Part 2 forum nexus finance class summer 2011


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Part 2 forum nexus finance class summer 2011

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