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International Financechp1.docx

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FIN 621
Sergiy Rakhmayil

International Finance IBS 621 • Lecture 1 • Course topics – Foundations of International Financial Management – World Financial Markets and Institutions – Foreign Exchange Exposure – Financial Management for a Multinational Firm • Foundations of International Financial Management • Globalization and the Multinational Firm • International Monetary System • Balance of Payments • The Market for Foreign Exchange • International Parity Relationships • Globalization and the Multinational Firm • International vs domestic finance • Goals for international financial management • Globalization • Multinationals • Comparative advantage • International vs Domestic Finance • Foreign Exchange and Political _____ • __________in regulations, tax laws, government policies • Greater opportunity set for production and/or investment • Additional Opportunities • Investment opportunities • Lower ________for resources • New product markets • Managerial objectives • Consensus in NorthAmerica – Long-run _______________wealth maximization • In other countries – Shareholder wealth – Stakeholder wealth – Corporate wealth – Market share, et c. • Long-term _________wealth maximization is the only sustainable strategy for running a business – Who are the owners?Are home country owners’interests superior to those of foreign country owners? • Recent Trends in the World Economy • Globalization • Introduction of Euro • Trade liberalization • Privatization • Multinational Enterprise • MNE: Multinational firm is a company that has operating branches, subsidiaries and affiliates located in ___________countries. • It has both domestic and foreign shareholders • View World Investment Report and check the list of largest transnational corporations (Largest TNCs) • Multinationals face two major sources of risks in addition to normal risks faced by domestic companies. (Fx and political) • Why do firms become multinational? • Market Seekers • Raw Material Seekers • Production Efficiency Seekers • Knowledge Seekers • Political Safety Seekers • Comparative advantage • Idea: – Situation 1: countries try to produce ____ themselves all products they need, no international trade occurs – Situation 2: countries produce only what they can produce _______efficiently (efficiently as compared with the other countries), sell their products, and buy what they need but do not produce – According to the theory of comparative advantage, in Situation 2 all participating countries are better off than in Situation 1, under a set of assumptions • Comparative advantage • No trade exists • Terms of trade • Comparative advantage • Comparative advantage • Comparative advantage • If countries specialize in producing certain goods because they can do it more efficiently than the others, they use their comparative advantage over the other countries • In general, countries that specialize and trade are _________ off than those that do not – This effect is not automatic, all depends on the _________________(open the spreadsheet and see if dashed lines are always above the solid lines for each country) • Aconstant need for international transactions = constant need for / interest in international finance • Foundations of International Financial Management • Globalization and the Multinational Firm • International Monetary System • Balance of Payments • The Market for Foreign Exchange • International Parity Relationships • International Monetary System • … is the institutional _____________within which international payments are made, movements of capital are accommodated and exchange rates among currencies are determined. • International Monetary System • History of the international monetary system • Current currency regimes • Major events • History of the International Monetary System • Bimetalism: Before 1875 • The Gold Standard, 1876-1913 • The Interwar Years and World War II, 1914-1944 • Bretton Woods and the International Monetary Fund, 1944 • Fixed Exchange Rates, 1945-1973 • 1973- Present • Current Currency Regimes • Exchange Arrangements with no separate legal tender • Currency BoardArrangements • Fixed Peg • Pegged Rate within Horizontal Bands • Crawling Pegs • Crawling Bands • Managed Float • Independent Float • Fixed versus Flexible Exchange Rate • IMF classification of currency systems • Fixed exchange rate brings fo
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