Chapter 1. Introduction of International Finance

MODULE OUTLINE
Nguyen Thi Dieu Chi. Assoc. Prof – Course of International Finance
Chapter 1. Introduction of International Finance

Chapter 2. International Monetary System
Chapter 3. Balance of Payments
Chapter 4. Fundamentals of exchange rate
Chapter 5. Foreign Exchange Market
INTERNATIONAL FINANCE Chapter 6. International Capital Market
School of Banking and Finance

Nguyen Thi Dieu Chi (Assoc. Prof.) 2
1 2
REFERENCES ASSESSMENT
Nguyen Thi Dieu Chi. Assoc. Prof – Course of International Finance Nguyen Thi Dieu Chi. Assoc. Prof – Course of International Finance
1. Cheol S. Eun & Bruce G.Resnick, International Financial  10% attendance (attend class, contribute for lessons…)
Management, 7th edition, McGraw-Hill Education.
2. Jeff Madura, International Financial Management, 10th  20% mid term exams (2 exams)
edition, South Western.  20% team project (Maybe replace by exams)

3. Keith Pibeam, International Finance, 3rd, Palgrave
 50% final exams
Macmillan
4. Maurice D. Levi, International Finance, 4th, Routledge
5. Handouts
6. Related Readings
3 4
3 4
EXAMS TEAM PROJECT

There will be three (3) tests during the semester. Two midterm tests The purpose of this project is to stimulate students
and one final test. participating in lessons relating international finance, therefore
each team must read lessons basing on module outline at home and
No makeup exams will be given, If you have to miss an exams, the
present them in front of the class.
instructor must be notified before the exams
Your midterm report should include (at least):
The exams are used books and notes. You may bring your 1. Present basic issues of the chapter which will be introduced in
calculator(s). Any other electronic devises (e.g.cell phones, PDAs, that day.
MP3 players, and laptop computers) are not allowed during the 2. Applying and connecting lesson's issues with realities of
exams. international financial market in Vietnam and the World.
5 6
5 6
1
TEAM PROJECT
Deadlines:
 Soft copies (words + slides) should be sent to my email
at chintd@neu.edu.vn before the day of presentation
Hard copies (words + slides) will be submitted on the
Chapter 1
day of presentation. INTRODUCTION OF
INTERNATIONAL FINANCE
School of Banking and Finance

7 Nguyen Thi Dieu Chi (Assoc. Prof.)
7 8
Chapter One Outline What’s special

about “International Finance?
What’s special about “International  Foreign Exchange Risk

1 Finance?
 Political Risk
2 The origin of International Finance
 Market Imperfections
 Expanded Opportunity Set
3 Definition of International Finance
4 Globalization of the World Economy:

Major Trends and Developments
9 10
What’s special What’s special

about “International Finance? about “International Finance?
Monthly Percentage Change in Japanese Yen—U.S.

• Foreign Exchange Risk
Dollar Exchange Rate
– This is risk that foreign currency profits may evaporate 15
in dollar terms due to unanticipated unfavorable
10
exchange rate movements.
Percentage Change
5
– Suppose $1 = ¥100 and you buy 10 shares of Toyota at
¥10,000 per share. One year later the investment is 0
worth ten percent more in yen: ¥110,000. -5
– But, if the yen has depreciated to $1 = ¥120, your -10
investment has actually lost money in dollar terms.
-15
Copyright © 2014 by the McGraw- 1-11 Copyright © 2014 by the McGraw- 1-12
Hill Companies, Inc. All rights Hill Companies, Inc. All rights
11 12
2
What’s special What’s special
about “International Finance? about “International Finance?
 Political Risk Market Imperfections
Sovereign governments have the right to regulate the  Legal restrictions on the movement of goods, people,
movement of goods, capital, and people across their and money
borders. These laws sometimes change in unexpected  Transactions costs
ways.  Shipping costs
 Tax arbitrage
13 14
What’s special The origin of International Finance

about “International Finance?
Expanded Opportunity Set  Development of International Trade
 It doesn’t make sense to play in only one corner of the  Movement International capital sources
sandbox.  Cooperation among nations in many fields and sectors:

Economics, Culture, Politics…
 True for corporations as well as individual investors.
 Globalization
Copyright © 2014 by the McGraw- 1-15
Hill Companies, Inc. All rights
15 16
Definition of International Finance Globalization of the World Economy:

Major Trends and Developments
International finance (also referred to as international monetary

economics or international macroeconomics) is the branch of financial  Emergence of Globalized Financial Markets
economics broadly concerned with monetary and macroeconomics
interrelations between two or more countries.  Emergence of the Euro as a Global Currency
International finance research deals with macroeconomics; that is, it is
concerned with economies as a whole instead of individual markets.  Europe’s Sovereign Debt Crisis of 2010
International finance examines the dynamics of the global financial
 Trade Liberalization and Economic Integration
system, international monetary systems, balance of payments, exchange
rates, foreign direct investment, and how these topics relate to international  Privatization
trade.
Financial institutions and companies that conduct international finance  Global Financial Crisis of 2008-2009
research include the World Bank, the International Finance Corporation
(IFC), the International Monetary Fund (IMF) and the National Bureau of
Economic Research (NBER).
17 18
3
Globalization of the World Economy: Globalization of the World Economy:
Major Trends and Developments Major Trends and Developments
Europe’s Sovereign-Debt Crisis of 2010 The Greek Drama

 In December of 2009 the new Greek government revealed that
its budget deficit for the year would be 12.7% of GDP, not the
3.7% forecast.
 Investors sold off Greek government bonds and the ratings
agencies downgraded them to “junk.”
 While Greece represents only 2.5% of euro-zone GDP, the
crisis became a Europe-wide debt crisis.
 The challenge remains that fiscal indiscipline of one euro-zone
country can escalate to a Europe-wide crisis.  Greece paid no premium above the German rate until late fall 2009.
 The Greek interest rate rose until the bailout package on May 9.
19 20

Economic Integration Liberalization of Protectionist Legislation

 Over the past 50 years, international trade increased about  The General Agreement on Tariffs and Trade (GATT) is a
twice as fast as world GDP. multilateral agreement among member countries that has
reduced many barriers to trade.
 There has been a change in the attitudes of many of the
 The World Trade Organization has the power to enforce the
world’s governments, who have abandoned mercantilist views rules of international trade.
and embraced free trade as the surest route to prosperity for  On January 1, 2005, the era of quotas on imported textiles
their citizenry. ended.
 This is an event of historic proportions.
21 22

NAFTA Privatization
 The North American Free Trade Agreement (NAFTA) called for  The selling of state-run enterprises to investors is also known as
phasing out impediments to trade between Canada, Mexico, and “denationalization.”
the United States over a 15-year period beginning in 1994.  Privatization is often seen in socialist economies in transition to
 For Mexico, the ratio of export to GDP has increased dramatically market economies.
from 2.2% in 1973 to 31.7% in 2011.  By most estimates, this increases the efficiency of the enterprise.
 The increased trade has resulted in increased numbers of jobs and  It also often spurs a tremendous increase in cross-border
a higher standard of living for all member nations. investment.
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4
Chinese Privatization Global Financial Crisis of 2008—2009

 State-owned enterprises have been listed on organized stock  The “Great Recession” was the most serious, synchronized
exchanges. economic downturn since the Great Depression of the 1930s.
 More than 1,500 companies are currently listed on China’s  Factors included:
stock exchanges.  Households and financial institutions borrowed too much and
 The Chinese government still retains the majority stakes in took too much risk.
most public firms.  This risk was repackaged with securitization, and so defaults
 Chinese citizens can buy “A” shares, while foreigners are on subprime mortgages in the U.S. came to threaten the
limited to “B” shares. solvency of a teacher’s retirement plans in Norway.
25 26

Global Financial Crisis of 2008—2009 Multinational Corporations

 A multinational corporation (MNC) is a firm that has been
incorporated in one country and has production and sales
operations in other countries.
 There are about 60,000 MNCs in the world.
 Many MNCs obtain raw materials from one nation, financial
capital from another, produce goods with labor and capital
equipment in a third country, and sell their output in various
During the course of the crisis, the G-20 emerged as the premier forum for other national markets.
discussing international economic issues and coordinating financial regulations
and macroeconomic policies
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Q&A
29
29

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MODULE OUTLINE

Nguyen Thi Dieu Chi. Assoc. Prof – Course of International Finance

Chapter 1. Introduction of International Finance

School of Banking and Finance

edition, South Western.  20% team project (Maybe replace by exams)

EXAMS TEAM PROJECT

School of Banking and Finance

Chapter One Outline What’s special

What’s special about “International  Foreign Exchange Risk

4 Globalization of the World Economy:

What’s special What’s special

Monthly Percentage Change in Japanese Yen—U.S.

 Political Risk Market Imperfections

What’s special The origin of International Finance

Expanded Opportunity Set  Development of International Trade

sandbox.  Cooperation among nations in many fields and sectors:

Copyright © 2014 by the McGraw- 1-15

Hill Companies, Inc. All rights

Definition of International Finance Globalization of the World Economy:

International finance (also referred to as international monetary

Europe’s Sovereign-Debt Crisis of 2010 The Greek Drama

Globalization of the World Economy: Globalization of the World Economy:

Economic Integration Liberalization of Protectionist Legislation

Globalization of the World Economy: Globalization of the World Economy:

Chinese Privatization Global Financial Crisis of 2008—2009

Globalization of the World Economy: Globalization of the World Economy:

Global Financial Crisis of 2008—2009 Multinational Corporations

Nguyen Thi Dieu Chi. Assoc. Prof – Course of International Finance

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