International Financial Management: Review
[Pages:6]Giddy
Integrated Financing Decisions/1
International Financial Management: Review
Prof. Ian Giddy New York University
International Financial Management
1. Management, Markets and Linkages 2. Exchange Rate Determination and Forecasting 3. Hedging Tools: Forwards vs Futures vs Options 4. Measuring and Managing Risk 5. Managing Corporate Financial Structure 6. Swap-Linked Financing 7. Bank and Money Market Financing 8. Long Term Financing in Intl Capital Markets 9. Hybrids and Structured Finance 10. Integrated Multimarket Financing
Copyright ?2002 Ian H. Giddy
Review #
Copyright ?1996 Ian H. Giddy
Giddy
Integrated Financing Decisions/2
What Is So Special about Corporate Finance in the Int'l Environment?
Financial Markets Are Partially Linked / Partially Separated
Exchange Rates Fluctuate
u Risks - Eg currency exposure measurement and management
u Opportunities - such as deviations from purchasing power parity
u Analytical Tools - like exchange rate determination and hedge pricing
Copyright ?2002 Ian H. Giddy
Review #
Currency Fluctuations
Copyright ?2002 Ian H. Giddy
Copyright ?1996 Ian H. Giddy
Review #
Giddy
Integrated Financing Decisions/3
To Fix or To Float, That is the Question
Floating
Economic circumstances,
and Economic
policies
Fixed
Copyright ?2002 Ian H. Giddy
Independent free float Managed float
Frequent devaluations or revaluations Crawing peg
Tied by formula to inflation index
Basket peg
Pegged to one currency Absolutely fixed to one
currency
Review #
Implication of EMU
Only Eurofed creates money Central banks can no longer print money
to finance public deficits Only a nation's creditworthiness
determines ability to run a fiscal deficit
Copyright ?2002 Ian H. Giddy
Copyright ?1996 Ian H. Giddy
Review #
Giddy
Integrated Financing Decisions/4
Domestic Policies, Domestic Prices and Interest Rates, and Exchange Rates
Country A DOMESTIC ECONOMIC POLICIES INFLATION
RATE
INTEREST RATE
Copyright ?2002 Ian H. Giddy
EXCHANGE RATE
FORWARD RATE
Country B
DOMESTIC ECONOMIC POLICIES
INFLATION RATE
INTEREST RATE
Review #
Forecasting in a Fixed-Rate System
STEP 2 Estimate outflow of foreign exchange resulting from currenct and capital account deficit,.
STEP 3 Estimate number of months that present policies can be sustained, given the availablity of reserves and avaiable borrwoing sources versus their rate of depletion,.
STEP 1 Calculate the equiibrium exchange rate given relative money supplies, inflation, economic growth and other factors.
STEP 4 Predict which of limited policy options the government will choose:
! Exchange controls ! More foreign debt ! Deflation through tight
monetary and budgetary policies, or ! Devaluation
Copyright ?2002 Ian H. Giddy
Copyright ?1996 Ian H. Giddy
Review #
Giddy
Integrated Financing Decisions/5
Market Efficiency: A Random Walk?
EXCHANGE RATE Spot
Today
Copyright ?2002 Ian H. Giddy
Random walk: If the market is effictent, today's spot rate reflects all available information. Every new movement of the spot exchange rate results from new information. By definition, new information cannot be anticipated. Hence each move of the exchange rate must be unexpected, or random.
TIME
In three months
Review #
Purchasing Power Parity: Theory and Evidence
S t=1-St = I-I* St 1+I*
EXCHANGERATE
CHANGE
MEXICO 1994
RELATIVE INFLATION JAPAN 1995
Copyright ?2002 Ian H. Giddy
Copyright ?1996 Ian H. Giddy
Review #
Giddy
Integrated Financing Decisions/6
Unbiased Forward Rate Theory
EXCHANGE RATE
Spot
Probability distribution of actual exchange rate
Forward
Today
Copyright ?2002 Ian H. Giddy
Actual
TIME
In three months
Review #
International Fisher Effect
EXCHANGE RATE
Spot INTEREST RATE
DIFFERENTIAL
Forward
Probability distribution of actual exchange rate
Actual
Today
Copyright ?2002 Ian H. Giddy
Copyright ?1996 Ian H. Giddy
TIME
In three months
Review #
Giddy
Integrated Financing Decisions/7
Interest-Rate Parity
$1 (1 + / E$) = ($1/ S t )(1 + /EBP) Fnt where St is the spot exchange rate (dollars per British Pound) and Fnt is the forward rate. to a close approximation, (/E$ - /EBP) = [(Ft n - St)/St] (365/n) 100
Interest-rate differential = forward premium or discount
Copyright ?2002 Ian H. Giddy
Review #
Where the Eurocurrency Market Fits In
US Domestic Market
EUR0CURRENCY MARKET
Eurodollar Market
Euro-Deutsche Mark Market
Foreign Exchange
Market Euro-Yen Market
German Domestic Market
Japanese Domestic Market
Euro-Commercial Paper Market
Copyright ?2002 Ian H. Giddy
Euro-Floating Rate
Straight
Note Market
Eurobond Market
Review #
Copyright ?1996 Ian H. Giddy
Giddy
Integrated Financing Decisions/8
Hedging Transactions Exposure
Types of exposure One-shot exposure Hedging approaches:
uOpen uForward uMoney market uFutures uOptions
Ongoing transactions exposure
Copyright ?2002 Ian H. Giddy
Review #
The Forward Rate Tracks the Spot Rate
EXCHANGE RATE, YEN PER US$
140
135
FORWARD (LEFT SCALE)
130
SPOT (LEFT SCALE)
125
120 FORWARD PREMIUM (RIGHT SCALE)
115
110 MONTHLY DATA, 1987-1989
FORWARD PREMIUM = [(SPOT-FORWARD)/SPOT]*(12/3)*100
Copyright ?2002 Ian H. Giddy
24 23 22
21 20
19 18
17 16 15
14 FP11RO23ERMWUAIMR,D P1E1RCENT P1E0R ANNUM 9 8
7 6
5 4
3 2
1 0
Review #
Copyright ?1996 Ian H. Giddy
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