Slide 0Slide 1Chapter One OutlineWhat’s Special about “International” Finance?Slide 5Slide 6Slide 7The Example of Nestlé’s Market ImperfectionNestlé’s Foreign Ownership RestrictionsSlide 10Slide 11Goals for International Financial ManagementMaximize Shareholder WealthOther GoalsSlide 15Slide 16Globalization of the World Economy: Major TrendsEmergence of Globalized Financial MarketsEmergence of the Euro as a Global CurrencyEuro AreaValue of the Euro in U.S. DollarsEconomic IntegrationLiberalization of Protectionist LegislationNAFTAPrivatizationMultinational CorporationsTop 10 MNCsEnd Chapter OneThe Theory of Comparative AdvantageThe Geometry of Comparative AdvantageSlide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 41Slide 42Arguments in Favor of Free TradeEnd Appendix OneINTERNATIONALFINANCIALMANAGEMENTEUN / RESNICKFifth EditionCopyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/IrwinChapter Objectives:Understand why it is important to study international finance.Distinguish international finance from domestic finance.1Chapter OneGlobalization and the Multinational Firm1-2What’s Special about “International” Finance?Goals for International Financial ManagementGlobalization of the World EconomyMultinational CorporationsOrganization of the TextSummaryChapter One Outline1-3What’s Special about “International” Finance?Foreign Exchange RiskPolitical RiskMarket ImperfectionsExpanded Opportunity Set1-4What’s Special about “International” Finance?Foreign Exchange RiskThe risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements.Suppose $1 = ¥100 and you buy 10 shares of Toyota at ¥10,000 per share.One year later the investment is worth ten percent more in yen: ¥110,000 But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms.1-5What’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.1-6Market ImperfectionsLegal restrictions on the movement of goods, people, and moneyTransactions costsShipping costsTax arbitrageWhat’s Special about “International” Finance?1-7The Example of Nestlé’s Market ImperfectionNestlé used to issue two different classes of common stock bearer shares and registered shares.Foreigners were only allowed to buy bearer shares.Swiss citizens could buy registered shares.The bearer stock was more expensive.On November 18, 1988, Nestlé lifted restrictions imposed on foreigners, allowing them to hold registered shares as well as bearer shares.1-8Nestlé’s Foreign Ownership Restrictions12,00010,0008,0006,0004,0002,000011 20 31 9 18 24Source: Financial Times, November 26, 1988 p.1. Adapted with permission.SFBearer shareRegistered share1-9The Example of Nestlé’s Market ImperfectionFollowing this, the price spread between the two types of shares narrowed dramatically.This implies that there was a major transfer of wealth from foreign shareholders to Swiss shareholders.Foreigners holding Nestlé bearer shares were exposed to political risk in a country that is widely viewed as a haven from such risk.The Nestlé episode illustrates both the importance of considering market imperfections and the peril of political risk.1-10Expanded Opportunity SetIt doesn’t make sense to play in only one corner of the sandbox.True for corporations as well as individual investors.What’s Special about “International” Finance?1-11The focus of the text is to equip the reader with the “intellectual toolbox” of an effective global manager—but what goal should this effective global manager be working toward?Maximization of shareholder wealth?orOther Goals?Goals for International Financial Management1-12Maximize Shareholder WealthLong accepted as a goal in the Anglo-Saxon countries, but complications arise.Who are and where are the shareholders?In what currency should we maximize their wealth?1-13Other GoalsIn other countries shareholders are viewed as merely one among many “stakeholders” of the firm including:EmployeesSuppliersCustomersIn Japan, managers have typically sought to maximize the value of the keiretsu—a family of firms to which the individual firms belongs.1-14Other GoalsAs shown by a series of recent corporate scandals at companies like Enron, WorldCom, and Global Crossing, managers may pursue their own private interests at the expense of shareholders when they are not closely monitored.These calamities have painfully reinforced the importance of corporate governance i.e. the financial and legal framework for regulating the relationship between a firm’s management and its shareholders.1-15Other GoalsThese types of issues can be much more serious in many other parts of the world, especially emerging and transitional economies, such as Indonesia, Korea, and Russia, where legal protection of shareholders is weak or virtually non-existing.No matter what the other goals, they cannot be achieved in the long term if the maximization of shareholder wealth is not given due consideration.1-16Globalization of the World Economy: Major TrendsEmergence of Globalized Financial MarketsEmergence of the Euro as a Global CurrencyTrade Liberalization and Economic Integration Privatization 1-17Deregulation of Financial Markets coupled withAdvances in Technology have greatly reduced information and transactions costs, which has led to:Financial Innovations, such asCurrency futures and optionsMulti-currency bondsCross-border stock listingsInternational mutual fundsEmergence of Globalized Financial Markets1-18Emergence of the Euro as a Global CurrencyA momentous event in the history of world financial systems.Currently more than 300 million Europeans in 15 countries are using the common currency on a daily basis.In May 2004, 10 more countries joined the European Union and adopted the euro.The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future.1-19Euro AreaAustria, Belgium,Cyprus, Finland, France, Germany, Greece, Ireland, Italy,