Brian Butler’s lecturesPart #1Welcome (to Spain, to Catalonia, to the EU, to FORUM-NEXUS!)

Brian David ButlerProfessor of international finance and global entrepreneurship with Forum-Nexus Study Abroad. Guest lecturer with the IQS Business School of the Ramon Llull University in Barcelona, and the Catholic University of Milan. Previously, Brian taught finance, economics and global trade courses at Thunderbird’s Global MBA program in Miami, and worked as a research analyst with the Columbia Business School in New York City. Brian currently lives in Recife, Brazil where he is teaching classes on “Global Entrepreneurship” at the university FBV.

A global citizen, Brian was born in Canada, raised in Switzerland (where he attended international British school), educated through university in the U.S., started his career with a Japanese company, moved to New York to work as an analyst, married a Brazilian, and has traveled extensively in Latin America, Asia, Europe and North America.

briandbutler@gmail.com

LinkedIn/briandbutler

Skype: briandbutler

Brian Butler is a specialist in international economic analysis, and is founder of the prestigious “GloboTrends“ (www.globotrends.com) online economics site, which has been featured as syndicated content on Nouriel Roubini’s RGE Monitor, Emerginvest.com, Business Week Exchange, Wikinvest.com, and other leading news outlets.

http://globotrends.pbworks.com/ , http://blog.globotrends.com/

Online

Online

http://www.roubini.com/author/brian_butler

Find my slides:

www.slideshare.net/briandbutler

Course Objectives• Upon successful completion of this course students

will be able to: ▫ Be familiar with the functioning of financial markets, both

domestic and international.▫ Understand the role of key financial institutions, both

domestic and international.▫ Examine the evolution of financial markets in the last

decade and the excesses and abuses that placed the foundation for the global crisis.

▫ Understand the role and responsibility of financial institutions, central banks and government agencies in contributing to the crisis as well as taking steps towards stabilization and recovery.

Course Objectives▫ Examine the domino effect that resulted in the expansion of

the crisis to Europe, Asia, Latin America and the rest of the world.

▫ Examine the role of multilateral organizations as part of the global financial system.

▫ Analyze impediments to the globalization of financial markets.▫ Evaluate the growth and development of specific

international financial markets.▫ Analyze the impact of globalization via financial integration

on the cost of capital.▫ Understand the specific challenges posed by the global crisis

on European economies and European financial markets

Required books

•Required Textbook▫'An Introduction to Global Financial

Markets', by Stephen Valdez, Palgrave Macmillan, 5th Edition, 2006

▫'Fixing Global Finance', by Martin Wolf Yale University Press, updated 2010

Book: Martin Wolf, “Fixing Global Finance”

Martin Wolf is chief economics commentator at the Financial Times (online FT.com)

Assigned Readings

•Martin Wolf book

▫Final chapter (ch 8) “From Imbalances to the Subprime Financial Crisis”

▫Recommended: First four Chapters

• Finance book▫ Chapter 9 – foreign

exchange ▫ Chapter 11 - European

Economic and Monetary Union

▫ Switzerland – p 288▫ Euro – p 289, p304

• Optional additional reading▫ Chapter 2 – banking

background p30-38▫ Chapter 6 – the money and

bond markets▫ Chapter 12 – traded options▫ Chapter 13 - Futures

Expectations:

▫Attend classes – exams will be from lectures, from assigned readings and from guest lecturers/ professional visits

▫Turn in assignments before class ▫Be prepared for class discussions – lots of small

group assignments during class▫Contribute to group assignment (team grading /

peer review)▫No sleeping, no laptops, no phones (sorry) ▫If your tired… standup, go get a drink, come back

Questions:

Global Crisis:1. How many “understand” more or less

what happened so far? (ask volunteer)2. In US? (ask volunteer)3. In Europe?4. Predictions of what will happen in 6

months? (will the Euro still be currency? How about in 6 years? Same members? More? Less?)

How related??

•US crisis 2007-08 to the

•EURO-zone crisis 2010-11

•What are these 2 crises, how are they related???

Course Objectives

•Upon successful completion of this course students will be able to: ▫Understand the European financial crisis (in context of the lager global macro picture)

Course Objectives•To get there…

▫First need “building blocks” ▫Basic financial concepts (currency, inflation, interest, IMF, current account, etc)

•Course will assume:▫No financial experience▫But, this is a “masters” level course – same as taught

Grading

•Components of Final Grade▫Midterm exam 15% ▫Final exam 25% ▫Team project 20% ▫International IQ 20%▫Assignments (incl. Case study) 10% ▫Class participation 10%

Question – why do you think “international IQ” is important for a class on international finance?

Grading

More than just a “monkey with a calculator”?

Need to understand…

•Psychology of other investors (where will scared investors run when avoiding risk?)

•Politics in Europe (voters in Germany vs. voters in Greece, Ireland, Portugal)

•Global trends, international markets, etc

Themes – 3 dangers

1. Danger in borrowing abroad in foreign currencies

2. Danger in relying on short term finance – especially when foreign capital involved

3. Danger in changing rules of finance

* Solution: be aware, and hedge to protect!

Borrowing $$ abroad in foreign currency = RISKY

Topics to cover - macro1. $ flow poor-rich2. Foreign reserves – IOUs3. Current / capital account4. IMF5. Self insurance6. Local currency bond – key7. Savings glut = response to past

crises8. Series of crises9. Export oriented growth 10. US accept capital – stabile, but

now… expect crisis in emerging…11. Borrower last resort12. Smoke but don’t inhale, send it

back13. Fast money, commercial banks,

east Europe, unicredit14. Danger Europe – foreign bank

deposits not guaranteed?

15. Lack of crisis 2000-09 = result of US policy

16. Inflation – impact – no long term investing

17. Inflation – good for borrowers, inflate away debts, bad for banks

18. Creation of $ , fiat, gold19. Fiscal/ Monetary policy20. Why ever raise interest%?21. Mundell Trilemma 22. Euro, fixed currencies23. Liquidity / Solvency24. 2 phases of crisis 200825. Regulations, deleveraging26. US unique position – borrow own

currency, more solvent27. Euro vs. Dollar – 2 weaknesses

Topics to cover - trading1. Effect of devaluation on

investment choices2. Forward, future, options3. How forward rates set?4. Interest rate arbitrage5. How currency FX rates

set – money flows6. Eurobond, Eurodollar-

facebook case 7. Size of FX markets

• More…

Topics to cover - CountriesFinance / Economical

environment in :

• The European Union + Eurozone (must identify map)

With special focus on: Countries we visit:

1. Spain2. France3. Switzerland4. Italy5. Greece6. Turkey

• Other regions we will discuss

• USA + China – unique relationship

• BRIC’s – big emerging markets

• SE Asia – Thailand, Malaysia, Indonesia

Team Project

• Due date: last class before Final Exam

Homework (part1) … while in Spain…

•Be ready for class discussion on MONDAY…

•Each student – introduce self + tell one thing about Spanish economy they noticed so far + class discuss

Homework (part2) … while in Spain…

•Be ready for professional visits•Especially to bank – “Banco Sabadell” –

4th largest bank in Spain; most important in Catalonia

•Every one prepare ONE question (related to crisis, banking, euro)

International FinanceIntro…

Questions:

Finance:1. How many econ / finance majors? 2. Taken “international finance” before?3. Studied FX, foreign currencies?

Dr. Kishore Dash, January 20, 2007

International Finance

•Group: Discuss differences between:▫Portfolio investing▫FDI▫Which is “better”?

What is “international finance”?• Story of Carlos, Brazilian “macro trader” • Shorting Canadian bonds• Betting for global stability• That Canadian central bank will (be one of the first

to) raise interest rates• How might he get “burned”? If crisis in Greece

causes contagion, and Canadian bank does NOT raise interest rates

• So, imagine that if a crisis in Greece could cause a hedge fund manager in Brazil to loose (a lot of) money

• This is Global finance!

What is “international finance”?• Need to understand

▫ that bonds fall in value when interest rates are raised (inverse relation)

▫That central banks raise interest rates when afraid of inflation, and how related to global growth / crisis

▫These are the building blocks Im talking about! (which we will try to build in class…. So the bigger financial picture makes sense!)

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1.

2.

3.

Foreign Exchange Market

Domestic FinancialMarkets in OtherCountries—Short-Term

Domestic FinancialMarkets in OtherCountries—Long-Term

Deposits, Cash, Forwards, Futures

T-Bills, Deposits,Commercial Paper,Money Market Funds

Bonds, Stocks,ADRs, Deposits, CMOs

Banks, Companies, Brokers

Banks, Companies,Brokers

Banks, Companies,Brokers

International Financial Markets

MARKET

INSTRUMENTS PARTICIPANTS

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4.

5.

6.

7.

Euro-Currency Market

Euro-Bond Market

International MonetarySystem (IMF)

The Real Sector

Deposits, Euro CPEuroloans

Eurobonds, FloatingRate Notes,Euro-Equities

SDRs, $US, [Gold],Position in the Fund

Banks, Clients

Investment Banks Companies, Brokers

Central Banks,The Fund

International Financial Markets (cont.)

MARKET

INSTRUMENTS PARTICIPANTS

Goods & Services

Consumers & Firms

Why Study “International Finance”?

Why?

•Why not just study “Finance”?▫NPV, cash flows, bonds▫If you understand domestic finance, isnt

International finance the same thing?

•Currencies•Gov’t default foreign investors•Understand macro-themes

Why Finance matters:

•Long term planning:

•“If financing is not stable, then investment in social infrastructure does not go as you expect.”

▫Hiraoki Nakanishi, president of Japan’s Hitachi

Core of our class:

•Tools to protect•Hedging techniques:

▫Forward, Futures, options, etc…▫tools to PROTECT (and potentially

speculate)

What are the benefits of “International Finance”?

Benefits of Global Finance1. Serve international companies

▫Citi bank in Sao Paulo▫HSBC everwhere

2. Some countries don’t have DEEP enough capital markets

▫Needs of companies Bigger than Depth of capital markets

3. Efficiency, 4. Best practices (international competition

forces local monopolies to offer better rates)

Benefits of Global Finance

•“remember the remarkable prosperity of the past 25 years. Finance deserves some of the credit for that.”

source: http://www.economist.com/printedition/displayStory.cfm?Story_ID=12957709

What are the dangers of “International Finance”?

Dangers

•Fast money in, fast money OUT

•Borrowing in foreign currencies▫Discuss, WHY?

Independent thinkers neededThe importance of thinking independently – don’t follow the “herd”

Be careful of “expert” predictions

http://bucks.blogs.nytimes.com/tag/asset-allocation/

Challenge to students…

While we are in Europe together…

•Think critically •Challenge* accepted assumptions•Look for trends (not facts & figures)•Educational journey…

*politely, with challenging thoughts, not just words

Failure of “economic forecasting” profession

•Why didn’t predict worst crisis since Great Depression?

•Some exceptions (Nouriel Roubini, others..)

•But, in general, a few lone voices does not equal a profession (dismissed as quack, “Dr. Doom”, etc…)

Resource: http://www.roubini.com/

Mis-diagnosis of the problem• Globally, during much of 2008, economic

growth appeared to be holding up

• IMF Projection▫In April 2008, eight months into the global crisis

if we date its start as August 2007, the IMF was forecasting only a mild slowdown in global growth in 2008 to 3.7, from the 4.9 percent that then was estimated for 2007.

• ECB▫Recall that the European Central Bank (ECB)

raised the target for its key refinancing rate on July 3, 2008, and the ECB was not alone in its inflation concerns at that time.

As late as 2008, the IMF forecasted growth in 2009

Failure of “economic forecasting” profession

Conclusion: highest trained, most respected, most influential did not predict collapse

Repeat challenge to students:

•Think critically, don’t accept “expert” forecasts, challenge accepted assumptions.

•With critical analysis, any one can learn to spot macro trends

•GET AHEAD OF THE TRENDS!!!▫Tools for investors▫Business leaders – position for threats /

opportunities

Impossible to Predict

•Currencies, when flexible, are impossible to predict▫Don’t believe anyone that tells you

otherwise▫Tools: PPP, IFE▫Difference in interest rates between 2

countries to set forward rate, estimate future spot rate

CURRENCIEScurrencies

Currency

Do you know these symbols? Their approximate value in (in terms of dollars)? How has that value changed over the past 5-10 years?

Currencies:

•Question:▫“Why is it “expensive” to come to Europe

and travel (shop, stay, enjoy)?▫Compared to US, Mexico, Brazil, etc…▫Why does it “seem” expensive here?

▫Is it less “expensive” now (compared to 1 year ago?)??

Global travel…How about if you went to Argentina? • at about 4-1 USD…. Everything SEEMS

cheap….hotels, restaurants, clothes shopping.

Or Iceland? Idea for (cheap) Global Travel… follow the crises

Watch from China = $10• is that “cheap”?• how about if you lived in China? Is it still

cheap?

Group assignment

•Assume you are going to Europe in 6 months, and that you expect to spend 1000 Euros.

•What is your risk?•How could you avoid / limit that risk?

Group assignment

•Assume you are going to Europe in 6 months, and that you expect to spend 1000 Euros.

•What is your risk? How could you avoid / limit that risk?

1.Deposit $ in European bank now… grow to be 1000 euros in 6 months

2.Forward contract with Bank3.Futures / Options

Core of our class:

•International finance = risk •We will outline those risks, and offer:•Tools to protect•Hedging techniques:

▫Forward, Futures, options, etc…▫tools to PROTECT (and potentially

speculate)

Currency basics:

Do you want a “strong” currency? Not necessarily….

•Producers – ▫ prefer weak currency – produce for exports

•Consumers – ▫prefer strong currency – to purchase cheap

imports, and afford foreign travel•Government-

▫it depends, but for full employment from exports, often prefer weak currency

Homework (part1) … while in Spain…

•Be ready for class discussion on MONDAY…

•Each student – introduce self + tell one thing about Spanish economy they noticed so far + class discuss

Homework (part2) … while in Spain…

•Be ready for professional visits•Especially to bank – “Banco Sabadell” –

4th largest bank in Spain; most important in Catalonia

•Every one prepare ONE question (related to crisis, banking, euro)