INTERNATIONAL FINANCIAL MANAGEMENT
Introduction ........................................................................................................................................................................... 3
Chapter 1: Globalization and the Multinational Firm (NXLQCS) ......................................................................................... 3
Chapter 2: The international monetary system (LUAGAE)................................................................................................ 16
Chapter 3: Balance of payments (TEPNQT)....................................................................................................................... 33
Chapter 4: Corporate Governance (WC: SIEDXI) ................................................................................................................. 44
Chapter 5: The Market for Foreign Exchange (WC: NZAJAD) .............................................................................................. 53
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates (KSSNCE) .................................. 65
Chapter 7: Futures and Options on Foreign Exchange (SHDASP) ..................................................................................... 78
Chapter 14: Interest Rate and Currency Swaps ................................................................................................................... 90
,2
,Introduction
Overarching goal of financial management
- Shareholder maximization
Foreign exchange risk
- Earning and spending money in different currencies
Chapter 1: Globalization and the Multinational Firm (NXLQCS)
Why study international finance?
The world economy is highly globalized and increasingly integrated in:
- The markets for goods and services
- The financial markets
o Market for exchange of capital
The major economic functions are globalized:
- Consumption
- Production
- Investment
What’s special about international finance?
Four major dimensions set international finance apart from domestic finance:
- Foreign exchange risk
- Political risk
o Tariffs (also economic risk)
o War: assets are frozen
§ ‘Russia seizes $50 billion in assets as economy shifts during war in Ukraine’
- Market imperfections
- Expanded opportunity set
- Reason
o Sovereign nations have the right to issue currencies, formulate their own economic policies, impose
taxes, and regulate movements of people, goods, and capital across their borders
Foreign exchange risk
Foreign exchange risk
- Comes from uncertain future exchange rates
- E.g. profits made in a foreign currency may disappear once converted into the domestic currency due to
unanticipated exchange rate movements
- Exchange rates among major currencies (e.g., U.S. dollar, Japanese yen, British pound, and euro) fluctuate
continuously in an unpredictable manner
- Exchange rate uncertainty influences all major economic functions: consumption, production, and investment
3 main currencies in the world
- USD
o Percentage of reserves held in USD all over the world = 60%
- EUR
o Percentage of reserves held in EUR all over the world = 20%
- Yuan: Chinese currency
o Percentage of reserves held in yuan all over the world = 5%
3
, Foreign ecxhange risk example:
Suppose $1 = ¥100 today, and you invest $1,000 to buy 50 shares of Toyota at ¥2,000 per share. One year later, the
share price has increased by ten percent, and your investment is worth ¥110,000. If the yen has depreciated to
$1 = ¥120 by that time, how much is your investment worth in dollar terms?
- Initial investment in dollars: $1,000
- Initial investment in yen: $1,000 × (¥100/$) = ¥100,000
- Maturity value in yen: ¥110,000 (after 10% increase)
- Maturity value in dollars: ¥110,000 / (¥120/$) = $916.67
ROI in USD
- ( Pt – Pt-1 ) / Pt-1
- (916,67 – 1000)/1000 = -8,33%
ROI in Yen
- (110000 – 100000) / 100000 = 10%
Japanese Yen – USD
- Weekly exchange rate since start of the Covid crisis (base = 100)
o Value of Yen in USD
o Yen is going up à Yen is depreciating + USD is appreciating
o You need more yen to buy $1
o The Yen has been depreciating by 35% since covid crisis (huge
fluctuations)
§ Japan is a cheap travel destination, because you will
have more purchasing power
§ Also the € is more valuable than the Yen
- Percentage change from a year ago since the covid crisis
o Yen depreciated by 30% from mid 2022 compared to mid 2021
o Yen didn’t depreciate/appreciate from mid 2023 compared to
mid 2022
Carry trade: ‘What happened in August 2024 with respect to the yen carry trade’ (video slide 9)
- Carry trade = you borrow one currency that has a low interest rate, and use this to buy another currency that
has a high interest rate
- Shorting = borrowing a currency to buy something else
- Yen carry trade
o Japan had very low interest rates, so you can borrow this currency very cheaply
o The borrowed yen is exchanged for USD
o The USD are used to buy t-bills in the US
o Suppose you’re making 5% on your US t-bills and you pay 1% interest on your Yen debt
§ You have 4% for yourself
o Since it’s risk-free you do this a lot, and thus borrow a lot of yen
o USD kept appreciating to the yen
o Everyone started doing this = shorting
§ Downward pressure on the yen and upward pressure on the USD
o Trigger resulted in this trade not working anymore
§ The market is expecting and betting on rate cuts
§ Bank of japan raised interest rates à the yen currency appreciates against the USD
• If the bank decreases interest rates, the currency would depreciate
§ You used a lot of leverage
4
Introduction ........................................................................................................................................................................... 3
Chapter 1: Globalization and the Multinational Firm (NXLQCS) ......................................................................................... 3
Chapter 2: The international monetary system (LUAGAE)................................................................................................ 16
Chapter 3: Balance of payments (TEPNQT)....................................................................................................................... 33
Chapter 4: Corporate Governance (WC: SIEDXI) ................................................................................................................. 44
Chapter 5: The Market for Foreign Exchange (WC: NZAJAD) .............................................................................................. 53
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates (KSSNCE) .................................. 65
Chapter 7: Futures and Options on Foreign Exchange (SHDASP) ..................................................................................... 78
Chapter 14: Interest Rate and Currency Swaps ................................................................................................................... 90
,2
,Introduction
Overarching goal of financial management
- Shareholder maximization
Foreign exchange risk
- Earning and spending money in different currencies
Chapter 1: Globalization and the Multinational Firm (NXLQCS)
Why study international finance?
The world economy is highly globalized and increasingly integrated in:
- The markets for goods and services
- The financial markets
o Market for exchange of capital
The major economic functions are globalized:
- Consumption
- Production
- Investment
What’s special about international finance?
Four major dimensions set international finance apart from domestic finance:
- Foreign exchange risk
- Political risk
o Tariffs (also economic risk)
o War: assets are frozen
§ ‘Russia seizes $50 billion in assets as economy shifts during war in Ukraine’
- Market imperfections
- Expanded opportunity set
- Reason
o Sovereign nations have the right to issue currencies, formulate their own economic policies, impose
taxes, and regulate movements of people, goods, and capital across their borders
Foreign exchange risk
Foreign exchange risk
- Comes from uncertain future exchange rates
- E.g. profits made in a foreign currency may disappear once converted into the domestic currency due to
unanticipated exchange rate movements
- Exchange rates among major currencies (e.g., U.S. dollar, Japanese yen, British pound, and euro) fluctuate
continuously in an unpredictable manner
- Exchange rate uncertainty influences all major economic functions: consumption, production, and investment
3 main currencies in the world
- USD
o Percentage of reserves held in USD all over the world = 60%
- EUR
o Percentage of reserves held in EUR all over the world = 20%
- Yuan: Chinese currency
o Percentage of reserves held in yuan all over the world = 5%
3
, Foreign ecxhange risk example:
Suppose $1 = ¥100 today, and you invest $1,000 to buy 50 shares of Toyota at ¥2,000 per share. One year later, the
share price has increased by ten percent, and your investment is worth ¥110,000. If the yen has depreciated to
$1 = ¥120 by that time, how much is your investment worth in dollar terms?
- Initial investment in dollars: $1,000
- Initial investment in yen: $1,000 × (¥100/$) = ¥100,000
- Maturity value in yen: ¥110,000 (after 10% increase)
- Maturity value in dollars: ¥110,000 / (¥120/$) = $916.67
ROI in USD
- ( Pt – Pt-1 ) / Pt-1
- (916,67 – 1000)/1000 = -8,33%
ROI in Yen
- (110000 – 100000) / 100000 = 10%
Japanese Yen – USD
- Weekly exchange rate since start of the Covid crisis (base = 100)
o Value of Yen in USD
o Yen is going up à Yen is depreciating + USD is appreciating
o You need more yen to buy $1
o The Yen has been depreciating by 35% since covid crisis (huge
fluctuations)
§ Japan is a cheap travel destination, because you will
have more purchasing power
§ Also the € is more valuable than the Yen
- Percentage change from a year ago since the covid crisis
o Yen depreciated by 30% from mid 2022 compared to mid 2021
o Yen didn’t depreciate/appreciate from mid 2023 compared to
mid 2022
Carry trade: ‘What happened in August 2024 with respect to the yen carry trade’ (video slide 9)
- Carry trade = you borrow one currency that has a low interest rate, and use this to buy another currency that
has a high interest rate
- Shorting = borrowing a currency to buy something else
- Yen carry trade
o Japan had very low interest rates, so you can borrow this currency very cheaply
o The borrowed yen is exchanged for USD
o The USD are used to buy t-bills in the US
o Suppose you’re making 5% on your US t-bills and you pay 1% interest on your Yen debt
§ You have 4% for yourself
o Since it’s risk-free you do this a lot, and thus borrow a lot of yen
o USD kept appreciating to the yen
o Everyone started doing this = shorting
§ Downward pressure on the yen and upward pressure on the USD
o Trigger resulted in this trade not working anymore
§ The market is expecting and betting on rate cuts
§ Bank of japan raised interest rates à the yen currency appreciates against the USD
• If the bank decreases interest rates, the currency would depreciate
§ You used a lot of leverage
4
