International Financial Markets

1
International Financial Markets

• Dr. Darius Miller

2
First things First

• Who is Professor Miller?
• What should I expect to learn?
• How do I make an A
• Why do we study International Finance?

3
About Me

4
What is this class about?
Domestic Finance Institutions, Investments,
Corporate
International Finance Institutions, Investments,
Corporate
5
What is this class about?
International Finance Institutions, Investments,
Corporate
This class covers these topics
Exchange rate markets, International equity and
bond markets, offshore markets, International
Corporate Governance, Accounting, Corruption, Law
and Finance
?
What determines exchange rates? Why do some
countries have large, well developed capital
markets and some do not? What purpose do offshore
markets have? Does ownership structure matter to
value?
6
What is this class about?
International Finance Institutions, Investments,
Corporate
This class covers these topics
International Portfolio Diversification,
International Bonds, International Market
Efficiency
?
Why invest internationally, how do we price
assets internationally, home bias, survivorship
biases and other international anomalies
7
What is this class about?
International Finance Institutions, Investments,
Corporate
This class DOES NOT cover these topics, thats
what youll do when you take 6215
Risk management (hedging currency risk),
International Financial Engineering,
International Valuation
How/why do we hedge currency risk? How do we
calculate the international cost of capital? How
do we design new international securities. How do
we value companies around the world?
8
Some Syllabus Highlights
http//faculty.cox.smu.edu/dmiller/
Lets look at the Grading, Texts and Contact
information
9
What is International in International Finance?

• Another way What are the things that make
  investor and corporate behavior country specific?
• Is it that countries have different exchange
  rates?
• Is it the presence of market imperfections?

10
Is it that countries have different exchange
rates?

• For many people, this is the answer
• However, Grauer, Litizenberger, and Stehle (1976)
  show that, if markets are integrated, then
  international finance, in all important aspects,
  IS JUST LIKE DOMESTIC FINANCE.
• Same asset pricing relationships hold (ex. CAPM)
• (Returns are independent of country)
• Same corporate finance decisions are optimal

11
What are Market Imperfections?

• Direct Capital Flow Restrictions, Differential
  taxation, Ownership Limits
• Indirect Disclosure Requirements, Accounting
  Standards, Liquidity, Rule of law, Effectiveness
  of legal systems, Corporate Governance, Political
  Risk
• When these barriers are binding, international
  finance becomes much different than domestic
  finance.

12
The Impact of Market Imperfections

• That is, these barriers change everything you
  learned in the domestic setting.
• Capital Market development, Portfolio
  Diversification, Asset Pricing, Market
  Efficiency, etc.

13
Lets look at the topics well cover
http//faculty.cox.smu.edu/dmiller/
14
What do the main homework assignments teach us?
All use actual international data

• Testing parity Conditions
• Can inflation rates predict exchange rates?
• Are there profitable arbitrage opportunities in
  the foreign exchange market?
• Technical Trading Rules in the Foreign Exchange
  Market
• How efficient are the FX markets?
• How do you implement an technical trading rule?
• How do you evaluate a FX forecasting service?
• Multinational Diversification Project
• Can we invest in U.S. multinationals and achieve
  international diversification with out leaving
  the U.S.?

15
What do the main homework assignments teach us?
All use actual international data

• 4. Case Czech Mate
• Case on Expropriation in the Czech Republic
• 5. Law and Finance in Bond Pricing
• Using data on bond issues of foreign firms made
  to U.S. investors, we investigate how to price
  bonds and determine if any international
  factors are important.
• The Bonus All of these assignments also
  reinforce your knowledge of critical thinking as
  well as using tools such as spreadsheets,
  statistical testing, and regression analysis.
  That is, the stuff that makes you more valued.

16
Whats my philosophy about the Class?

• Its important to know regular (i.e. domestic)
  finance in order to understand international
  finance.
• Im going to try to give you as much hands on
  work as possible, using actual stock, bond and
  exchange rate data.
• In addition, well spend significant time asking
  big picture questions like is the free flow
  of capital always a good thing? Should all
  barriers to trade be lowered? Why do some
  countries have deep and liquid capital markets
  while others do not?
• We will also try to understand some of the
  personalities behind our discipline.
• Finally, we try to have fun (at least as much as
  possible in a finance class)