INTERNATIONAL BUSINESScontents.kocw.net/KOCW/document/2015/chungbuk/younsujin/9.pdf · The Structure of the Foreign-Exchange Market The Role of Banks Spot and Forward Markets Arbitrage

INTERNATIONAL BUSINESS- Chapter 8

- Case Study - Subprime Meltdown, Global Recession

- Chapter 9

Chapter 8: The Foreign Exchange and International Financial Markets

Su Jin Victoria Yeon, Copyright 2015

Chapter 8 Review


1. The Economics of Foreign Exchange2. The Structure of the Foreign-Exchange Market

The Role of Banks Spot and Forward Markets Arbitrage and the Currency Market

Arbitrage of Goods-Purchasing Power Parity Arbitrage of Money

3. The International Capital Market Major International Banks

Commercial Banking Services Investment Banking Services

The Eurocurrency Market The International Bond Market Global Equity Markets Offshore Financial Centers

3) The International Bond Market


The International Bond Market Represents a major source of debt financing for the world’s governments, international

organizations and larger firms Two types of international bonds Foreign bonds

Bonds issued by a resident of country A but sold to residents of country B & denominated in the currency of country B

E.g. the Nestle Corporation, a Swiss resident: issue a foreign bond denominated in yen & sold primarily to residents of Japan

Eurobond A bond issued in the currency of country A but sold to residents of other countries E.g. American Airlines borrow $500 million to finance new aircraft purchases by selling Eurobonds denominated in dollars to residents of Denmark & Germany

Dominant currencies in the international bond market The euro & the US dollar

3) The International Bond Market


Syndicates of international banks, securities firms, and commercial banks put together complex packages of international bonds to serve the borrowing needs of large, creditworthy borrowers

Global bond A large, liquid financial asset that can be traded anywhere at any time Pioneered by the World Bank

Sold $1.5 billion of US dollar-denominated global bonds in North America, Europe and Japan Succeed in lowering its interest costs on the bond issue by 0.225 percentage point　 0.225 percentage point X $1.5 billion 　 the bank reduced its annual financial costs by $3,375,000

International bond market Highly competitive Borrowers are often able to obtain funds on very favorable terms

4) Global Equity Markets


Globalization of equity markets The growing importance of multinational operations Improvements in telecommunications technology Facilitated by the globalization of the financial services industry

Start-up companies: No longer restricted to raising new equity solely from domestic sourcesE.g. Swiss pharmaceutical firms 　 major source of equity capital for new US biotech firms

Established firms: When expanding into a foreign market, a firm may choose to raise capital for its foreign subsidiary in the

foreign market E.g. The Walt Disney Company – initially sold 51% of its Disneyland Paris project to French investors

Country Funds A mutual fund that specializes in investing in a given country’s firm

5) Offshore Financial Centers


Offshore Financial Centers Focus on offering banking and other financial services to nonresident customers Its financial centers mostly located on island states

E.g. Bahamas, Bahrain, the Cayman Island, Bermuda, the Netherlands Antilles and Singapore Luxembourg & Switzerland 　 not island states but important “offshore” financial centers

MNEs can obtain low-cost Eurocurrency loans Benefits of offshore financial centers

Political stability, A regulatory climate that facilitates international capital transactions, Excellent communications links to other major financial centers, Availability of legal, accounting, financial and other expertise needed to package large loans

Efficiency in attracting deposits & lending these funds to customers worldwide　 Important factor in the growing globalization of the capital market

Case StudySubprime Meltdown, Global Recession

Week 10 Day 1


Class Discussion


Globalization


Discuss the following issue

“What would be the impact on world trade and investment if there were only one currency?”

Case Study Discussion

Subprime Meltdown, Global Recession




The events Led to the financial crisis currently affecting the global financial services industry and its impact

on the world economy This crises impacts people from all over the world.

The key cause of the global recession The globalization of the financial markets that allowed the bursting of the real estate bubble

around the world. The problems in the subprime mortgage market were based on;- Poor lending practices, Low interest rates, A boom in the U.S. housing market An unusual level of high risk taking on the part of lenders and investors

Over the past 10 years, almost $2 trillion worth of securities were sold worldwide. Investors were driven to invest on the belief that the housing prices would continue to

increase, and homeowners would continue making payments against these outstanding loans.



The problem made worse When the U.S. Federal Reserve cut interest rates in an attempt to stimulate the economy

Cheaper to purchase houses Created the boom in the U.S. housing market (Housing prices increased)　 The lenders lowered the down payment requirement, and started offering “no money down”

mortgages, interest only and adjustable rate mortgages, 　 Came with some uncharacteristically low initial rates [Subprime Mortgage Loans]　 People with poor credit histories then became involved because of these new non-traditional

mortgage programs　 Interest rates increased and many of these borrowers started defaulting 　 Because they were unable to make the payment.

　 The weakening housing market, 　 Lenders were then left with property that was worth less than the value of the loan

This became a global crisis because many of these mortgages were sold into the secondary market. Many of these mortgages were bundled together and sold to investors as “Collateralized Debt

Obligations” (CDO’s) Pooled mortgages of thousands of home-owners and packaged them into new financial instruments



Specialized investment vehicles (SIVs) Created by investment bankers and hedge funds to invest in CDOs Not on the bank’s balance sheet

Because the banks were not owners of the SIVs

FRB increased interest rates Worried more about inflation than recession Interest rate ↑ 　 borrowing costs ↑ 　 housing price ↓

People started defaulting on their loans, These investors were left with properties that continued to lose value Owing more on their mortgage than their hosing price 　 vicious cycle

Many central banks (including the U.S. Federal Reserve) released funds In an attempt to maintain liquidity

Several “Sovereign Wealth Funds” purchased equity positions in many of these financial institutions The Singapore Investment Authority, China Investment Corporation, and the Abu Dhabi Investment Authority

UBS 　 sold 12.4% of it share to the Singapore Investment Corporation Morgan Stanley 　 sold 10% ownership stake to China Investment Corporation Citigroup 　 sold 4.8% of its ownership to Abu Dhabi Investment Authority



The case refers to the “classic trap of borrowing short and lending long.” Explain what this means.

What are the advantages of borrowing short and lending long? What are the disadvantages?



Why did the sovereign wealth funds of Singapore, Abu Dhabi, and China choose to invest in UBS, Citigroup, and Morgan Stanley at a time when they were performing so poorly? Do these investments create any public policy issues? If so, what are they?



What happens to an economy when a housing bubble bursts?



The change in mortgage lending standards in the United States created a global financial crisis. Do you think an international financial regulatory agency should be created to reduce the likelihood that such crises will arise in the future? Why or why not?

Homework #14 – due Friday


Read Chapter 9 – Formulation of National Trade Policies Answer the following questions

1. What is fair trade? Who benefits from it?2. What is the infant industry argument?3. What are the different types of tariffs?4. Why might a country adopt a VER?5. What are the major forms of NTBs?6. What is an FTZ?7. What is the role of the Eximbank?8. What is the purpose of a CVD?9. What are the two definitions of dumping?

Do not spend more than 2 pages (Type your answers) Try and keep your answers brief Due date: Friday, 8th of May by11 a.m.

Homework #15 – due next Wednesday


Read the case “Green Energy and Free Trade” Answer the four case discussion questions Do not spend more than 2 pages answering the questions You may use bullet points Keep your answers brief but think! Type your answers

Due date: Wednesday, 13th of May by 10 a.m.

Group discussion Report #7 (due next Wednesday)


With your group members discuss; About Chapter 9 About Chapter 9 case study And discuss based on case discussion questions

Discuss following statement“What are the advantages and disadvantages of an industrial policy?”

Report due date: Wednesday, 13th of May by 10 a.m. Group report / Individual Report (sheets are downloadable from the

website http://ecampus.cbnu.ac.kr)

Case StudySubprime Meltdown, Global Recession

Week 10 Day 1


Course Outline


Week 11 (Wed – May 13th) Chapter 9: Formulation of National Trade Policies Homework # 14 due: Chapter 9 summary (Answers to the Chapter Questions)

Week 11 (Fri – May 15th) Case study discussion: Green Energy and Free Trade Homework # 15 due: answers to the case study questions Group discussion report # 7 due

Week 12 (Wed – May 20th) Chapter 10: International Cooperation Among Nations Homework # 16 due: Chapter 10 summary (Answers to the Chapter Questions)

Week 12 (Fri –May 22nd) Case study discussion: The New Conquistador Homework # 17 due: answers to the case study questions Group discussion report # 8 due

Course Outline


Week 13 (Wed – May 26th) Chapter 11: International Strategic Management Homework # 18 due: Chapter 11 summary (Answers to the Chapter Questions)

Week 13 (Fri – May 28th) Case study discussion: The Global Success of SM Entertainment Homework # 19 due: answers to the case study questions Group discussion report # 9 due

Week 14 (Wed – June 3rd) Chapter 16: International Marketing Homework # 20 due: Chapter 16 summary (Answers to the Chapter Questions)

Week 14 (Fri – June 5th) Final Exam Review Group discussion report # 10 due

Week 15 (Wed – June 10th) Final Exam

Evaluation Method


Attitude 5% (3% 　 5%) Attendance 10% Discussion & Participation 10% Homework Assignments 20% (22% 　 20%) Weekly Group Discussion Report 20% Mid-Term Exam 15% Final Exam 20%

Case Study Discussion





The case refers to the “classic trap of borrowing short and lending long.” Explain what this means. “Borrowing short and lending long”

Borrow money for short terms and lend money for long terms E.g. Financial institutions borrow money from short-term notes with low interest rates (SIVs) Then the institutions take that borrowed money to high yielding, long term, CDOs (backed by

subprime mortgages)

What are the advantages of borrowing short and lending long? What are the disadvantages? High risk

When the borrowers (banks) agreeing to pay the money back when they have know information about where or when they will obtain funds to repay the depositor

The financial institutions might have to pay a much higher interest rate to the financing that they might need



Why did the sovereign wealth funds of Singapore, Abu Dhabi, and China choose to invest in UBS, Citigroup, and Morgan Stanley at a time when they were performing so poorly?

Do these investments create any public policy issues? If so, what are they? Sovereign Wealth Funds

A new & controversial source of capital for the world economy Government controlled pools of capital that invest in a variety of industry (mostly in passive way) Most of the SWFs are owned by oil-rich governments Controversial　 Could be a backdoor means of promoting the political goals of the governmental owner of the SWF　 May not be solely for commercial purposes



What happens to an economy when a housing bubble bursts? Collapse in the housing market

Direct impact on home valuation The nation’s mortgage markets Home builders Real estate Home supply retail outlets



The change in mortgage lending standards in the United States created a global financial crisis.

Do you think an international financial regulatory agency should be created to reduce the likelihood that such crises will arise in the future? Why or why not?

Chapter 9: Formulation of National Trade Policies

Week 10 Day 1


Learning Objectives


1. Present the major arguments in favor of and against government intervention in international trade.

2. Identify the advantages and disadvantages of adopting an industrial policy.3. Analyze the role of domestic politics in formulating a country’s international

trade policies.4. Describe the major tools countries use to restrict trade.5. Specify the techniques countries use to promote international trade.6. Explain how countries protect themselves against unfair trade practices.

Formulation of National Trade Policies


1. Rationales for Trade Intervention2. Barriers to International Trade3. Promotion of International Trade4. Controlling Unfair Trade Practices

1) Rationales for Trade Intervention


Free Trade or Fair Trade? Free trade:

The national government exerts minimal influence on the exporting and importing decision of private firms and individuals

Fair trade: The national government should intervene to ensure that 　 domestic firms’ exports receive an equitable share of foreign markets　 imports are controlled to minimize losses of domestic jobs and market share in specific industries

Government should ensure a “level playing field” on which foreign and domestic firms can compete on equal terms

1) Rationales for Trade Intervention


Industry-Level Arguments The National Defense Argument The Infant Industry Argument Maintenance of Existing Jobs Strategic Trade Theory

National Trade Policies Economic Development Programs Industrial Policy Public Choice Analysis

2) Barriers to International Trade


Tariffs Nontariff Barriers Quotas Numerical Export ControlsOther Non-tariff Barriers

Product and Testing Standards Restricted Access to Distribution Networks Public-sector Procurement Policies Local-purchase Requirements Regulatory Controls Currency Controls Investment Controls

3) Promotion of International Trade


Subsidies Foreign Trade Zones (FTZs) Export Financing Programs

4) Controlling Unfair Trade Practices


Countervailing Duties Antidumping Regulations Safeguards

Homework #14 – due next Wednesday


Read Chapter 9 – Formulation of National Trade Policies Answer the following questions

1. What is fair trade? Who benefits from it?2. What is the infant industry argument?3. What are the different types of tariffs?4. Why might a country adopt a VER?5. What are the major forms of NTBs?6. What is an FTZ?7. What is the role of the Eximbank?8. What is the purpose of a CVD?9. What are the two definitions of dumping?

Do not spend more than 2 pages (Type your answers) Try and keep your answers brief Due date: Wednesday, 11th of May by10 a.m.

Homework #15 – due next Friday


Read the case “Green Energy and Free Trade” Answer the four case discussion questions Do not spend more than 2 pages answering the questions You may use bullet points Keep your answers brief but think! Type your answers

Due date: Friday, 15th of May by 11 a.m.

Group discussion Report #7 (due next Friday)


With your group members discuss; About Chapter 9 About Chapter 9 case study And discuss based on case discussion questions

Discuss following statement“What are the advantages and disadvantages of an industrial policy?”

Report due date: Friday, 15th of May by 11 a.m. Group report / Individual Report (sheets are downloadable from the

website http://ecampus.cbnu.ac.kr)

INTERNATIONAL BUSINESScontents.kocw.net/KOCW/document/2015/chungbuk/younsujin/9.pdf · The Structure of the Foreign-Exchange Market The Role of Banks Spot and Forward Markets Arbitrage

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