Ch1 Lecture

Ch1 Lecture - Chapter 1 - International Financial...

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Chapter 1 - International Financial Management and the Multinational Firm Course Overview: International Finance is concerned with the multinational firm and with the international business activities to which a domestic firm faces exposure in its operations, as well as the reasons why a firm becomes involved in international markets. Corporate Financial Management principles that were presented in previous courses must be adapted for the reality that all firms now operate in a truly global market. 1. What is the Multinational Enterprise? A Multinational Enterprise (MNE) is a business (firm) that has operating subsidiaries, branches, and affiliates located in foreign countries. MNEs operate in manufacturing, mining, agriculture, construction, entertainment, travel services, accounting, consulting, advertising, legal, banking, communications, and virtually every conceivable "market" or industry. Transnational firm refers to firms with ownership dispersed internationally such that the firm is managed not from a perspective of a particular country but from a global perspective. Corporate finance strategies for the MNE must consider complexities of the international financial arena, including currency exchange, interest rate differences, and financing arrangements such as letters of credit. 2. Business Risk for the Multinational Firm Firms operating across international borders (especially with significant capital investments in multiple countries) face increased risks and must pay a risk premium in raising funds to finance these investments. Foreign Exchange Risk results from operating in countries with volatile currencies. As a result of volatile exchange rates, investors will require a higher return for moving funds from more stable currencies into the country with more volatile currencies. Advantages of "low costs" can be wiped out if broad currency fluctuations increase those costs in terms of the stable currencies. Political Risk results from operations in countries that are viewed as relatively less stable politically, or especially in "emerging markets" or developing countries that may be perceived as politically volatile. Again, investors will require a premium - or higher return - for moving funds into such a politically unstable environment. Management must recognize and forecast levels of political risk when evaluating whether to operate in a particular country. (Suppose, for example, a major agricultural conglomerate were to consider buying several farms in Zimbabwe to take advantage of low costs and economies of scale available in that country. How might that decision differ today from two or three years ago?) Macro Risks are risks that affect all foreign firms operating in a particular country and are characterized primarily by risks of expropriation or ethnic strife . Expropriation
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Ch1 Lecture - Chapter 1 - International Financial...

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