International Financial Management: Review

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

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Copyright ?1996 Ian H. Giddy

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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

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Currency Fluctuations

Copyright ?2002 Ian H. Giddy

Copyright ?1996 Ian H. Giddy

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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

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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

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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

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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 #

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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

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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 #

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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

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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 #

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