LECTURE 6 Financial risk and the multinational firm国际商务-Dr Robert Read.pptVIP

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2018-04-13 发布于北京
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LECTURE 6 Financial risk and the multinational firm国际商务-Dr Robert Read.ppt

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LECTURE 6 Financial risk and the multinational firm国际商务-Dr Robert Read.ppt

ECON 334:INTERNATIONAL BUSINESS AND FINANCE Lecture 6: Financial risk and the multinational firm INTERNATIONAL BUSINESS AND EXCHANGE RISK RR’s lectures have discussed the sources of MNE competitive advantage These real advantages suggest higher rates of return for MNEs over competitors But MNEs also face sources of financial risk and NS’s sessions turn to this topic Concentration on forex risk, but also see how the risks of multinational operation may affect the MNE’s cost of finance for undertaking real projects FOREIGN EXCHANGE RISK Three questions arise: What is foreign exchange risk? Should the MNE be concerned about it? What can be done (if so)? Foreign exchange risk arises if the firm suffers losses from unexpected changes in exchange rates. What do we mean by unexpected? (1) FOREX RISK AND PPP Recall the ‘law of one price’ from second year macro: P = eP* If all countries consume the same ‘basket’ this would imply absolute PPP. In % changes: Δe/e = ΔP/P – ΔP*/P* This is relative PPP. If it always held, unexpected losses would not arise. The value of forex amounts would rise or fall reflecting relative inflation. But do we observe relative PPP? Look at the ￡/$ rate since 1975: Exchange rate quotes Note that the exchange rate is ￡/$ - A higher value means the $ is ---- appreciating (rising in ￡ value) This is a direct quote for the $ and is how most currencies are quoted against it – but not the ￡ or € (exceptions quoted $/￡, $/€) But, how does the market rate relate to PPP? Recall the vertical line at Sept. 1992 Choosing a PPP base In terms of forex risk the nominal exchange rate does not help much – the firm is worried about unexpected changes in the rate No problem if PPP is always true. The next graph assumes that the ERM crisis helped to establish the ‘right’ exchange rate at the time (the economy began to recover): Nature of the risk While the ￡ may have been a little undervalued immediately after the ERM crisis, the graph suggests that the ￡ streng