Some Caveates

** In-class rules
1. Be sure that the material have been read before in-class learning
2. Be focusing and imaginative in the process of in-class learning
3. Ask questions for clarification and answer to my questions
4. Be on time and present because you are not able to catch up after being absent
5. I may add a lot to the materials, so please take notes
** Material Specificity
1. Many shorthand, so be adapted
2. Generally, models are preferred to wording
** Submission
1. Assignment submission must be on time
2. Prepare for its defense at the END of the course
 Chapter 1

INTRODUCTION to

INTERNATIONAL FINANCE

2
 Course Overview
FOREX
IF System MKTs Sourcing
Capital in
IF MKT FOREX Global Markets
Exposure
International
Finance Synthesis
(IF)

Financial
Instruments BoP
PARITY
Financial Int. Inv. condition
Derivatives Decision
 i. What is the IF?

• IF is the study of monetary interaction b/w nations

under the international financial system.

• Because of the IF...

– Balance of payment is changing

– Cross-border financial flows occur such as FDI & Portfolio investment

– Variables like ER & IR,  are changing daily

4
 ii. Learning outcomes from the course

• To understand the importance of IF

– Why ΔER, IR-differential, -differential happen
– INF flows, BoP, how IF relates with trade
• To know players in IF, how big they are and how they interact
• To get know the financial instruments

• To understand financial variables

5
 iii. Benefits of the course

• You are able to make buy/sell decision when you understand

ΔER, IR-differential, -differential, and Δ (asset value).
• You can make prediction because you understand the domino
effects/contagion, and systemic risk caused by volatile IF MKT,
then make the right choice.
• IF shed light on macroeconomic situation (variables), and ER,
IR, inflation, jobs, ΔGDP, bond/stock price, government budget.
–INF variables are macroeconomic variables.
6
iv. Growing importance of IF

• IF flows have changed very fast with upward trend.

– Flow-in vs flow-out,

– before the crisis, INF flow is BIG, during crisis it is small

• It helps allocate capital worldwide

• IF creates opportunities and also challenges

* So, you have to better understand the way the F-MKTs work.

7
v. Factors behind the growth of IF

• Growth of International Trade (finance associated to trade)

• Growth of Multinational Corporations (IF associated to FDIs and

M&A activity) and Multinational Banking

• Growth of the eurodollar MKT

• Growth of global saving and risk-return trade-offs

• Global trade now accounts for about 60% of world GDP (2019)

Globalization? Multinational Corporations? Eurodollar? 8

 Trade (%
Year
of GDP)

2019 60.27%

2018 59.47%

2017 57.89%

9
Growth of MNC
• Due to UN estimate, there
are around 100,000 MNCs
• The top 100 being
responsible for ≈ 20% of
the world’s production.
• MNCs are the cause of
FDI, which means
producing abroad (instead
of export).
Growth of Multinational Banking
• Banking becomes a MN through
opening of branches abroad by the way
of either the acquisition or new
establishment.
• In CAM thare are around 40 banks,
mostly are foreign banks.
• Some countries put restrictions to the
entry of foreign banks in order to protect
the domestic banks
10
World's largest MNCs, 2011
Rank Companies Revenue ($M) Profit ($M)
1 Wal-Mart Stores 421,849 16,389
2 Royal Dutch Shell 378,152 20,127
3 Exxon Mobil 354,674 30,46
4 BP 308,928 -3,719
5 Inopec Group 273,422 7,629
6 China National Petroleum 240,192 14,367
7 State Grid 226,294 4,556
8 Toyota Motor 221,760 4,766
9 Japan Post Holdings 203,958 4,891
10 Chevron 196,337 19,024
11 Total 186,055 14,001
12 ConocoPhillips 184,966 11,358
13 Volkswagen 168,041 9,053
14 AXA 162,236 3,641
... ... ...
21 Bank of America* 134,195 -2,238

Source: Fortune 11
Banks in CAM
COMMERCIAL SPECILIZED
ACLEDA Bank PLC First Commercial Bank ANCO Specialized Bank (ASB)

Advanced Bank of Asia Ltd
AGRIBANK
ANZ Royal Bank
Bank of China Limited
Bank of India
BIDC Plc.
Booyoung Khmer Bank
Cambodia Asia Bank Ltd
CIMB Bank PLC
Cambodia Mekong Bank Public Ltd Shinhan Khmer Bank
Cambodian Commercial Bank
Foreign Trade Bank of Cambodia Angkor Capital Specialized Bank (ACSB)
HwangDBS Commercial Bank PLC CAMKO Specialized Bank (CKB)
Kookmin Bank Cambodia PLC Tomato Specialized Bank (TSB)
First Investment Specialized Bank
Krung Thai Bank PLC
(FISB)
Maruhan Japan Bank PHSME Specialized Bank (PHSME)
May Bank Rural Development Bank (RDB)
OSK Indochina Bank
Phnom Penh Commercial Bank
Sacom Bank
Singapore Banking Corporation Ltd

Cambodian Public Bank Union Commercial Bank PLC

Canadia Bank PLC Vattanac Bank Ltd

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 Factors behind Multinational Banking

• Factors that contribute to the internationalization of banking.

1. MKT insight: by operating locally at host countries, a bank can

recognize how the local MKTs works.

2. Serving clients. MNBs follows investors abroad and give them

support (not via a correspondent banks), instead of losing them.

3. Avoiding regulation. Banking sector is the most regulated, so by

operating internationally banks try to soften regulation burden
(e.g.: Reserve requirements, deposit insurance, IR ceilings, etc.)

13
How big are MNBs (2009)
Current Assets % of world % of USA
BANK
Rank US$m GDP GDP
1 BNP Paribas SA , Paris , France 2,675,627 3,8 19,0

2 Deutsche Bank AG, Frankfurt, Germany 2,551,727 3,6 18,1

3 Barclays Bank PLC , London , UK 2,326,004 3,3 16,5

4 Crédit Agricole SA , Paris , France 2.133.810 3,0 15,1

5 Industrial & Commercial Bank of China 2.043.861 2,9 14,5

Limited ,Beijing , China
6 The Royal Bank of Scotlandplc , Edinburgh , UK 2.040.790 2,9 14,5

7 The Bank of Tokyo-Mitsubishi 1.840.587 2,6 13,0

UFJLtd , Tokyo ,Japan
8 China Construction 1.641.683 2,3 11,6
BankCorporation, Beijing ,China
9 JPMorgan Chase Bank National Association , New 1.631.621 2,3 11,6
York , USA
14
The Eurodollar Market

• Eurodollars are USDs that circulate outside USA, mainly refer to

deposits at Banks outside USA, thus are out of the Fed’s control.
• Bank accounts in various currencies exist side-by-side in every
financial center. In CAM you can open a deposit account in KHR
and obtain loan in US $.
• ‘Offshore currencies’ refer to currencies that are treated in MKTs
outside the country of origin. Offshore currency MKT is very big!
offshore currencies may give rise to multiplier effect that raise the supply
of global liquidity. Soft currency? Hard currency?

Reserve currency? Vehicle currency? 15

Factors behind the Growth of the Eurodollar MKT

1. US regulation:

> During the 1960s & 70s - Regulation Q put caps IR that US banks
could pay on deposit. This caused flows of USD to banks outside the
US, esp. to EU. Also most US banks opened branches there.

> Regulation M imposed a high ratio of RRs, which pushed more

offshore operations.

2. Interest equalization tax (1963-1974): a tax on $ loans to foreign

firms, made them to go to eurodollar MKT to avoid the tax.

* Despite the removal of those restrictions, eurodollar MKT continued to grow.

Factors (avoiding regulations) contributed to the growth of the offshore MKT.
16
 Benefits from international financial flow (investment)

• Micro perspective 1: Investors can search for higher returns (e.g. FDI
& Portfolio investmentt in emerging MKT),
• Micro perspective 2: Investors can better diversify risk than he could
do by investing his savings only domestically.
• Macro perspective 1: finance flow from high saving countries
(advanced economies) with low returns, to the low saving ones with
high returns
• Macro perspective 2: foreign debt allows a country to smooth
consumption over time at a desired level.
** Investing internationally is better than investing only at home.
17
The gain from a better allocation of capital

18
Home bias

• Home bias is the propensity when foreign investors prefer to

purchase assets from own countries rather than foreign assets,
especially for the case of equities.

• This phenomenon can (partly) be explained by: (i) own

willingness; (ii) double taxation, (iii) information asymmetries

• None of these explanation is fully convincing, hence economists

speak of a “home bias puzzle”.

• Given the existence of a home bias, there is still much room for
financial globalization!!!

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Financial Instability

• Financial instability is the ‘dark side’ of IF. It may consist of:

- Excess volatility of ERs (amongst major currencies) which

can be disruptive for trade and financial flows;

- Excess volatility in stock & bond MKTs, which makes

difficult to invest;

- Excess instability of financial flows, which giving rise to

bubbles having further economic consequences.

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Financial crises

* In 2007-2010, a Great crises have come in the scene of the IF

and put into doubt the benefits from financial globalization.

• 1982 Latin American Debt Crisis

• 1992 ERM crisis • 1994 Mexican crisis

• 1997 Asian Crisis • 1998 Russian Crisis

• 2000/01 New Economy Bubble Burst

• 2001 Argentina’s financial crisis

• The Great Crisis 2007-2010

• Greece and the Euro Crisis 2011-2012

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The Workings of a Financial Crisis

END of INTRODUCTORY CHAPTER 22