1. FUNDAMENTAL
OF
INTERNATIONAL
FINANCE
Topic 1 : Introduction to
International Finance

2. Why we study International Finance?
• Highly globalized and integrated world economy.
• Production of goods and services has become
globalized
• Financial markets have become highly integrated

3. What is special about
International Finance?
•Three major dimensions set international finance
apart from domestic finance.
•They are:
•1. Foreign exchange and political risks.
•2. Market imperfections.
•3. Expanded opportunity set.

4. Foreign Exchange Risk
• In integrated financial markets, individuals or households may also be exposed
to uncertain exchange rates.
• Cross-border transactions expose firms and individuals to foreign exchange risk
that they would not encounter in purely domestic transactions.
• For examples :
• A drastic depreciation of the Mexican peso against the US dollar in 1994, could
cause a products may become too expensive for Mexican consumers to purchase.
• The Asian currency crisis of 1997 could also cause similar difficulties for companies
exporting to Indonesia, Thailand, and Korea.
• Exchange rate uncertainty will have a pervasive influence on all the majoreconomic
functions, including consumption, production, and investment.

5. Political Risk
• Political risk refers to unexpected changes in tax rules and possible expropriation of
assets held by foreigners.
• Sovereign countries can change the "rules of the game" with no effective recourse for
the affected parties.
• Multinational firms and investors should be aware of political risk in countries without a
tradition of the rule of law.
• The example of Yukos, the largest Russian oil company, shows how political risk can
cause serious damage to international shareholders.

6. Market Imperfection
• Despite increased integration, barriers still hinder free movement of people,
goods, services, and capital across borders.
• Barriers include legal restrictions, high transaction and transportation costs,
information asymmetry, and discriminatory taxation.
• World markets are highly imperfect due to market imperfections.
• Market imperfections motivate MNCs to locate production overseas, such as
Honda establishing facilities in Ohio to circumvent trade barriers.
• MNCs can be seen as a result of market imperfections.
• Imperfections in world financial markets limit investors' ability to diversify their
portfolios.

7. Expanded opportunity set
• Firms can benefit from global markets by expanding their
opportunity set
• Production can be located in any country or region to maximize
performance
• Funds can be raised in any capital market where the cost of
capital is lowest
• Greater economies of scale can be achieved by deploying
tangible and intangible assets globally

8. Goals for International
Financial Management
• Understanding and managing foreign exchange and political risks and coping
with market imperfections are important parts of a financial manager's job in
global markets
• International Financial Management provides financial managers with
fundamental concepts and tools to be effective global managers
• Sound financial management's fundamental goal is shareholder wealth
maximization
• Shareholder wealth maximization means making business decisions and
investments to make shareholders better off financially

9. Goals for International
Financial Management
• Managers may not always pursue the goal of shareholder wealth maximization
if not closely monitored, leading to the agency problem.
• Recent corporate scandals have highlighted the importance of corporate
governance in regulating the relationship between a company's
management and shareholders.
• Corporate governance is a problem in many parts of the world, especially
emerging and transition economies, where legal protection of shareholders is
weak.

10. Activity 1
• Form a group of 3-4
• Find a major regions of the world (e.g. North America,
Europe, Asia, Africa, South America, Australia/Oceania)
and select ONE country from the region.
• List down their major exports, imports, industries, and
currencies.
• Conclude your findings impact of globalization on the
international economy/finance.

11. Globalization of the World Economy:
Major Trendsand Developments
1. Emergence of Globalized Financial Markets
2. Emergence of the Euro as a Global Currency
3. Europe’s Sovereign Debt Crisis of 2010
4. Trade Liberalization and Economic Integration
5. Privatization
6. Global Financial Crisis of 2008–2009

12. Emergence of Globalized Financial
Markets
• 1980s and 90s saw rapid integration of international capital and financial
markets.
• Major countries began to deregulate foreign exchange and capital markets.
• Deregulated financial markets and competition led to financial innovations,
such as currency futures, international mutual funds, and exchange-traded
funds.
• Corporations also played a role in integrating world financial markets by listing
their shares across borders.
• Advances in computer and telecommunications technology, especially
internet-based technologies, gave investors immediate access to news and
information, reducing information costs and transaction costs.

13. Emergence of the Euro as a Global
Currency
• The introduction of the euro in 1999 had a significant impact on
the global financial system.
• The euro has the potential to become another global currency
rivaling the U.S. dollar in international trade and finance.
• The European Central Bank (ECB) formulates the common
monetary policy for the euro zone and is mandated to achieve
price stability.

14. Europe’s Sovereign Debt Crisis of
2010
• The euro's emergence as a global currency was affected by
Europe's sovereign debt crisis.
• Excessive borrowing and spending, with wages and prices rising
faster than productivity, led to Greece's predicament.
• The crisis spread to other weak European economies, especially
Ireland, Portugal, and Spain, leading credit rating agencies to
downgrade their government bonds, making borrowing and
refinancing more costly.

15. Trade Liberalization and Economic
Integration
• International trade is becoming more liberalized at both global and regional levels.
• The General Agreement on Tariffs and Trade (GATT) is a multilateral agreement among
member countries.
• The General Agreement on Tariffs and Trade (GATT) was signed by 23 countries in
October 1947, after World War II, and became law on Jan. 1, 1948.
• The purpose of the GATT was to make international trade easier.
• In 1995, the GATT was absorbed into the World Trade Organization (WTO), which
extended it.
• Economic Integration examples are EU , NAFTA, ASEAN.

16. Privatization
• Economic integration and globalization increased in the 1990s
through privatization.
• Privatization is when a country turns over the ownership and
operation of a business venture to the free market system.
• Privatization has accelerated since the fall of communism in
Eastern Bloc countries.
• Privatization can be seen as a denationalization process, and it
can bring foreign cultural influence.

17. Global Financial Crisis of 2008–2009
• The global financial crisis occurred in 2008-2009 and was triggered by the
collapse of the US housing market and the subprime mortgage industry.
• The crisis spread to other parts of the world, leading to a global economic
recession.
• Governments around the world implemented various measures to stabilize the
financial system, including injecting liquidity into the markets, implementing
new regulations, and recapitalizing banks

18. Global Impact on Covid-19
• COVID-19 caused a global economic recession, with many businesses forced to shut
down or limit operations, leading to widespread job losses and reduced consumer
spending.
• Governments and central banks implemented unprecedented measures to stabilize
their economies, including low-interest rates.
• The pandemic created supply chain disruptions and reduced global trade, leading to
a decline in economic growth and increased inflation.
• Financial markets experienced significant volatility and uncertainty, with sharp drops
followed by rapid recoveries in some sectors.
• Many countries saw increases in public debt and deficits as a result of increased
spending and reduced tax revenues, which could have long-term implications for
economic stability.

19. THANK YOU