Intl Fin chp 1/2/4 Flashcards
(27 cards)
What is financial management?
How to optimally make corporate financial decisions
Investing
Financing
Dividend-policy
Why we study IFM
A highly globalized and integrated world economy
- Consumption of goods and services
- Production of goods and services
- Investment (Financial Markets)
Essential for financial managers to fully understand international dimensions of financial management
Four major dimensions set IFM apart from DFM
Foreign Exchange risks- in integrated fin. markets, companys are exposed to uncertain exchange rates
Political Risks- ranges from unexpected changes in tax rules to outright expropriation of assets held by foreigners
Market Imperfections- ie legal restrictions, excessive transaction and transportation costs, information asymmetry, and discriminatory taxation
Expanded opportunity set- firms can locate produc. in any country of the world to maximize their performance
Since the EU accession, many Hungarians have borrowed in terms of the euro or Swiss franc to purchase houses. However, as the forint (the Hungarian currency) was falling against the euro and Swiss franc, the cost of the mortgage payments in terms of the forint increased sharply, forcing many borrowers to default. This is an example of exposure toA) exchange rate risk B) political risk C) market imperfections D) weakness in the dollar.
exchange rate risk
Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example ofA.information asymmetry.B.excessive transactions costs.C.racial discrimination.D.a market imperfection.
market imperfection
Explain Europes Sovergn debt crisis
root: Greek’s excessive borrowing and spending
wages and prices rise faster than productivity
Problem begins with greece running a budget deficit that was a higher percentage of their GDP than was ,amdated pm the stability pact
Bc they’re part of the EU doesn’t have independent cebtral bank to use monetary policy to resolve the issue
Bc greece was overdebted, lenders were required a higher yield so the gov has to pay more to maintain debt
citizens are pressuring the gov for more high paying jobs and new jobs
EU will only help greece out if they 1. cut gov spending
but there is political pressure for the gov to spend money to create jobs
What are the factors that caused the Global fin. crisis
- HH and fin. inst. borrowed too much and took too much risk
- Crisis was amplified and transmitted globally by securitization which allowed for loan originators to avoid bearing the default risk, which leads to a compromised lending standard and increased moral hazard; shady mortgage backed securities could be used for excessive risk taking
- lax regulation (repeal of glass-seagull act)
- Highly integrated fin. markets
What happened in the global fin crisis of 2008
- mortgage crisis in the summer of 07 led to a credit crunch that made borrowing and refinancing difficult for HH, firms, and banks
- lehman brothers, major global investment bank filed for bankrupcy- confidence fell
- Interest rates rose bc of tighened mon. policy- house prices started declining- subprime (18) borrowes started to defualt
Compute OC:
A
Food 3
Textiles 5
B
Food 4
Textiles 15
Who has OC?
A- 5/3 yards of textiles
3/5 oz of food
B-15/4 yrds of textiles
4/15 oz of food
B food
A textiles
f you can’t come to a clear conclusion, you can determine your opportunity cost by using a very simple formula: divide what you’ll sacrifice by what you stand to gain if you take one job over the other.
Complete the OC sheet: (on whiteboard) Units of input Output per unit of input production Consuption
Answer in notebook
The intl monetary system introduces the inst. framework w/in which what 3 things happen
- intl pmt are made
- Movement of capital is accommodated
- Exchange rate is determined
What is the evolution of the intl. mon. system?
Bimetallism: Before 1875 Classical Gold Standard: 1875-1914 Interwar Period: 1915-1944 Bretton Woods System: 1945-1972 The Flexible Exchange Rate Regime: 1973-Present
Explain bimetallism
exchange rate among currencies were determined based on gold or silver contents- PROB: greshams law- look at value of a metal>the value of the currency
explain classical gold standard
During this period in most major countries:
Gold alone was assured of unrestricted coinage.
There was two-way convertibility between gold and national currencies at a stable ratio.
Gold could be freely exported or imported.
The exchange rate between two country’s currencies would be determined by their relative gold contents.
explain interwar period
Exchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market.
Participants lacked the political will to “follow the rules of the game”.
International trade and investment was profoundly detrimental.
U.S. dollar became the dominant world currency, replacing British pound
explain the Bretton woods system
- dollar came out as strong universal currency- dollar is overvalued
- creation fo world bank and IMF
explain flexible exchange rate regime
Flexible exchange rates were declared acceptable to the IMF members.
Central banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatilities.
Gold was abandoned as an international reserve asset.
Non-oil-exporting countries and less-developed countries were given greater access to IMF funds
What are the 4 current exchange rate arrangements
Free Float
The largest number of countries, about 48, allow market forces to determine their currency’s value.
Managed Float (dirty float) About 25 countries combine government intervention with market forces to set exchange rates; kenya, peru, jamaica
Pegged to another currency
Such as the U.S. dollar or euro (through franc or mark).
No national currency
Some countries do not bother printing their own currency. For example, Ecuador, Panama, and El Salvador have dollarized. Montenegro and San Marino use the euro
What is the european monetary system and what are its objectives
European countries maintain exchange rates among their currencies within narrow bands, and jointly float against outside currencies.
Objectives:
To establish a zone of monetary stability in Europe.
To coordinate exchange rate policies vis-à-vis non-European currencies.
To pave the way for the European Monetary Union.
What are the long term implications of teh EURO
As the euro proves successful, it will advance the political integration of Europe in a major way, eventually making a “United States of Europe” feasible.
It is likely that the U.S. dollar will lose its place as the dominant world currency.
The euro and the U.S. dollar will be the two major currencies.
What are exchange rate regimes?
Is the way a country manages its currencies and the foreign exchange market
The most common types are:
Fixed Exchange Rate Regime
Flexible Exchange Rate Regime
Arguments in favor/against flex ex rates
Arguments in favor of flexible exchange rates:
Easier external adjustments.
National policy autonomy.
Arguments against flexible exchange rates:
Exchange rate uncertainty may hamper international trade.
No safeguards to prevent crises. (abrupt inflation or deflation)
what is a public corporations major weakness?
the agency problem associated w the conflicts of interest bw shareholders and managers
self interested managers can take actions to promote their own interests at the expense of shareholders. The agency problem tend to be more serious for firms with excessive free cash flows but w/out growth opp.
What are remedies to minimize agency cost?
- strengthening the independence of boards of directors
- providing managers w incentive contracts (ie stock and stock options)
- Concentrated ownership so that large shareholders can control managers
- using debt to induce managers to yield free cash flow to investors
- listing stocks on the london or NY stock exchange where shareholders are better protected
- inviting hostile takeover bids if the managers waste funds and expropriate shareholders
