International Finance

Claims on the borrowers future income

Issuers

They are selling a financial asset

Investor

They buy a financial asset

Corporation itself issues new shares of stock and sells them to investors, they do so on the primary market

Example: IPOs = Initial Public Offering

After initial transaction the shares continue to trade in a secondary markets between investors. Can be organised into 2 Ways:

• Organized exchange

• Over- the-counter

Buyers and Sellers meet at a central location to conduct trades and standardize contracts

OTC

Dealers from different locations stand ready to trade shares to anyone who. An accept the prizes, more flexible

A company lists its shares in one or more Foreign stock exchange in addition to its domestic exchange.

• Diversifying sour shareholder base

• Enhances visibility

Companies must abide by and follow listing regulations for each stock exchange.

Hold a stock -> If the price of the stock increases in the future , you benefit

Gold analogy

1. A borrows 1kg gold (shares of stock) from B (for 5000€) ; A believes value will decrease

2. A sells gold for 5000€ (at a potentially higher price)

3. IF prices decline in the future as predicted (in this analogy it does)

4. You can buy back the gold (shares of stock) at a lower price (1kg = 4500€)

5. Return the Shares

6. A made 500€ profit

Identical goods sold in different locations must sell for the same price

At exchange rate

1.2EUR/GDP

• a burger that is sold at 1£ in the UK should cost 1€ in Germany

Exists when identical goods are sold at different prices

• practice of simultaneously buying and selling the same or equivalent asset in different markets to profit from prices differences

• Buy at a lower price and sell them at a higher price

• Will drive the distinct price to a single price

1. Sole Proprietorship

2. Partnership

3. Limited Liability Company

4. Corporation (AG) - Separation of ownership and control

Managers (Agent) may act in their own interest rather than in the best interest of the shareholders (Principle)

E(CF) = expected Cashflow to be received by the end of period t

n = the number of periods into the future in which cash flows are received

k = the required rate of return by investors

E(CF) = expected cash flows denominated in currency j to be received by the US parent at the end of period t

E (ER) = expected exchange rate at which currency j can be converted to dollars at the end of period t

k = the weighted average cost of capital of the US parent company

n = the number of periods into the future in which cash flows are received

Maximize Shareholders Wealth

When Shareholders Goals and the Managers Goals are in conflict

• Size of an MNC

• Scattering of distant subidiaries

• Culture of foreign managers

• 
  

• clearly communicate the goals for each subsidiary to ensure that all subsidiaries focus on maximizing the value of the MNC

• oversee subsidiary decisions and reward subsidiary mangers for complying with MNCs goals

• Stock compensation for executives

• Threat of hostile takeover

• Monitoring by institutional shareholders

• centralized

• decentralized

• (+) reduces agency cost

• (-) the parent’s managers may make poor decisions for the subsidiary if they are not informed

• (+) gives more control to the mangers who are closer to the subsidiary’s operations

• (-) higher agency cost

• Behavioral Approach

• International Network Thory

• Economists in Sweden have discovered firms tnded to invest ifrst in countries that weren’t too far distant in psychic terms.

• As the swedish learnt from their initial investments they became willing to take more risks

• Networks consist of nodes and linkages between them

• Control is decentralized, so foreign subsidiaries have influence. Their knowledge and relationships help identify attractive markets the headquarters might not see

• A market is chosen if adding a subsidiary there improves the overall network efficiency, connectivity, and knowledge flow.

  • nodes = subsidiaries

  • linkage = coordination, relationships, product flows, communication

• tight-control via centralized decision making

• multinational model with great autonomy of the subsidiaries but only weak linkage within the MNC

• Management regards each of the worldwide units as a potential source for ideas, skills and knowledge that can be used to benefit the entire organisation

• The greater the deoth if market penetration desired with the greater expected returns -> the greater the investment required with higher potential risks

• None of the unique risks facing FDI even though foreign exchange risk remains

• Agency costs are avoided

• front-end investment is lower

• Risk of losing markets to global competitors

• unability to internalize and exploit R&D to full extend