International Finance - WordPress.com · BUS291-Business Finance 12/28/2013 1 International Finance...

BUS291-Business Finance 12/28/2013

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International Finance

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12.1 INTERNATIONAL BUSINESS AND TRADE

12.2 ECONOMIC DEVELOPMENT AND

MONETARY SYSTEMS

12.3 INTERNATIONAL FINANCIAL MARKETS

12.4 GLOBAL PAYMENTS AND FINANCIAL

RISK

Chapter 12

Slide 2

Terms

absolute advantage

comparative advantage

imports

exports

quota

tariff

embargo

foreign debt

balance of trade

balance of payments

International Business and Trade

Slide 3

Foreign Trade Activities

domestic business

making, buying, selling, and financing

goods and services within a country

international business (international

trade)

business and financial activities necessary

for creating, shipping, and selling goods

and services across national borders


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Slide 4

Absolute Advantage

absolute advantage

exists when a country can produce a good

or service at a lower cost than other

countries

Comparative Advantage

comparative advantage

when a country specializes in the

production of a good or service at which it

is relatively more efficient

Slide 5

Importing

imports

goods and services bought from other

countries

Exporting

exports

the goods and services sold to other

countries

Slide 6

Trade Barriers

trade barriers

restrictions to reduce free trade imposed by a

government

formal trade barriers

an intentional restriction on trade imposed by a

government

informal trade barriers

when the culture, traditions, and religion of a

country create barriers to trade


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Slide 7

quota

an action by a government to regulate

international trade

sets a limit on the quantity of a product that may

be imported or exported in a given period of time

sometimes used to express disapproval of

the policies of a country

might be used to protect an industry from

too much foreign competition

Quotas

Slide 8

tariff

a tax that a government places on certain

products

can have the effect of diverting demand from the

foreign product to a domestic product

Tariffs

Slide 9

embargo

when a government completely stops the import or export of a product

Reasons embargoes might be put into effect include:

protection of a domestic industry

protection of sensitive products

expression of disapproval of another country’s policies

Embargoes


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Slide 10

Encouraging and Measuring Trade

Actions To Encourage Trade

Free-Trade Zones

a designated area, usually around a seaport or airport

products can be imported duty-free

products can be stored, assembled, and/or used in manufacturing

taxes paid when product leaves the zone

Slide 11

member countries agree to eliminate

duties and trade barriers on products

traded among them

trade is increased between members

can be between two or more countries

Free-Trade Agreements

Slide 12

members eliminate tariffs and other trade

barriers

allow companies to invest freely in each

member’s country

allow workers to move freely across

borders

have a common external duty on products

being imported from non-member countries

Common Markets (economic community)


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Slide 13

In most regions of the world, countries unite

to promote economic development and

trade.

Goals may include:

acceleration of economic growth, social

progress, and cultural development

attempting to improve living and work standards

coordination of economic development and

trade

Regional Trade Organizations

Slide 14

Trade Measurements

foreign debt

the amount a country owes to other countries

balance of trade

the difference between a country’s total exports

and total imports

trade surplus

when a country exports more than it imports

has a favorable trade position

trade deficit

when a country imports more than it exports

has an unfavorable trade position

Slide 15


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Slide 16

balance of payments

the difference between the amount of money that comes into a country and the amount that goes out

positive balance of payments

when a nation receives more money in a year than it pays out

negative balance of payments

when a country sends out more money than it brings in

Balance of Payments

Trade Measurements

Slide 17

Terms

infrastructure

industrialized country

less-developed country (LDC)

developing country

exchange controls

Economic Development and Monetary Systems

Slide 18

Economic Development

Economic Development Factors

level of economic development

the differences in living and work environments

Economic development levels are influenced by

Literacy Level

Technology

Agricultural Dependency

infrastructure

the transportation, communication, and utility

systems of a nation

Countries with a strong infrastructure have a

competitive advantage over countries with a weak

infrastructure.


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Slide 19

Types of Infrastructure

Physical Infrastructure

transportation, communication, and utility systems

that facilitate business activities

Natural Infrastructure

climate, waterways, farmland and other natural

resources

Slide 20

family relationships, labor unions, religious influences, schools, and other social organizations

Financial Infrastructure

banks, financial markets, and other financial institutions

Managerial or Entrepreneurial Infrastructure the ability of a nation’s people to organize and

implement business activities

Social Infrastructure

Types of Infrastructure

Slide 21

Levels of Economic Development industrialized country

a country with strong business activity that

is usually the result of

advanced technology

a highly educated population

less-developed country (LDC)

a country with little economic wealth and

an emphasis on agriculture or mining

developing countries

countries that are attempting to evolve

from less-developed to industrialized


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Slide 22

International Currency

Currencies vary throughout the world.

soft currency

not easy to exchange for other currencies

hard currency

accepted for most global financial

transactions

Slide 23

Foreign Exchange Rates

exchange rate

the value of a currency in one country

compared to the value of a currency in

another country

affected by supply and demand

Slide 24


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Slide 25

Factors Affecting Currency Values

Balance of Payments

When a country has a favorable balance of

payments, the value of its currency is

either constant or rising.

fueled by increased demand for its products

and currency

Slide 26

When consumer prices increase and the

buying power of a country’s money declines,

its currency will not be as attractive.

Inflation reduces the buying power of a

currency.

High interest rates cause a decline in

currency value.

Economic Conditions


Slide 27

Companies and businesses want to avoid

risk when doing business in foreign

countries.

Factors contributing to risk include:

unexpected government changes

the enactment of new laws and regulations

Risk reduces confidence in a country’s

currency.

Political Stability



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Slide 28

Foreign Exchange Controls

exchange controls

government restrictions to regulate the

amount and value of a nation’s currency

fixed exchange rates

limits on the amount and cost of currency

Slide 29

Terms

global stock index

American depository receipt (ADR)

floating exchange rates

currency futures

International Financial Markets

Slide 30

Global Security Markets

International Stock Exchanges

The New York Stock Exchange is the largest

in the world.

Technology advances have facilitated the

ability to make trades 24/7 in a variety of

countries.


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Slide 31

coordinates the activities of hundreds of

financial markets and stock exchanges

around the world

tries to increase efficiencies of the financial

markets

tries to meet the needs of capital markets in

emerging economies

World Federation of Exchanges


Slide 32

global stock index

based on a group of stocks selected to reflect the overall

progress of all stocks being represented

American depository receipt (ADR)

enables U.S. investors to buy foreign stock shares

ADRs are traded on U.S. exchanges and valued in

U.S. dollars

the foreign stock shares are held in trust by banks

stock earnings are converted to U.S. dollars and

distributed to investors

Global Stock Indexes


Slide 33

money that is invested by many people to buy

a portfolio of international stocks

diversification

spreads out risk

International Mutual Funds



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Slide 34

The Over-the-counter Market

listed stocks

large companies that meet financial

requirements of a stock exchange

traded regularly

over-the-counter (OTC) market

a network of stockbrokers who buy and sell

stocks not listed on the exchange

NASDAQ

the major computerized trading system for

OTC stocks in the U.S.

Slide 35

Global Bond Markets

International Bonds

Issuing bonds provides debt financing for

companies and governments.

issue value (face value) (maturity value)

will vary based on the nation

Slide 36

Projected returns face strong uncertainty when issued by companies with no past history of financial success.

Risk levels can increase quickly as a result of the economy and political instability.

Local ratings agencies lack sophistication.

Institutional investors can affect the bond market values of small companies.

The risks associated with buying bonds

issued by developing countries include:

Global Bond Markets


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Slide 37

a debt security that can provide protection

against economic uncertainty

the value increases based on the inflation rate

Inflation-Linked Bonds

Global Bond Markets

Slide 38

asset-backed security

secured by various company assets

receivable accounts often serve as collateral

have short maturities

have steady, definite cash flows

The asset-backed market is expected to show

continued growth.

International Asset-Backed Securities

Market

Global Bond Markets

Slide 39

Other International Financial Markets

Foreign Exchange Market

floating exchange rates

currency values change based on supply

and demand

foreign exchange market

banks and other financial institutions that

buy and sell different currencies


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Slide 40

Futures Market

currency futures

contracts to purchase for a fee a foreign

currency at today’s rate with payment and

delivery at a later date

futures market

allows investors to buy or sell contracts on

the future prices of commodities, metals

and financial instruments

Slide 41

Options Market

option

the right to buy or sell a security or commodity at a specific price within a limited time period

call option

the right to buy the item

put option

the right to sell the investment

When buying an option, you are not buying the investment.

You are only purchasing the right to buy or sell the investment in the future at a certain price.

Slide 42

Terms

letter of credit

bill of exchange

commercial invoice

proof of insurance

credit risk insurance

Global Payments and Financial Risk


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Slide 43

International Payments and Financial

Documents

Cash In Advance

risky

might not receive the items

hard to get refunds for damaged goods

seldom used

Letter Of Credit

letter of credit

a financial document issued by a bank for an

importer in which the bank guarantees

payment

Slide 44

Sale on Account

Most businesses buy or sell on

account.

allows regular customers to make payment

in a certain time period

Slide 45

Other Global Financial Documents

Promissory Note

a promise to pay a certain amount by a

certain date

bill of exchange

a written order by an exporter to an

importer to make payment, usually through

a third party


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Slide 46

moves payments through banking computer

systems

commercial invoice

provides a description of the merchandise and

the terms of the sale

used at the port of entry to calculate any

import duties that might be due

Electronic Funds Transfer

often required in import-export transactions

an insurance certificate that lists coverage for

damage that might occur in transit

proof of insurance

Slide 47

International Financial Agencies

Export-import Bank

EXIM

a U.S. government agency

helps finance the export sales of U.S. products

provides loans to exporters, loan guarantees and

export credit insurance

Overseas Private Investment Corporation

OPIC

provides investment insurance to U.S.

companies that establish operations in

developing countries

Slide 48

Foreign Credit Insurance Association

credit risk insurance

provides coverage for loss from non-

payment for delivered goods

available through FCIA

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