INTERNATIONAL FINANCE

BBA-403

Lecture 1
September 28, 2020
 Google Classroom
Classroom: International Finance (BBA 403)
Code: tio2jh2

INTRODUCTION
o Businesses operate in an increasingly interconnected global environment, where they
are directly or indirectly exposed to international competition and managing such
businesses requires understanding of currency risks and global financial environment.

o The course focuses on the management of foreign exchange exposure, foreign direct
investment decisions, multinational capital budgeting, forex markets and risk,
international parity conditions, etc.
 Course Objective
After successful completion of this course, students will be able to:
• Identify and contrast the major markets that facilitate international business.
• Describe relationships between exchange rates and economic variables, and explain the forces that
influence these relationships.
• Identify the best practices for measuring and managing exchange rate risk and explore currency
forecasting theories.
• Synthesize and evaluate options for the management of long-term assets and liabilities, including
motives for foreign direct investment, multinational capital budgeting, country risk, analysis, and
capital structure decisions.
• Prescribe MNCs’ management of short-term financing and international cash management in a variety
of real-world examples.
• Demonstrate basic understanding of foreign exchange market and exchange rates.
• Demonstrate basic understanding of the issues pertaining to multinational financing and investment
decisions.
• Demonstrate critical and analytical skills wherein they should be able to make sense out of a mass of
information to address relevant issues pertaining to international finance.
 Course Delivery
Current uncertain situation due to the ongoing Pandemic.

 Initially on an online basis but with improved conditions could move on campus.

 Sessions would be a combination of recorded and live lectures.

 Primary method of Communication would be Google Classroom.

 Lectures would be delivered using either Zoom or Google Meet.

 SB Policies
Attendance - Students must have 75% attendance by the end of the course to be graded and allowed
to sit in the Final Examination as per the University policy. NO EXCEPTIONS.
 
Class Policy and Student Responsibilities:

• Responsibility of the students to be aware of and to abide by the university’s policies on cheating,
plagiarism (accidental or otherwise), fairness, and academic integrity.

• Violations of the said policies will be dealt with in accordance with the university guidelines and
may result in serious consequences.

• While students are highly encouraged to form study groups and to learn from one another, cheating
and/or plagiarism of any sort is unacceptable.
 Absolute Grading
Nature of Examination Tentative Percentage

Quizzes 15%

Assignments/ Presentations 10%

Mid Semester Examinations 15%

Class Attendance and Participation 5%

Project & Presentation 20%

Final Examination 35%

Total 100%
 Assessments
1. Quizzes - a maximum of 4 quizzes, but this number could be reduced depending on the
progress and time constraints during the semester. There will be no make-up quizzes
for anyone who is absent or on leave.
 
2. Assignments - individual graded presentations by students on current topics and issues
in Finance on a weekly basis. There will be no make-up presentation for anyone
under any circumstances.
 
3. Mid-Term & Final Examinations - Mid-term and Final examinations as advised by the
School of Business.
 
4. Course Project - A Group based final project, which would include a written report and
presentation. The details of the project would be provided in Class.

A schedule of the assessments and lectures included in the Course Outline

 Course Content
Overview Multinational Financial Management • Exchange Rate Systems & Single European
• Managing an MNC & Motivation to Pursue International Currency
Business • Direct & Indirect Intervention
• Methods to Conduct International Business & Valuation
 
Models
  International Arbitrage & Interest Rate Parity
International Flow of Funds • Locational & Triangular Arbitrage
• Balance of Payments & Growth in International Trade • Covered Interest Arbitrage & Interest Rate Parity
• International Trade Flows, Capital Flows & International  
Agencies Inflation, Interest and Exchange Rates
  • Purchasing Power Parity (PPP)
International Financial Markets
• International Fisher Effect (IFE)
• Foreign Exchange Market, International Money Market &
International Credit Market  
• International Bond Market & International Stock Markets Exchange Rate Forecasting
  • Forecasting Techniques
Exchange Rate Determination • Assessment of Forecast Performance
• Measuring Exchange Rate Movements & Exchange Rate  
Equilibrium
• Factors That Influence Exchange Rates, Movements in
Cross Exchange Rates & Capitalizing on Expected
 Course Content
Measuring Exposure to Exchange Rate  
Fluctuations
• Transaction Exposure
Country Risk Analysis
• Economic Exposure
• Country Risk Characteristics, Measuring
  Country Risk & Incorporating Risk in Capital
Managing Transaction Exposure Budgeting
• Hedging Exposures to Receivables & Payables • Preventing Host Government Takeovers
• Limitations of Hedging & Alternate Methods  
  Multinational Capital Budgeting
Foreign Direct Investment • Subsidiary versus Parent Perspective, Input for
• Motives & Benefits of FDI Multinational Capital Budgeting,
• Host Government Impact & Assessing Potential • Other Factors & Adjusting Project Assessment
on FDI for Risk
   
International Corporate Governance and • Capital Structure and Cost of Capital
Control • The MNC’s Capital Structure Decision,
 Textbooks

• Textbook: International Financial Management by Jeff Madura, 13th Edition

• Various handouts (Web reference or soft/hard copy would be provided to the class)
Advise
1. Enjoy the course and the learning environment - Try not to become overly obsessed with Grades.

2. Do not be afraid to ask questions.

3. Online classes can be a daunting experience, share your issues and problems when they arise.

4. Ensure that you operate within the disciplinary parameters set for the Class.

5. We will try to shift to on campus mode as soon as it is deemed fit that the risk level is acceptable.

6. Try and keep up with the lectures.

 Multinational Corporations (MNCs)
MNCs - defined as firms that engage in some form of international business.
• Their managers conduct international financial management, which involves international investing and
financing decisions that are intended to maximize the value of the MNC.
• Initially, firms may merely attempt to export products to a certain country or import supplies from a foreign
manufacturer. Over time, however, many of these firms recognize additional foreign opportunities and
eventually establish subsidiaries in foreign countries.
• Dow Chemical, IBM, Nike, and many other firms have more than half of their assets in foreign countries.
• Some businesses, such as ExxonMobil, Fortune Brands, and Colgate-Palmolive, commonly generate more than
half of their sales in foreign countries.
• Many technology firms, such as Apple, Facebook, and Twitter, expand overseas in order to capitalize on their
technology advantages.
• Almost 75 percent of U.S. firms that export have fewer than 100 employees.
• International financial management is important even for companies with no international business - these
companies must recognize how their foreign competitors will be influenced by movements in exchange rates,
foreign interest rates, labor costs, and inflation. Such economic characteristics can affect the foreign
competitors’ costs of production and pricing policies.
 Using Business Disciplines to Manage the MNC
Various business disciplines are integrated to manage the MNC to maximize shareholder
wealth.
• Marketing - used to increase consumer awareness about the products and to monitor
changes in consumer preferences.
• Accounting and Information Systems - used to record financial information about
revenue and expenses of the MNC, which can be used to report financial information to
investors and to evaluate the outcomes of various strategies implemented by the MNC.
• Finance - used to make investment and financing decisions for the MNC. Common
finance decisions could include:
• whether to discontinue operations in a particular country,
• whether to pursue new business in a particular country,
• whether to expand business in a particular country, and
• how to finance expansion in a particular country.
 Agency Problems
Managers of an MNC may make decisions that conflict with the firm’s goal of maximizing shareholder wealth.

• Example: a decision to establish a subsidiary in one location versus another may be based on the location’s appeal
to a particular manager rather than on its potential benefits to shareholders.

This conflict of goals between a firm’s managers and shareholders is often referred to as the agency problem.

• The costs of ensuring that managers maximize shareholder wealth (referred to as agency costs) are normally larger
for MNCs than for purely domestic firms:
1. MNCs with subsidiaries scattered around the world & monitoring the managers of distant subsidiaries in
foreign countries is more difficult.
2. Foreign subsidiary managers who are raised in different cultures may not follow uniform goals.
3. The sheer size of the larger MNCs can also create significant agency problems.
• New York–based JPMorgan Chase & Co. lost at least US$6.2Billion and had to pay more than US$1Billion in fines
and penalties after a trader in its office in London, UK, made extremely risky trades.
 Example of Agency Problems
Two years ago, Seattle Co. (based in the United States) established a subsidiary in Singapore so that it
could expand its business there. It hired a manager in Singapore to manage the subsidiary. During the last
two years, sales generated by the subsidiary have not grown. Even so, the manager hired several
employees to do the work that he was assigned to do. The managers of the parent company in the United
States have not closely monitored the subsidiary because it is so far away and because they trusted the
manager there. Now they realize that there is an agency problem. The subsidiary is experiencing losses
every quarter, so its management must be more closely monitored.

When Seattle Co. recognized the agency problems with its Singapore subsidiary, it created incentives for
the manager of the subsidiary that aligned with the parent’s goal of maximizing shareholder wealth.
Specifically, it set up a compensation system whereby the manager’s annual bonus is based on the
subsidiary’s earnings.
 Prevention of Agency Problems
The parent corporation of an MNC should be able to prevent most agency problems with proper governance.
• The parent should clearly communicate the goals for each subsidiary to ensure that all of them focus on maximizing
the value of the MNC and not of their respective subsidiaries.
• The parent can oversee subsidiary decisions to check whether subsidiary’s managers are satisfying the MNC’s goals.
• The parent also can implement compensation plans that reward those managers who satisfy the MNC’s goals e.g. Stock
Options (a common incentive to buy Company’s stock at a fixed price).

A limitation of the corporate control process is that investors rely on reports by the firm’s own managers for information
which may be exaggerated e.g. in cases like Enron and WorldCom in which large MNCs were able to alter their financial
reporting and hide problems from investors. To improve their internal control processes, companies are:
• establishing a centralized database of information,
• ensuring that all data are reported consistently among subsidiaries,
• implementing a system that automatically checks data for unusual discrepancies relative to norms,
• speeding the process by which all departments and subsidiaries access needed data,
• making executives more accountable for financial statements by personally verifying their accuracy.
Centralized Management Structure
Decentralized Management Structure
Task

• Review the posted Course Outline

• Read Chapter 1 of the assigned Textbook