Theory and Practice of International

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Nov 10, 2013 (3 years and 9 months ago)

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Theory and Practice of International
Financial Management



Review



What to Remember in 5 Years

1. Governments are important:


-

governments print money


-

governments intervene in foreign exchange markets


-

governments tax

2. Interest rates reflect anticipated exchange rate changes:


-

international capital budgeting recognizes this relationship


implicitly (decentralized) and explicitly (centralized)


-

expected currency borrowing costs will depend on this,


particularly on an after
-
tax basis


-

risks associated with interest
-
bearing exposures will



account for this co
-
movement

What to Remember in 5 Years

3. Prices will reflect realized exchange rate changes:


-

the law of one price will hold in the short
-
run for



homogeneous commodities


-

any goods that are tradable will face similar arbitrage


pressures in the long
-
run


-

economic risks that are linked to both exchange rates


and prices must recognize for this relationship

4. International capital markets are segmented:


-


investors prefer local investments


-

different investors value different risks differently


-


borrowing costs and required returns on equity



depend on country of lenders and investors

What to Remember in 5 Years

5. Only risks which cannot be diversified are important:


-


valuations given by international capital budgeting will


depend on what risks are systematic to shareholders


-


measurement of foreign exchange exposure risks must


recognize that positions may naturally offset or diversify


-

risk management activities are only useful if they



increase expected returns or reduce risks systematic to


shareholders portfolios or managers’ careers.