ch1 - Chapter 1 Globalization the Multinational Firm...

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1 Chapter 1: Chapter Objectives Understand why it is important to study international finance. Distinguish international finance from domestic finance. Chapter Outline 1. What’s Special about “International” Finance? 2. Goals for International Financial Management 3. Globalization of the World Economy 4. Multinational Corporations
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2 What’s Special about “International” Finance? Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set
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3 Foreign Exchange Risk The risk that foreign currency profits may evaporate in home currency 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. What’s Special about “International” Finance?
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4 Decomposition of Political Risk
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5 What’s Special about “International” Finance? Market Imperfections Legal restrictions on movement of goods, people, and money Transactions costs Shipping costs Tax arbitrage
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6 The Example of Nestlé’s Market Imperfection Nestlé used to issue two different classes of common stock bearer shares and registered shares. Foreigners were only allowed to buy bearer shares. Swiss citizens could buy registered shares. The bearer stock was more expensive. On November 18, 1988, Nestlé lifted restrictions imposed on foreigners, allowing them to hold registered shares as well as bearer shares.
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7 Nestlé’s Foreign Ownership Restrictions 12,000 10,000 8,000 6,000 4,000 2,000 0 11 20 31 9 18 24 Source: Financial Times , November 26, 1988 p.1. Adapted with permission. SF Bearer share Registered share
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8 The Example of Nestlé’s Market Imperfection Following this, the price spread between the two types of shares narrowed dramatically.
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This note was uploaded on 01/26/2010 for the course ADMS 4542 taught by Professor Semihyildrim during the Spring '10 term at York University.

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ch1 - Chapter 1 Globalization the Multinational Firm...

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