Course introduction for 723G33

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10 nov. 2013 (il y a 7 années et 11 mois)

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Course introduction for 723G33


Risk Management and derivatives


(former 723g14 International Finance)


Yinghong.chen@liu.se

YH Chen, Doctor in Financial Economics

yinghong.chen@liu.se

1

Contents


1.
Couse introduction for 723G33

2.
Main Book, Other
Reference books,
chapters

3.
Detailed schedule

4.
Theories of international trade: comparative
advantage and competitive advantage

5.
Homework

1

6.
Assignment
: preparation
of

Case Porsche
changes

tack

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2

LiU
: Campus Valla


Class

location

L
ibrary

Exam
place

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3

Main book: Multinational Business Finance

by
Eiteman
,
Stonehill

and
Moffett


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4

O
ther Reference books, chapters



International Business: Environment and
Operations
,
John
D. Daniels, Lee H.
Radebaugh

&
Daniel P. Sullivan;
12
th

edition, for cultural aspect
of International business of MNEs




Corporate
Finance Foundations: Global Edition,
by
Hirt
, Block and
Danielsen
, 14E, McGraw
-
Hill.
Chapter 19 and 21


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5

Vecka 18, 2012

Moment

Location

Preliminary

Contents

Tue

May

7

13:15
-
15:00

L1

T15

Course
Outline
,
Important

Topics

In
International Corporate
Finance
,
chapter

1

Wed

May
8

13:15
-
17:00

L2,
seminar

1

p26

ESM:chapter

2
-
3, Case: Porsche Changes
Tack

Homework
:

end
of

chapter

1,
question

1
-
5

Tue

May
14

13:15
-
15:00

L
3

T
11

ESM:
Chapter

5, 6,

7
Foreign Exchange
Market and parity conditions

Wed

May
15

13:15
-
15:00

L4

P26

ESM:chapter

8, 9
currency derivatives,
Exchange rate

Thu

May
16

13:15
-
15:00

L
5

P26

ESM: Chapter 10, 11, 12: exposure
management

Booking


underway

17

?

data
system

Börssal

instructor

The

Use Of The
Datastream
. Collect Data
For Exchange Rate Theory Test

Tue

May
21

13:15
-
15:00

Seminar

2

T15

Exercise 4
-
12, Questions session

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6

Wed

May
22

13:15
-
15:00

L
6

T11

ESM: chapter 17, 19: Risk management:
an integrated risk approach. Financial risk,
operational risk,

macroeconomic risk,
country risk,
etc

Wed

May
29

13:15
-
15:00

Final
Seminar

T15

Project presentation (by
group
)

Group

A, B, C, D

Discussant

group

(E, F, G, H)





15:15
-
17:00

Final
Seminar

T1
5

Project presentation (by

group
)

Group E, F, G, H
discussant

group

(A, B,
C, D)


Thu

May
30

13:15
-
15:00

L7

T15

Review. Old exam questions,
etc


exam




preliminary

4 juni

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Obligatory

1.
Obligatory lectures and seminars.

2.
Obligatory Lab exercise on testing the Equilibrium
Theory of Exchange Rate (exercise to be handed in
before 25 of May, according to lab instructions)

3.
Group presentation is obligatory on 29
th

of may.
Discussant group will be picked later.

Topics can be chosen from major areas of the course.
Deadline, 27
th

of May. Send to both your discussant group
and
yinghong.chen@liu.se

Instructions on website.


1.
The
exam
is set preliminarily on
the 4
th

of June
.
(account for 80% of the total points)


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Introduction: importance of
risk
management
of

MNEs

1.
Globalization is a fact of life.

I define globalization as producing where it
is most cost
-
effective, selling where it is
most profitable, and sourcing capital where
it is cheapest, without worrying about
national boundaries.




Narayana

Murthy, President and CEO,
Infosys

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Importance

of

risk management
of

MNEs

2.
There are unique
risks and opportunities
involved
in running international firms
compared to purely domestic firms. They are
foreign exchange risk
,
operating risk,
country
specific risk,
laws and regulations
,
cultural
aspect of multinational firms
, etc.

3.
Derivative securities
such as
options and
futures

are used by
corporate
financial
managers
of MNEs for
hedging activities
. Case
in point: Porsche



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Various

aspects

of

International
Business


The Cultural Environments Facing Business


The Political and Legal Environments Facing
Business


The Economic Environments Facing Businesses


Globalization and Society


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Theories

of

international
trade


Theory of Comparative
advantage (Factor
Endowment: land, labor, location, natural
resources, population)


International
Trade and Factor
-
Mobility
Theory


Porter
´
s theory of competitive advantages of
nations of International trade (chapter 17)


Rationales of Foreign direct investment, FDIs


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The theory
of comparative advantage


The
theory of comparative advantage
provides a basis for explaining
and justifying international trade in a model world assumed to enjoy:


free trade;


perfect competition;


no uncertainty;


costless information; and


no government interference.

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The theory of comparative advantage



Absolute advantage and comparative advantage, opportunity costs


Firms
in Country A specialize in making products that can be produced
relatively efficiently, given Country A’s endowment of factors of
production, that is, land, labor, capital, and technology


Firms in Country B do likewise, given the factors of production found in
Country B


In this way the total combined output of A and B is
maximized

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Exhibit 1.3
Global Outsourcing of
Comparative Advantage

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Comparative

advantage

vs.
Competitive

advantage


Although international trade might have approached the
comparative advantage model during the nineteenth century,
it certainly does not today, for the following reasons:


Countries do not appear to specialize only in those products that could
be most efficiently produced by that country’s particular factors of
production (as a result of government interference and ulterior
motivations)


At least two factors of production


capital and technology


now flow
directly and easily between countries


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The Porter's Diamond

model for the
competitive advantage of nations (chapter 17)

Sources
of competitive
advantage
:


Factor Conditions
: nation's
position in factors of
production,
such as natural
resources, climate
,
skilled labors, infrastructure, technology,
etc


Demand
Conditions:
of home buyers needs
-

their sophistication


Suppliers and Related
Industries:
clusters of
related/supervising industries.


Firm Strategy, Structure and
Rivalry:
attitude,
willingness to succeed, domestic
rivary
.

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Four Determinants of National
Competitive
Advantage

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Pricing

of

foreign

exchange


Internat
ional parity
conditions:
Relationship
between Interest Rates
and, spot and forward
exchange
r
ates,
inflation,
changes in spot rate


Arbitrage principle: The law of one price, normally
we use home currency value per dollar, direct
quote.


Indirect quote: 1 £= 1,5 $

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7
-
20

The law of one price
and Exchange
Rates


If the identical product or service can be:


sold in two different markets; and


no restrictions exist on the sale; and


transportation costs of moving the product
between markets are equal, then


the products price should be the
same
in both
markets.


This is called the
law of one price
.

7
-
21

Exhibit 7.11 International Parity Conditions in Equilibrium
(Approximate Form)

Exhibit 1.1
Global Capital Markets

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What is Different About International Financial
Management of MNEs?


Exhibit 1.4 summarizes the differences.


Culture and history differ among countries


Corporate governance


Greater levels of foreign exchange and political
risks


Financial theory and applications are modified in
the global versus domestic marketplace


Specialized and complicated financial instruments
become tools of the trade

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Exhibit 1.4
What Is Different About International
Financial Management?

ESM: 13
th

edition

24

Market Imperfections: A Rationale for the Existence of
the Multinational Firm


MNEs strive to take advantage of imperfections in national
markets for products, factors of production, and financial
assets.


Imperfections in the market for products translate into market
opportunities for MNEs.


Large international firms are better able to exploit such
competitive factors as economies of scale, managerial and
technological expertise, product differentiation, and financial
strength than their local competitors.

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Strategic motives drive the decision to invest abroad and
become a MNE and can be summarized under the following
categories:


Market seekers


Raw material seekers


Production efficiency seekers


Knowledge seekers


Political safety seekers


These categories are not mutually exclusive.

Market Imperfections: A Rationale for
the Existence of the Multinational Firm

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The Globalization Process


Stage I:
early domestic phase
growing into the
international trade phase
(Exhibit 1.5)


Stage II: A successful firm will continue to
grow from simple international trade to the
multinational phase characterized by
production and investment both at home and
abroad (Exhibit 1.6)


Growth may be limited by the twin agency
problems of corporate insiders and the rulers
of sovereign states (Exhibit 1.7)

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Exhibit 1.5
Trident Corp: Initiation of the Globalization
Process

ESM: 13
th

edition

28

Exhibit 1.6
Trident’s Foreign Direct
Investment Sequence

ESM 13
th

edition

29

Exhibit 1.7
Potential Limits of Financial
Globalization

ESM: 13
th

edition

30

Homework



Chapter

1: problems 1
to

5.
Recardian

theory

of

Comparative

advantages

. China and
France
,
due

on
Tuesday
, 14th. Hand in by
group

or
individually

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Assignment
: Prepare the
Porsche
case
before
Wednesday’s workshop


Form two groups A and B: one will present the Porsche
Changes Tack case. The other asks questions,
Preparation needed.


The Case is to
be found
on course homepage under
course notes.
http://
www.iei.liu.se/fek/frist/723G33?l=en



Discussion of the class follows: various risk
management aspects of Porsche.
O
wnership,
management style, synergies, financial risks,
performance, etc.


Other info: Porsche Homepage http
://www.porsche
-
se.com/pho/en/

yinghong.chen@liu.se

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The holding structure of Porsche SE as
of May 3
rd,

2012.

¹
voting

rights

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Some concepts before the case of
Porsche Changes
T
ack


Ownership structure and corporate governance


Owner control vs. Management control


Family ownership (concentrated ownership: common
in Continental Europe


Shareholder oriented governance structure, or
stakeholder oriented governance structure


The conflicts of interests: shareholders verses other
constituents (stakeholders: debt holders, labor
unions, governments,
etc
),


Performance measures, ROA, ROE

34

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35

Mini
-
Case Questions: Porsche Changes
Tack

1.
What strategic decisions made by Porsche over
the
years
1999 to 2004 had
given rise to its extremely high return on
invested capital?

2.
Vesilina

D. wondered
if
she might
have to distinguish
between the
Porsche’s
ability to generate results for
stockholders versus its willingness to do so. What do you
think?

3.
Is pursuing the interest of Porsche’s controlling families
different from maximizing the returns to its public share
owners?

yinghong.chen@liu.se

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Exhibit 1 Porsche’s Growth in Sales,
Income, and O
perating Margin

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Exhibit 2 Return on Invested Capital
(ROIC) for European Automakers, 2004

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Exhibit 3 Porsche’s
Velocity (capital
turnover),
Margin, and ROIC

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Useful links for today

Main Book homepage for Multinational Business Finance , 13
th
,
12
th

ed. Both are ok.

http://wps.pearsoned.co.uk/ema_ge_eiteman_mbf_13
/


http://wps.pearsoned.co.uk/ema_ge_eiteman_mbf_12/

Corporate Finance Foundations: Global Edition, by
Hirt
, Block
and
Danielsen
, 14E, McGraw
-
Hill. Chapter 19 and 21

http://highered.mcgraw
-
hill.com/sites/0073530727/student_view0/index.html

http://highered.mcgraw
-
hill.com/sites/0073530727/student_view0/video_clips.html


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Practical help

How to get around Linköping University?

1.
English version of the University:
http://www.liu.se/?l=en


2.


N
eed help? book a Librarian for information
searching and database, etc.

http://www.bibl.liu.se/?l=en

3. School map:

http://www.liu.se/om
-
liu/till
-
liu/kartor?l=en


Search a location, reserve a room etc.

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