Chapter_01 - Whats Special about International Finance...

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What’s Special about “International” Finance? Foreign Exchange Risk Political Risk Market Imperfections Expanded Opportunity Set
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What’s Special about “International” Finance? Foreign Exchange Risk The risk that foreign currency profits may evaporate in dollar terms due to unanticipated unfavorable exchange rate movements. Suppose $1 = ¥100 and you buy 10 shares of Toyota for ¥100,000 ( i.e. $100 per share = ¥10,000 per share). One year later the investment is worth ten percent more in yen: ¥110,000 But, if the yen has depreciated to $1 = ¥120, your investment has actually lost money in dollar terms.
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What’s Special about “International” Finance? 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.
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Market Imperfections Legal restrictions on movement of goods, people, and money Transactions costs Shipping costs Tax arbitrage What’s Special about “International” Finance?
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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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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
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Chapter_01 - Whats Special about International Finance...

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