Lecture 1 - Global Financial Management Trends Flashcards
What is different about International Financial Management?
- Cultural and historical differences among countries
- Corporate governance differences
- -> different institutional arrangements
- -> different goals; maximize shareholder wealth
- Challenges of FX and political risk
- Specialized and complicated financial instruments, financial innovations including…
- -> currency features and options
- -> multi-currency bonds
- -> cross border stock listings
- -> international mutual funds
- Modification of financial models and theories to incorporate greater complexity
The heart of the global capital markets
Debt securities issued by the government
Most widely quoted international interest rate
LIBOR
Interbank Market
Exchange of securities among institutions occurs on a global network, “interbank market” and the medium of exchange are currencies
Reference Rate
- A reference rate is the rate of interest used in a standardized quotation, loan agreement, or financial derivative valuation
- Most reference rates used are widely quoted interbank rates
- Another source of reference rates is government borrowing rates
LIBOR or ICE LIBOR
- the LIBOR is the most widely used and quoted benchmark rate
IBA process in the collection/calculation of LIBOR
- “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offer rates in a reasonable market size just prior to 11am London time?”
Problems with LIBOR
- Origin of the rates submitted –> “estimated”
- Incentive to falsify disclosures as reveals credit standing
Some new reference rates?
CORRA - Canadian Overnight Repo Rate Average is a comparable risk-free benchmark rate measuring the average cost of overnight collateralized funding
SONIA - Sterling Overnight Index Average
SOFR - U.S. Secured Overnight Funding Rate
Canadian Interest Rate Benchmark Reform
- In Canada, benchmark reform efforts are being led by the Canadian Alternative Reference Rate Committee (CARR), a group of financial sector firms and public sector institutions. CARR’s mandate includes promoting the use of the CORRA as a key risk-free rate benchmark in Canada
CORRA
- CORRA is a robust transaction-based benchmark that reflects billion of dollars in daily overnight repo transactions.
- Risk-free rate that reflects the overnight risk-free rate
- Closely tracks the BoC policy rate
- Measures the cost of overnight lending via general collateral repo transactions secured by Government of Canada debt
- Needs to be compounded in arrears to calculate a term rate and payment
Forward-Looking Rate
Set at the start of the period over which you calculate interest
Compounded-in-arrerars term rate
Based on a daily interest rate compounded over the calculation period
Foreign Exchange Implications on Portfolio Managers
- Calculate returns including exchange rate implications
- Should they manage/hedge these effects?
- Maybe they intended for the exposure
Consolidated Financial Results
Consolidated financial results are a combination of local performance and exchange rate effects - these translation effects are very important for analysis
Changes in Exchange Rates Can Impact…
- prices of goods/services
- security returns
- MNC earnings
- managers compensation
Eurocurrencies
- domestic currencies of one country on deposit in a second country so there are “offshore” currencies
Two Valuable Purposes of the Eurocurrency Market
- Eurocurrency deposits are an efficient and convenient MM device for holding excess corporate liquidity
- Major source of ST loans to finance corporate working capital needs, including the financing of imports and exports
Private Enterprise
- privately held: businesses may be owned in whole or in part by families, and may be operated for profit or not-for-profit
- publicly traded shares: both public and private enterprises may have a portion of their ownership publicly traded
Public Enterprise
- Owned by the state: public enterprises can be operated for profit or not-for-profit
- Publicly traded shares: both public and private enterprises may have a portion of their ownership publicly traded
Operational Goals Differ depending on Type of Business, Firm, Company, or Enterprise
- Maximize shareholder value –> short-term results the focus of managers
vs. - Maximize current and sustainable future income to owners –> longer term view in privately held or controlled firms
Benefits of being public
- public shareholdings give owners liquidity, ability to sell all/part of their holdings
- perhaps public scrutiny and disclosure requirements are beneficial to the management of the business
Cons of Public
- IPO is expensive
- increasingly strict regulatory environment
- frequent reporting and disclosure limits privacy of the firm and may result in disclosure of proprietary information
- Emphasis on short-run performance of public shareholders may be detrimental to pursuit of long-run strategies
- U.S. litigious environment, public companies easy targets
Alternatives to becoming public
- private equity firms are becoming the owner of choice
- -> provides access to capital, shield the company from public disclosure and reporting
How do “early stage” firms get required financing to fulfill their promise?
- private equity firms
- specialized “venture capital” firms or individual investors
How do VERY early stage and or very small get funding?
- Crowdfunding
- Micro-Lending
Four Types of Crowdfunding Structures
- Donations based
- Rewards Based
- Debt or Lending Based
- Equity Based
Three Critical Components to a Successful Equity-Based Crowdfunding Initiative
- A well defined and capable crowdsourcing ecosystem
- A defined solid business plan and competitive analysis
- A motivated, capable, and committed entrepreneur
What is good governance?
- The North American corporate governance perspective focuses on the separation of ownership from management and reducing resulting agency conflicts
OECD Governance Guidelines
- Shareholder rights
- Board responsibilities
- Equitable treatment of shareholders
- Stakeholder rights
- Transparency and Disclosure
Comparative Corporate Governance Regimes
- Market-Based: efficient equity markets; dispersed ownership
- Family-Based: management and ownership is combined; family/majority and minority shareholders
- Bank-based: government influence in bank lending; lack of transparency; family control
- Government-Affiliated: state ownership of enterprise; lack of transparency; no minority influence
Rational for International Business Activities
- Good starting point is the theory of comparative advantage
- In a world where FOP are national and immobile
- World wealth is maximized if production occurs in the location where the nation has a comparative advantage in the production activity due to its resources endowments
- Even if one country is better at everything, it will likely be relatively better at one thing and this is what it should focus on producing, and import the other items from elsewhere
Why comparative advantage?
Maximum total production and total world wealth if every nation produces what it is relatively better at
Comparative Advantage still relevant
- Though some underlying factors of production are more mobile now than they once were, since countries still have their “endowments” of raw materials, labor skills, access to capital, and technology
- helps to explain why particular countries are more suitable for production of particular goods and services, either as finished goods or as components for a global supply chain of MNE’s and domestic firms
Definition of a MNE
- has operating subsidiaries, branches or affiliates located in foreign countries
- A MNC may have a global supply chain
- domestic firms with only local production also have significant international activities:
- -> import/export of products, components and services
- -> licensing of foreign firms to conduct their international business
- -> exposure to foreign competition in the domestic market
- -> indirect exposure to international risks through relationships with customers and suppliers who are exposed to such risks
Why become multinational?
- to take advantage of imperfections in national markets for products, factors of production, and financial assets
Initiation of the globalization process
Global Transition I: Domestic Phase to the International Trade Phase
Global Transition II: The International Trade Phase to the Multinational Phase
Global Transition I: Domestic Phase to the International Trade Phase
- exporting and importing products and services increases the demands of financial management over and above the traditional requirements of the domestic-only business
Global Transition II: The International Trade Phase to the Multinational Phase
- Ganado will soon need to establish foreign sales and service affiliates. This step is often followed by establishing manufacturing operations abroad or by licensing foreign firms to produce and service Ganado’s products
- As Ganado moves further down the foreign direct investment sequence, the extent of its physical presence in foreign markets increases
The Foreign Direct Investment Sequence
- Firms usually start their international business activities by exporting and important then evolve to a greater degree of involvement
- the firm may start engaging in international trade via exporting
- for more foreign involvement, they may decide to engage in a licensing manufacturing arrangement or to control assets themselves abroad
If the firm decides to engage in Foreign Direct Investment, involving owning a foreign operating unit, it can do so via a
Joint Venture vs Wholly Owned Subsidiary
Vertical FDI
- occurs when foreign investors break up their production processes by location. This allows them to locate difference activities in specific regions and benefit from natural resource endowment and or economies of scale. Many of these inventors are resource-seeking or strategic-asset seeking, but they can also be efficiency-seeking
Conglomerate FDI
- multinational whose FDI is often already structured horizontally and vertically. This type of multinational enters an industry or multiple industries that are unrelated to its existing domestic business
