INTERNATIONAL FINANCIAL MANAGEMENT

TOPICS! 1. Globalization of the World Economy: Recent Trends 2. Globalization and the Multinational Firm 3. What’s Special about “International” Finance? 4. World’s most traded currencies!

1. Globalization of the World Economy: Recent Trends Trade Liberalization and Economic Integration Privatization Emergence of Globalized Financial Markets Advent of the Euro Currency

Why do we need to study “international” financial management? Highly globalized and integrated world economy. consumption, production of goods and services has become highly globalized as a result of multinational corporations’ (MNCs) China exports textiles, mechanical and electrical products to Saudi Arabia, and imports crude oil. US (military supplies) is the leading trading partner for imports to Saudi Arabia, followed by JAPAN (cars), UK ( gold, military equip) SWITERZERLAND ( medicines), GERMANY

For example, IBM personal computers sold in the world market might have been assembled in Malaysia with Taiwanese-made monitors, Korean-made keyboards, U.S.- made chips, and preinstalled software packages that were jointly developed by U.S. and Indian engineers. Recently, financial markets have also become highly integrated. -- shares cross-listed on foreign stock exchanges, thereby rendering their shares internationally tradable and gaining access to foreign capital as well. Hence, it is vital for a finance manager to understand the international dimensions of financial management.

2. Globalization & Multinational Corporations A firm that has incorporated in one country and has production and sales operations in other countries. There are about 60,000 MNCs in the world. Many MNCs obtain raw materials from one nation, financial capital from another, produce goods with labor and capital equipment in a third country and sell their output in various other national markets. 1-5

Top 10 MNCs 1General ElectricUnited States 2Vodafone Group PLCUnited Kingdom 3General MotorsUnited States 4British Petroleum Co. PLCUnited Kingdom 5Royal Dutch/Shell GroupUK/Netherlands 6ExxonMobile CorporationUnited States 7Toyota Motor CorporationJapan 8Ford Motor CompanyUnited States 1-6

MULTINATIONAL SAUDI COMPANIES ARAMCO ALMARAI SAUDI-BIN LADIN GROUP SABIC AMERICA Inc.

3. What’s Special about “International” Finance? Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set 1-8

What’s Special about “International” Finance? Foreign Exchange Risk The risk that foreign currency profits may depreciate / appreciate in dollar terms due to unanticipated unfavorable exchange rate movements. e.g. Recent depreciation in currencies of India, Brazil, Russia against US dollar 1-9

What’s Special about “International” Finance? Political Risk Sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways. Eg. Nationalization of properties, seizure of private property by the govt….. Eg 2. Ban on Chinese goods by few countries in Asia and Africa 1-10

Market Imperfections Legal restrictions on the movement of goods, people, and money Transactions costs Shipping costs Tax arbitrage What’s Special about “International” Finance? 1-11

Expanded Opportunity Set It doesn’t make sense for corporations to play in only one market. Corporations has to expand their business horizon. What’s Special about “International” Finance? 1-12

4. World’s Most Traded Currencies: 1. United States, United States dollar USD ($) – 84.9% 2. European Union, Euro EUR (€) – 39.1% 3. Japan, Japanese yen JPY (¥) – 19.0% 4. United Kingdom, Pound sterling GBP (£) – 12.9% 5. Australia, Australian dollar AUD ($) – 7.6% 6. Switzerland, Swiss franc CHF (Fr) – 6.4% 7. Canada, Canadian dollar – CAD ($) – 5.3% 8. Hong Kong, Hong Kong dollar HKD ($) – 2.4% 9. Sweden, Swedish krona SEK (kr) – 2.2% 10. New Zealand, New Zealand dollar NZD ($) – 1.6%

Emergence of the Euro as a Global Currency A momentous event in the history of world financial systems in the 1999 Currently more than 320 million Europeans in 17 countries are using the common currency on a daily basis. The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future though now we see a downtrend in the euro The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar. [ [ 1-14

Euro Area Austria Belgium Cyprus Finland France Germany Greece Ireland Italy Luxembourg Malta The Netherlands Portugal Slovenia Spain Slovaika Estonia 1-15