Globalization and Finance PDF

The global financial system includes institutions, regulations, and financial instruments that facilitate international economic transactions. Key components: - Central Banks (e.g., BSP, European Central Bank) - Stock Markets (e.g., NYSE, NASDAQ, London Stock Exchange) - International Fina...

The global financial system includes institutions, regulations, and financial instruments that facilitate international economic transactions. Key components: - Central Banks (e.g., BSP, European Central Bank) - Stock Markets (e.g., NYSE, NASDAQ, London Stock Exchange) - International Financial Institutions (e.g., IMF, World Bank, WTO) Global financial markets allow companies and governments to raise capital beyond their home countries. Key markets: - Equities Market (Stock exchanges across the world) - Bond Market (Government and corporate bonds issued internationally) - Foreign Exchange Market (Forex) (Largest financial market in the world) THE IMPACT OF GLOBALIZATION ON FINANCIAL MANAGEMENT - Capital Flow Across Borders - Companies access funds from different countries. - Foreign Direct Investments (FDI) - Global expansion of businesses. - Mergers & Acquisitions - Companies merge with or acquire foreign firms. Microsoft's acquisition of LinkedIn for \$26.2 billion expanded its global presence. CHALLENGES AND RISKS OF GLOBALIZATION IN FINANCE - Currency Fluctuations - Exchange rates impact financial transactions. - Regulatory Differences - Compliance with different financial regulations. - Geopolitical Risks - Political instability affects financial markets. The U.S.-China trade war impacted global stock markets and supply chains. FOREIGN EXCHANGE AND INTERNATIONAL TRADE FINANCING - Foreign Exchange (Forex) Market - Daily transactions exceed \$7 trillion. - Exchange Rate Mechanisms - Fixed vs. Floating Exchange Rates. - International Trade Financing - Letters of credit, export financing, and trade credits. A Philippine company exporting goods to the U.S. needs to hedge against USD/PHP fluctuations. UNDERSTANDING EXCHANGE RATE RISK - Transaction Exposure - Impact of currency fluctuations on international trade. - Economic Exposure - Long-term effects of currency changes on business profitability. - Hedging Strategies - Use of forward contracts and options. Apple hedges against currency fluctuations in Europe and China to stabilize profits. EMERGING FINANCIAL MARKETS -- OVERVIEW Economies transitioning into developed status. Characteristics: High growth potential, increasing FDI, evolving regulatory frameworks. Examples of Emerging Markets: China, India, Brazil, Philippines, Vietnam.   OPPORTUNITIES IN EMERGING MARKETS - High Economic Growth Rates (5%+ annual GDP growth in some markets). - Expanding Middle Class drives consumer demand. Investment - Opportunities - Stocks, bonds, and startups. Vietnam's economy has grown rapidly due to technology and manufacturing. RISKS IN EMERGING MARKETS - Political Instability - Changes in government policies affect investments. - Currency Volatility - Unstable exchange rates impact returns. - Market Liquidity Issues - Harder to buy/sell assets compared to developed markets. Argentina's financial crisis led to high inflation and devaluation of its currency. CASE STUDY -- THE PHILIPPINES AS AN EMERGING MARKET - Key Industries BPO, tourism, remittances, manufacturing. - Foreign Investment Increasing FDI in infrastructure and technology.  - Risks Political shifts, economic inequality, inflation. Example: Growth of fintech companies like GCash revolutionizing payments.   THE FUTURE OF GLOBAL FINANCIAL TRENDS - Digital Currencies & Blockchain: Rise of Bitcoin, Ethereum, and CBDCs - Fintech Disruption: Mobile banking, AI-driven investments. - Sustainable Investing: ESG (Environmental, Social, Governance) trends. Tesla's stock surged due to ESG investment strategies. BRAIN TEASER  An exporter, Maui Taylor, receives a payment of \$20,000 from a US client. The exchange rate at the time of invoicing was P56/USD, but by the time the payment was received, it changed to P54/USD. Question: Did the Maui Taylor gain or lose money? And by how much in PHP? The Mysterious Currency Swap Given: Payment received: \$20,000 Exchange rate at invoicing: P56/USD Exchange rate at payment: P54/USD Step 1: Convert at the invoicing rate (PHP 56/USD) \$20,000 × P56= P1,120,000 Step 2: Convert at the actual payment rate (PHP 54/USD) \$20,000 × P54= P1,080,000 Step 3: Find the difference P1,120,000 − P1,080,000= P40,000   Did the Maui Taylor gain or lose money? And by how much in PHP? Answer: Maui Taylor lost PHP 40,000 due to the exchange rate dropping from PHP 56/USD to PHP 54/USD. This is an example of foreign exchange risk, where currency fluctuations affect the final payment received.