International Finance Midterm Chapter 1

· Foreign Exchange Risk- The risk the foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. · Political Risk- sovereign governments have the right to regulate the movement of goods, capital, and people across their borders. These laws sometimes change in unexpected ways. · Market imperfections- o Legal restrictions on the movement of goods, people, and money o Transactions costs o Shipping costs o Tax arbitrage · Expanded Opportunity Set- firms can locate production in any country or region of the world to maximize their performance and raise funds in any capital market where the cost of capital is the lowest. In addition, firms can gain greater economies of scale where their tangible and intangible assets are deployed on a global basis.

· Is designed to provide today’s financial managers with an understanding of the fundamental concepts and the tools necessary to be effective global managers. o Goal: § Shareholder wealth maximization means that the firm makes all business decisions and investments with an eye toward making the owners of the firm- the shareholders- better off financially, or wealthier, then they were before. § Accepted more in the Anglo-Saxon countries § The shareholders are viewed as merely one among many “stakeholders” of the firm including; employees, suppliers, customers. o Other goals: Managers may pursue their own private interests at the expense of shareholders when they are not closely monitored, but this has painfully reinforced the importance of corporate governance. These issues can be more serious in other parts of the world! No matter what the other goal is, they cannot be achieved in the long term if the maximization of shareholder wealth is not given due consideration.

Emergence of the Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and economic Integration
Privatization.

o Deregulation of Financial Markets coupled with Advances in Technology have greatly reduced information and transactions costs, which have led to many financial innovations. § Currency futures and options § Multi-currency bonds § Cross-border stock listings § International mutual funds

o A momentous event in history and over 300 million Europeans in 15 countries are using the Euro o The “transaction domain” of the euro may become larger than the U.S. dollar’s in the near future. o Estonia just joined!

o Over the past 50 years, international trade increased about twice as fast as the world GDP. The attitude of many of the world’s governments has changed to embrace free trade as the surest route to prosperity for their citizenry. o The principal argument for this is comparative advantage which exists when one party can produce a good or service at a lower opportunity cost than another party. o Arguments in favor of free trade: both partners gain from trade and “Freedom.” o NAFTA North American Free Trade Agreement: § Between Canada, U.S., and Mexico and was implemented 1994-2009 § The increased trade has resulted in increased numbers of jobs and higher standard of living for all member nations.

o The selling off state-run enterprises t investors is also know as “Denationalization” and it is often seen in socialist economies in transition to market economies.