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International finance notes.docx

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FIN 621
Sergiy Rakhmayil

Chapter 1globalization and the multinational firm What is special about international financeDimensions setting international finance apart from domestic finance o Foreign exchange risk and political riskForeign exchange risk change in sales and profits due unexpected changes in the exchange ratesPolitical risk from unexpected changes in changes in tax rules to outright expropriation of assets held by foreigners o Differences in regulations tax law and government policies Market imperfectionsvarious frictions and impediments that prevent markets from functioning effectively MNCMultinational corporations o Greater set of business opportunities for production and investmentExpanded opportunity setability of firms engaging in business beyond their own national borders when they become transnational or multinational Benefiting by investing internationally rather than domesticallyInvestment opportunitiesLower costs for resourcesNew product marketsGoals for international financial management o Understanding and managing foreign exchange and political risks and coping with market imperfections have become important parts of the financial managers jobGoalShareholder wealth maximization o Shareholder wealth maximizationfirm makes all business decisions and investments with an eye toward making the owners of the firmshareholders 0 better off financially wealthier than they were before o More and more countries are beginning to pay serious attention to this as capital markets become more liberalized and internationally intergrated o Doing so it will simultaneously be accomplishing other legitimate goals that are perceived as worthwhileSince shareholder wealth maximization is a longterm goalCorporate governance financial and legal framework for regulating the relationship between a companys management and its shareholdersGlobalization of the world economy recent trendsKey trends in the world economy o The emergence of globalized financial marketsintergration of internation capital and financial marketsDeregulated financial markets and heightened competition in finanacial services provide a natural environment for financial innovations that result in the intro of various financial instrumentsTechnological advancements give investors around the world immediate access to news and information affecting their investments sharply reducing information costs o The advent of the euroTransaction domain of the euro will become larger than that of the US dollarEuro is now the responsibility of the European central bank ECB in FrankfurtBrought changes in the eurpoean financePrecipitated the emergence of continent wide capital markets in europed characterized by depth and liquidity o Trade liberalization and economic integrationThe continued expansion of international trade More and more countries are now embrasing freemarket and openeconomy policies because of gains in international tradeComparative advantageit is mutually beneficial for countries to specialize in production of those goods they can produce most efficiently and trade such goods among themLiberalization of international trade will enhance the welfare of the worlds citizens all players of the game winGeneral agreement on Tariffs and Trade GATTinternational trade liberalized at the global level through thisWorked to reduce import tariffs worldwideWorked to increase proportion of dutyfree products for industrial countriesWorked to extend the rules of world trade to cover agricultureWorld trade organization WTO was created to replace GATT o More power to enforce the rules of international tradeOn a regional level formal arrangements among countries promote economic integration o Large scale privatization of stateowned enterprisesPricatizationthrough which a country divests itself of the ownership and operation of a business venture by turning it over to the free market systemDenationalization processSeen as a cure for bureaucratic inefficiency and wasteMultinational corporations MNC Multinational corporationa business firm incorporated in one country that has production and sales operations in several other countries o Obtaining raw materials from one market and fianancial capital from anotherproducing goods with labour and capital equipment in a third country selling the finished product in yet other national marketsWays MNCs gain o Foreign investmento Benefit from economies of scaleSpreading RD expenditures and advertising costs over their global salesPooling lobal purchasing power over suppliersUtilizing their technological and managerial knowhow globally with minimum additional costs o Take advantage of lowcost labour available in certain developing countries
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