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Part 2 forum nexus finance class summer 2011

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  • 1. Brian Butler’s lectures Part #2 Welcome (to Spain, to Catalonia, to the EU, to FORUM-NEXUS!)
  • 2. Brian David Butler Professor of international finance and global entrepreneurship with Forum-Nexus Study Abroad. Guest lecturer with the IQS Business School of the Ramon Llull University in Barcelona, and the Catholic University of Milan . Previously, Brian taught finance, economics and global trade courses at Thunderbird’s Global MBA program in Miami, and worked as a research analyst with the Columbia Business School in New York City. Brian currently lives in Recife, Brazil where he is teaching classes on “Global Entrepreneurship” at the university FBV. A global citizen, Brian was born in Canada, raised in Switzerland (where he attended international British school), educated through university in the U.S., started his career with a Japanese company, moved to New York to work as an analyst, married a Brazilian, and has traveled extensively in Latin America, Asia, Europe and North America. [email_address] LinkedIn/briandbutler Skype: briandbutler
  • 3. Find my slides:
    • www.slideshare.net/briandbutler
  • 4. Expectations:
      • Attend classes – exams will be from lectures, from assigned readings and from guest lecturers/ professional visits
      • Turn in assignments before class
      • Be prepared for class discussions – lots of small group assignments during class
      • Contribute to group assignment (team grading / peer review)
      • No sleeping, no laptops, no phones (sorry) 
      • If your tired… standup, go get a drink, come back
  • 5. review
    • Discussion
  • 6. 1. Homework while in Spain…
    • Be ready for class discussion on today…
    • Each student –tell one thing about Spanish economy they noticed so far + class discuss
      • (source- wall street journal, other)
  • 7. 2. Professional visit review
    • Banco Sabadell; most important in Catalonia
    • What did you learn?
    • Any questions?
  • 8. Quotes for discussion:
    • When talking about the risks of global markets, he said …“ money responds to fear… When political turmoil occurs… money disappears ”
    • Q. How does this relate to our discussion of the “dangers of international finance”? Of “portfolio money”?
  • 9. Potential exam material – covered in professional visit:
    • 2 tier banking - Difference between “banks” like Santander and Sabadell…. and “savings banks” as relates to crisis
    • Banking business model and fragility - Liquidity, Solvency (will discuss today)
    • Regulation in Spain
  • 10. 3. Guest Lecture – yesterday Prof. Ricardo Ubeda, IQS
    • What did you learn?
    • Questions?
    • Confusions?
    • (insults  )
  • 11. Discussion - Questions
    • Q: Who are the “PIGS” of Europe? Why are they called this? What do they have in common?
    • Q. When he said: “When I say Europe, I mean Germany”… what did he mean? Did it sound like Spanish might be upset? What is risk to Spain?
  • 12. Discussion - Questions
    • Q: He said that monetary policy set in Germany might not be appropriate for Spain (one suit jacket for all body sizes). Why is this a problem?
  • 13. Discussion - Questions
    • Q: He said that (for Spain, Greece, etc)… “the Euro is the problem”. Why?
  • 14. Discussion - Questions
    • Other questions?
  • 15. Hedging examples
    • Hedging FX risk
  • 16. Core of our class:
    • International finance = risk
    • We will outline those risks, and offer:
    • Tools to protect
    • Hedging techniques:
      • Forward, Futures, options, etc…
      • tools to PROTECT (and potentially speculate)
  • 17. Small group exercises
    • Break into groups of 2-3
    • Names on paper, keep notes today
    • Turn in ALL problems at end of class (one page for group)
  • 18. Terms you need to know….
    • Appreciation :
      • Currency gets STRONGER vs other
    • Depreciation :
      • Currency gets WEAKER vs other
    • USING USD/ EURO …. If todays rate is 1.4 dollars per euro… GIVE ME AN EXAMPLE OF USD “APPRECIATION” AND USD “DEPRECIATION”
  • 19. Terms you need to know….
    • Appreciation :
      • Currency gets STRONGER vs other
      • Example :
        • US Dollar Appreciates
        • Goes from 2.0 USD per Euro to 1.0 USD per Euro
          • So, it takes LESS US dollars to buy one Euro
        • Goes from 1 usd buys 0.5 Euro…. Now; 1 usd buys 1 Euro
          • So, it 1 USD buys MORE Euros
    • Depreciation :
      • Currency gets WEAKER vs other
      • Example :
        • US dollar Depreciates
        • Goes from 1.0 USD per Euro to 2.0 USD per Euro
          • So, it takes MORE US dollars to buy one Euro
  • 20. Risk - in foreign currency
    • Example:
        • You are a German company … buying a container of furniture from Brazil (to resell at fixed prices in Germany)
        • You agree to pay 100,000 Reais (Brazilian currency) in 6 months to the Brazilian company
        • Assume the currency exchange rate is currently 2:1 (R$ to Euro)
        • How many Euros will you expect to pay in 6 months? (if FX doesn’t change)
    0 6 mo. $R100k
  • 21. Risk - in foreign currency
    • Easy:
        • You expect to owe 100,000 / 2
        • = 50,000 Euros (if FX doesn’t change)
        • But what is the risk???
        • (euro appreciates? Or depreciates?)
        • (BRL appreciates? Or depreciates?)
    0 6 mo. $R100k
  • 22. Risk - in foreign currency
      • Forget the numbers for a minute…
      • Conceptually…You owe foreign currency in the future… What is your risk?
  • 23. Risk - in foreign currency
    • … if the exchange rate goes from 2:1 to 1:1
      • You now need 100,000 Euros… (instead of 50,000 Euros…ouch!!!)
      • Question: how could you have avoided that risk?
  • 24. Avoiding Risk
      • Don’t buy foreign goods (avoid risk)
      • Negotiate contract so currency is based in YOUR currency (transfer risk)
      • How else?
  • 25. Avoiding Risk – tools to use:
    • You could…
        • Convert your money to R$ today…and deposit that money in a Brazilian bank account (deposit hedge)… and pay the Brazilian supplier in 6 mo.
        • Contract with your bank to buy $R forward (sell Euros forward) in 6 months at a fixed rate (approx 2:1) for a fee (forward contract)
        • Buy Future contracts on exchange (if you can find them) to sell Euros forward
        • Buy Options contracts (most expensive, but with option to tear up, don’t execute trade) to sell Euros forward
  • 26.
    • Key lesson of international finance:
    • Currencies change, so…
    • Danger in owing $$ in foreign currencies
    • * Solution: be aware, and hedge to protect!
  • 27. Core of our class:
    • International finance = risk
    • We will outline those risks, and offer:
    • Tools to protect
    • Hedging techniques:
      • Forward, Futures, options, etc…
      • tools to PROTECT (and potentially speculate)
  • 28. Another Hedging example
  • 29. Hedging (to protect against risk)
  • 30. Hedging foreign currency risk
      • Assume… you are a US based company … buying machinery from a company in Germany
      • You agree to pay 1mm Euros in 6 months
      • Assume the currency exchange rate is currently 1.25 USD for each 1 Euro
      • Team assignment:
        • Assume the exchange rate, doesn’t change… how many US dollars do you expect to pay in 6 months?
        • Draw it out…
  • 31. Hedging foreign currency risk
    • Next question: In 10 words or less, describe “What is your currency risk”? (you could be harmed if WHAT happens?... Be specific!!)
    0 6 mo. US$ 1.25mm
  • 32. Hedging foreign currency risk
      • Answer:
        • Risk = US dollar will depreciate (Euro will appreciate)… and you would owe more USD (for same bill in Euros)
        • You always owe 1mm Euros
    • Next question:
      • Assume the exchange rate changes from 1.25 USD$ / Euro… and becomes 1. 5 USD$ / Euro… how many US dollars will you owe in 6 months?
  • 33. Hedging foreign currency risk
    • Example:
      • Answer:
        • Instead of owing $US 1.25mm
        • You would owe $US 1.5 mm
    • Next question :
      • What could you do to avoid that risk?
    0 6 mo. US$ 1.25mm 0 6 mo. US$ 1.5mm
  • 34. Hedging foreign currency risk
      • Answer:
        • Purchase from local US suppliers only (risk avoidance)
        • Change money to Euros today, deposit in Euro bank account, pay liability in 6 mo. ( deposit hedge )
        • Contract with your bank - forward contract to sell dollars (buy Euros) forward in 6 months at specified rate (example , 1.25:1) + fees
        • Similar choices: futures , options , etc…
  • 35. Question -
    • Which do you think is the most expensive way (and least common) to hedge currency risk?