET SEEKERSProduce and sell in foreign marketsHave heavy foreign direct investorsRepresented
7、today by firms such as:IBMMacDonaldsNestleLevi Strauss,10,THE RISE OF THE MULTINATIONAL CORPORATION,COST MINIMIZERSseek lower-cost production abroadTheir motive:to remain cost competitiveRepresented today by firms such as:Texas InstrumentsIntelSeagate Technology,11,THE RISE OF THE MULTINATIONAL CORP
8、ORATION,D.What is the MNC?From a Behavioral Viewits a state of mind committed to globallyproducing,undertaking investment,marketing,andfinancing.,12,THE RISE OF THE MULTINATIONAL CORPORATION,E.THE GLOBAL MANAGER:1.Understands political and economic differences;2.Searches for most cost-effective supp
9、liers;3.Evaluates changes on value of the firm.,13,Part II INTERNATIONALIZATION OF BUSINESS AND FINANCE,I.GlobalizationII.Political and Labor UnionConcernsIII.Consequences of Global Competition:The acceleration of the global economy,14,PART III.MULTINATIONAL FINANCIAL MANAGEMENT:THEORY AND PRACTICE,
10、I.The MNCs PoliciesA.Main Objective of MNC:Maximize shareholder wealthB.Other Objectives Reflect Its Ability to Link:via affiliate transfer mechanisms,15,MFM:THEORY AND PRACTICE,C.Mode of Transfer:Reflects freedom to select a variety of financial channels.D.Timing Flexibility:Most MNC have some flex
11、ibility in timing of fund flows.E.ValueThe ability to avoid national taxes has led to controversy.,16,MFM:THEORY AND PRACTICE,II.FUNCTIONS OF FINANCIAL MANAGEMENTA.Two Basic Functions:1.Financing2.Investing,17,MFM:THEORY AND PRACTICE,B.Additional Factors Facing the MNC Executive1.Political risk2.Eco
12、nomic risk,18,MFM:THEORY AND PRACTICE,III.THEORETICAL FOUNDATIONSA.Useful Concepts from Financial Economics:1.Arbitrage2.Market Efficiency3.Capital Asset Pricing,19,MFM:THEORY AND PRACTICE,B.Importance of Total Risk1.Adverse Impactlower sales and higher costs2.Justifies hedging activities of MNC3.Di
13、versification reduces risk,20,MFM:THEORY AND PRACTICE,IV.THE GLOBAL FINANCIAL MARKET PLACEA.Inter-linkage by ComputersB.Market Acts as A GlobalReferendum Process Where:Currencies may rise or fall,21,CHAPTER 2,Understanding Exchange Rates,Part I.Understanding Exchange Rates,I.SETTING THE EQUILIBRIUM
14、A.The exchange rateis the price of one unit of foreign currency expressed as a certain price in local currency.For example$.99/means the euro in the U.S.is worth$.99.,Understanding Exchange Rates,B.How Do Americans Purchase German Goods?1.Foreign Currency Demand:-derived from the demand for foreign
15、countrys goods,services,and financial assets.e.g.Americans demand German goods such as Mercedes autos,The Demand for in the U.S.,Qty,$1.10/,$/,D,At higher exchange rates,Americans demand less euros and vice versa.,$1.20/,$1.00/,Understanding Exchange Rates,2.Foreign Currency Supply:-derived from the
16、 foreign countrys demand for local goods.-Foreign buyers must convert their currency in order to purchase.e.g.German demand for US goods such as Dell computers means Germans must convert eurosto US$in order to buy.,The Supply of in the U.S.,$/,Qty,$1.10/,S,$1.20/,$1.00/,At higher exchange rates,Germ
17、ans supply more euros and vice versa.,Understanding Exchange Rates,3.Equilibrium Exchange Rateoccurs where the quantity suppliedequals the quantity demanded of a foreign currency at a specific local price.,The$/Equilibrium Rate,Qty,$1.10,S,$/,D,Equilibrium,Understanding Exchange Rates,C.How Exchange
18、 Rates Change1.Increased demandas more foreign goods are demanded,more of the foreign currency is demand at each possible exchange rate2.The price of the foreign currency in local currency increases.,Understanding Exchange Rates,3.Home Currency Depreciation a.Foreign currency more valuable than the
19、home currency.b.Conversely,the foreign currencys value has appreciated against the home currency.,The US$Depreciates When,Qty,$1.10/,S,$/,D,D,$1.20/,Q1,Q2,Understanding Exchange Rates,D.Computing a Currency Appreciation=(e1-e0)/e0where e0=old currency value e1=new currency value,Understanding Exchan
20、ge Rates,EXAMPLE:AppreciationIf the dollar value of the goes from$1.10(e0)to$1.20(e1),then the has appreciated by(1.20-1.10)/1.10=9.1%,Understanding Exchange Rates,C.4.Calculating a Depreciation:=(e0-e1)/e1where e0=old currency value e1=new currency value,Understanding Exchange Rates,EXAMPLE:US$Depr
21、eciationUse the formula(e0-e1)/e1substituting(1.10 1.20)/1.20=-8.3%is the US$depreciation.,Understanding Exchange Rates,D.FACTORS AFFECTING EXCHANGE RATES:1.Inflation rates2.Interest rates3.GNP growth rates,Sample Problem,Suppose the U.S.dollar appreciates against the Russian ruble by 500%.How much
22、did the ruble depreciate against the dollar?,Sample Problem,Depreciation of the ruble:,Sample Problem,CHAPTER 3,Defining and Analyzing the International Monetary System,PART I.ALTERNATIVE EXCHANGE RATE SYSTEMS,I.FIVE MARKET MECHANISMSA.Freely Floating(Clean Float)1.Market forces of supply and demand
23、 determine rates.2.Forces influenced bya.price levelsb.interest ratesc.economic growth 3.Rates fluctuate over time randomly.,ALTERNATIVE EXCHANGE RATE SYSTEMS,B.Managed Float(Dirty Float)1.Market forces set rates unless excess volatility occurs.2.Then,central bank determines rate.,ALTERNATIVE EXCHAN
24、GE RATE SYSTEMS,C.Target-Zone Arrangement1.Rate Determinationa.Market forces constrained to upper and lower range of rates.b.Members to the arrangement adjust their national economic policies to maintain target.,ALTERNATIVE EXCHANGE RATE SYSTEMS,D.Fixed Rate System1.Rate determinationa.Government ma
25、intains target rates.b.If rates threatened,central banks buy/sell currency.c.Monetary policies coordinated.,ALTERNATIVE EXCHANGE RATE SYSTEMS,D.Fixed Rate System(cont)2.Some Government Controls:a.On global portfolio investments.b.Ceilings on direct foreign direct insurance.c.Import restrictions.,ALT
26、ERNATIVE EXCHANGE RATE SYSTEMS,E.Current System1.A hybrid systema.Major currencies:usefreely-floating methodb.Others move in and outof various fixed-rate systems.,PART II.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,I.THE USE OF GOLDA.Desirable propertiesB.In short run:High production costs
27、limit short-run changes.C.In long run:Commodity money insures stability.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,II.The Classical Gold Standard(1821-1914)A.Major currencies on gold standard.1.Involved commitment by nations to fix the price of domestic currency in terms of a specific amo
28、unt of gold.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,2.Maintenance involved the buying and selling of gold at that price.3.Disturbances in Price Levels:Would be offset by the price-specie*-flow mechanism.*specie refers to gold coins,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,a
29、.Price-specie-flow mechanism had automatic adjustments:1.)When a balance of payments surplus led to a gold inflow;2.)Gold inflow led to higher prices which reduced surplus;3.)Gold outflow led to lower prices and increased surplus.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,III.The Gold Exc
30、hange Standard(1925-1931)A.Only U.S.and Britain allowed to hold gold reserves.B.Others could hold both gold,dollars or pound reserves.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,C.Currencies devalued in 1931-led to trade wars.D.Bretton Woods Conference-called in order to avoid future prote
31、ctionist and destructive economic policies,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,IV.The Bretton Woods System(1946-71)A.The Bretton Woods Agreement1.U.S.$was key currency;valued at$1=1/35 oz.of gold.2.All currencies linked to that price in a fixed rate system.3.Exchange rates allowed t
32、o fluctuate by 1%above or below initially set rates.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,B.Collapse,19711.Causes:a.U.S.high inflation rateb.U.S.$depreciated sharply.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,Post-Bretton Woods System(1971-Present)A.Smithsonian Agreement,1
33、971US$devalued to 1/38 oz.of gold.By 1973:World on a freely floating exchange rate system.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,B.OPEC and the Oil Crisis(1973-1974)1.OPEC raised oil prices four fold;2.Exchange rate turmoil resulted;3.Caused OPEC nations to earn large surplus B-O-P.4.
34、Surpluses recycled to debtor nations which set up debt crisis of 1980s.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,C.Dollar Crisis(1977-78)1.U.S.B-O-P difficulties2.Result of inconsistent monetary policy in U.S.3.Dollar value falls as confidence shrinks.,A BRIEF HISTORY OF THE INTERNATIONA
35、L MONETARY SYSTEM,D.The Rising Dollar(1980-85)1.U.S.inflation subsides as the Fed raises interest rates2.Rising rates attracts global capital to U.S.3.Result:Dollar value rises.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,E.The Sinking Dollar:(1985-87)1.Dollar revaluated slowly downward;2.P
36、laza Agreement(1985)G-5 agree to depress US$further.3.The Louvre Agreement(1987)G-7agree to support the falling US$.,A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM,F.Recent History(1988-Present)1.1988 US$stabilized2.Post-1991 Confidence resulted in stronger dollar3.1993-1995 Dollar value falls
37、,PART III.THE EUROPEAN MONETARY SYSTEM,I.INTRODUCTIONA.The European Monetary System(EMS)1.A target-zone method(1979)2.Close macroeconomic policycoordination required.,THE EUROPEAN MONETARY SYSTEM,B.EMS Objective:to provide exchange rate stability to all members by holding exchange rates within speci
38、fied limits.,THE EUROPEAN MONETARY SYSTEM,C.European Currency Unit(ECU)a“cocktail”of European currencies with specified weights as the unit of account.1.Exchange rate mechanism(ERM)each member determines mutually agreed upon central cross-rate for its currency.,THE EUROPEAN MONETARY SYSTEM,2.Member
39、Pledge:to keep within 15%margin above or below the central rate.D.EMS ups and downs1.Foreign exchange interventions failed due to lack of support by coordinated monetary policies.,THE EUROPEAN MONETARY SYSTEM,2.Currency Crisis of Sept.1992a.System breaks downb.Britain and Italy forced towithdraw fro
40、m EMS.G.Failure of the EMSmembers allowed political prioritiesto dominate exchange rate policies.,THE EUROPEAN MONETARY SYSTEM,H.Maastricht Treaty1.Called for Monetary Union by 1999(moved to 2002)2.Established a single currency:the euro3.Calls for creation of a single central EU bank4.Adopts tough f
41、iscal standards,THE EUROPEAN MONETARY SYSTEM,I.Costs/Benefits of A Single CurrencyA.Benefits1.Reduces cost of doing business2.Reduces exchange rate riskB.Costs1.Lack of national monetary flexibility.,70,CHAPTER 4,International Finance and Currency:Parity Conditions,PART I.ARBITRAGE AND THE LAW OF ON
42、E PRICE,I.THE LAW OF ONE PRICEA.Law states:Identical goods sell for the same price worldwide.,ARBITRAGE AND THE LAW OF ONE PRICE,B.Theoretical basis:If the prices after exchange-rate adjustment were not equal,arbitrage in the goods worldwide ensures eventually it will.,ARBITRAGE AND THE LAW OF ONE P
43、RICE,C.Five Parity Conditions Result From These Arbitrage Activities1.Purchasing Power Parity(PPP)2.The Fisher Effect(FE)3.The International Fisher Effect(IFE)4.Interest Rate Parity(IRP)5.Unbiased Forward Rate(UFR),ARBITRAGE AND THE LAW OF ONE PRICE,D.Five Parity Conditions Linked by1.The adjustment
44、 of variousrates and prices to inflation.2.The notion that money should have no effect on real variables(since they have been adjusted for price changes).,ARBITRAGE AND THE LAW OF ONE PRICE,E.Inflation and home currency depreciation:1.jointly determined by the growth of domestic money supply;2.Relat
45、ive to the growth ofdomestic money demand.,ARBITRAGE AND THE LAW OF ONE PRICE,F.THE LAW OF ONE PRICE-enforced by international arbitrage.,PART II.PURCHASING POWER PARITY,I.THE THEORY OF PURCHASINGPOWER PARITY:states that spot exchange rates between currencies will change to the differential in infla
46、tion rates between countries.,PURCHASING POWER PARITY,II.ABSOLUTE PURCHASING POWER PARITYA.Price levels adjusted for exchange rates should beequal between countries,PURCHASING POWER PARITY,II.ABSOLUTE PURCHASING POWER PARITYB.One unit of currency has same purchasing power globally.,PURCHASING POWER
47、PARITY,III.RELATIVE PURCHASING POWER PARITYA.states that the exchange rate of one currency against another will adjust to reflect changes in the price levels of the two countries.,PURCHASING POWER PARITY,1.In mathematical terms:where et=future spot rate e0=spot rate ih=home inflation if=foreign infl
48、ation t=the time period,PURCHASING POWER PARITY,2.If purchasing power parity is expected to hold,then the bestprediction for the one-periodspot rate should be,PURCHASING POWER PARITY,3.A more simplified but less precise relationship isthat is,the percentage change should be approximately equal to th
49、e inflation rate differential.,PURCHASING POWER PARITY,4.PPP says the currency with the higher inflation rate is expected to depreciate relative to the currency with the lower rate of inflation.,PURCHASING POWER PARITY,B.Real Exchange Rates:the quoted or nominal rate adjusted for a countrys inflatio
50、n rate is,PURCHASING POWER PARITY,C.Real exchange rates1.If exchange rates adjust to inflation differential,PPPstates that real exchange rates stay the same.,PURCHASING POWER PARITY,C.Real exchange rates 2.Competitive positions:domestic and foreign firmsare unaffected.,PART III.THE FISHER EFFECT(FE)
