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Unformatted text preview: FIN 417- Chapter 1 Book Notes 06/09/2011 14:43:00 ← Chapter 1 – Globalization and the Multinational Firm ← ← We need to study international financial management because we are living in a highly globalized and integrated world economy ← Consumption and production of goods and services has become highly globalized due to multinational corporations inputting and locating anywhere in where world where costs are lower-profits higher ← Financial Markets the same=> US investors invested $549 billion in foreign securities and foreigners invested $377 in US securities ← ← What’s Special about International Finance? • Foreign Exchange and Political Risk o When firms and individuals are engaged in cross-border transaction, they are potentially exposed to foreign exchange risk that they wouldn’t normally encounter in purely domestic transactions o 1970’s fixed exchanged risks were abandoned, then exchanged rate volatility exploded o Exchange rate uncertainty will have influence on ALL economic functions ( consumption, production, investment) o Political Risk- Arises from the fact that a sovereign country can change the “rules of the game” and the affected parties may not have effective recourse. unexpected changes in tax rules to outright expropriation of assets held by foreigners. • Market Imperfections o Various frictions and impediments preventing markets from functioning perfectly, play an important role in motivating MNCs to locate production overseas o Restrict the extent to which investors can diversify their portfolios Ex) Nestle Example page 6-Bearer shares and registered shares. • Expanded Opportunity Set o Firms expanding into the arena of global markets o Firms can gain from greater economies of scale when their tangible and intangible assets are deployed on a global basis o Diversify greater by investing in international and domestic stocks because stock returns tend to covary less across countries than within a given country… expanded opportunity ← ← Goals for International Financial Management • Designed to provide today’s financial managers with an understanding of the fundamental concepts and tools necessary to be effective global managers. • Also need to maximize the benefits from an expanded global opportunity set • Written from the perspective that the fundamental goal of sound financial management is shareholder wealth maximization • Shareholder Wealth Management= the firm makes all business decisions and investments with an eye toward making the owners of the firm- better off financially than they were before o Not widely embraced by ALL COUNTRIES...
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- Fall '11
- Exchange Rate, international gold standard