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Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
Part 4 finance class summer 2010 forum nexus
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Part 4 finance class summer 2010 forum nexus

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  • 1. Class #4 Last class in Spain
  • 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 at the university Faculdade Boa Viagem . 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. Brian Butler is a specialist in international economic analysis, and is founder of the prestigious “GloboTrends“ ( www.globotrends.com ) online economics site, which has been featured as syndicated content on Nouriel Roubini’s RGE Monitor, Emerginvest.com, Business Week Exchange, Wikinvest.com, and other leading news outlets. http:// globotrends.pbworks.com / , http:// blog.globotrends.com /
  • 4. Lecture Schedule* * Does not include professional visits, *Subject to change, modification without warning
    • Tues 22 th – boat to Greece
    • Mon 26 th – Athens
    • Tues 27 th – Rhodes
    • Wed 28 th – Rhodes
    • Thurs 29 th – Rhodes EXAM
  • 5. Observations while in Spain…
    • This class –
    • Each student - tell one thing about Spanish economy ( or about the Euro, Greece, etc ) they noticed so far + class discuss
    • Note: observations should come from reading ( wall street journal , etc)… any other sources?
  • 6. Review…
  • 7. Who can tell me… what is the difference between a liquidity crisis, and a solvency crisis for banks?
  • 8. Liquidity Solvency Money flows? Enough $? (to cover short term debts?) (more than expenses?) Who can tell me… what is the difference between a liquidity crisis, and a solvency crisis for banks?
  • 9. Competitive Devaluations Dr. Kishore Dash, January 20, 2007 “ Beggar thy neighbor” Last class we talked about “competitive devaluations”… what did we mean? When was this a problem? What is the danger?
  • 10. http://mohammedfikri.files.wordpress.com/2010/02/bretton_woods_sign.jpg Who can tell me what happened at Bretton Woods ? Did the financial world become more or less stable afterward? When did it fail? Why?
  • 11. “ As Good as Gold” Dr. Kishore Dash, Thunderbird, January 20, 2007
    • U.S. Dollar Pegged to Gold ($35 per ounce)
    • All Other Currencies Pegged to the dollar
    During the Bretton Woods era…
  • 12. Fixed vs. Flexible exchange rates
    • What system is Better? Why?
      • Groups of 2-3 students, answer
  • 13. Brief History – Key points
    • Key point: there is NO “best” system
    • It all depends on what you want to achieve…
    • History: Cycle from Fixed to Flexible to Fixed to Flexible……(future?)
    Fixed Fixed Flexible Flexible The gold standard (~1850–1914) Fixed exchange rates during the 1920s Great Depression era Post WWII Bretton Woods / IMF system (1944–1971) 1970’s –today: since U.S. left the gold/dollar standard ?????
  • 14. Brief History – Key points
    • QUESTION:
      • Why change from flexible to fixed? (give 1 reason)
      • Why change from fixed to flexible?
    Fixed Fixed Flexible Flexible The gold standard (~1850–1914) Fixed exchange rates during the 1920s Inter-war period Great Depression era Post WWII Bretton Woods / IMF system (1944–1971) 1970’s –today: since U.S. left the gold/dollar standard
  • 15. Brief History – Key points
    • ANSWER:
      • Why change from flexible to fixed?
        • CONTROL, STABILITY, LOWER INFLATION, END CHAOS
        • Note: Too chaotic in depression… so fixed for stability
        • Note: Argentina = fixed to dollar was “brilliant” at the time…but should have dropped sooner (not just in 2002)
      • Why change from fixed to flexible?
        • EASE ADJUSTMENT PROCESS, IMPROVE LOCAL MONETARY CONTROL, INCREASE GLOBAL FLOW OF FUNDS
  • 16. FIXED system…
    • KEY QUESTION:
      • Under a fixed system, how do you increase exports?
            • … .Group answer
  • 17. FIXED system…
    • Answer
      • need to decrease prices, wages
      • So exports more competitive
      • Can’t adjust FX rates, so adjustment has to be painfully with wages, prices
    • KEY POINT:
      • adjustment in fixed system is = painful process, slow, very unpopular!
      • political
  • 18. What will the future hold? ….Fixed vs. Flexible ?
  • 19. What will the future hold? ….Fixed vs. Flexible ?
    • Future… if crisis brought terrible volatility…
    • Will we move toward era of FIXED FX?
      • emerging markets DOLLARIZE?
      • More countries to join the EURO?
      • US / euro move to fixed?
      • New Breton Woods?
    • Or, move toward more flexibility?
      • “ Dollar Bloc” move toward flexibility?
      • Europe abandon the Euro?
      • Answer: no body knows what will happen, but HISTORY tells us the CHANGE = the only CONSTANT!!
  • 20. Take away: Key points
    • History: systems change
    • Business leaders NEED to watch carefully for SHIFTS in political attitude, and be READY for potential shifts in the system
    • Protect yourself!!
    Fixed Fixed Flexible Flexible The gold standard (~1850–1914) Fixed exchange rates during the 1920s Great Depression era Post WWII Bretton Woods / IMF system (1944–1971) 1970’s –today: since U.S. left the gold/dollar standard ?????
  • 21. Mundell Trilemma Decisions countries must make…
  • 22. Difficult Choices… the “Mundell Trilemma”
    • Countries face a trade-off when deciding whether to fix or be flexible
    • Can only have 2 of the following 3 …
      • Monetary policy independence (interest rates)
      • Fixed exchange rates (predictable, stable)
      • Free flow of money (access to global capital)
  • 23. Mundell Trilemma
    • example of USA - Country wants:
    • Monetary Policy control (US wants to have control of interest rates to heat-up / slow-down economy)
    • Open access to international finance (US wants access to external funding, example from China)
    • Fixed, predictable exchange rates (US would like this, but according to the Mundell Trilemma, they need to give up one, and this is the one that the US lives without)
  • 24. Mundell Trilemma
    • example of Spain joining Euro-Zone - Country wants:
    • Group assignment: discuss which 2 of 3 Mundell Trilemma options that Spain has opted to have, and which 1 of 3 that Spain had to give up (by electing to join the Euro-zone)
  • 25. Mundell Trilemma
    • Country wants ( example of Spain joining Euro-Zone )
    • Open access to international finance (taken as a given, assumed)
    • Fixed, predictable exchange rates (Spain gets this by joining Euro-Zone)
    • What’s left over? (ie. What did they have to give up?). What does this mean for Spain? Greece? Ireland?
  • 26. Review:
    • We talked about fixed and flexible exchange rates, monetary policy, controls of global capital flows, the threats to the Euro, devaluation, “beggar thy neighbor”, competitive devaluations, and more…
    • Any thoughts? questions? (this will be on the exam)
  • 27. GROUP ASSIGNMENT
    • Write down:
      • According to the Mundell Trilemma, what are the 3 things that countries want to achieve?
      • What 2 of 3 items did Spain elect to maintain? (which 1 did they give up?)
  • 28. GROUP ASSIGNMENT
    • Write down:
      • After WWII, at the Breton Woods conference, which 1 of 3 was given up (by the USA, and most western countries)?
  • 29. China + Mundell Trilemma
    • China:
      • Which 2 of 3 that they have selected. Who can guess? Why did they choose these 2? (and not the 3 rd )?
      • Hint: peg with dollar
    • (do you think it will last 20 years from now?)
  • 30. International money markets Arbitrage + international money markets
  • 31. Borrowing in Foreign Currencies…. Where would you prefer to borrow?
    • You have a factory in Brazil, and want to borrow money to expand. You could…
    • Borrow money locally at 10%
    • Borrow money abroad (in US) at 5%
    • Which would you choose?
    • What is the risk of borrowing abroad (in the US)? – general comment 20 words or less
    • Note: fictional data based on current loan rates Brazil…
    • LIBOR + 1.5% for US = 2.5+1.5 = 4%
    • CDI + 2% for Brazil = 9.75 +2 = 11.75%
  • 32. New problem…
  • 33. Question: If you were a US based investor, with dollars to invest for 12 months…..where would you choose to deposit your money (to make the most return)? Note: You can assume you have an account with a bank in London (HSBC, etc)… and its easy to switch from one account to the other (click of a button)
  • 34. Where would you invest?? International Money Market Rates (Bid Side) United States dollar England sterling Europe euro Switzerland franc Japan yen Eurocurrency Rate LIBOR 12 months 3.2% 6.0% 5.3% 3.2% 1.1%
  • 35. Right?? … maybe not!! International Money Market Rates (Bid Side) United States dollar England sterling Europe euro Switzerland franc Japan yen Eurocurrency Rate LIBOR 12 months 3.2% 6.0% 5.3% 3.2% 1.1%
  • 36. Need to consider….
    • You might be temped to choose the England (sterling) option of 6% because it’s the highest…
    • but that currency might be expected to lose value (depreciate) over the next year…wiping out the expected gains.
  • 37. Need to consider….
    • Answer: it DEPENDS not just on the interest rate, but also on the expected change in foreign exchange rate as well.
  • 38. Which would you choose now?? International Money Market Rates (Bid Side) United States dollar England sterling Europe euro Switzerland franc Japan yen Eurocurrency Rate LIBOR 12 months 3% 6.0% 5% 3.5% 1.1% Expected appreciation / depreciation vs. US Dollar to EQUATE choices… x -3% -2% -0.5% +1.9%
  • 39. Answer…
    • You wouldn’t care (all investment options would appear neutral)
    • Foreign exchange markets are in “equilibrium”
  • 40. Controlling the economy 2 tools – monetary + fiscal policy
  • 41. Monetary vs. Fiscal Policy
    • Group assignment;
    • Who can describe the difference?
  • 42. Monetary vs. Fiscal Policy
    • Monetary Policy:
      • Think “interest rates”,
      • Central Bank (FED, ECB, etc)
      • Issue: inflation
      • Milton Friedman
    • Fiscal Policy
      • Think “government spending”
      • Fiscal Stimulus
      • Issue: budget deficits
      • John M. Keynes
  • 43. Fiscal Policy
    • Fiscal Policy
      • Think “tax & spend”
      • Trouble is = gov’t often spends, but forgets about the tax part.
      • Democracy, voters, upcoming election
      • Question- if government spends, doesn’t tax enough, runs deficits, and gets into debt trouble, what can they do?..... Leads to our discussion on the IMF (Breton Woods institution)
  • 44. Monetary policy
    • “ interest” = cost of money
    • Increase interest = increased cost of money
        • Leads to slow down of economy
    • Decrease interest = decreased cost of money
        • Leads to speed up of economy
  • 45. Monetary policy – to speed up economy (lower interest rates, print money) http://www.daily-bourse.fr/images/analyses/2009/03/30/Cartoon%20Emergency.gif
  • 46.  
  • 47. Monetary policy
    • Group Question:
      • “ why would a government EVER want to increase interest (increase the cost of money) and SLOW down the economy?” answer, turn in, then discuss
  • 48. Inflation
    • 2 ways to think about it:
      • A general rise in prices (ok, but not useful)
      • A decrease in the value of money (better)… less purchasing power for $1 in future (than now)
        • Example: $1 will buy 1 apple now, but only 1/10 th of an apple in the future. This is inflation! Money is worth less (in terms of real goods) in the future
        • Question: if you think your money will be worth less in the future, what would you do today?

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