W1 - International - Intro

Global Financial Marketplace

• Learning objectives include exploring the global financial marketplace, considering multinational business through comparative advantage, and examining differences between international and domestic financial management.
• The global financial marketplace comprises multinational enterprises, securities and institutions, and the currency market.

Multinational Enterprises (MNE)

• Multinational enterprises are the core unit of multinational financial management.
• An MNE has operating branches, subsidiaries, or affiliates in foreign countries.
• Firms globalize to expand their markets, access resources, and increase efficiency.
• Risks of going global include political instability, exchange rate volatility, and cultural differences.

Currency Market

• Most currencies are quoted against the US dollar, as in "so many units per US dollar".
• The rates at which currency traders buy currency is referred to as the "bid rate".
• The rates at which currency traders sell currency is referred to as the "offer rate".
• The "bid-ask spread" is the difference between the bid rate and the offer rate.
• Some currencies have higher bid-ask spreads than others for varied reasons.

Theory of Comparative Advantage

• The theory of comparative advantage was first proposed by Ricardo.
• Countries should specialize in producing goods in which they are relatively more efficient.
• These countries should then trade with the rest of the world to obtain needed commodities.
• If countries specialize according to comparative advantage, total world production is greater.
• Portugal holds an absolute advantage in the production of both wine and cloth.
• To produce one unit of wine, England must sacrifice 2 units of cloth.
• To produce one unit of wine, Portugal must sacrifice 1 unit of cloth.
• Wine is relatively less costly for Portugal, so Portugal has a comparative advantage in producing wine.
• To produce one unit of cloth, England must sacrifice 1/2 of a unit of wine.
• To produce one unit of cloth, Portugal must sacrifice 1 unit of wine.
• Cloth is relatively less costly in England, so England has a comparative advantage in producing cloth.
• Even if a country has an absolute advantage in producing both goods, both countries could benefit from trade.
• Wine is relatively less costly in Portugal, giving it a comparative advantage in wine production.
• Cloth is relatively less costly in England, giving it a comparative advantage in cloth production.

Benefits of Trade (Example)

• Assume each country has 100 units of resources.
• Prior to trade, each country devotes half of its resources to each good.
• For England before trade: Wine = 50/8 = 6.25, Cloth = 50/4 = 12.5.
• For Portugal before trade: Wine = 50/2 = 25, Cloth = 50/2 = 25.
• World output can be increased if England produces less wine and more cloth, and Portugal produces more wine and less cloth.
• If England devotes all resources to cloth, it can produce Cloth = 100/4 = 25.
• Assume Portugal now devotes 70% of resources to wine and 30% to cloth.
• Portugal produces Wine = 70/2 = 35 and Cloth = 30/2 = 15.
• World output of wine increases from 31.25 to 35, and cloth rises from 37.5 to 40.

International vs. Domestic Financial Management

• Culture and history differ among countries, which impacts financial management.
• Corporate governance structures vary significantly between countries.
• International financial management involves greater foreign exchange and political risks.
• Financial theory and applications must be modified for the global marketplace.
• Specialized and complicated financial instruments become tools of the trade in international finance.

Market imperfections

• MNEs take advantage of imperfections in national markets for products, production factors, and financial assets.
• Imperfections in the product market translate into market opportunities for MNEs.
• Large international firms can exploit competitive factors such as economies of scale, expertise, product differentiation, and financial strength better than local competitors.
• Strategic motives for investing include seeking markets, raw materials, production efficiency, knowledge, and political safety.
• These categories are not mutually exclusive.

Australian Monetary Policy (RBF)

• The Reserve Bank of Australia (RBA) increased the official interest rate from 0.1% to 3.35% between April 2022 and February 2023.
• The RBA will likely continue to increase the interest rate to 4.1% or higher.
• There's a concern that this rate rise will have adverse effects.
• Monetary policy manages economic fluctuations to achieve price stability.
• Central banks in advanced economies typically set explicit inflation targets.
• Many developing countries are also moving to inflation targeting.
• Central banks adjust the money supply by buying or selling securities in the open market.
• Open market operations affect short-term interest rates, which influence longer-term rates and economic activity.
• Lowering interest rates is easing monetary policy, while raising interest rates is tightening it.
• The RBA is responsible for monetary policy in Australia and sets the cash rate.
• The cash rate is the Australian official interest rate, influencing other interest rates, economic activity, employment, and inflation.
• The cash rate is the interest rate on unsecured overnight loans between banks.
• This is the (near) risk-free benchmark rate (RFR) for the Australian dollar.
• Monetary policy decisions involve setting a target for the cash rate, announced at 2:30 pm after each Reserve Bank Board meeting, effective the following day.