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Unformatted text preview: WEB CHAPTER I International Finance The Corporate Perspective web-international.tex: ©Ivo Welch, 2004. Confidential: Access by Permission Only! last file change: Feb 10, 2006 (18:55h). compile date: Thursday 30 th March, 2006 (14:02h). This chapter provides a brief introduction to international finance as viewed from the perspec- tive of a domestic CFO, who is dealing (at relative arms-length) with subsidiaries, sales, or capital requisition in other countries. When a U.S. firm goes multinational, many issues, and especially operational ones, can become more complex. For example, marketing to customers, hiring employees, and dealing with suppliers, or just the accounting rules, can all be different in other countries. Fortunately, these issues are not principally the domain of corporate finance, and thus we shall ignore them in this chapter. Similarly, foreign managers of foreign corpora- tions can have a whole slew of other issues that we can also ignore from our perspective—for example, in some European countries, managers are legally obliged to maximize a broader stakeholder value. Ultimately, for a U.S. financiers expanding abroad, there is one primary complication: curren- cies. Otherwise, you can treat foreign subsidiaries pretty similarly as you can treat domestic operations. The problems and solutions look very much alike. Of course, currency issues can pervade multiple areas of finance—exchange rates for trading, foreign investment, capital budgeting, and hedging. These are the subject of our chapter. 101 102 file=web-international.tex: LP Web Chapter I. International Finance. 1 · 1. Currencies The financial markets of the United States are the largest in the world. About half of the world’s Relative size of global markets. stock market capitalization and bond market capitalization is in the United States. Europe accounts for about one quarter and Japan for about one-eighth. (It is likely that South East Asia, including China, will soon play a more prominent role.) Corporate borrowing is even more lopsided: U.S. corporations account for about 75% of the world’s corporate bond issues. The most important conceptual difference between transacting within one’s own country and Currencies! transacting with other OECD countries is that of exchange rates between currencies. 1 · 1.A. Exchange Rates and Currency-Dependent Rates of Return An exchange rate is the price of one country’s currency in units of another currency. It is All prices are really exchange rates. really no different than the price of a good. A grocery store may post an “exchange rate” of 0.25 $/apple or an exchange rate of 4 apples/$. There are standardized currency quoting conventions. For example, one convention is to quote Yen/Dollar but Dollar/Euro....
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This note was uploaded on 08/08/2008 for the course ECON 103 taught by Professor Lin during the Spring '08 term at Rutgers.
- Spring '08