International Finance

Front 1

1-1A. Describe the current state & future direction of exchange rate arrangements

Back 1

Jamaica Agreement - Flexible (1973-now), gold abandoned
- banks intervene for unwarranted volatility
Plaza Accord - 1985 US$ depreciation
Louvre Accord - 1987 G7 countries stabilize rates
Future: Growth in regional currencies to increase international trade benefit by eliminating some FX uncertainty. Intl Monetary System - Liquidity, adjustment, confidence

Front 2

1-1B. What fundamental factors are likely to persuade the choice of an exchange rate arrangement?

Back 2

Flexible: Easier, market-driven external adjustments
National policy autonomy
Fixed: International Economic Intergration

Front 3

1-1C. Why a global currency might or might not be a viable exchange rate arrangement.

Back 3

Not:
loss of monetary sovereignty
political frictions
market imperfections (esp. labor)
Greece's excessive debt/effects on euro

Front 4

1-2. Assume that foreign government interest rates are expected to rise above comparable U.S. government interest rates. Based on the material covered in this course, discuss what this suggests about the future strength or weakness of the U.S. dollar.

Back 4

International Fisher Effect:
foreign interest > $ interest
dollar will strengthen

Front 5

1-3 Relate and discuss the relevance of 3 concepts covered in this course to your current job.

Back 5

Globalization: private jobs become gov't, diversifying from 1 customer
FDI: Sites opening in England & Okinawa, intangible assets - proprietary info, comparative advantage from building planes
FX Exposure: England site, pay U.S. employees in pounds or $? Spot change of .10 pounds/dollar could cost more than $4000 (on salary of 100K pounds)

Front 6

1-4A Australian Dollar

Back 6

Work problem with variables
Initial Spot - After Spot = 6.9% AuD gain on US $

Front 7

1-4B What additional variables should be included in the model: S = 1.3(M*-M) + 0.5(Y*-Y) + 0.8(r-r*)
S = A$/$
M = money supply
Y = Real GDP
r = short-term real interest rate *Australian

Back 7

FUNDAMENTAL - monetary approach + quantity theory of money
velocity of $: increase = depreciate
national output: increase = appreciate
TECHNICAL - history repeats itself, no econ variables
uses trans. data: trading volume, outstanding interests, bid-ask spreads
Moving Ave. Crossover: SMA over LMA = appreciate
LMA over SMA = depreciate...self-fulfilling

Front 8

1-5A Economist Data 09-10-2005; Identify deviations from relative PPP based on past year's data on Yen-Euro relationship.

Back 8

Relative PPP - Consumer & Producer prices
Exchange rates: (euro/$) / (yen/$) = euro/yen

Front 9

1-5B What are the prospects for the yen/euro exchange rate based on the latest figures for (a) money supplies and (b) wages/earnings?

Back 9

(a) Money supply increase = depreciation
euro increased more than yen, so yen appreciates
(b) Relative PPP

Front 10

1-5C Based on the 3 month money market interest rates, what is the 3 month yen/euro forward rate?

Back 10

Forward PPP or IRP = 134.2 yen/eur

Front 11

1-5D From these indicator sheets, describe any additional potential pressures on the exchange rate.

Back 11

National output (current account balance) increase = appreciation, Japan > euro, yen appreciates, ceteris parabis

Front 12

1-6A Consider the following financial data for the British pound and the Thai baht:
GBP THB
Inflation (annual) 2.3% 5.6%
3m Interest Rate (annualized) 4.53% ?
Spot Exchange Rate (฿/£) 75.40

Assuming that the international parity conditions hold perfectly, what is the expected exchange rate in one year?

Back 12

Fisher Effect, IFE; Forward PPP
77.83 baht/pound

Front 13

1-6B Describe why an understanding of currency levels and movements is important.

Back 13

Understand forces that affect investment and financing opportunities; hedges, options, forwards, futures

Front 14

1-7 Homemaker fx trading in Japan. Discuss important FX factors that these homemakers should consider in the FX investment decisions.

Back 14

TRANSACTION: change in financial positions due to FX change between begin & end of contract
-Hedge with financial contracts (fwd, money, option, swap)
-Hedge with ops tech: invoice currency,lead/lag strategy, exposure netting
ECONOMIC: cash flow/firm value affected by FX
TRANSLATION: unexpected FX affects on fin statements

Front 15

1-8 WSJ China's call for new currency to replace US$ as world standard. IMF calls for US$ alternative. Discuss your perspectives.

Back 15

loss of monetary sovereignty
political frictions
market imperfections (esp. labor)
Greece's excessive debt/effects on euro

Front 16

1-9 Globalization & Outsourcing. Discuss pros & cons, potential benefits and losses; how to reap benefits or mitigate loss.

Back 16

PROS: Cheaper products/services by taking advantage of mkt imperfections (labor), peaceful alliances due to economic dependence
CONS: Loss of jobs at home, dependence on bad-behaving nations
Mitigation: Diversify skill set

Front 17

1-10 Economist 9/15/2012, discuss exchange rate pressures between US Dollar and South Korean Won. Use various concepts and only data given.

Back 17

SKwon depreciated vs USD
Relative PPP/inflation
IFE/interest
National output/current account balance

Front 18

2-1 Economist 4-13-13. Discuss relative performance of any country of your choice versus the US across all reported indicators. Overall takeaway

Back 18

US-Japan
GDP: Japan's growth slower
Ind. Prod.: double-digit dip in J
Cons. Price: US inflation, J deflation/level
Unempl.: J lower
Current Acct: J exp>imp; US largest neg, but not in %
Budget Def.: J forecast to grow
Int rates: J lowest, borrow from J to invest else: US encourage investment
Yen weakened against $, US economy appears stronger and better investment

Front 19

2-2A 3 factors that cause a bond's price to change? Predicted direction of change for the bond's price from changes in these factors?

Back 19

Interest rates - increase = bond price falls
Cash flows (pmts or face value) - increase = b.p. rises
Maturity - discount increase as mature, premium decrease as mature

Front 20

2-2B From a US investor's perspective, how do the risks associated with non-dollar denominated bonds impact the price of the bond and the dollar denominated return?

Back 20

Depend on SOVEREIGN RISK (greater risk = lower rating, higher interest rate, lower price)
- political risk
- economic structure
- fiscal flexibility
-gov't debt burden
- offshore liabilities
- liquidity
Increases dollar return, but higher risk of default

Front 21

2-3 Two items about 2 countries/regions interesting

Back 21

BRAZIL #1: Mercosur (local) and BRICS (like economies)
BRAZIL #2: High degree of home bias which is correlated to higher cost of capital
EMU #1: Euro history, assymetric economies test, Civil War
EMU #2: English common law (investor) vs French civil law (non-investor protection)

Front 22

2-4 What is social capital? Is it important? Why or why not? Discuss relevance for finance, economics, global economy.

Back 22

SOCIAL CAP: institutions, relationships, norms that shape quantity & quality of society's interactions
Important? Time will tell for macro; clearly matters at micro level
Relevance: Measures still be working, but some include
-trust
-online social networks
-lost wallet tests
-bribery indexes
-rule of law measures
-culture & religion
BEHAVIORAL FINANCE: econ growth & development, asset pricing, capital structure decisions

Front 23

2-5A Describe alternative international equity investment instruments that are available to individual investors

Back 23

INT'L MUTUAL FUNDS: reduce trans. & info costs, circumvent legal/institutional barriers, pro fund mgrs
COUNTRY FUNDS: IMF in single country
ADRs: Am. Deposit Receipts; foreign shares held in U.S. banks, saves trans costs
ETFs: Exchange-traded funds, track foreign stock mkt indices
HEDGE FUNDS: Privately pooled investment funds

Front 24

2-5B NYT Borderless Investing. Agree or disagree?

Back 24

Agree: easy to diversify across sectors with negative correlations with flexibility & versatility; gain for globalization where competition within sector is borderless
Disagree: Sectors may be too heavy in one country; vulnerable to speculators that can manipulate prices

Front 25

2-6 Benefits of international portfolio diversification & why likely to be greater or less in next decade than last.

Back 25

Security returns less correlated across countries than within (can diversify away more risk)
Likely to grow with market liberalization, advances in telecom/computer tech, ADRs & GDRs to eliminate risks/delay/inconveniences & expenses

Front 26

2-7 Is financial innovation necessary or desirable? Positive and negative consequence associated with innovation.

Back 26

Financial innovation is important to tech innovation and has real economic effects, though sometimes negative; consequences of innovation meeting lax practices and difficulty in writing reg rules

Front 27

2-8 Formulate domestic & international version of a multi-beta asset-pricing model. Describe each and the key differences.

Back 27

Domestic:
ri =rf + bm * RPm+ bIP * RPIP + bDRP * RPDRP + bLP * RPLP + bMRP * RPMRP
risk free rate, market risk, inflation, liquidity, default, maturity
International
ri=rf + bIM * RPIM+ bFX * RPFX + bIP * RPIP + br * RPr + bD * RPD
Int'l market risk, FX, inflation, interest, domestic

Front 28

2-9 CNNMoney.com Private Equity looking outside of US for opportunities. Would you recommend that a private equity firm like Blackstone Group, the Carlyle Group, or KKR invest or not invest in South Africa?

Back 28

INVEST: South Africa emerging market, gov't friendly to int'l business, well-developed financial services/mkt, positive growth, investors protected
NOT: No robust human capital (educated workforce), weak infrastructure, rampant corruption

Front 29

2-10 Why firms partake in foreign direct investment

Back 29

Establish worldwide presence, become household name, pursue profits, bolster competitiveness, market imperfections
Trade Barriers
Imperfect Labor Mkt
Intangible Assets
Vertical Integration
Product Life Cycle
Shareholder diversification services

Front 30

2-11 Political risk in considering investments, how to measure political risk, methods to address and hedge

Back 30

Political risk - potential loss from adverse pol. developments in host country
Macro - all foreign ops affected
Micro - only selected foreign ops affected
Manners:
Transfer risk - cross border flows
Operation risk - policies towards MNCs
Control risk - ownership policies

Front 31

2-12 Economist 9-8-2012, Local currency vs dollar equity return differences as well as across country equity return differences.

Back 31

"Local currency only" = domestic performance of market
"In $ terms" = international apples-apples performance

Front 32

2-13 Bitcoin. What extent would traditional exchange rate analyses apply to digital currency price fluctuations? Other considerations? Potential investment opportunity?

Back 32

Virtual currency appreciation/depreciation not pegged, so purely speculative...or a basket currency.
Factors: similar to bearer bonds, difficult to regulate and secure
Investment op? Mercy of speculators and can create bubbles, can be hacked (similar to devaluation), borderless investment

Front 33

3-1 Define Foreign Exchange and Foreign Political Risk Exposure for a firm. Whether or not a domestic firm is subject to these?

Back 33

Foreign Exchange Risk – The risk of facing uncertain future exchange rates; yes, weaker yen allows Japanese competitor to lower prices
Foreign Political Risk Exposure – Political risk – potential losses to parent firm resulting from adverse political developments in the host country; yes, policies, wars

Front 34

3-2 What are key differences among economic exposure, transaction exposure, translation exposure?

Back 34

Transaction - direct FX
Economic - cash flows/firm value
Translation - fin statements

Front 35

3-3 Should a firm hedge? Why or why not?

Back 35

Yes, can add value in imperfect market
1 - mgmt knows best
2 - firms hedge at lower cost
3 - reduces probability of default costs
4 - reduce tax obligations

Front 36

3-4 GM exports to Spain, dollar strengthens against euro and hurts sales. GM competition from euro carmakers. Recommend measures to maintain Spanish market share.

Back 36

Depreciation in euro
Additional gross margin for euro carmakers
Lower prices
Gain market share
GM sales decrease
GM profits lower
GM market value lower
Recommend: FDI, hedges,

Front 37

3-5 Warren Buffet, derivatives are bad. Agree or disagree?

Back 37

In the beginning (on the first level of derivative), these products share a small amount of risk among many. However, in the end, they’ve combined and multiplied many times, and the opportunities for risk multiply as well.

Front 38

3-6 CSR and alternative country performance measures. What are these factors, and are they important from personal, business, international perspective?

Back 38

CSR
1. Sustainability
2. Reducing carbon footprint and effect on global ecosystem
3. Philanthropy
Alt. performance measures
1. National success
2. Gross National Happines
3. Gallup-Healthways Well-Being Index

Front 39

3-7 WSJ Stress test & Complex Structured - individual risk management. Discus your perspective, what are potential approaches?

Back 39

Working and investing for same company - all eggs in same basket

Front 40

3-8 Mitigating corporate risk exposure with derivatives, relocation of production & sourcing. Economist - Boomerang: clustering & innovation effects. Agree/disagree with article and why? How facilitate comparative advantages?

Back 40

Cheap labor eventually becomes expensive
Create other ways of comparative advantage (clusters, technology)
Local production to serve local needs

Front 41

3-9 Behavioral finance and economics - how do they affect personal investment decisions or work environment? Take advantage/mitigate risk?

Back 41

Find someone who is your opposite
Pain of getting degree versus reward down the road

Front 42

2-11 part 2 - Measures of Political Risk

Back 42

Political & Gov't system - streamlined decisions?
Track record of political parties - nationalistic? market-oriented?
Integration into world - isolated?
Ethnic & religious stability - conflict?
Regional security - neighbors?
Key economic indicators - trade deficits, recession

Front 43

2-11 part 3 Managing Political Risk

Back 43

1. Identify Political Risk
2. Incorporate political risk into capital budgeting
3. Diversify political risk
4. Minimize exposure
5. Finance with local debt