Objectives
To identify factors that have led to the prominence of international finance
To explain the role of the financial manager
To verify the internationalisation of finance
To identify the developments leading to the formation of the present financial environment
To examine the causes and consequences of the global financial crisis

Introduction
why we study IF?
International finance as studied here deals with the financial operations of business firms in an environment of open and integrated financial markets.
The background
The world of finance has changed as a result of the global financial crisis.
The importance of international finance 
International finance has assumed increasing importance at an accelerating rate.
US was using Bretton Woods system before 1971.
US$ is an equivalent of gold
The importance of international finance (cont.)
Things started to change with the collapse of the Bretton Woods system of fixed exchange rate in Aug 1971
Before the decision, US was printing $35 per ounce gold reserved
       
The emerge of International , multinational, global and transnational firms
These developments have given prominence to international finance. The field has become concerned with the very important issues of exchange rate determination and the sources and consequences of exchange rate volatility.
These issues are significant for international firms, now that the economic and financial environment makes it viable and desirable for them to expand the scope of international operations.
This has led to the emergence of multinational firms and transnational firms.

The risk of exchange rate volatility not only affect business firms with international operations, but also for domestic firms.
E.g. AUD ↑, more foreign competitors come to Aust. to threaten local business.
Differences between international , multinational, global and transnational firms

International companies are importers and exporters, they have no investment outside of their home country.

Multinational companies have investment in other countries, but do not have coordinated product offerings in each country.

Differences between international , multinational, global and transnational firms (cont.)

Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets.
Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.

International interdependence and examples
What happens in the financial markets of other countries is bound to show up in domestic markets.
The micro aspects of international finance
The micro aspects pertain to the financial operations of business firms, including financing, investment, hedging, arbitrage and speculation

Financing
Investment
Hedging

Hedging, arbitrage and speculation
Speculation, on the other hand, is a type financial strategy that involves a significant amount of risk. Financial speculation can involve the trading of instruments such as bonds, commodities, currencies and derivatives. Speculators attempt to profit from rising and falling prices
The macro aspects of international finance
The macro aspects pertain to the international monetary system and the determination of interest and exchange rates
E.g. RBA (Reserve Bank of Australia) decreases interest rate to boost consumption, to encourage consumers make payments by instalment as the economics downturn in Australia

Benefits and costs of international trade
Benefits
The extension of the market
More consumers and higher profit
Costs
Foreign competition
Foreign exchange risk
from uncertain exchange rates
Country risk
from economic, political and social factors
International finance and the role of the financial manager
The financial manager needs to be concerned about:
Fluctuations in exchange and interest rates
Balance-of-payments difficulties
Financial contagion
Real life examples
British company – Beecham Group
Raised a loan of CHF100 million in 1971
ER is 9.87 CHF/GBP at that time

When the repayment was due in 1976
ER is 4.4 CHF/GBP

The depreciation of the pound gave an additional cost of GBP12.59m (22.72-10.13m) in principal.

Knowledge needed by the financial manager
Major economic indicators
Government policies
The channels and effects of contagion
Foreign exchange risk management
Factors affecting the demand for the firm’s products
Indicators of the internationalisation of finance
International bank lending
Securities transactions with foreigners
Flows of portfolio investment and FDI (Foreign direct investment )
Trading volume in the FX market
The percentage of FX trading conducted with cross-border counterparties
Deterioration of the US external position
The US external position has deteriorated, turning it from a surplus to a deficit of current account in 1970s.
A persistent deficit was continuing until the present time
The reason was the massive military expenditure.
The US budget was in deficit and had to be financed.
Low saving ratio → sold treasury bonds to borrow abroad.
Interests payments are recorded on the current account.

The current account
The current account balance is one of two major measures of the nature of a country's foreign trade.

This records all transactions that involve a transfer of goods and services or a direct transfer of income.

The difference between imports and exports is known as the ①balance on merchandise trade.
If negative, imports exceed exports – trade deficit
Conversely, trade surplus

The current account (cont.)
Net services records the freight, insurance and other charges associated with buying and selling commodities.
②The net services balance is the difference between the amount the domestic country spends on these services in other countries and the amount foreign residents spend on them domestically.
③The net income balance comprises direct income payments, such as interest, dividend and royalty payments, and also labour and property income.

The current account (cont.)
④Current transfers record one-off transactions in the current account that aren’t easily classified elsewhere,
for example, an amount of money as a gift from a foreign relative received by Australian.

The balance of the ①merchandise trade, ②net service, ③net income and ④net current transfers gives the current account balance.
When the balance is negative, it is known as a current account deficit.
When the balance is positive, it is known as a current account surplus.

The structure of the current account
Current account balance (US)
Current account balance (Japan)
Current account balance (Australia)
The international use of non-dollar currencies
In the past, the US dollars is dominated currency in the worldwide.
The US dollar’s use has declined with respect to trading volume in the FX market, the invoicing of trade, the holding of reserves, international loans and international bonds
The emergence of the euro
The importance of CNY
There is no dominated currency today
Integration, deregulation and globalisation
There has been a trend towards deregulation and integration of financial markets
Globalisation has emerged due to increasing market integration
Market integration
A country’s financial markets are integrated with other financial markets if
Capital is free to move into and out of countries
Domestic assets are close substitutes for foreign assets.
In the aftermath of the global financial crisis, more thought is given to the costs and benefits of globalisation and deregulation

Financial crises and contagion
Financial crises have become widespread in the post-war period, particularly since the 1980s
Major examples are the EMS (European Monetary System)crisis, Asian crisis, Mexican crisis, Argentine crisis and the global financial crisis
The global financial crisis 
The global financial crisis has resulted from the US subprime crisis, leading to the “Great Recession” of 2009
This crisis is far more complex than earlier crises because financial innovation and securitisation have created complex securities whose risk profile is difficult to assess

Origin of the subprime crisis
Mortgage originators provide loans to low-quality borrowers

The players and causes
Mortgage originators
    – creditors, banks, agency
Rating agencies
      – who rate the different levels of credibility from low to high for businesses
Policy makers and regulators
The role of securitisation
The role of globalisation

Simple Case Study : Why USA always force Chinese government to make appreciation of CNY instead of controlling? Analyse with graphs
Current account balance (US)
The trend of Exchange Rate of S(CNY/USD)
Analysis
In 2004, the exchange rate of CNY/USD is 8.25 from graph



Analysis (cont.)
In 2008, the exchange rate of CNY/USD is 7.3 from graph