Multinational Finance Lectures
Part 1: The International Financial Environment
- Lecture and chapter 1, MN Financial Management: An Overview
- Lecture & chapter 2, International Flow of Funds
- Lecture & chapter 3, International Financial markets
- Lecture 3+, Additional Reading, Cost of Capital and Capital Structure
- Lecture & chapter 4, Exchange Rate Determination
- Lecture & chapter 5, Currency Derivatives
Part 2: Exchange Rate Behaviour
- Lecture & Chapter 6, Exchange Rate and the Role of Governments
- Lecture & Chapter 7, International Arbitrage and Interest Rate Parity
- Lecture & Chapter 8, Relationships among inflation, interest and exchange rates
Part 3: Exchange Rate Risk Management
- Lecture & Chapter 9, Forecasting Exchange Rates
- Lecture & Chapter 10, Measuring Exposure to Exchange Rate Fluctuations
- Lecture & Chapter 11, Managing Transaction Exposure
- Lecture & Chapter 12, Managing Economic Exposure and Translation Exposure
Part 4: Long-Term Asset and Liability Management
- Lecture & Chapter 13, Foreign Direct Investment
- Lecture 13+, Additional Reading 2, Multinational Capital Budgeting
- Lecture & Chapter 14, Country Risk Analysis
- Lecture & Chapter 15, Long-Term Financing
- Lecture & Chapter 16, Ethics
Part 5: Short-Term Investment & Financing Decisions
- Lecture & Chapter 17, Financing International Trade
- Lecture & Chapter 18, Short Term Financing
- Lecture & chapter 19, International Cash Management
Week 1
,Lecture 0, Welcome
Multinational corporation: a corporation with facilities and other assets in at least one
country other than its home country.
Pros for MNC:
- Provide investments.
- Provide jobs.
- Development of infrastructure.
- Transfer of technology.
- Access among countries.
Cons against MNC:
- Decapitalization of countries.
- Income inequality.
- Exploit poor workers/countries.
- Dependency of countries.
- Reduce domestic market shares.
What is it all about?
Part I -International Financial Environment.
Part II -Exchange Rate Behavior.
Part III -Exchange Rate Risk Management.
- Measuring and managing Transaction Exposure, Economic Exposure, Translation Exposure.
Part IV -Long-Term Asset and Liability Management.
- Financing, FDI, Country Risk Analysis.
Part V -Short-Term Asset and Liability Management.
- Financing, Int. Cash Management.
Part 1: The International Financial Environment
,Lecture 1, MN Financial Management: An Overview
Chapter 1
When you have a MNC and deal with other countries,
you need to go through foreign exchange markets.
MNC – Goals and Conflict
- Goal financial manager: maximize shareholders wealth.
maximize value of entire MNC (max. share price)
- Constraints interfering with goals:
* environmental constraints (pollution controls, building codes... which increase costs of
production)
* regulatory constraints (employee rights, tax law, restrictions on earnings remittance…
which may reduce CFs to parent)
* ethical constraints (working standards, bribes to government...)
- Corporate Governance: system by which a company is directed and controlled. Do
managers act in the best interest of shareholders?
agency Problem: conflict of goals
Recall: agency theory.
- Agency relationship exists whenever: someone (the principal) contracts with someone else
(the agent) to take actions on behalf of the principal and represent the principal’s interests.
- The shareholders (principal) hire the manager (agent) and he performs.
- Asymmetric information because shareholders are not involved in everything of the
information process. Gives manager some power.
- Agency problem: incentives don’t align.
* shareholders try to provide incentives for agent to act in their interest
Agency costs and corporate control
Providing these incentives come with some costs.
- Direct costs:
* monitoring
* compensation
- Indirect costs:
* Free Cash Flow Hypothesis
* managers decide in favor of other stakeholders
- Corporate control:
* compensation schemes aligned with shareholder interest (if company performs well,
, manager gets paid more)
* hostile takeover threat (if company performs bad and might be taken over, the manager
will be fired)
* investor monitoring
Agency costs in MNC
This works in a particular company or country. But in a MNC you have different countries,
companies and managers. This makes it harder and more expensive to monitor.
- Monitoring distant managers.
- Culture.
- Complexity of operation and communication.
Do local managers maximize value of MNC or rather value of subsidiary?
Reduction of agency cost via management control?
* decentralized vs. centralized management styles
Centralized management style: you have a management board which monitors the entire
company. Also if it’s in 2 countries for example
Decentralized management style: managers right at the subsidiary. So a manager for every
country or regents. And then there’s one big headquarter which manages all the managers.
- Subunit related knowledge and experience, efficient decision, cultural skills, local network.
- Less control, fragmented subunits, costs higher, inefficiencies due to duplication of
activities.
Why engage in international business?
Theories of international business.
- Economic related: does international business increase or decrease a nation’s wealth?
* theory of absolute and comparative advantage
* imperfect markets theory
- Business related: why are firms motivated to expand their business internationally?
* product cycle theory
* global strategies
Absolute and comparative advantage
- Absolute advantage: a country enjoys absolute advantage over another country in the
production of a product when it uses fewer resources to produce that product.
- Comparative advantage: when a country can produce a good at a lower cost in terms of
other goods.
Imperfect Market Theory
Different countries have different factors that are relevant for production but there can be a
immobility of these factors. The country that has the factor has an advantage of producing a
good with that factor.
- Unrestricted mobility of production factors.
* freely transferable
* removes comparative advantage because you can just move the factor
- Restricted mobility of production factors.
Part 1: The International Financial Environment
- Lecture and chapter 1, MN Financial Management: An Overview
- Lecture & chapter 2, International Flow of Funds
- Lecture & chapter 3, International Financial markets
- Lecture 3+, Additional Reading, Cost of Capital and Capital Structure
- Lecture & chapter 4, Exchange Rate Determination
- Lecture & chapter 5, Currency Derivatives
Part 2: Exchange Rate Behaviour
- Lecture & Chapter 6, Exchange Rate and the Role of Governments
- Lecture & Chapter 7, International Arbitrage and Interest Rate Parity
- Lecture & Chapter 8, Relationships among inflation, interest and exchange rates
Part 3: Exchange Rate Risk Management
- Lecture & Chapter 9, Forecasting Exchange Rates
- Lecture & Chapter 10, Measuring Exposure to Exchange Rate Fluctuations
- Lecture & Chapter 11, Managing Transaction Exposure
- Lecture & Chapter 12, Managing Economic Exposure and Translation Exposure
Part 4: Long-Term Asset and Liability Management
- Lecture & Chapter 13, Foreign Direct Investment
- Lecture 13+, Additional Reading 2, Multinational Capital Budgeting
- Lecture & Chapter 14, Country Risk Analysis
- Lecture & Chapter 15, Long-Term Financing
- Lecture & Chapter 16, Ethics
Part 5: Short-Term Investment & Financing Decisions
- Lecture & Chapter 17, Financing International Trade
- Lecture & Chapter 18, Short Term Financing
- Lecture & chapter 19, International Cash Management
Week 1
,Lecture 0, Welcome
Multinational corporation: a corporation with facilities and other assets in at least one
country other than its home country.
Pros for MNC:
- Provide investments.
- Provide jobs.
- Development of infrastructure.
- Transfer of technology.
- Access among countries.
Cons against MNC:
- Decapitalization of countries.
- Income inequality.
- Exploit poor workers/countries.
- Dependency of countries.
- Reduce domestic market shares.
What is it all about?
Part I -International Financial Environment.
Part II -Exchange Rate Behavior.
Part III -Exchange Rate Risk Management.
- Measuring and managing Transaction Exposure, Economic Exposure, Translation Exposure.
Part IV -Long-Term Asset and Liability Management.
- Financing, FDI, Country Risk Analysis.
Part V -Short-Term Asset and Liability Management.
- Financing, Int. Cash Management.
Part 1: The International Financial Environment
,Lecture 1, MN Financial Management: An Overview
Chapter 1
When you have a MNC and deal with other countries,
you need to go through foreign exchange markets.
MNC – Goals and Conflict
- Goal financial manager: maximize shareholders wealth.
maximize value of entire MNC (max. share price)
- Constraints interfering with goals:
* environmental constraints (pollution controls, building codes... which increase costs of
production)
* regulatory constraints (employee rights, tax law, restrictions on earnings remittance…
which may reduce CFs to parent)
* ethical constraints (working standards, bribes to government...)
- Corporate Governance: system by which a company is directed and controlled. Do
managers act in the best interest of shareholders?
agency Problem: conflict of goals
Recall: agency theory.
- Agency relationship exists whenever: someone (the principal) contracts with someone else
(the agent) to take actions on behalf of the principal and represent the principal’s interests.
- The shareholders (principal) hire the manager (agent) and he performs.
- Asymmetric information because shareholders are not involved in everything of the
information process. Gives manager some power.
- Agency problem: incentives don’t align.
* shareholders try to provide incentives for agent to act in their interest
Agency costs and corporate control
Providing these incentives come with some costs.
- Direct costs:
* monitoring
* compensation
- Indirect costs:
* Free Cash Flow Hypothesis
* managers decide in favor of other stakeholders
- Corporate control:
* compensation schemes aligned with shareholder interest (if company performs well,
, manager gets paid more)
* hostile takeover threat (if company performs bad and might be taken over, the manager
will be fired)
* investor monitoring
Agency costs in MNC
This works in a particular company or country. But in a MNC you have different countries,
companies and managers. This makes it harder and more expensive to monitor.
- Monitoring distant managers.
- Culture.
- Complexity of operation and communication.
Do local managers maximize value of MNC or rather value of subsidiary?
Reduction of agency cost via management control?
* decentralized vs. centralized management styles
Centralized management style: you have a management board which monitors the entire
company. Also if it’s in 2 countries for example
Decentralized management style: managers right at the subsidiary. So a manager for every
country or regents. And then there’s one big headquarter which manages all the managers.
- Subunit related knowledge and experience, efficient decision, cultural skills, local network.
- Less control, fragmented subunits, costs higher, inefficiencies due to duplication of
activities.
Why engage in international business?
Theories of international business.
- Economic related: does international business increase or decrease a nation’s wealth?
* theory of absolute and comparative advantage
* imperfect markets theory
- Business related: why are firms motivated to expand their business internationally?
* product cycle theory
* global strategies
Absolute and comparative advantage
- Absolute advantage: a country enjoys absolute advantage over another country in the
production of a product when it uses fewer resources to produce that product.
- Comparative advantage: when a country can produce a good at a lower cost in terms of
other goods.
Imperfect Market Theory
Different countries have different factors that are relevant for production but there can be a
immobility of these factors. The country that has the factor has an advantage of producing a
good with that factor.
- Unrestricted mobility of production factors.
* freely transferable
* removes comparative advantage because you can just move the factor
- Restricted mobility of production factors.
