CHAPTER 1: INTRODUCTION TO
INTERNATIONAL FINANCE
1. Introduction to International finance
2. Financial instruments
3. International financial market


1. Introduction to International finance
1.1. Why is International Finance Important?

19/12/10

B02013 - Introduction to
International finance

2


Why is International Finance Important?
 Companies (and individuals) can raise funds,
invest money, buy material, produce goods and
sell products and services overseas.
 With these increased opportunities comes
additional risks. We need to know how to identify
these risks and then how to control or remove
them.

19/12/10

B02013 - Introduction to
International finance

3


1.2. What is different about international
Financial Management?
1.2.1. Culture, history and institutions
1.2.2. Corporate governance
1.2.3. Foreign Exchange Risk
1.2.4. Political Risk
1.2.5. Market Imperfections
1.2.6. Expanded Opportunity Set

19/12/10

B02013 - Introduction to
International finance

4


2. Financial instruments:
•
•
•
•

Cash
Shares
Bonds

Other cash instruments such as loans and
deposits
• Derivative instruments

19/12/10

B02013 - Introduction to
International finance

5


3.

International Financial Market
3.1.International capital transfer.
• Unilateral transfer
• Bilateral transfers
• Multilaterals transfer.

19/12/10

B02013 - Introduction to
International finance

6


3.2. Classification of Financial Market
3.2.1. Form of Financial Instruments


• Equity market
• Bonds market
• Foreign exchange markets

19/12/10

B02013 - Introduction to
International finance

7


3.2.2. Length of Maturity
– Currency market
– Capital market
3.2.3. Kind of Trading:
- Primary Market
- Secondary Market
- Collateralized Mortgage Obligations
- Future contracts.

19/12/10

B02013 - Introduction to
International finance

8



Discussion questions
• What are the Advantages and
disadvantages of financial instruments?
• Update financial news

19/12/10

B02013 - Introduction to
International finance

9


CHAPTER 2
THE INTERNATIONAL MONETARY
SYSTEM
Chapter Objectives:
1.
Evolution of the International Monetary
System
2.
International institutions systems
3.
International financial adjustment

12/19/2010

B02013 - The international Monetary
system


1


1. Evolution of the International Monetary
System
•
•
•
•
•

Bimetallism: Before 1875
Classical Gold Standard: 1875-1914
Interwar Period: 1915-1944
Bretton Woods System: 1945-1972
The Flexible Exchange Rate Regime: 1973Present

12/19/2010

B02013 - The international Monetary
system

2


1.1. Bimetallism: Before 1875
• A “double standard” in the sense that both gold
and silver were used as money.
• Both gold and silver were used as international
means of payment and the exchange rates

among currencies were determined by either
their gold or silver contents.

12/19/2010

B02013 - The international Monetary
system

3


1.2. Classical Gold Standard: 1875-1914
• During this period in most major countries.
• The exchange rate between two country’s
currencies would be determined by their relative
gold contents.

12/19/2010

B02013 - The international Monetary
system

4


1.3. Interwar Period: 1915-1944
• Exchange rates fluctuated as countries widely
used “predatory” depreciations of their
currencies as a means of gaining advantage in
the world export market.


12/19/2010

B02013 - The international Monetary
system

5


1.4. The Bretton Woods system
• Under the Bretton Woods system, the U.S. dollar
was pegged to gold at $35 per ounce and other
currencies were pegged to the U.S. dollar.
• The Bretton Woods system was a dollar-based
gold exchange standard.

12/19/2010

B02013 - The international Monetary
system

6


1.5.The Flexible Exchange Rate Regime:
1973-Present
• Flexible exchange rates were declared
acceptable to the IMF members.
• Gold was abandoned as an international
reserve asset.


12/19/2010

B02013 - The international Monetary
system

7


2. International institutions systems
2.1.The financial institutions:
• Stock market
• All funds: superannuation, Mutual Funds…..
• Banks
• Financial institutions of government.

12/19/2010

B02013 - The international Monetary
system

8


2.2. International institutions:
-

Eurocurrency market
Bank for international settlements
World Bank

International Finance Corporation
International Development Association (IDA)
International Monetary Fund (IMF)
Asian Development Bank

12/19/2010

B02013 - The international Monetary
system

9


3. International financial adjustment
3.1. Structural Adjustment Facilities.
3.2. The Basel Committee on Banking
Supervision
3.3. International banking facilities (IBF)
3.4. IMF conditionality

12/19/2010

B02013 - The international Monetary
system

10


Mini-Case Questions: The Revaluation of
the Chinese Yuan

• Many Chinese critics had urged China to revalue
the yuan by 20% or more. What would the
Chinese yuan’s value be in US dollars if it had
indeed been devalued by 20%?
• Do you believe that the revaluation of the
Chinese yean was politically or economically
motivated?

12/19/2010

B02013 - The international Monetary
system

11


CHAPTER 3: INTERNATIONAL FINANCE
AND TECHNOLOGY TRANSFER
1. International investment
2. The market for foreign exchange
3. International banking and money market

12/20/2010

B02013 - INTERNATIONAL FINANCE
AND TECHNOLOGY TRANSFER

1



1. International investment
1.1.Foreign direct investment (FDI).
• Forms of FDI : export and Multinational
corporation.
• Reasons for FDI.

12/20/2010

B02013 - INTERNATIONAL FINANCE
AND TECHNOLOGY TRANSFER

2


1.2. The impact of foreign direct investment (FDI)
on economic growth.
1.3. The role of FDI:
Foreign direct investment (FDI) plays a special
role in stimulating the growth of countries’
competitiveness and FDI has the positive
growth effects the economy around the world.

12/20/2010

B02013 - INTERNATIONAL FINANCE AND
TECHNOLOGY TRANSFER

3



1.4. International portfolio investment:
• Definition of international portfolio investment.
• The benefits of international portfolio investment.
- Advantages.
- International diversification.

12/20/2010

B02013 - INTERNATIONAL FINANCE AND
TECHNOLOGY TRANSFER

4


2. The Market for Foreign Exchange
2.1. Function and Structure of the FOREX
Market
– FX Market Participants
– Correspondent Banking Relationships

12/20/2010

B02013 - INTERNATIONAL FINANCE
AND TECHNOLOGY TRANSFER

5