Post on 28-Dec-2015
Theory and Practice of International Financial Management
Review
What to Remember in 5 Years
1. Governments are important:
- governments print money
- governments intervene in foreign exchange markets
- governments tax
2. Interest rates reflect anticipated exchange rate changes:
- international capital budgeting recognizes this relationship implicitly (decentralized) and explicitly (centralized)
- expected currency borrowing costs will depend on this, particularly on an after-tax basis
- risks associated with interest-bearing exposures will account for this co-movement
What to Remember in 5 Years3. Prices will reflect realized exchange rate changes:
- the law of one price will hold in the short-run for homogeneous commodities
- any goods that are tradable will face similar arbitrage pressures in the long-run
- economic risks that are linked to both exchange rates and prices must recognize for this relationship
4. International capital markets are segmented:
- investors prefer local investments
- different investors value different risks differently
- borrowing costs and required returns on equity depend on country of lenders and investors
What to Remember in 5 Years
5. Only risks which cannot be diversified are important:
- valuations given by international capital budgeting will depend on what risks are systematic to shareholders
- measurement of foreign exchange exposure risks must recognize that positions may naturally offset or diversify
- risk management activities are only useful if they increase expected returns or reduce risks systematic to shareholders portfolios or managers’ careers.