International Finance

An MNC may gain from its global presence by

Spreading R&D expenditures and advertising costs over their global sales. Pooling global purchasing power over suppliers. Utilizing their technological and managerial know-how globally with minimum additional costs.

With regard to expiration date,

futures contracts have standardized delivery dates.

A country that gives foreign aid to another country can be viewed as

importing goodwill from the latter.

A corporation that can source its products in one country, sell them in another country, and raise the funds in a third country

is a multinational corporation.

The choice between the alternative exchange rate regimes (fixed or floating) is likely to involve a trade-off between

national monetary policy autonomy and international economic integration.

Today for an MNC to produce merchandise in one country on capital equipment financed by funds raised in a number of different currencies through issuing securities to investors in many countries, and then selling the finished product to customers in yet other countries is

not uncommon.

The board of directors may grant stock options to managers

to align the interest of managers with that of shareholders.

Relative to the spot price, the forward price is

usually less than or more than the spot price more often than it is equal to the spot price.

Corporate governance structure

varies a great deal across countries.

The price of a McDonald's Big Mac sandwich

varies considerably across the world in dollar terms.

In the United Kingdom, the majority of public companies

voluntarily abide by the Code of Best Practice on corporate governance.

Financial managers of MNCs should

Learn how to manage foreign exchange and political risks using proper tools and instruments. Deal with (and take advantage of) market imperfections. Benefit from expanded investment and financing opportunities.

Advantages of a fixed exchange rate include

Reduction in exchange rate risk for businesses. Reduction in transactions costs. Reduction in trading frictions.

Generally speaking, liberalization of financial markets when combined with a weak, underdeveloped domestic financial system tends to

create an environment susceptible to currency and financial crises.

While debt can reduce agency costs between shareholders and management,

excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem. Additionally, with debt financing, companies can misuse debt to finance corporate empire building.

When money can move freely across borders, policy makers must choose between

exchange-rate stability and an independent monetary policy.

The Sarbanes-Oxley Act of 2002

has had the consequence that many foreign firms have de-listed in the U.S. exchanges and listed their shares on the London Stock Exchange and other European exchanges.

The standard size foreign exchange transactions are for

$10 million USD.

The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves

acquisitions of controlling interests in foreign businesses.

International trade is

an "increasing-sum" game at which all players become winners.

If one has agreed to buy a foreign exchange forward,

you have a long position in the forward contract.

Privatization

A country divesting itself of the ownership and operation of a business venture by turning it over to the free market system.

Prior to the Argentine Peso Crisis

Argentina had a currency board arrangement with the peso pegged to the U.S. dollar at parity.

The statistical discrepancy in the balance-of-payments accounts

Arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods. Arise because some transactions (illegal transactions) occur "off the books." Represents omitted and misreported transactions.

Major dimensions that set apart international finance from domestic finance

Foreign exchange and political risks Market imperfections Expanded opportunity set

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime.

BCA = −BKA

The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.

Bank A's pound-denominated account at B will rise by £45,000.

A purely domestic firm that sources its products, sells its products, and raises its funds domestically

Can face stiff competition from a multinational corporation that can source its products in one country, sell them in several countries, and raise its funds in a third country. Can be more competitive than an MNC on its home turf due to superior knowledge of the local market. Can still face exchange rate risk, just like an MNC.

Private benefits of corporate control will tend to be higher in

French civil law countries than in English common law countries.

A European option is different from an American option in that

European options can only be exercised at maturity; American options can be exercised prior to maturity.

A formal statement of IRP is

F($/€)/S($/€)=1+i$/1+i€

The Mexican peso crisis is significant in that

It is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital. Selling by international portfolio managers had a highly destabilizing, contagious effect on the world financial system. It provides a cautionary tale that as the world's financial markets are becoming more integrated, this type of contagious financial crisis is likely to occur more often.

Following the adoption of the Cadbury Code of Best Practice,

Joint CEO/COB (chief executive officer and chairman of the board) positions declined. There has been a significant impact on the internal governance mechanisms of U.K. companies. CEOs have become more sensitive to company performance, strengthening managerial accountability and weakening managerial entrenchment.

Advantages of a flexible exchange rate include which of the following?

National policy autonomy. Easier external adjustments. The government can use monetary and fiscal policies to pursue whatever economic goals it chooses.

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for the statistical discrepancy.

The statistical discrepancy = BCA + BKA + BRA

The key strength(s) of the public corporation is/are

Their capacity to allow efficient risk sharing among many investors. Their capacity to raise large amounts of funds at relatively low cost. Their capacity to consolidate decision-making.

Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board.

This is a potential conflict of interest for both parties.

Suppose the managers of a company have driven the stock price down because they have spent the investors' money on lavish perquisites like golf club memberships.

This situation may prompt a corporate raider to buy up the shares of the firm in a hostile takeover. If the hostile takeover is successful, the managers will probably lose their jobs in the ensuing restructuring. If the restructuring is successful, the corporate raider can sell his shares at a profit.

Since the end of World War I, the dominant global currency has been the

U.S. dollar.

A currency board arrangement is

a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation.

An exchange-traded fund (ETF) is

a portfolio of financial assets in which shares representing fractional ownership of the fund trade on an organized exchange.

The official reserve account includes

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

The Fisher effect states that

an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.

Nestlé, a well-known Swiss corporation,

at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to domestic shareholders.

The key requirements of the Cadbury Code of Best Practice state that

boards of directors should include at least three outside directors and the positions of CEO and chairman of the board should not reside in the same individual.

If you think that the dollar is going to depreciate against the euro, you should

buy call options on the euro.

Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management

by listing their stocks in countries with strong investor protection.

If the interest rate rises in the U.S. while other variables remain constant

capital inflows into the U.S. will increase.

In 2012, the United States had a current account deficit. The current account deficit implies that the United States

consumed more output than it produced.

Outside the United States and the United Kingdom,

diffused ownership of the company is more the exception than the rule.

Although IRP tends to hold, it may not hold precisely all the time

due to transactions costs, like the bid-ask spread, as well as capital controls imposed by governments.

Covered Interest Arbitrage (CIA) activities will result in

restoring equilibrium prices quickly.

One of the objectives of corporate governance reform is to,

strengthen the protection of outside investors from expropriation by managers and controlling insiders.

An arbitrage is best defined as

the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain guaranteed profits.

The capital account measures

the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

Under a flexible exchange rate regime, governments can retain monetary policy independence because the external balance will be achieved by

the exchange rate adjustments.

When a currency trades at a discount in the forward market

the forward rate is less than the spot rate.

The "J-curve effect" shows

the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.

The main cost of European monetary union is

the loss of national monetary and exchange rate policy independence.

Indirect exchange rate quotations from the U.S. perspective are

the price of one U.S. dollar in the foreign currency.

Comparing "forward" and "futures" exchange contracts, we can say that

their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity, and a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while a forward contract is tailor-made by an international bank for its clients and is traded OTC.