MULTINATIONAL FINANCE Barry1.pdf
Transcript of MULTINATIONAL FINANCE Barry1.pdf
MULTINATIONAL FINANCE
Barry Topf April 2014
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INTRODUCTION
• Course Goals
• Methodology
• Organization
• Background
• Course Outline
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COURSE GOALS
• Acquire analytical tools
• Obtain necessary knowledge and perspective
• Familiarity with basic concepts and their uses - and their limitations
• Basic quantitative and computational skills
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Multinational Finance
• Multinational financial management is financial management conducted in more than one cultural, social, economic, or political environment
• However, in today’s world important to everyone regardless of nature of operations
• Especially clear in Israel
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Methodology
• 3 six hour sessions – trial by ordeal
• + 3 six hour sessions With Kobi
• Textbook –Multinational Finance, Kirt C. Butler, 5th edition
• Additional Readings
• Some audiovisual enrichment
• Open format, questions, comments and discussions- and feedback- welcomed.
• Relevance from an Israeli viewpoint
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Organization
• Schedule: Today; May 8th, May 15th
• Quizes: May 8th and May 15th at 7:30 pm; Final Quiz May 22
• Grades: Simple average of best two out of three quiz grades
• Bonus possibility for participation
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Organization
• Session Schedule (tentative):
4:00-5:20
5:20-5:40 Break
5:40-7:00
7:00-7:30 Break
7:30-8:40
8:40-8:50 Break
8:50- 9:45
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My Background
מנהל חדר עסקות בבנק ישראל•
י"ח בב"מנהל מחלקת מט•
י"מנהל חטיבת השווקים בב•
חבר בועדה המוניטארית בבנק ישראל•
:היום •
חבר ועדת השקעות של משקיעה מוסדי•
( IMF)יועץ לקרן המטבע הבינלאומי •
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Course Outline
• The International Financial Environment • The Multinational Enterprise • The International Capital Market and Investment
Management • Along the way:
– Efficient Markets – Agency theory – Behavioral Finance – Regulation and macro risk – Monetary Policy and Operations – The Crisis
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The International Financial Environment
• Chapters 1-4 Integration of the world’s markets for goods, services, and
financial instruments
Balance-of-payments statistics
Exchange rate systems – Fixed versus floating, and everything in between
Recent history of international exchange rates – Recent currency crises
– The evolving role of the IMF Regulatory environment
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Integration of global markets for goods and services
• Global trend toward free-market economies; particularly the industrialization of the Pacific Rim
• 1991 breakup of the Soviet Union; the reunification of Germany; and the migration of central and eastern European countries toward the European Union
• 1995 creation of the World Trade Organization (WTO)
• China’s emergence in international markets, Hong Kong’s 1997 return to China, and China’s 2001 entry into the WTO
• 1999 creation of the euro and its adoption by an expanding set of European countries
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Trade
deficit
Exports
Imports
U.S. Merchandise Trade ($ billions)
Integration of the world’s markets Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
The Impossible Trinity
• MONETARY INDEPENDENCE • • • • • • • • • • • •
• •
FIXED EXCHANGE RATE OPEN CAPITAL ACCOUNT
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Capital Flows
• Open Trade Account – no restrictions on imports and exports
• Open Current Account – no restrictions on services
• Open Capital Account - no restrictions on financial flows
• Convertible Currency
• Reserve Currency
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Capital Flows
• Foreign Exchange Controls – Outward/Inward
– FDI /Portfolio
– Residents/nonresidents
• Taxes
• Reserve Requirements
• Minimum Holding Periods
• Repatriation Limitations
• Administrative Measures
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• Integration of financial markets
• An increase in cross-border financing
• Increasingly interdependent national financial markets, including cooperative linkages among securities exchanges
• An increasing number of cross-border mergers, acquisitions, and joint ventures
• Increased international regulation
Integration of the world’s markets Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange rates
• World Bank - which now includes
–International Bank for Reconstruction and Development
–International Development Association
–International Finance Corporation
–Multilateral Investment Guarantee Agency
–Int’l Centre for Settlement of Investment Disputes
• International Monetary Fund (IMF)
–Responsible for ensuring the stability of the international financial system
–Compiles balance-of-payments statistics
• GATT/WTO
The Bretton Woods Agreement
Integration of World Markets
• GATT/WTO
• Multilateral
–Mercosur
–Caricom
–Asean
–Efta
–Nafta
• Bilateral
–US-Israel
–Australia-New Zealand
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The U.S. Balance of Payments 2000 2010
Goods: Exports 772 1293 Goods: Imports -1224 -1937 Trade Balance -452 -644
Services: Credit 292 541 Services: Debit -219 -393
Balance on Goods & Services -379 -496
Income: Credit 353 662 Income: Debit -331 -499
Balance on Goods, Servs, & Income -357 -333
Current transfers: Net -53 -137 Current Account -410 -470
Source: IMF (www.imf.org).
Integration of the world’s markets
payments statistics-of-Balance Exchange rate systems
Recent history of international exchange rates
The U.S. balance of payments 2000 2010
Capital account: Net 1 0
Direct Investment Abroad -178 -346 Direct Invest from Abroad 308 194
Portfolio Investment Assets -278 -144 Portfolio Invest Liabilities 552 757 Other Investment Assets -150 -533
Other Investment Liabilities 156 293
Financial Account 409 237
Net Errors and Omissions 0 235
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BOP: International Comparisons
GDP in GDP per Trade surplus per
billions capita GDP capita Germany $3,085 $37,900 6.6% $2,506 Australia $918 $40,800 3.2% $1,320
Korea $1,554 $31,700 2.2% $685 China $11,300 $8,400 2.1% $173 Brazil $2,284 $11,600 1.4% $158
Japan $4,389 $34,300 0.1% $48 India $4,463 $3,700 -3.4% -$127
Canada $1,389 $40,300 -0.6% -$261 U.K. $2,250 $35,900 -7.1% -$2,545 U.S. $15,040 $48,100 -5.3% -$2,568
Greece $306 $27,600 -12.8% -$3,536
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ISRAEL CURRENT ACCOUNT
BALANCE % OF GDP1995-2012)
הלשכה המרכזית לסטטיסטיקה ועיבודי בנק ישראל: מקור
%
-4.8 -4.7
-2.9
-0.9
-1.6 -1.6 -1.6-1.1
0.5
1.6
2.9
1.4
3.8
3.1
1.3
0.3
4.7
3.2
-6
-4
-2
0
2
4
6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Exchange rate systems
Pegged or fixed exchange rate systems
Forges a direct link between inflation differentials and employment levels
Can result in large adjustments
Floating exchange rate systems
Allows exchange rates to adjust for inflation differences
Allows employment levels and wages to equalize through the exchange rate mechanism
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems Recent history of international exchange rates
Floating Soft Peg Hard peg
Nigeria, S. Africa Burundi, WAEMU Djibouti AFRICA
India, Australia, Malaysia
Nepal Hong Kong ASIA
Israel, Turkey Saudi Arabia - MIDDLE EAST
Chile Argentina Ecuador AMERICAS
Sweden, UK, Eurozone
Russia,Denmark Bulgaria EUROPE
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Hard pegs: Exchange arrangements with no separate legal tender, and currency board arrangements
Soft pegs: Conventional peg arrangements, stabilized arrangements, crawling pegs, crawl-like arrangements, and pegs within horizontal bands
Floating arrangements: 'Floating' (largely market determined and without exchange rate targets) 'Free floating' (market determined with very infrequent intervention)
Major events in the history of FX rates
1946 Bretton Woods Conference
IMF and World Bank created
1971Exchange rate turmoil begins the modern era of floating exchange rates
Jamaica Agreement (1976)
European Exchange Rate Mechanism (1979)
1991Treaty of Maastricht
Introduction of the euro (1999)
Euro begins public circulation (2002)
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems Recent history of international exchange rates
Major events in the history of FX rates
• 1946 Bretton Woods Conference
– Dollar is convertible into gold at $35/ounce
– Other currencies are pegged to the dollar
– The IMF and the World Bank also were created
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems Recent history of international exchange rates
Major events in the history of FX rates • 1971—Exchange rate turmoil
– U.S. dollar falls off the gold standard
– Most currencies float on world markets
• 1976—Jamaica Agreement
– Floating rates are declared “acceptable”
• 1979—European Monetary System (EMS)
– European Exchange Rate Mechanism (ERM) established to maintain EEC currencies within a 2.25% band around central rates
– European currency unit (ECU) created
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems Recent history of international exchange rates
Major events in the history of FX rates
• 1991—Treaty of Maastricht
– EC members agree to a broad agenda of economic, financial and monetary reforms
– A single European currency is proposed as the ultimate goal of monetary union
• 1999—Introduction of the euro
– Emu-zone currencies pegged to the euro
– European bonds convert to the euro
• 2002—Euro begins public circulation
– The euro is now a major international currency
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems Recent history of international exchange rates
Israel’s ER Regimes
• 1985 – Peg to dollar
• 1986 –Peg to basket • 1989-1991 Horizontal Bands
• Adjustments of central rate
• Adjustments of width
• 1991-present – Crawling Bands • Adjustments of central rate
• Adjustments of width
• Adjustments of slope
• Asymmetric slopes
• “internal Bands”
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After a few years the Band became irrelevant
Formally eliminated in 2005
Ten years of non-intervention
During crisis of 2008, resumed intervention
2010 – Discretionary policy introduced
Chronology of the Transition
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Exchange-Rate Regime
• 1985-1989: Fixed Exchange Rates
• 1989-1991: Horizontal Exchange-Rate Band
• 1991-2001: Crawling Exchange-Rate Band
• 2005: Band eliminated • 2008: Resume Intervention
Trading System
1985-1990: Fixing
1990-1995: Multilateral Trade
1995-2001: Continuous Bilateral Trade
The FX Regime and the FX Market
Israel’s Transition
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Bank
Bank
Bank
Bank
Surplus
Units Environment: Regime, Supervision, Authorities
Infrastructure: Communications, Computer
Systems, Clearing Systems
Surplus
Units
Deficit
Units Broker
4-The Foreign Exchange Market: Interbank Trading Ingredients of Transition
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(July 85 - May 89)
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
III IV I II III IV I II III IV I II III IV I II
10%
5%
8% 3%
3%
basket
USdollar
shekels
1985 1986 1987 1988 1989
NIS
Peg to USD
Peg to Basket
The FX Regime Israel’s Transition
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1.80
1.90
2.00
2.10
2.20
2.30
2.40
2.50
2.60
2.70
2.80
2.90
I II III IV I II III IV I II III IV I II
1989 1990 1991 1992
shekels
3%
3%
3%
3%
5%
5%
5%
5% 5%
5%
6%
6%
10%
6%
(Jan 89-Mar 92)
NIS /Basket
Multilateral
Trade
The FX Regime
adjustment
Hurt the specs
artificial
Israel’s Transition
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(Oct91 - May01)
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
10/9
1
03/9
2
09/9
2
03/9
3
09/9
3
03/9
4
09/9
4
03/9
5
09/9
5
03/9
6
09/9
6
03/9
7
08/9
7
02/9
8
08/9
8
02/9
9
08/9
9
02/0
0
08/0
0
02/0
1
08/0
1
5%5%
5%
5%5%
5%
7%
7%
14%
14%
07/08/98
6% slope
6% slope
4% slope
6% slope
6% slope
2% slope
8% slope
9% slope6% slope
Broker Bilateral
Trade
The FX Regime
Differential slopes Internal
band
End of Intervention
Israel’s Transition
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The FX Regime
Israel’s Transition
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
10/9
1
03/9
2
09/9
2
03/9
3
09/9
3
03/9
4
09/9
4
03/9
5
09/9
5
03/9
6
09/9
6
03/9
7
08/9
7
02/9
8
08/9
8
02/9
9
08/9
9
02/0
0
08/0
0
02/0
1
08/0
1
5%5%
5%
5%5%
5%
7%
7%
14%
14%
07/08/98
6% slope
6% slope
4% slope
6% slope
6% slope
2% slope
8% slope
9% slope6% slope
Recent currency crises
•Mexican peso crisis of 1995
•Asian contagion of 1997
–Korea, Indonesia, and Thailand
•Russian ruble crisis in 1998
•Brazilian real crisis in 1998
•Argentinian peso crisis of 2002
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
✓ Recent history of international exchange rates
Recent currency crises ✓
Causes and consequences
Countries in crisis
Currency crises and the IMF
Currency crises
• Contributing factors in each crisis
–A fixed or pegged exchange rate system that overvalued the local currency
–A large amount of foreign currency debt
• Consequences of currency crises
–Currency crises have a pronounced negative short-term impact on the local economy
–A market-based exchange rate can have an invigorating long-term impact on the local economy and on the local stock market
Balance-of-payments statistics
Exchange rate systems
Recent history of international exchange
rates
Stock market (Dec 1995 = 1.00; in rupiah)
Indonesian rupiah ($/rupiah)
Indonesia’s 1997 currency crisis
Integration of the world’s markets
Balance-of-payments statistics
Exchange rate systems
history of international exchange ratesRecent
International Regulatory Regime
• Bank Supervision :Basel I, II, III
– ECB Supervision
• Anti-Money Laundering (AML), anti-terrorist, sanctions
• IOSCO
• Insurance
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