Week 1: Agency problem- manager use
power for their own benefit.
– Parent control of agency problem
– Corporate control of agency
– Sarbanes-oxley act
Style: Centralised/decentralised
Theory of comparative advantage:
Specialisation more productivity
Imperfect Market Theory: Factors of
production Immobile, seek foreign opp
Product Cycle Theory: Firm grow find
opportunity overseas.
How to INT trade: International trade,
Licensing, Franchising, Joint Ventures,
Acquisition of existing operations,
Establishing foreign Subsidiaries
MNC cash flow risk
– International economic conditions,
political risk, exchange rate risk, higher
cost of capital
Week 2 1. Current Account-
Purchases of Goods/service/
provision of income on asset.
Import Negative Export Positive
Export<import=-VE
Export>Import=>VE
2.Capital Account- Sale of asset
between country over a period of
time. 3.Financial Account- Special
Investment in fixed Asset
Affect trade volume
1. International trade changes
2. Outsourcing
Affect TRADE FLOW
1. Cost of labor- cheaper more
trade
2. Inflation- Price up, less exports
more import(-CA)
3. National income- more
disposable, Imports up(CA-)
4. Credit conditions- More
exports
5. Government policies- Quota,
lower imports, subsidize export
6. Exchange rate- Price change.
Appreciate more, more
expensive(less export)
Week 3- foreign exchange market
Over the counter market- one
currency for another
Spot market- immediate exchange,
interbank market
Bid-Ask percentage spread
=(𝑨𝒔𝒌 𝒓𝒂𝒕𝒆−𝑩𝒊𝒅 𝒓𝒂𝒕𝒆)
𝑨𝒔𝒌 𝒓𝒂𝒕𝒆
Spread affected by: Order cost,
inventory cost, competition, volume,
currency risk.
Base: Dollar USD
Direct Quote= Value of foreign
currency in dollar (1.40USD per euro)
Indirect Quote= Number of units of a
foreign currency per dollar (0.7143
Euro/USD)
Exchange rate change direct and
indirect affected.( check change in
indirect and direct)
Cross exchange rate- one foreign
currency for another foreign
-(usd/peso) /(Usd/CND)
Forward contract- agreement MNC
and dealer to exchange at a specific
date and rate, Over the counter
Currency call- buy at specific strike
Week 4 exchange rate determination
Appreciation and depreciation
Change=𝑠𝑡+1
𝑠𝑡(negative depreciate)
Demand supply affected by inflation
Week 5 Currency derivatives
Payoff depends on two or more
currencies
Forward contract- specific amount at
forward rate on specific date.
Hedge imports by locking in exchange
rate. 1 Million in 90 days ,spot rate= 0.5
USD/SGD, Future spot
rate=.6USD/SGD, hedge exchange rate
risk forward contract
Opportunity cost
Premium=𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒−𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒
𝑆𝑝𝑜𝑡 𝑅𝑎𝑡𝑒
Arbitrage– forward=spot and int rate dif
Forward premium affected by int rate
Futures contract, standardized, traded
on exchange, more liquid, US base.
Brokers can sell and trade future
contracts.
Increase in demand- exchange rate up.
Decrease in demand- rate down
Supply adjusted to suit amt demanded
Relative inflation rate- US inflation= dmd
for foreign goods, =dmd for foreign
currency and increase in exchange rate
Relative interest rate=US rates up,
demand for deposits up= more dmg for
dollar and higher exchange rate
Relative income level- Increase in US
income= increase in demand for foreign
Week 6 Int Arbitrage, IRP
Price will realign to have no arbitrage
Locational arbitrage, buy cheap sell high
at another location
POUND: B:1.6, A:1.61, Pound B:1.61,
A:1.62, buy at 1.61 and sell at 1.62
The prices will realign to no arbitrage.
Triangular Arbitrage. –use 3 currencies
: USD –MYR- Pound
Brute force: method 1: USD to MYR to
pound back to USD
Method 2: USD to pound to MYR to USD
Realign in different places to eliminate
discrepancies. Forces exchange rate to
equilibrium
Covered interest Arbitrage
Capitalize interest rate differential
1. Change to foreign currency
2. Lock in forward sales
3. Lend the money to other country of
higher interest
4. Exchange at forward rate
5. Earn difference
Timing of realignment slightly slower.
Forward rate will readjust most.
