1、Multinational Financial Management Alan Shapiro8th Edition J.Wiley & SonsPower Points byJoseph F. Greco, Ph.D.California State University, FullertonCHAPTER 1Introduction3PART 1 THE RISE OF THE MULTINATIONAL CORPORATIONI. The MNC: A Definitiona company with production and distribution facilities in m
2、ore than one country. with a parent company located in the home country at least five or six foreign subsidiaries4THE RISE OF THE MULTINATIONAL CORPORATIONA. 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 capitalism5THE RISE OF THE MULTINATIONAL CORPORATIONThe Rise of China as a Global Competitorthe most dramatic change in the international economy over the last decadethe n
4、umber one destination for foreign direct investment (FDI)Note: FDI is the acquisition abroad of companies, property, or physical assets 6THE RISE OF THE MULTINATIONAL CORPORATIONB. Who is the Prime Transmitter of Competitive Forces in the Global Economy: The MNC emphasizes group performance such asG
5、lobal coordinated allocation of resources Market entry strategyOwnership of foreign operationsProduction, marketing and financial activities7THE RISE OF THE MULTINATIONAL CORPORATIONC. The MNCs EvolutionReasons to Go Global:1. More raw materials2. New markets3. Minimize costs of production8THE RISE
6、OF THE MULTINATIONAL CORPORATIONRAW MATERIAL SEEKERSexploit markets in other countrieshistorically first to appearmodern-day counterpartsBritish PetroleumExxon9THE RISE OF THE MULTINATIONAL CORPORATIONMARKET SEEKERSProduce and sell in foreign marketsHave heavy foreign direct investorsRepresented tod
7、ay by firms such as:IBMMacDonaldsNestleLevi Strauss10THE RISE OF THE MULTINATIONAL CORPORATIONCOST MINIMIZERSseek lower-cost production abroadTheir motive: to remain cost competitiveRepresented today by firms such as:Texas InstrumentsIntelSeagate Technology11THE RISE OF THE MULTINATIONAL CORPORATION
8、D. What is the MNC? From a Behavioral Viewits a state of mind committed to globallyproducing,undertaking investment,marketing, andfinancing.12THE RISE OF THE MULTINATIONAL CORPORATIONE. THE GLOBAL MANAGER:1. Understands political and economic differences;2. Searches for most cost- effective supplier
9、s;3. Evaluates changes on value of the firm.13Part II INTERNATIONALIZATION OF BUSINESS AND FINANCEI.GlobalizationII. Political and Labor UnionConcernsIII.Consequences of Global Competition:The acceleration of the global economy14PART III. MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICEI. The
10、 MNCs PoliciesA. Main Objective of MNC: Maximize shareholder wealthB. Other Objectives Reflect Its Ability to Link:via affiliate transfer mechanisms15MFM: THEORY AND PRACTICEC. Mode of Transfer:Reflects freedom to select a variety of financial channels.D. Timing Flexibility:Most MNC have some flexib
11、ility in timing of fund flows.E. ValueThe ability to avoid national taxes has led to controversy.16MFM: THEORY AND PRACTICEII. FUNCTIONS OF FINANCIAL MANAGEMENTA. Two Basic Functions:1. Financing2. Investing17MFM: THEORY AND PRACTICEB. Additional Factors Facing the MNC Executive1. Political risk2. E
12、conomic risk18MFM: THEORY AND PRACTICEIII. THEORETICAL FOUNDATIONSA. Useful Concepts from Financial Economics:1. Arbitrage2. Market Efficiency3. Capital Asset Pricing19MFM: THEORY AND PRACTICEB. Importance of Total Risk1. Adverse Impactlower sales and higher costs2. Justifies hedging activities of M
13、NC3. Diversification reduces risk20MFM: THEORY AND PRACTICEIV. THE GLOBAL FINANCIAL MARKET PLACEA. Inter-linkage by ComputersB. Market Acts as A GlobalReferendum Process Where :Currencies may rise or fall21CHAPTER 2Understanding Exchange RatesPart I. Understanding Exchange RatesI. SETTING THE EQUILI
14、BRIUM 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 RatesB. How Do Americans Purchase German Goods?1. Foreign Currency Demand:-derived from the demand f
15、or foreign countrys goods, services, and financial assets.e.g. Americans demand German goods such as Mercedes autosThe Demand for in the U.S.Qty$1.10/ $/DAt higher exchange rates, Americans demand less euros and vice versa.$1.20/ $1.00/ Understanding Exchange Rates2. Foreign Currency Supply:- derive
16、d from the 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 ra
17、tes, Germans supply more euros and vice versa.Understanding Exchange Rates3. Equilibrium Exchange Rateoccurs where the quantity suppliedequals the quantity demanded of a foreign currency at a specific local price.The $/ Equilibrium RateQty$1.10S$/ DEquilibriumUnderstanding Exchange RatesC. How Excha
18、nge 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 Rates3. Home Currency Depreciation a. Foreign currency more valuable tha
19、n the home currency.b. Conversely, the foreign currencys value has appreciated against the home currency.The US$ Depreciates WhenQty$1.10/ S$/ DD$1.20/ Q1Q2Understanding Exchange RatesD. Computing a Currency Appreciation = (e1 - e0)/ e0where e0 = old currency value e1 = new currency valueUnderstandi
20、ng Exchange RatesEXAMPLE: AppreciationIf the dollar value of the goes from $1.10 (e0) to $1.20 (e1), then the has appreciated by(1.20 - 1.10)/ 1.10 = 9.1%Understanding Exchange RatesC.4. Calculating a Depreciation:= (e0 - e1)/ e1where e0 = old currency value e1 = new currency valueUnderstanding Exch
21、ange RatesEXAMPLE: US$ DepreciationUse the formula(e0 - e1)/ e1substituting(1.10 1.20)/1.20 = - 8.3% is the US$ depreciation.Understanding Exchange RatesD. FACTORS AFFECTING EXCHANGE RATES:1.Inflation rates2. Interest rates3.GNP growth ratesSample ProblemSuppose the U.S. dollar appreciates against t
22、he Russian ruble by 500%. How much did the ruble depreciate against the dollar?1010()5eeeeSample ProblemDepreciation of the ruble:011()eexeSample Problem10005eeee10001010511516eeeeeeee011()eexe00066568 3 %eexexxCHAPTER 3Defining and Analyzing the International Monetary System PART I. ALTERNATIVE EXC
23、HANGE RATE SYSTEMSI.FIVE MARKET MECHANISMSA.Freely Floating (Clean Float)1.Market forces of supply and demand determine rates.2.Forces influenced bya. price levelsb. interest ratesc. economic growth 3.Rates fluctuate over time randomly.ALTERNATIVE EXCHANGE RATE SYSTEMSB.Managed Float (Dirty Float)1.
24、 Market forces set rates unless excess volatility occurs.2. Then, central bank determines rate. ALTERNATIVE EXCHANGE RATE SYSTEMSC.Target-Zone Arrangement1. Rate Determinationa.Market forces constrained to upper and lower range of rates.b.Members to the arrangement adjust their national economic pol
25、icies to maintain target.ALTERNATIVE EXCHANGE RATE SYSTEMSD.Fixed Rate System1. Rate determinationa. Government maintains target rates.b. If rates threatened, central banks buy/sell currency.c. Monetary policies coordinated.ALTERNATIVE EXCHANGE RATE SYSTEMSD. Fixed Rate System (cont)2. Some Governme
26、nt Controls:a. On global portfolio investments.b. Ceilings on direct foreign direct insurance.c. Import restrictions.ALTERNATIVE EXCHANGE RATE SYSTEMSE. Current System1. A hybrid systema. Major currencies:usefreely-floating methodb. Others move in and outof various fixed-rate systems.PART II. A BRIE
27、F HISTORY OF THE INTERNATIONAL MONETARY SYSTEMI. THE USE OF GOLDA. Desirable propertiesB. In short run: High production costs limit short-run changes.C. In long run: Commodity money insures stability.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMII.The Classical Gold Standard (1821-1914)A.Majo
28、r currencies on gold standard.1.Involved commitment by nations to fix the price of domestic currency in terms of a specific amount of gold.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM2.Maintenance involved the buying and selling of gold at that price.3.Disturbances in Price Levels:Would be o
29、ffset by the price-specie*-flow mechanism.* specie refers to gold coinsA BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMa. 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.)
30、Gold outflow led to lower prices and increased surplus.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMIII.The Gold Exchange 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 MON
31、ETARY SYSTEMC.Currencies devalued in 1931- led to trade wars.D.Bretton Woods Conference- called in order to avoid future protectionist and destructive economic policiesA BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMIV. The Bretton Woods System(1946-71)A. The Bretton Woods Agreement1. U.S.$ was
32、key currency;valued at $1 = 1/35 oz. of gold.2. All currencies linked to that price in a fixed rate system.3. Exchange rates allowed to fluctuate by 1% above or below initially set rates.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMB. Collapse, 19711. Causes:a. U.S. high inflation rateb. U.S.
33、$ depreciated sharply.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMV.Post-Bretton Woods System (1971-Present)A.Smithsonian Agreement, 1971US$ devalued to 1/38 oz. of gold.By 1973: World on a freely floating exchange rate system.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMB. OPEC and t
34、he 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. Surpluses recycled to debtor nations which set up debt crisis of 1980s.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEMC. Dollar Crisis (1977-78)1.
35、 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 INTERNATIONAL MONETARY SYSTEMD. The Rising Dollar (1980-85)1.U.S. inflation subsides as the Fed raises interest rates2.Rising rates attracts global capital to U
36、.S.3.Result: Dollar value rises.A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEME. The Sinking Dollar:(1985-87)1.Dollar revaluated slowly downward;2.Plaza Agreement (1985) G-5 agree to depress US$ further.3.The Louvre Agreement (1987) G-7agree to support the falling US$.A BRIEF HISTORY OF THE IN
37、TERNATIONAL MONETARY SYSTEMF. Recent History (1988-Present)1.1988 US$ stabilized2.Post-1991 Confidence resulted in stronger dollar3.1993-1995 Dollar value fallsPART III.THE EUROPEAN MONETARY SYSTEMI. INTRODUCTIONA. The European Monetary System (EMS)1.A target-zone method (1979)2.Close macroeconomic
38、policycoordination required.THE EUROPEAN MONETARY SYSTEMB. EMS Objective:to provide exchange rate stability to all members by holding exchange rates within specified limits.THE EUROPEAN MONETARY SYSTEMC.European Currency Unit (ECU)a “cocktail” of European currencies with specified weights as the uni
39、t of account.1. Exchange rate mechanism (ERM) each member determines mutually agreed upon central cross-rate for its currency.THE EUROPEAN MONETARY SYSTEM2. Member Pledge:to keep within 15% margin above or below the central rate.D.EMS ups and downs1. Foreign exchange interventions failed due to lack
40、 of support by coordinated monetary policies.THE EUROPEAN MONETARY SYSTEM2. Currency Crisis of Sept. 1992a. System breaks downb. Britain and Italy forced to withdraw from EMS.G.Failure of the EMSmembers allowed political prioritiesto dominate exchange rate policies.THE EUROPEAN MONETARY SYSTEMH. Maa
41、stricht 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 fiscal standardsTHE EUROPEAN MONETARY SYSTEMI.Costs / Benefits of A Single CurrencyA. Benefits1. Reduces cost of doing business
42、2. Reduces exchange rate riskB. Costs1. Lack of national monetary flexibility.70CHAPTER 4International Finance and Currency: Parity Conditions PART I. ARBITRAGE AND THE LAW OF ONE PRICEI.THE LAW OF ONE PRICEA. Law states:Identical goods sell for the same price worldwide.ARBITRAGE AND THE LAW OF ONE
43、PRICEB.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 PRICEC.Five Parity Conditions Result From These Arbitrage Activities1.Purchasing Power Parity (PPP)2.The Fisher Effect (FE)3.
44、The International Fisher Effect(IFE)4.Interest Rate Parity (IRP)5.Unbiased Forward Rate (UFR) ARBITRAGE AND THE LAW OF ONE PRICED.Five Parity Conditions Linked by1. The adjustment of variousrates and prices to inflation.2. The notion that money should have no effect on real variables (since they hav
45、e been adjusted for price changes).ARBITRAGE AND THE LAW OF ONE PRICEE.Inflation and home currency depreciation:1. jointly determined by the growth of domestic money supply;2. Relative to the growth ofdomestic money demand.ARBITRAGE AND THE LAW OF ONE PRICEF. THE LAW OF ONE PRICE- enforced by intern
46、ational arbitrage.PART II. PURCHASING POWER PARITYI.THE THEORY OF PURCHASINGPOWER PARITY: states that spot exchange rates between currencies will change to the differential in inflation rates between countries.PURCHASING POWER PARITYII. ABSOLUTE PURCHASING POWER PARITYA. Price levels adjusted for ex
47、change rates should beequal between countriesPURCHASING POWER PARITYII. ABSOLUTE PURCHASING POWER PARITYB. One unit of currency has same purchasing power globally.PURCHASING POWER PARITYIII. RELATIVE PURCHASING POWER PARITYA. states that the exchange rate of one currency against another will adjust
48、to reflect changes in the price levels of the two countries.PURCHASING POWER PARITY1.In mathematical terms:where et = future spot rate e0= spot rate ih= home inflation if = foreign inflation t= the time periodtfthtiiee110PURCHASING POWER PARITY2.If purchasing power parity is expected to hold, then t
49、he bestprediction for the one-periodspot rate should betfthtiiee110PURCHASING POWER PARITY3. A more simplified but less precise relationship isthat is, the percentage change should be approximately equal to the inflation rate differential.fhtiiee0PURCHASING POWER PARITY4.PPP says the currency with t
50、he higher inflation rate is expected to depreciate relative to the currency with the lower rate of inflation.PURCHASING POWER PARITYB.Real Exchange Rates:the quoted or nominal rate adjusted for a countrys inflation rate isthtfttiiee)1()1(PURCHASING POWER PARITYC.Real exchange rates1. If exchange rat
