Theory and Practice of International Financial Management Review

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Theory and Practice of International Financial
Management Review
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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) - ex
pected 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
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What to Remember in 5 Years
3. 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
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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.