Principles of International Finance

  • Main goals of Multinational Corporations

  • Theories of International business (Ricardo Smith Theory, Imperfect market theory)

  • Common methods to conduct international business 

  • Exposure to international risk

  • MNC valuation


The main goal of a multinational corporation is creation of value for shareholders. 


Align the interest of the company with the interests of the shareholders.


Example: Fiat at the beginning of 2000´s  had a big financial problem and they hired a manager with the aim of selling the company. Querían vender el 80% de las acciones a General Motors, cuando los hermanos que fundaron FIAT se murieron, era claro que un nuevo CEO debería vender la compañía para ganar algo de la compañía como shareholders.


Mr. Machione es un ejemplo de manager que siempre durante su entera carrera estuvo obsesionado por la “creación de valor”. En 2003, no solo no vendió la compañía, sino que pudo extraer la compañía, hizo transacciones hasta un punto que en 2009 se dio cuenta que para la supervivencia de FIAT era necesario ser una multinational corporation. Compró a Chrysler (adquisición) empresa americana, en 2011 FIAT pudo completar la adquisición y Mr. Machione estaba insatisfecho con la percepción del mercado, porque no se podía notar ahora que FIAT era MNC.


Pese a haber comprado a empresas americanas la gente la seguía percibiendo como una empresa italiana algo que era negativo al situarnos en el año 2011 cuando Italia estaba en riesgo de default. El mercado le estaba aplicando un country risk discount al valor de FIAT, no estaba correctamente valuada por el mercado. Es por eso que las acciones estaban infravaloradas (en ese momento cotizaba en dos mercados (dualisted)). Pese a los esfuerzos de Marchionne de explicar a los inversores los números, la percepción no cambiaba.


Solución → Sacar Fiat de la bolsa italiana (Turín) y ponerla en Netherlands, empezar a pagar impuestos en UK. Lo más importante de la transacción era dar un mensaje al mercado de que la compañía era internacional. The share price went up the day of the announcement, in a few hours $1 Billion dlls sin hacerle nada a la compañía.


Con esta acción Mr Macchione estaba bajo ataque por los de Italia, ahora que FIAT fue rescatada, van a moverse fuera de Italia porque no quieren pagar más impuestos al gobierno italiano. Mr Macchione pasó de ser una estrella en Italia a alguien odiado por los italianos. “Necesitamos probar a los inversores que no somos ya italianos”.


Main Goals of MNC

  1. Maximizing Shareholder Wealth

  2. Global Expansion- balancing growth

  3. Profitability- ensuring returns

  4. Risk Management - mitigation

  5. Regulatory Compliance - follow of local laws


Fundamental objective of MNC= increase the value of the company, measured by stock price appreciation and dividend distribution. MNC´s must balance global expansion, profitability, risk management while ensuring compliance with local regulations.


Agency problems: There is not an alignment between managers and shareholders.

Sometimes managers forget that they are not the owners, just employees (shareholders are the real owners). The larger the company is, the more difficult it is to align all the interests.


Variables que afectan al problema de agencia:

  • Size of the company → Communication problems

  • Control over subsidiaries

  • Different cultures

  • Subsidiary values vs. Parent company 


Algunas veces un manager local va a tomar decisiones que podrían ser en la dirección de invertir en proyectos con un IRR positivo. Invertir en estos proyectos como subsidiario, crea ese rendimiento al nivel de la subsidiaria, pero no todas las veces en el “parent company”, como leyes fiscales, de impuestos, que destruyen el valor creado a nivel de la subsidiaria.


La perspectiva de la subsidiaria no es suficiente para dar valor a los shareholders de TODA la empresa.


Different solutions for this to be aligned (impact on management control)

  • Centralized control → All the decisions are approved by the parent company. The disadvantage is that they miss opportunities because they don't understand what happens abroad. Example: Apple, tiene tiendas en todo el mundo pero el precio que el Iphone se debe vender en Italia por ejemplo, se decide por el “parent company”. Common in Japanese companies. 

    • La ventaja de esto es el control y que se le da directamente valor  a la “parent company”.

  • Decentralized control → The decisions are taken by local managers. Visión global, pero algunas decisiones se toman al nivel de subsidiarias. Ejemplo: Coca Cola, sus campañas de mkt las deciden los managers locales.

    • La desventaja es que la demanda de los clientes dirige a toda la subsidiaria, ya que debe seguir las tendencias. No paga rendimiento a corto plazo, es difícil de monitorear (ejemplo: Prada).



Some international corporations have introduced a balance between a centralized control and decentralized control. 


La tecnología ha permitido hacer el control de las subsidiarias más fácil porque no requiere presencia física.

  • Electronic Networks: Easier Monitoring

  • Communication Tools (internet/email/scanning)


Forms of Corporate Control to Reduce Agency Costs:

• Stock compensation for board members and executives.

• The threat of a hostile takeover.

Si una compañía está listada, una manera de mantenerlos quietos es el riesgo de que la compañía sea comprada por un tercero, forzando que el top management sea reemplazado.

• Monitoring and intervention by large shareholders


Incentives to solve agency problems:


Bonus Pool= stock options + cash incentives

  • Stock options compensation (when a company is listed). Aligns interest between shareholders and managers. La mayoría de los salarios están ligados a las stock compensations. But it has to be properly designed. 

  • Cash incentives. La cantidad de revenues que el manager puede generar, lo más que él puede recibir de compensación. Un manager puede tomar riesgos para hacer más grande los revenues, pero capaz y no están considerando el costo, que afecta al NET INCOME (ahí no se está dirigiendo a los shareholders). Entonces ahí no tendría sentido darle el bonus al manager porque no está creando valor para los shareholders.


  • The risk of takeover: (Ej. noticia de compra OpenAi / Twitter) The first thing done is to substitute the managers (if the company is listed). Si eres una listed company, tienes el riesgo de ser comprado mediante acciones.

  • Shareholder Activist: acquire (buy) minorities into listed companies that are living in a period of time where their own valuation is depreciated by the market, so they can change something in the management of the company so it can gain value. Passive investors have a long-term perspective (invest and wait) (ex: pension funds). However, the shareholder activists have the opposite approach. After studying the company they buy a minority of a listed company, so they don't have the right to vote (How can they influence?) but they start delivering their analysis to the top managers. 

    • Si soy un retail investor y compro el 1% de una compañía pública, y quieres opinar en una reestructura de la compañía, quizá nadie te haga caso; pero si eres Buffet por ejemplo, shareholders te siguen.

    • Colaboración entre active investors y management de una compañía.

The UK has lost a lot of liquidity, reduction of IPOs because everything is going to the US. (Ejemplo Klarna)


Types of Constraints to achieve MNC’s goals:

  • Environmental (higher costs)

    • Sustainability regulations

    • Tesla & Renewable Energy Shift: Tesla builds Gigafactories powered by renewable energy in Germany and China to comply with EU carbon emission regulations.

    • Unilever´s Sustainable Sourcing: Unilever shifted 100% sustainably sourced palm oil to reduce deforestation (alignment of profit goals with sustainability).

*Como banco las regulaciones ESG se han vuelto importantes cuando otorgan préstamos.

  • Regulatory (reduction in cash flows)

    • Varying Laws and policies

    • Google's Antitrust Challenge: The European Commission imposed 4.3B Euro in fines against Google for anti-competitive practices related to android devices.

    • Data Privacy Regulations: Meta confronted significant billion-dollar penalties in Europe for violations of user data privacy under GDPR laws.

Necesitas la autorización de la persona para recibir un tipo de comunicación (i.e correo electrónico).

  • Ethical (no standard of business conduct that applies worldwide)

    • Global Ethics

    • Systemic Concerns

      • Addressing issues of bribery, corruption, and worker exploitation.

    • Transparency

      • Developing ethical supply chains and corporate accountability.

Example: Child labor.


Session 3

LECTURE 2 AGENDA

1.MNC GOAL

2.THEORIES OF INTERNATIONAL BUSINESS

3. COMMON METHODS TO CONDUCT INTERNATIONAL BUSINESS


2.THEORIES OF INTERNATIONAL BUSINESS

Economic theories → Trying to explain international trades across countries relying in 3 approaches:


Relative Advantage Theories (Comparative & Absolute)

  1. Comparative advantage  → Ricardo → The country specializes/ focalices in one product (service) /production process and importing the rest. 

    1. Taiwan dominates semiconductor manufacturing, while the US leads in AI.

  2. Absolute advantage → Smith → NATIONAL LEVEL → A country should specialize not only in a specific product but in one whole industry, and the rest is imported. It has influenced less than Ricardo's theory.

    1. Saudi Arabia´s low cost oil extraction makes Aramco the most profitable oil company in the world.

  3. Imperfect market theory →No se pueden mover fácilmente productos de un país a otro. Decidimos mover nuestros productos a un país extranjero, donde podamos aprovechar ciertos beneficios, como mano de obra más barata. There are some cases in the world where you can access some raw material or source and you decide to move your production to that country. If the market would be perfect I wouldn't need to relocate to other places for my production because I could just import. Ej: Labor cost differences, access to natural resources, supply chain optimization, government & tax incentives.


Business theories: MICRO LEVEL perspective (company perspective).


Business expansion Theories

  1. Product Life Cycle Theory

    1. i.e Iphones evolve across international markets (produced in the US, then China…)

  2. Internalization Theory

Si se estudia la vida de una compañía se identifican las etapas donde se tiene un starting point (una nueva compañía creada), cuando empiezas a vender tus productos comienzas a vender a un número LIMITADO de clientes (start up phase). Luego hay un early grow, cuando hay suficiente demanda, comienzas a expandirte (expansion phase) y si sale bien, vas internacionalmente. 


Expansion of a company: When you start to enter different markets (international)

You start locally and if the product is interesting you expand to the rest of the world.


3.Common Methods Used to Conduct international Business

(De menor a mayor complexity: exposure to international risk, amount of investment and level of control)

1. International trade → Exports and imports 

Ex: Boeing exporta internacionalmente mientras importa ciertos componentes. Samsung en su supply chain importa materia prima de diferentes países. El único riesgo es la demanda que puede ser afectada por razones externas. Simplest way to conduct a business across borders without establishing physical presence.

2. Licensing → (Brand and Technology use) Being able to sell some patent rights in exchange of royalties, no need for a big investment. Ex: Microsoft con Lenovo o Dell

3. Franchising → Un poco más complejo que las licencias. Business model adoption, pero también el que da la franquicia invierte capital para la capacitación, mkt support. Ex: McDonald's y Starbucks

4. Joint venture → A new company formed between an MNC and a local business, sharing ownership, profits and risks. Alliance with a local player. No significa un merge / acquisition. Shared ownership. In China for example it is mandatory to start the activities with a local partner. Ex. Sony & Honda formed a JV to produce electric vehicles. JV General Motors and Fiat.

  • Strategic Alliance: less formal collaboration between companies for specific goals like R&D or supply chain optimization. Ex. Starbucks & Tata Alliance (India entrance).

5. Foreign direct investment (FDI) → Transacciones bastante analizadas. Active investment. 

2 posibilidades de expansión con FDI:

  • External growth → Acquiring a local target / player de otro país. (synergies and control premium). It is a quick solution to grow but risky. Ex: LUXOTTICA (adquisición de Ray Ban)

    • Se tienen diferentes riesgos que no pudieron haber sido considerados en la valuación de la adquisición. 

    • Common outcome in M&A: misprice synergies & control premium, you pay too much and destroy value for shareholders. 

  • Internal growth → Establishing new subsidiaries abroad. Ex: PRADA entrando en China (al inicio tuvo retornos negativos). It is a slow process, less risky.



We are going to be exposed to several risks when we are not considering it within the home country. Ex: Political risk exposure.


4. Exposure to international risk

  • Exchange rate risk: currency fluctuations impact revenues, costs, and profitability.

    • Apple's revenue dropped in Europe when the USD strengthened against the Euro making Iphones more expensive.

  • Economic conditions: Global recessions or inflation reduce consumer demand.

    • Netflix lost subscribers in Argentina due to hyperinflation and currency depreciation.

    • Si existe una crisis la demanda baja.

  • Political and regulatory risk: government policies, sanctions, and regulations can affect business operations.

    • Tik Tok faces potential US bans due to data security concerns.


5. International Valuation Model



  1. Economic conditions

  2. Exchange rate risk

  3. Political risk



  1. Key factors driving growth of international capital markets

    1. Technology

    2. Deregulation

      1. Higher competition

      2. Reduction of costs for financial transactions

      3. Opening of national markets to global investors

        1. aquí hay riesgo país de inestabilidad que cambien de cobrarte 32% en taxes a 52%.

        2. Europa no tiene casi avances en IA, tiene regulaciones cambiantes.

    3. Innovative financial instruments

Home banking technology: posibilidad de hacer ciertas transacciones (checar balance, transferencia). No se podía hacer inversión porque necesitabas que el del banco te lo aprobara.

Ahora estamos en el mobile banking technology, tenemos acceso a la cuenta de banco sin tener la necesidad de estar frente a la PC y también no se necesita presentarse físicamente en un banco para invertir en el stock exchange.

.

  1. FOREX

  2. International Money Markets

  3. Eurocredit markets

  4. International Debt Markets (Bonds)

  5. International Stock markets






Session 4

Due to growth in international business over the last 30 years, various international financial markets have been developed. Financial managers of MNCs must understand the various international financial markets that are available so that they can use those markets to facilitate their international business transactions.

 ■ foreign exchange market

■ international money market

■ international credit market

 ■ international bond market

■ international stock markets.

■ The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions. Commercial banks serve as financial intermediaries in this market. They stand ready to exchange currencies for immediate delivery in the spot market. In addition, they are also willing to negotiate forward contracts with MNCs that wish to buy or sell currencies at a future point in time.

■ The international money markets are composed of several large banks that accept deposits and provide short-term loans in various currencies. This market is used primarily by governments and large corporations. The European market is a part of the international money market.

■ The international credit markets are composed of the same commercial banks that serve the international money market. These banks convert some of the deposits received into loans (for medium-term periods) to governments and large corporations.

■ The international bond markets facilitate international transfers of long-term credit, thereby enabling governments and large corporations to borrow funds from various countries. The international bond market is facilitated by multinational syndicates of investment banks that help to place the bonds. Institutional investors such as mutual funds, banks, and pension funds are the major purchasers of bonds in the international bond market.

■ International stock markets enable firms to obtain equity financing in foreign countries. Thus, these markets have helped MNCs finance their international expansion. Institutional investors such as pension funds and mutual funds are the major purchasers of newly issued stock.



AGENDA LESSON 3

  1. Reasons for international markets

  1. Why investing in foreign markets

    1. Economic conditions

    2. Exchange rate expectations: Example, you have excess cash and want to invest at a higher rate. Expecting appreciation.

    3. Diversification

  2. Why providing credit in foreign markets

    1. High foreign interest rates: investors get paid more for the capital.

    2. Exchange rate expectations

    3. Stability of the economy

  3. Why borrowing in foreign markets

    1. Low interest rates

    2. Expectations in exchange rates


If you are a multinational you have to move to other countries and try to finance yourself at the lowest rate. Ex:Prada


Dim- sum bonds: foreign bonds, possibility to borrow funds, issued and sold in Hong Kong, denominated into the local currency. (1.1% interest rate para PRADA en Asia).


Si un bono está en otra divisa, me expongo al riesgo divisa (fluctuación) Que por ejemplo en Asia se aprecie la divisa y deba pagar más intereses a los inversionistas que compraron mis bonos en esa moneda.

La expectativa del inversor era que la divisa de Asia se iba a apreciar. Como Prada puedo poner bonos en Asia, si hay demanda por parte de los inversionistas. Y Prada no creía que se iba a apreciar y solo quería pagar el 1.1%.



→ Some accepted a lower interest rate because of the expectations that the local currency was going to appreciate itself. 

This is called: Foreign bond solution

The condition for Prada was that the bonds had to be repaid in 12 months for covering the exposure of debt. En 12 meses vuelven a la situación inicial. El forex market solo se puede predecir en el corto plazo, pero no en el medio y largo plazo.


Esto no era tan bueno para PRADA, porque ellos tenían problemas en su Balance Sheet para cubrir deuda pasada. Se necesita una alternativa para comprar tiempo y arreglar el Debt/Capital Ratio.




FOREX  - prácticamente imposible predecir qué es lo que pasará en el mediano-largo plazo.

Worlds largest and most liquid financial market, daily trading volume over $7.5 trillion. It allows for the exchange of currencies between governments, corporations, banks and investors.

Security= currency

Exchange rate = price


From 1876 to 1913, each currency was convertible into gold at a specified rate, as

dictated by the gold standard.


Characteristics:

  • Decentralized: No central exchange, operated globally via banks, brokers and electronic trading platforms.

  • 24/7: opened five days a week, covering all time zones.

  • Highly liquid: major currencies (USD, EUR, JPY, GBP)


→ Most liquid

→ OTC

→ Bid/ Ask spread: The remuneration charged by banks. → %=(ASK-BID)/ASK


Major participants:

  • Commercial banks & MNC: convert currencies for international trade and investments. I want to evaluate the advice, speedness of the transaction, competitiveness, the most important is the relationship with the bank.

  • Central banks: intervene in the forex market to stabilize their currencies (i.e Bank of Japan interventions in 2024)

  • Institutional investors and hedge funds: speculation & hedging.


MNC get advice from international commercial banks, and provide additional service (advice), not only for the execution of the deal but also to assist with a research record (check if it's convenient or not).


Commercial banks make money reeling in the bid/ask spread (bid at a lower price than the asset price). Buy BID, sell ASK.


Main Forex instruments & techniques

  • Spot market (immediate delivery): Used by MNCs for immediate payments in international trade.

  • Forward contracts (Future exchange rate agreement): contract to sell/buy a currency at a set exchange rate for a future date (hedging strategy). Between MNC and the client who buys.

  • Currency Swaps (Agreements between parties to exchange principal and interest payments in different currencies to hedge risks). OTC, the client is not involved.

    • Recibo 500 dlls americanos y doy 500 euros, yo espero que el dólar se aprecie, mientras que la otra persona espera lo opuesto. O quizá yo tengo deudas en esa moneda. Intercambio de posiciones entre jugadores.


Potential question: The main participants in the market of forex trading. Calculate remuneration for a commercial bank (Ask-Bid)/Ask.


FOREX Market Trends (2024) Updates.

(Germany, France, Spain & Portugal are under GDP crisis)

  1. US Dollar Strength & Impact on Global Markets

    1. In 2024, the USD remains strong due to high U.S interest rates and demand for safe-haven assets.

  2. China's Yuan & De-dollarization Trends

    1. China is promoting the yuan for global trade, reducing reliance on the USD.

  3. Central Bank interventions (2024)

    1. The Bank of Japan intervened to support the yen, which had weakened to a 34-year low against the dollar.


ACTUAL TRENDS

The US dollar remains strong due to high interest rates.

China is promoting the yuan for global trade, and reducing reliance to the USD

The Japanese central bank intervened to support the yen.


IMPACT OF FOREX TRENDS ON MNCs

  1. Emerging markets struggle: currencies weaken against the dollar.

  2. Apple & Microsoft: lower revenues from Europe and Asia as currency conversions reduce earning in USD terms.

  3. Saudi Arabia: accepted yuan for oil sales instead of USD for the first time in 2024.

  4. Brazil & China: settle 40% of their trade in yuan.


INTERNATIONAL MONEY MARKETS- market where we are going to invest and trade securities that have a common future /characteristics, maturity lower than 12 months. 


  1. Short term financing, < 1 year

  2. Working capital- inventory, payroll

  3. Liquidity management- multiple currencies

  4. Eurocurrency Markets - foreign currency lending.

  • European money market: was started for the first time.

  • Asian money market: US Dollars deposited in Asian Banks. Initiated in Singapore and Hong Kong (la historia y estas cosas del libro son para los attendance)


We are going to rely on these markets for short-term financing, as for example financing the working capital. If I finance myself through the money market for long term matters, I am exposed to an important exchange rate risk.


Euro currency money market 

Eurocurrency= Any currency held outside its home country.

Banks offer short-term deposits and loans in various currencies.



Us dollar deposits placed in Europe (Eurodollar) and opened by European Banks (Eurobanks). Término que también se usa aunque sean otras divisas. ¿Razones de porqué hacerlo? Stability, …

Eurobanks → Los bancos que aceptan depósitos en moneda extranjera.

Eurodollar → Label, si tengo una MNC de Japón y quiere abrir una cuenta en europa y quiere recibir depósitos en yenes, se le sigue diciendo eurodollars.

US Dollars deposited in Asian Banks or other foreign countries. 


The most important regulatory adoption that has changed the approach of the banking activities worldwide is in 1987 with the Basel Agreements. In terms of financial strategies, risk exposures and capital requirements banks have become equal.  


LIBOR era una referencia a poner el precio a Money Market Loans, este fue reemplazado por SOFR (Secured Overnight Financing Rate).

LIBOR: estimado por bancos, risk of manipulation by banks.


Use of the international money market by MNCs

  1. Managing short term liquidity

  2. Short-term investment of excess cash (invest in eurodollar)

  3. Foreign currency cash flow management (subsidiaries)



INTERNATIONAL CREDIT MARKET

Medium term financing, the maturity is between 1 and 5 years. 

Floating rate loans: linked to SOFR, EURIBOR

Syndicated loans: A group of banks giving a loan (normally to finance a project). Multiple banks share a risk.

Example: Netflix $800M loan.

Euro Credits and euro credits loans.

Si necesitas financiar por un proyecto más largo de 1 año, tengo la opción de un bank loan o un syndicated loan (unit bank loan provided by group of banks). 

Porqué elegir un syndicated loan:

  • lower cost- multiple banks compete, reducing borrowing rates.

  • access to larger capital pools- no single banks could lend such large amounts alone.

  • diversified risk