International Corporate Finance
1. Introduction
International finance or the existence of borders
Borders still matter in finance:
Closed economy global integrated entity
The world is becoming increasingly globalized
- Globalization: increasing connectivity and integration of countries
and corporation and the people within them in terms of their
economic, political, and social activities
- The international scope of business creates new opportunities for
firms
Example: Covid-19
- What happened in China had an impact in Europe
- The production is China was delayed, so Europe didn’t receive the
goods
- We used to travel from here to Spain without trouble, today: tests
Growing trade flows between countries
Financial openness: countries allow foreigners to invest in their capital
markets & allow their citizens to invest abroad
China: they are strict in what can come in & what can go out. Their
currency is pretty fixed over time. This means that everything that relates
to their monetary policy needs to be under control.
Advantages for multinational corporations (MNC’s):
- Access to foreign capital
- Ability to reduce financing costs
Growing trading flows between countries = growing opportunities for
MNC’s
MNC’s are moving their production capacity to underdeveloped countries,
minimizing labor costs, and reexport these goods to the west where they
are sold.
Result of globalization
1
,Foreign Direct Investment (FDI):
The volume FDI substantially increases. This means that there are more
foreign investments in the country. We need to deal with this, so we need
to know what the motives and risks of these investments are.
Risk of investing abroad
- Currency fluctuations
- Geopolitical instability
- Government regulations
- Credit risk
Result of globalization
- Highly globalized & integrated world economy
- Continued liberalization of international trade
- Globalization production
- Integrated financial markets
important to understand the international setting in which firms are
operating and how corporate financial decisions are made. We need to
include globalization & the risks in our decision-making process.
Return/risk in an international setting:
- Multinational firms: operations beyond domestic national border
- Risk & return opportunities outside the domestic market
- How can we maximize the return on firm’s investment, given an
acceptable level of risk?
o More difficult to estimate the risk of a foreign country
Borders complicate the job of the CEO
The job of a CFO is much more difficult if you trade internationally then if
you are just trading in Belgium.
1. Existence of national currencies – exchange rates & exchange risks
2. Segmentation of goods markets along national lines
3. Existence of separate judicial systems
4. Sovereign autonomy of countries – political risk
5. Separate tax systems
2
,You can’t predict exchange rates. If you predict it, it’s worse than just
taking todays exchange rate.
What do you need to do as an investor? You are going to hedge, to protect
the investment. You need to protect yourself from changes in the
exchange rate.
Why do most countries have their own money?
- Printing bank notes is a positive NPV activity
o Seignorage: if you print your own money, you make money out
of it
- National pride: pound, danes
- The monetary policy is tailored to the local situation
Exchange rate risk = the uncertainty about the value of an asset or
liability and is denominated in a foreign currency
3 key features of prices
- Prices are not homogenous internationally
o The law of one price
o Purchasing-power parity (PPP)
o You need to look at what you can buy with the money you get
it
o Short term vs long term
o Common feature: prices rise with GDP per capita
- Within a country: prices are more homogenous
- Sticky prices (price elasticity)
EXAMEN: Big Mac Index: informal measure used to compare the
purchasing power parity (PPP) between different countries. Using the Big
Mac because you can get it in every country and it is all the same.
Short-run exchange rate fluctuations: appreciation of a currency does not
lead to falling prices abroad or soaring prices at home to keep good prices
similar in both countries
- However, 2 main consequences:
o Affects the competitiveness and attractiveness of a country on
the export or import market
o How do you value investments?
3
, Consequence 1: exchange rates & the import and export markets
Consequence 2: capital budgeting decisions
- Exchange rate risks also affect asset value
Credit risk:
- Domestic: if a customer does not pay you, you go to court
- Internationally: two legal systems involved, which may be
contradicting
- Business seeks the guarantees from financial institutions because
o They are better placed to deal with credit risks shifted towards
them
o They have an incentive to honor their commitments to
preserve their reputation
Political risks:
- Transfer risk: currency controls by blocking exchange contracts
(money stuck abroad)
- Expropriation risk: in particular in strategic sectors
Example: Brexit
Where do you tax in an international trade?
- Governments want to touch all residents for a share of their income
whether domestic or foreign
- The idea is to tax anybody making money within their territory
Example: Icelandic business sets up a shop in Luxembourg
- Taxed in Luxembourg: it is a resident of Luxembourg
- Firm pays a dividend to its parent: both Luxembourg and Iceland
may want to tax the parent
double taxation & Treaty shopping
Why is international finance useful?
To understand the new trends in international finance
How to spot the next financial crisis?
- Anything that is related to water
- Gas & electricity
How to predict exchange rates?
Understand the politics
Everyday life – exchange money
2. Architecture of international markets, spot markets
for foreign currency
Introduction
4
1. Introduction
International finance or the existence of borders
Borders still matter in finance:
Closed economy global integrated entity
The world is becoming increasingly globalized
- Globalization: increasing connectivity and integration of countries
and corporation and the people within them in terms of their
economic, political, and social activities
- The international scope of business creates new opportunities for
firms
Example: Covid-19
- What happened in China had an impact in Europe
- The production is China was delayed, so Europe didn’t receive the
goods
- We used to travel from here to Spain without trouble, today: tests
Growing trade flows between countries
Financial openness: countries allow foreigners to invest in their capital
markets & allow their citizens to invest abroad
China: they are strict in what can come in & what can go out. Their
currency is pretty fixed over time. This means that everything that relates
to their monetary policy needs to be under control.
Advantages for multinational corporations (MNC’s):
- Access to foreign capital
- Ability to reduce financing costs
Growing trading flows between countries = growing opportunities for
MNC’s
MNC’s are moving their production capacity to underdeveloped countries,
minimizing labor costs, and reexport these goods to the west where they
are sold.
Result of globalization
1
,Foreign Direct Investment (FDI):
The volume FDI substantially increases. This means that there are more
foreign investments in the country. We need to deal with this, so we need
to know what the motives and risks of these investments are.
Risk of investing abroad
- Currency fluctuations
- Geopolitical instability
- Government regulations
- Credit risk
Result of globalization
- Highly globalized & integrated world economy
- Continued liberalization of international trade
- Globalization production
- Integrated financial markets
important to understand the international setting in which firms are
operating and how corporate financial decisions are made. We need to
include globalization & the risks in our decision-making process.
Return/risk in an international setting:
- Multinational firms: operations beyond domestic national border
- Risk & return opportunities outside the domestic market
- How can we maximize the return on firm’s investment, given an
acceptable level of risk?
o More difficult to estimate the risk of a foreign country
Borders complicate the job of the CEO
The job of a CFO is much more difficult if you trade internationally then if
you are just trading in Belgium.
1. Existence of national currencies – exchange rates & exchange risks
2. Segmentation of goods markets along national lines
3. Existence of separate judicial systems
4. Sovereign autonomy of countries – political risk
5. Separate tax systems
2
,You can’t predict exchange rates. If you predict it, it’s worse than just
taking todays exchange rate.
What do you need to do as an investor? You are going to hedge, to protect
the investment. You need to protect yourself from changes in the
exchange rate.
Why do most countries have their own money?
- Printing bank notes is a positive NPV activity
o Seignorage: if you print your own money, you make money out
of it
- National pride: pound, danes
- The monetary policy is tailored to the local situation
Exchange rate risk = the uncertainty about the value of an asset or
liability and is denominated in a foreign currency
3 key features of prices
- Prices are not homogenous internationally
o The law of one price
o Purchasing-power parity (PPP)
o You need to look at what you can buy with the money you get
it
o Short term vs long term
o Common feature: prices rise with GDP per capita
- Within a country: prices are more homogenous
- Sticky prices (price elasticity)
EXAMEN: Big Mac Index: informal measure used to compare the
purchasing power parity (PPP) between different countries. Using the Big
Mac because you can get it in every country and it is all the same.
Short-run exchange rate fluctuations: appreciation of a currency does not
lead to falling prices abroad or soaring prices at home to keep good prices
similar in both countries
- However, 2 main consequences:
o Affects the competitiveness and attractiveness of a country on
the export or import market
o How do you value investments?
3
, Consequence 1: exchange rates & the import and export markets
Consequence 2: capital budgeting decisions
- Exchange rate risks also affect asset value
Credit risk:
- Domestic: if a customer does not pay you, you go to court
- Internationally: two legal systems involved, which may be
contradicting
- Business seeks the guarantees from financial institutions because
o They are better placed to deal with credit risks shifted towards
them
o They have an incentive to honor their commitments to
preserve their reputation
Political risks:
- Transfer risk: currency controls by blocking exchange contracts
(money stuck abroad)
- Expropriation risk: in particular in strategic sectors
Example: Brexit
Where do you tax in an international trade?
- Governments want to touch all residents for a share of their income
whether domestic or foreign
- The idea is to tax anybody making money within their territory
Example: Icelandic business sets up a shop in Luxembourg
- Taxed in Luxembourg: it is a resident of Luxembourg
- Firm pays a dividend to its parent: both Luxembourg and Iceland
may want to tax the parent
double taxation & Treaty shopping
Why is international finance useful?
To understand the new trends in international finance
How to spot the next financial crisis?
- Anything that is related to water
- Gas & electricity
How to predict exchange rates?
Understand the politics
Everyday life – exchange money
2. Architecture of international markets, spot markets
for foreign currency
Introduction
4
