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IFM Exam 1
| Question | Answer |
|---|---|
| IFM | financial management in an international setting (how to make corporate financial decisions... investing, financing, dividend policy) |
| why use IFM | we live in highly integrated world economy globalization: 1. CONSUMPTION of goods and services 2. PRODUCTION of goods + services 3. INVESTMENT in financial markets |
| 4 dimensions (differentiate IFM and DFM) | 1. foreign exchange risks 2. political risks 3. market imperfections 4. expanded opportunity set |
| foreign exchange risks | -anyone investing outside country is exposed -exchange rates fluctuating continuously and unpredictably |
| political risk | includes: 1. unexpected changes in tax rules 2. expropriation/nationalizing assets of foreigners 3. sovereign country can change rules |
| market imperfections | drive multinational companies to locate production overseas. Seen in: 1. price disparity 2. info asymmetry 3. excessive transition costs |
| expanded opportunity sets | firms can locate production in one country or region of the world to maximized their performance 1. raise capital 2. greater economies of scale 3. diversify internationally |
| theory of comparative advantage | a country can't produce everything... so they focus on a product we have advantage in making and then trade for the other product |
| comparative advantage steps | 1. calculate opportunity cost 2. resource allocation 3. see if there's efficiency in consumption and production of goods |
| evolution of monetary systems | 1. bimetallism (before 1875) 2. classical gold standard (1875-1914) 3. interwar period (1915-1944) 4. bretton woods (1945-1972) 5. flexible exchange rate regime (1973-present |
| bimetallism | Before 1875 2 metals (gold and silver) were used as means of payment (exchange rates depended on gold and/silver) |
| classical gold standard | 1875-1914 gold was unrestricted coinage, gold could be imported and exported |
| interwar | 1915-1944 US $ became the dominant currency |
| bretton woods | 1945-1972 the goal was to create exchange rate stability without gold resulted in creating IMF and standard world bank (it fell because of the Vietnam war, 1 ounce of gold went from $35 to $675) |
| flexible exchange regime | gold was abandoned and flexible exchange rates were declared acceptable in IFM market |
| current exchange rate types | 1. free float 2. managed float 3. pegged to another country 4. no national currency |
| european monetary systems | all adopted the euro to establish stability and coordinate exchange rates |
| free float | exchange rate is determined by demand for that currency |
| managed float | countries combine with government intervention |
| pegged to another country | 1 x currency = $0.2 US dollar/euro for example |
| no national currency | the country doesn't print their own money dollarization (accepting dollar as your currency and just leaving out their currency) |
| fixed exchange rate | central banks set the fixed rate |
| flexible exchange rate | market changes the rate, unpredictable, more difficult for budgets |
| corporate governance | -the way that corporations are governed -deals with the relationship between stockholders and management (focus on shareholder's rights) -associated with public corporations |
| country governance | gives an idea how a country's businesses are run |
| associated with public corporations | -conflict of interest is between management and shareholders -agency problem |
| agency problem | people concerned with making their own money, not the well being of the shareholders |
| remedies to agency problem | -board of directors -incentive contracts -concentrated ownership -accounting transparency -debt |
| law and corporate governance | not totally isolated from country governance (if a country governance is bad, corporate governance can't be good) *content of the law predicts the investor's rights/corp. gov. |
| 4 models of the legal system | 1. english common law (strongest) 2. french civil law (weakest) 3. german civil law 4. scandanavian civil law |
| consequences of law | 1. valuation of money and ownership 2. development of capital market 3. economic growth ***the more you protect investors, better economy will be |
| ownership and valuation | weak investor protection --> concentrated ownership strong investor --> diffused ownership protection (people trust the company) |
| capital markets and valuation | weak investor protection --> underdeveloped capital market strong investor protector --> large (advanced) capital markets |
| economic growth | weak investor protection --> stimulates (better) economic growth strong investor protection --> less economic growth |
| foreign exchange market | this market allows an exchange of 1 currency for another |
| direct quotations | home currency per unit of foreign currency (depends where you are) *IN $ ex. $1 per 1.5 euro |
| indirect quotations | foreign currency per unit of home currency (PER $) ex. 1 euro = x $ |
| bid rate | the rate the dealer (bank) is ready to buy |
| ask rate | the rate the dealer asks to sell the currency |
| spot rate | rate that is stated for immediate delivery |
| forward rate | rate for future delivery |
| cross exchange rate | determining exchange rates between 2 foreign currencies depending on the exchange rate to US dollar |
| buy forward | for payables/payments in a foreign country (worry = currency appreciating) |
| sell forward | for receivables/collections in foreign currency (worry = currency depreciating) |
Created by:
spage08
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