FINC3240 International Finance

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FINC3240International Finance

• Chapter 2
• International Flow of Funds

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• Financial managers of MNCs care about the flows
  of funds between countries. Why?
• International fund flows may cause changes in
  exchange rates

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Chapter Overview

• A. Balance of Payments
• B. Factors Affecting International Trade Flows
• C. Factors Affecting DFI
• D. Factors Affecting International Portfolio
  Investment

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Balance of Payments

• A summary of transactions between domestic and
  foreign residents for a specific country over a
  specified period of time. It accounts for
  transactions by businesses, individuals, and the
  government.
• Transactions that reflect fund inflows generate
  positive numbers (credits) for the balance
• Transactions that reflect fund outflows generate
  negative numbers (debits)

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Balance of Payments

• 1. Current Account
• a. Payments for merchandise and services
• Import export balance of trade
• b. Factor income payments
• interest and dividend payment
• c. Transfer payments
• aid, grants, gifts
• A large current account deficit indicates
  sending more cash abroad to buy goods and
  services or to pay income than receiving for
  those same reasons

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Exhibit 2.2 Summary of U.S. Current Account in
the Year 2006 (in billions of )
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2006 Distribution of U.S. Exports and Imports

• Insert Exhibit 2.4 from page 28

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Balance of Payments

• 2. Capital Accounts
• a. Value of financial assets transferred
  across country borders by people who move to a
  different country.
• b. Value of nonproduced nonfinancial assets
  that are transferred across country borders
  (patents and trademark)

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Balance of Payments

• 3. Financial Accounts
• a. Direct foreign investment (DFI)
• b. Portfolio investment
• transaction of long-term financial assets such
  as stocks and bonds between countries that do
  not affect the transfer of control
• c. Other capital investment
• transaction of short-term financial assets such
  as money market securities between countries

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Factors Affecting International Trade Flows

• A. Inflation
• US inflation increase US import US
  export
• rise drop
• B. National income
• higher demand for foreign goods
• C. Government policy
• subsidizing exporters restrictions on imports
• D. Exchange Rates
• stronger US dollar US import US export
• rise drop

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Factors Affecting Direct Foreign Investment (DFI)

• A. Restrictions
• B. Privatization
• C. Potential Economic Growth
• D. Tax Rates
• E. Exchange Rates

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Factors Affecting International Portfolio
Investment

• A. Foreign tax Rates on Interest or Dividends
• B. Interest Rates
• C. Exchange Rates

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Agencies that Facilitate International Flows

• 1. International Monetary Funds
• 2. World Bank
• 3. World Trade Organization

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Example 1

• Assume a simple world in which the United States
  exports soft drinks and beer to France and
  imports wine from France. If the U.S. imposes
  large tariffs on the French wine, explain the
  likely impact on the values of the U.S. beverage
  firms, U.S. wine producers, the French beverage
  firms, and the French wine producers.

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Example 2

• US-based MNCs commonly invest in foreign
  securities.
• Assume that the dollar is presently weak and is
  expected to strengthen over time. How will these
  expectation affect the tendency of US investors
  to invest in foreign securities?
• Explain how low US interest rates can affect the
  tendency of US-based MNCs to invest abroad.

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Summary

• A. Balance of Payments
• B. Factors Affecting International Trade
  Flows
• C. Factors Affecting DFI
• D. Factors Affecting International Portfolio
  Investment
• E. Homework QA 2,9,13 a