References

• The course is mainly based on the textbook by

International Finance David K. Eiteman, Arthur I. Stonehill and Michael

H. Moffett, “Multinational Business Finance’’, 15th
Edition, ed: Pearson Education, 2019
A course by Jérôme Héricourt
(Univ. Lille, LEM-CNRS & CEPII) • You may find also interesting insights in :
– Frederic Mishkin, “Economics of Money, Banking
jerome.hericourt@univ-lille.fr and Financial Markets, Global Edition”, 12th
edition, ed: Pearson Education, 2018.
Ecole d’Economie de la Sorbonne – Univ. Paris 1 – Frederic Mishkin, Stanley Eakins, “Financial
Master Programmes Markets and Institutions, Global Edition”, 9th
Spring 2022 edition, ed: Pearson Education, 2018.

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What is the course about Evaluation

• The course aims at providing students with practical
perspectives and tools for the current context of
International Finance.

• 1st step: broad overview of the current global financial • 100%: final quiz (30-40 multiple-choice questions),
environment; consequences of economic and financial sitted exam. Simple questions (multiple choices) on
integration some topics from the lectures…

• 2nd step: understanding of FX markets: International

financial parity conditions and exchange rates,
impacting business environment

• 3rd step: financing issues and tools for the global firm
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 Roadmap
Roadmap • Reading (Eiteman et al.):
Foreign Exchange Rate
6 March 9 Chapter 9
Determination and Intervention
Session Date Topic Readings and Activities • In-class problem set #6
• Reading (Eiteman et al.):
Course introduction – Chapter 10
• Course overview, review syllabus
syllabus & schedule; 7 March 16 Transaction Exposure • In-class problem set #7
• Reading (Eiteman et al.): • The academic view on a corporate
1 January 26 Global Financial
Chapter 1 issue
Environment –
• In-class problem set #1 • Reading (Eiteman et al.):
Opportunities & Challenges
8 March 23 Global Cost and Availability of Capital Chapter 13
• Reading (Eiteman et al.): • In-class problem set #8
The International Monetary • Reading (Eiteman et al.):
2 February 2 Chapter 2
System Chapter 14
• In-class problem set #2 9 March 30 Funding the Multinational Firms • In-class problem set #9
• Reading (Eiteman et al.): • The academic view on a corporate
Chapter 3 issue
3 February 9 The Balance of Payments • Reading (Eiteman et al.):
• In-class problem set #3
10 April 6 Multinational Tax Management Chapter 15
• In-class problem set #10
• Reading (Eiteman et al.): • Reading (Eiteman et al.):
The Foreign Exchange
4 February 16 Chapter 5 11 April 13 International Trade Finance Chapter 16
Market
• In-class problem set #4 • In-class problem set #11
• Reading (Eiteman et al.): • Questions about the course
International Parity 12 April 20 Review session •…
5 February 23 Chapter 6
Conditions
• In-class problem set #5
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Syllabus
• Living, breathing document: may be modified along
the way.

• https://cours.univ-
paris1.fr/fixe/International_Finance Lecture 1

International
• Slides will be uploaded AFTER the lecture has been
Finance:
presented in class.
Intro /
Opportunities
• In addition to lectures: illustrative cases + and Challenges
presentation (in the 3rd part) of a few « home-
made » research papers on China and France, (ESM Chapter 1)
directly related to considered topics
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 Lecture Learning Objectives Learning Objectives

1. Understand the complexity of risks associated with

4. Discover what is different about international financial
financial globalization
management, and which market imperfections give rise
to the multinational enterprise
2. Explore how global capital markets are critical for the
exchange of products, services, and capital in the
5. Examine how imperfections in global markets translate
execution of global business
into opportunities for multinational enterprises

3. Consider how the theory of comparative advantage

6. Consider how the globalization process moves a
establishes the foundations for the justification for
business from a purely domestic focus in its financial
international trade and commerce
relationships and composition to one truly global in scope

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The Multinational Enterprise

Financial Globalization and Risk
(MNE)
• The global financial market place is a combination of
• The October–December 2014 quarter was a challenging one with complex risks:
unprecedented currency devaluations. Virtually every currency in the
world devalued versus the U.S. dollar, with the Russian Ruble leading – The international monetary system is an eclectic mix of floating and
the way. While we continue to make steady progress on the strategic managed fixed exchange rates. China is more and more a dominant
transformation of the company—which focuses P&G on about a dozen player.
core categories and 70 to 80 brands, on leading brand growth, on – Monetary and fiscal policies are complicated by large fiscal deficits.
accelerating meaningful product innovation and increasing productivity
savings—the considerable business portfolio, product innovation, and • Forces domestic capital reduction (BUT unconventional MP/QE)
productivity progress was not enough to overcome foreign exchange. – Large and continuing balance of payments (BoP) imbalances will
—Chairman, President and Chief Executive Officer, Proctor & Gamble , A.G. shift the exchange rate landscape.
Lafley, January 27, 2015 • BoP measures international flows of money and products
– The dominant form of business may have shifted from the publicly-
• A multinational enterprise (MNE) has operating branches, traded firm to the privately owned model.
subsidiaries, or affiliates located in foreign countries – Global capital markets are shrinking and changing.
• Today’s MNEs are dependent on emerging markets – Large inflows and outflows of capital travel through industrial and
emerging markets complicating financial management.
ICPS1.1

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 BoP Effects The Global Financial Marketplace
Correlation of CNY / $ FX rate and Trade Balance

• Assets, institutions, and linkages comprise one method

to map global capital markets (see next slide).

• Assets are debt securities issued by governments (e.g.,

U.S., French, German… Treasury Bonds). These form the
baseline for other forms of financing.

• Institutions are the central banks, commercial, and

investment banks. Their health keeps the global
financial system stable.

CNY / $1
• Linkages are the interbank networks using currency.
Without ready exchange of currencies the market is
• What is the relationship between CNY/$ FX rate and the China-US trade balance?
hard-pressed to operate efficiently.
• Relationship can even lead to sovereign debt default – e.g. Russia 1998

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Global Capital Markets The Market for Currencies

• Most currencies are quoted against the dollar as in
“so many units per dollar”

• A few are quoted as “dollars per unit” due to

Assets

Assets

custom e.g., $/£ and $/€.

• Direct vs. indirect quotation.

The 2008-2009 global financial
crisis demonstrated the
integration of this network.
• Computer symbols (ISO-4217 codes) are used in
digital networks
Institutions

• Next slide provides selected currency exchange rate

quotes.
ICPS1.2
FXC -> BB

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 Selected Global Currency Exchange Selected Global Currency Exchange
Rates for January 2, 2018 (1 of 2) Rates for January 2, 2018 (2 of 2)

Note that a number of different currencies use the same symbol (for example
both China and Japan have traditionally used the ￥ symbol, which means
“round” or “circle,” for yen and yuan respectively). All quotes are mid-rates, and
are drawn from the Financial Times.
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Selected Global Currency Exchange Eurocurrencies and LIBOR/RFR

Rates for January 25, 2022
• Eurocurrencies (a major linkage in the
global and capital markets)
– These are domestic currencies of one country on
deposit in a second country
– The Eurocurrency markets serve two valuable
purposes:
1. Eurocurrency deposits are an efficient and convenient
These representative exchange rates,
money market device for holding excess corporate
which are reported to the Fund by the liquidity
issuing central bank, are expressed in
terms of currency units per U.S. dollar, 2. The Eurocurrency market is a major source of short-term
except for those indicated by
bank loans to finance corporate working capital needs
(1) which are in terms of U.S. dollars
per currency unit.
(including export and import financing)
All quotes are drawn from the IMF:
https://www.imf.org/external/np/fin/data/rms_rep.aspx

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 Eurocurrencies and LIBOR/RFR Eurocurrencies and LIBOR/RFR
• The LIBOR survived until the end of 2021, and is now
• Eurocurrency Interest Rates: LIBOR replaced by RFR (“risk-free rates”), preventing any
– In the Eurocurrency market, the reference rate kind of manipulations:
of interest was the London Interbank Offered – LIBOR on GBP replaced by SONIA (Sterling Over Night Index
Rate (LIBOR) until December 31, 2021. Average)
– LIBOR on USD replaced by SOFR (Secured Overnight
– This rate was the most widely accepted rate of Financing Rate)
interest used in standardized quotations, loan – LIBOR on CHF replaced by SARON (Swiss Average Rate
agreements, and financial derivatives Overnight).
transactions • EURIBOR on EUR should remain, though with some
• In 2008, a complex financial scandal modifications
involving UBS, Barclays and Royal Bank of – ESTER (Euro Short-TErm Rate) should replace the EONIA
(Euro Overnight Index Average) (https://www.banque-
Scotland showed massive and profitable france.fr/en/statistics/rates/main-euro-area-interbank-
manipulations of the LIBOR. market-rates
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The Theory of Comparative Advantage The Theory of Comparative Advantage

: Ricardian Model
Absolute Advantage (Adam Smith, 1776) • This is Ricardo’s principle of comparative
When a country has the best technology for advantages
producing a good, it has an absolute advantage
in the production of that good.
• Which is important is not to do
Comparative Advantage (David Ricardo, 1817) better, but to do relatively better
Absolute advantage is not a good explanation for
trade patterns. Instead, comparative advantage
is the primary explanation for trade among • Ingres is a good example:
countries. – Very good violinist… but exceptional painter

A country has comparative advantage in

producing those goods that it produces best
compared with how well it produces other goods.
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 The Theory of Comparative Advantage The Theory
of Comparative Advantage
• The theory of comparative advantage provides a basis • The theory contains the following features:
for explaining and justifying international trade in a – Exporters in Country A sell goods or services to unrelated
model world assumed to enjoy: importers in Country B
– free trade; nonexistent barriers, tariffs etc. – Firms in Country A specialize in making products that can
– perfect competition; firms are price takers be produced relatively efficiently, given Country A’s
– no uncertainty; endowment of factors of production, that is, land, labor,
capital, and technology
– costless information; and
– Firms in Country B do likewise, given the factors of
– no government interference. production found in Country B
– In this way the total combined output of A and B is
maximized

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The Theory The Theory

of Comparative Advantage cont’d of Comparative Advantage
Weaknesses

– Because the factors of production cannot be moved freely • Although international trade might have approached the
from Country A to Country B, the benefits of specialization comparative advantage model during the nineteenth
are realized through international trade
century, it certainly does not today, for the following
reasons:
– The way the benefits of the extra production are shared
depends on the terms of trade, the ratio at which – Countries do not appear to specialize only in those products
quantities of the physical goods are traded that could be most efficiently produced by that country’s
particular factors of production (as a result of government
interference and ulterior economic motivations)
– Each country’s share is determined by supply and demand
in perfectly competitive markets in the two countries – At least three factors of production – labor, capital and
technology – now flow directly and easily between countries
– Neither Country A nor Country B is worse off than before
trade, and typically both are better off, albeit perhaps
unequally
ICPS1.3

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 The Theory
The Theory of Comparative Advantage
of Comparative Advantage Strengths
Weaknesses cont’d
• Comparative advantage is however still a relevant theory to
– Modern factors of production (land, capital, technology) are more explain why particular countries are most suitable for exports
numerous than in this simple model – e.g. entrepreneurship, legal of goods and services that support the global supply chain of
structure, tax differentials etc. both MNEs and domestic firms.

– Although the terms of trade are ultimately determined by supply and • The comparative advantage of the 21st century, however, is
demand, the process by which the terms are set is different from
that visualized in traditional trade theory one based more on services, and their cross-border facilitation
by telecommunications and the Internet – i.e., outsourcing
– Comparative advantage shifts over time, as less developed countries
become developed and realize their latent opportunities • The source of a nation’s comparative advantage is still created
from the mixture of its own labor skills, access to capital and
– The classical model of comparative advantage did not really address technology.
certain other issues, such as the effect of uncertainty and
information costs, the role of differentiated products in imperfectly
competitive markets, and economies of scale

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The Theory What is Different About International

of Comparative Advantage Financial Management?

• Many locations for supply chain outsourcing exist today • Primary differences:
• It takes a relative advantage in costs, not just an 1. Culture and history differ among countries
absolute advantage, to create comparative advantage 2. Corporate governance, e.g. regulation
• Clearly, the extent of global outsourcing is reaching out 3. Greater levels of foreign exchange and political
to every corner of the globe risks
Political impact: {Saritha Rai, 12/4/2017 on Infosys’ new 4. Financial theory and applications are modified
CEO} in the global versus domestic marketplace
5. Specialized and complicated financial
instruments become tools of the trade, e.g.
derivatives

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 What Is Different About International Market Imperfections: A Rationale for the
Financial Management? Existence of the Multinational Firm

• MNEs strive to take advantage of imperfections in

national markets for products, factors of
production and financial assets
– Imperfections in the market for products
translate into market opportunities for MNEs

• Large international firms are better able to exploit

such competitive factors as economies of scale,
managerial and technological expertise, product
differentiation, and financial strength than their
local competitors

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Market Imperfections: A Rationale for the The Globalization Process

Existence of the Multinational Firm

• Strategic motives drive the decision to invest abroad • Stage I: early domestic phase growing into the
and become a MNE and can be summarized under international trade phase (next slide)
the following categories:
1. Market seekers • Stage II: A successful firm will continue to grow
from simple international trade to the multinational
2. Raw material seekers phase characterized by production and investment
3. Production efficiency seekers both at home and abroad
4. Knowledge seekers
• The increase in foreign subsidiaries increases
5. Political safety seekers currency risks and exposures

• Growth may be limited by the twin agency

• These categories are not mutually exclusive – e.g. a
problems of corporate insiders and the rulers of
cost effective raw material opportunity could
sovereign states
translate to market penetration for an in demand
product
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 Ganado Corp: Initiation of the Globalization Ganado’s Foreign Direct Investment
Process Evolution
The multitude of issues and
activities associated with this
international transition is the
real focus of this course.

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The Limits of Financial Globalization Acknowledgement

-Globalization.

-Economic
growth/efficiency
-Innovation. Slides of this course are inspired by those taught by D. K.
Eiteman, A. I. Stonehill, M. H. Moffett, and M. Desoky
-Corruption.
-Fraud.
-Market-
manipulation.
-Economic
inefficiency.
-Limits
globalization.

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