1. Course introduction for 723G33 Risk Management and derivatives
(former 723g14 International Finance)
YH Chen, Doctor in Financial Economics

2. Contents Couse introduction for 723G33
Main Book, Other Reference books, chapters
Detailed schedule
Theories of international trade: comparative advantage and competitive advantage
Homework 1
Assignment: preparation of Case Porsche changes tack

3. LiU: Campus Valla Library Class location Exam place

4. Main book: Multinational Business Finance by Eiteman, Stonehill and Moffett

5. Other Reference books, chapters
International Business: Environment and Operations, John D. Daniels, Lee H. Radebaugh & Daniel P. Sullivan; 12th edition, for cultural aspect of International business of MNEs
Corporate Finance Foundations: Global Edition, by Hirt, Block and Danielsen, 14E, McGraw-Hill. Chapter 19 and 21

6. ESM:chapter 2-3, Case: Porsche Changes Tack
Vecka 18, 2012
Moment
Location
Preliminary Contents
Tue
May 7
13:15-15:00 L1
T15
Course Outline, Important Topics In International Corporate Finance, chapter 1
Wed
May 8
13:15-17:00
L2, seminar 1
p26
ESM:chapter 2-3, Case: Porsche Changes Tack
Homework: end of chapter 1, question 1-5
May 14
L 3
T11
ESM: Chapter 5, 6, 7 Foreign Exchange Market and parity conditions
May 15 L4
P26
ESM:chapter 8, 9 currency derivatives, Exchange rate
Thu
May 16
L 5
ESM: Chapter 10, 11, 12: exposure management
Booking
underway 17 ?
data system
Börssal instructor
The Use Of The Datastream. Collect Data For Exchange Rate Theory Test
May 21
Seminar 2
Exercise 4-12, Questions session
Note: Friday is the deadline hand in the exercise on exchange rate equilibrium theory test.

7. Project presentation (by group) Group A, B, C, D
Wed
May 22
13:15-15:00
L 6
T11
ESM: chapter 17, 19: Risk management: an integrated risk approach. Financial risk, operational risk, macroeconomic risk, country risk, etc
May 29
Final Seminar
T15
Project presentation (by group)
Group A, B, C, D
Discussant group (E, F, G, H)
15:15-17:00
Group E, F, G, H discussant group (A, B, C, D)
Thu
May 30 L7
Review. Old exam questions, etc
 exam
preliminary
4 juni

8. Obligatory Obligatory lectures and seminars.
Obligatory Lab exercise on testing the Equilibrium Theory of Exchange Rate (exercise to be handed in before 25 of May, according to lab instructions)
Group presentation is obligatory on 29th of may. Discussant group will be picked later.
Topics can be chosen from major areas of the course. Deadline, 27th of May. Send to both your discussant group and Instructions on website.
The exam is set preliminarily on the 4th of June. (account for 80% of the total points)

9. Introduction: importance of risk management of MNEs
Globalization is a fact of life.
I define globalization as producing where it is most cost-effective, selling where it is most profitable, and sourcing capital where it is cheapest, without worrying about national boundaries.
—Narayana Murthy, President and CEO, Infosys
We will cover all aspects of risks but focusing on what finance people can do. That is to hedge using financial instruments. By all means it is a complement to the overall risk management

10. Importance of risk management of MNEs
There are unique risks and opportunities involved in running international firms compared to purely domestic firms. They are foreign exchange risk, operating risk, country specific risk, laws and regulations, cultural aspect of multinational firms, etc.
Derivative securities such as options and futures are used by corporate financial managers of MNEs for hedging activities. Case in point: Porsche

11. Various aspects of International Business
The Cultural Environments Facing Business
The Political and Legal Environments Facing Business
The Economic Environments Facing Businesses
Globalization and Society
I define globalization as producing where it is most cost-effective, selling where it is most profitable, and sourcing capital where it is cheapest, without worrying about national boundaries.
—Narayana Murthy, President and CEO, Infosys

12. Theories of international trade
Theory of Comparative advantage (Factor Endowment: land, labor, location, natural resources, population)
International Trade and Factor-Mobility Theory
Porter´s theory of competitive advantages of nations of International trade (chapter 17)
Rationales of Foreign direct investment, FDIs
The theory of competitive advantage probes into three major aspects of trade phenomenon:
i. Why does a nation succeed international in a particular industry?
ii. What influence does a nation carry on competition in specific industries and their segments?
iii. Why do a nation's firms choose particular strategies of business?
Porter's analysis begins with following premises:
1. The nature of competition and the sources of competitive advantage differentials in the industries.
2. Successful global enterprises draw competitive advantages through their value chain of worldwide network.
3. Innovation is the pillion of gaining/sustaining competitive advantage.
4. Pioneering and aggressive competitors in exploiting new market/technology are most successful.

13. The theory of comparative advantage
The theory of comparative advantage provides a basis for explaining and justifying international trade in a model world assumed to enjoy:
free trade;
perfect competition;
no uncertainty;
costless information; and
no government interference.

14. The theory of comparative advantage
Absolute advantage and comparative advantage, opportunity costs
Firms in Country A specialize in making products that can be produced relatively efficiently, given Country A’s endowment of factors of production, that is, land, labor, capital, and technology
Firms in Country B do likewise, given the factors of production found in Country B
In this way the total combined output of A and B is maximized

15. Exhibit 1.3 Global Outsourcing of Comparative Advantage

16. Comparative advantage vs. Competitive advantage
Although international trade might have approached the comparative advantage model during the nineteenth century, it certainly does not today, for the following reasons:
Countries do not appear to specialize only in those products that could be most efficiently produced by that country’s particular factors of production (as a result of government interference and ulterior motivations)
At least two factors of production – capital and technology – now flow directly and easily between countries

17. The Porter's Diamond model for the competitive advantage of nations (chapter 17)
Sources of competitive advantage:
Factor Conditions: nation's position in factors of production, such as natural resources, climate, skilled labors, infrastructure, technology, etc
Demand Conditions: of home buyers needs - their sophistication
Suppliers and Related Industries: clusters of related/supervising industries.
Firm Strategy, Structure and Rivalry: attitude, willingness to succeed, domestic rivary.
A nations demand conditions, thus, refer to:
i. The nature of home buyers needs - their sophistication and fastidiousness
ii. The size and pattern of growth of home market
iii. The timing of development of demands relative to buyer in foreign markets
iv. The knowledge presence of domestic buyers in foreign markets and their preferences.
v. The timing of market saturation and challenges at home market provide a strong reason to acquire global competitive position to a business firm.

18. Four Determinants of National Competitive Advantage
Porter´s diamond model of international trade. The 5 factor model

19. Pricing of foreign exchange
International parity conditions: Relationship between Interest Rates and, spot and forward exchange rates, inflation, changes in spot rate
Arbitrage principle: The law of one price, normally we use home currency value per dollar, direct quote.
Indirect quote: 1 £= 1,5 $

20. The law of one price and Exchange Rates
If the identical product or service can be:
sold in two different markets; and
no restrictions exist on the sale; and
transportation costs of moving the product between markets are equal, then
the products price should be the same in both markets.
This is called the law of one price.

21. Exhibit 7.11 International Parity Conditions in Equilibrium (Approximate Form)

22. Exhibit 1.1 Global Capital Markets

23. What is Different About International Financial Management of MNEs?
Exhibit 1.4 summarizes the differences.
Culture and history differ among countries
Corporate governance
Greater levels of foreign exchange and political risks
Financial theory and applications are modified in the global versus domestic marketplace
Specialized and complicated financial instruments become tools of the trade

24. Exhibit 1.4 What Is Different About International Financial Management?
ESM: 13th edition

25. Market Imperfections: A Rationale for the Existence of the Multinational Firm
MNEs strive to take advantage of imperfections in national markets for products, factors of production, and financial assets.
Imperfections in the market for products translate into market opportunities for MNEs.
Large international firms are better able to exploit such competitive factors as economies of scale, managerial and technological expertise, product differentiation, and financial strength than their local competitors.

26. Market Imperfections: A Rationale for the Existence of the Multinational Firm
Strategic motives drive the decision to invest abroad and become a MNE and can be summarized under the following categories:
Market seekers
Raw material seekers
Production efficiency seekers
Knowledge seekers
Political safety seekers
These categories are not mutually exclusive.

27. The Globalization Process
Stage I: early domestic phase growing into the international trade phase (Exhibit 1.5)
Stage II: A successful firm will continue to grow from simple international trade to the multinational phase characterized by production and investment both at home and abroad (Exhibit 1.6)
Growth may be limited by the twin agency problems of corporate insiders and the rulers of sovereign states (Exhibit 1.7)

28. Exhibit 1.5 Trident Corp: Initiation of the Globalization Process
ESM: 13th edition

29. Exhibit 1.6 Trident’s Foreign Direct Investment Sequence
ESM 13th edition

30. Exhibit 1.7 Potential Limits of Financial Globalization
ESM: 13th edition

31. Homework
Chapter 1: problems 1 to 5. Recardian theory of Comparative advantages . China and France, due on Tuesday, 14th. Hand in by group or individually

32. Assignment: Prepare the Porsche case before Wednesday’s workshop
Form two groups A and B: one will present the Porsche Changes Tack case. The other asks questions, Preparation needed.
The Case is to be found on course homepage under course notes.
Discussion of the class follows: various risk management aspects of Porsche. Ownership, management style, synergies, financial risks, performance, etc.
Other info: Porsche Homepage
The transformation of the holding company into a European Company, Societas Europaea (SE) was done in November The name 'Porsche Automobil Holding' was unanimously approved by the shareholder meeting.

33. The holding structure of Porsche SE as of May 3rd, 2012.
¹ voting rights

34. Some concepts before the case of Porsche Changes Tack
Ownership structure and corporate governance
Owner control vs. Management control
Family ownership (concentrated ownership: common in Continental Europe
Shareholder oriented governance structure, or stakeholder oriented governance structure
The conflicts of interests: shareholders verses other constituents (stakeholders: debt holders, labor unions, governments, etc),
Performance measures, ROA, ROE

35. Mini-Case Questions: Porsche Changes Tack
What strategic decisions made by Porsche over the years 1999 to 2004 had given rise to its extremely high return on invested capital?
Vesilina D. wondered if she might have to distinguish between the Porsche’s ability to generate results for stockholders versus its willingness to do so. What do you think?
Is pursuing the interest of Porsche’s controlling families different from maximizing the returns to its public share owners?

36. Exhibit 1 Porsche’s Growth in Sales, Income, and Operating Margin

37. Exhibit 2 Return on Invested Capital (ROIC) for European Automakers, 2004

38. Exhibit 3 Porsche’s Velocity (capital turnover), Margin, and ROIC

39. Useful links for today
Main Book homepage for Multinational Business Finance , 13th, 12th ed. Both are ok. Corporate Finance Foundations: Global Edition, by Hirt, Block and Danielsen, 14E, McGraw-Hill. Chapter 19 and

40. Practical help How to get around Linköping University?
English version of the University:
Need help? book a Librarian for information searching and database, etc.
3. School map:
Search a location, reserve a room etc.