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20 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What is the objective of Multinational Financial Management? |
To maximise shareholder wealth as measured by share price. This means financing and investment decisions that add as much value as possible to the firm. And it also means that companies must manage effectively the assets under their control. |
Value |
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Why should MFM focus on shareholder wealth? |
1. Companied who don't are likely to be a prime takeover target and candidate for a forced corporate restructuring. 2. Maximising shareholder value provides the best defense against a hostile takeover: a high stock price. Its also easier to attract equity capital. |
Takeovers |
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What are the functions of FM? |
1. Aquisition of Funds : involves generating funds from internal/external sources to the firm at the lowest long run cost possible. 2. Investing those funds : Concerned with allocation of funds over time in such a way that shareholder wealth is maximised. |
Generating funds and investing them |
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Define an Exchange Rate |
Its simply the price of one countries currency in terms of another currency. They are market clearing prices that equilibrate S&D in the FX market. |
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Discuss the role of expectations in determining exchange rates. |
It depends on the fact that currencies are financial assets and the exchange rate is the relative price of two financial assets - one countrys currency in terms of anothers'. Asset prices are influenced by people's willingness to hold existing quantities of assets, which in turn depends on their expectations of future worth of these assets. |
Financial assets |
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Discuss the nature of money |
The value of money depends on its purchasing power. The demand for money, depends on moneys ability to maintain its value and on the level of economic activity. Its also affected by the demand for assets denominated in that currency. Because the exchange rate reflects the relative demands for two moneys, factors that increase demand for the home currency should also increase the price of the HC on the FX market. Summary : the economic factors that affect a currencys FX value include its usefulness as a store value, determined by its expected rate of inflation; D for liquidity, determined by the volume of transactions in that currency; and the D for assets denominated in that currency, determined by risk/return pattern on investment in that economy and by wealth of residents. |
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Discuss the central bank reputations and currency values |
Its job is to use the instruments of monetary policy, including the sole power to create money, to achieve one or more of the following objectives: - price stability/ low interest rates/ or a target currency value. A currencies value is largely determined by the central bank through its control of the money supply. If they create too much money, inflation will occur and the value of money will fall. Expectations of the central banks behaviour will affect exchange rates today; a currency will decline if people think central bank will expand the money supply in future. |
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Discuss the Price stability and the Central Bank independence |
The perception of inflation risk stems from the fact that government officials and other critics routinely exhort the central bank to followe "easier" monetary policies, by which they mean boosting the MS to lower interest rates. These exhortations arise because people believe that (1) the central bank can trade off a higher rate of inflation for more economic growth and (2) the central bank determines the rate of interest independently of the rate of inflation and other economic conditions. Non-independent central banks often respond to these demands by expanding the MS. CB that lack independence are also often forced to monetize the deficit which means financing the public sector deficit by buying government debt with newly created money. |
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How does Real Exchange rates affect Relative Competitiveness? |
Pt. An appreciation of the exchange rate beyond that necessary to offset the inflation differential between 2 countries raises the price of domestic goods, relative to the price of foreign goods. U.S dollar appreciated Advantages : imports were cheaper, decrease in inflation, cost to US firms and individuals are lower for foreign investment, foreign capital attracted to strong currency lowers US interest rates. Disadvantages : US exports are less competitive in foreign markets, US firms face more competition domestically from lower priced foreign imports, US lose jobs in the traded-goods sector, higher costs of operating in US reduces FDI in US which slows job creation by foreign firms. |
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Name the types of transactions |
1. Spot : currencies are traded for immediate delivery. 2. Forward : contracts are made to buy or sell currencies for future delivery 3.FX swap : involves a package of spot and forward contracts. |
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Discuss Arbitrage |
Its the simultaneous purchase and sale of the same assets or commodities on different markets to profit from price discrepancies. One of the central ideas of international finance stems from arbitrage: In competitive markets theres the law of one price and its enforced by international arbitrageurs who follow the profit guaranteeing dictum of 'buy low, sell high' and prevent all but trivial deviations from equality. 5 key theoretical economic relationships, result from arbitrage 1. Purchasing power parity 2. Fisher effect 3. Internation Fisher effect 4. Interest rate Parity 5. Forward rates as unbiased predictors of future spot rates |
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Define a Futures contract |
A futures contract (more colloquially, futures) is a standardized forward contract, a legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other. |
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Discuss International Monetary System |
It is a complex system of international management, rules, institutions, policies in regard to exchange rates, international payments and capital flows. Responsibilities include: Assuring currency convertibility, maintain sufficient availability of currencies for trading and capital flows (liquidity), maximize stability of exchange rates given changes in D and S. History: The Gold Standard and Bretton Woods Conference |
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Define the Gold Standard 1876 to 1913 |
It has been a medium of exchange since 3000 bc. The rules were simple, each country set the rate at which its currency unit could be converted to a weight of gold. Therefore the exchange rates were "fixed" in effect.
Expansionary monetary policy was limited to a government's supply of gold.
This standard was in effect until the outbreak of WW1 as the free movement of gold was interrupted. |
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Discuss the Bretton Woods Conference 1945 to 1973 |
This agreement established a US dollar based international monetary system and created two new institutions ; the IMF and the World Bank. It was a new-postwar monetary system. Allied nations pledged to maintain a fixed (pegged) exchange rate in terms of the dollar or gold. 1. Exchange rates could fluctuate only within 1% of their stated par value rates.
The collapse of the BW system: 1. of the 21 major industrial countries only the US and Japan maintained their par values 2. Fixed exchange rates were maintained by CB intervention in foreign exchange rates. 3. 1971 President Nixon was forced to suspend official purchases or sales of gold by the US treasury. rates. |
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Discuss country risk analysis |
Its the potentially adverse impact of a country's environment on the MNC's cash flows. Two main components of country risk: 1. Economic and financial performance 2. Political stability |
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What are the Political Risk Channels? |
1. Transfer risk The uncertainty regarding cross-boarder flows of capital (blockage of fund transfers, fund transfer restrictions; additional withholding taxes; currency inconvertibility). 2. Operational risk Uncertainty regarding host country policies and consumers attitudes on firms OCF. 3. Control risk Uncertainty regarding ownership rights and expropriation |
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What are the Economic factors involved with Country Risk? |
Determinents of a country's economic performance: 1. GDP per capita and real GDP growth 2. Fiscal responsibility and government spending Budget balance (deficit) as % of GDP and Total foreign debt as % of GDP 3. Monetary stability Inflation rate and interest rates 4. Exchange rate stability Fixed exchange rate could result in an overvalued currency 5. Resource based Natural, human and financial resources. The quality of human resources and the degree to which those resources are efficiently employed can offset disadvantages of having sparse natural resources 6. Adjustment to external shocks How effectively a country deals with external shocks e.g. natural disasters |
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Discuss the Politcal Factors involved with Country Risk |
1. Government stability Government unity, legislative strength, popular support (new policy with office changes) 2. Level of integration into the world 3. Socioeconomic conditions U/E, consumer confidence, poverty and inequality 4. Investment profile Contract viability, profits repatriation, payment delays. 5. Corruption and bureaucracy 6. Law and Order Availability of legislations 7. Democracy accountability Need a system free of corruption |
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Discuss Country Level data |
1. World Banks Worldwide Governance Indicators 2. Economic Freedom indicators 3. Sovereign Ratings 4. Euromoney Country Risk scores Another source could be the P.E.S.T.L.E analysis |
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