International Finance Good afternoon Dobré odpoledne 1.

transcript

International Finance

Good afternoon

Dobré odpoledne

At end of each day PowerPoint slides placed on course web site.

Google: homepages balik prague

http://homepages.wmich.edu/~balik/VSE/

International Finance: Today, 8.6.09

Lecture: 14:00 to 15:50. Break: 15:50 to 16:10 (ask about topics). Lecture: 16:10 to 17:30 Research topics (17:30 to 18:00)

International Finance: Tomorrow, 9.6.09

Lecture: 9:00 to 10:45.Break: 10:45 to 11:00.Lecture: 11:00 to 12:00Break: 12:00 to 1:00Lecture 1:00 to 3:00

Robert Balik

Robert BalikFirst visit to Czech Republic in 1994Fulbright Scholar at Silesian University 1995 – 1996Fulbright Specialist at Silesian University 2006Attended conferences in Czech Republic 1998 – 2004.

Western Michigan University http://www.wmich.edu/

Western Michigan University, Haworth College of Business

http://www.wmich.edu/business/8

Stryker, Headquarters, Kalamazoo, Michigan, USA

http://www.stryker.com/en-us/index.htm 9

Linet, Slaný, Czech Republic, Manufactures Hospital Beds.

http://www.linet.com/ 10

Kalamazoo, Michigan, USA

Chicago Symphony Orchestra, Dvořák Festival

http://www.cso.org/main.taf?p=3,11,6&CategoryID=dvorak&SeasonID=0809

Chicago Symphony Orchestra, Dvořák Festival

Two parts• Classroom lectures (more than teacher talking)• Research paper

Grading• 50 % based on lectures• 50 % based on research paper

Students• How many only 1 finance class?• How many 2 or more finance classes?

Students: How many work 20 or more hours per week?

Education: Big Picture

Learn discipline (economics, finance, marketing, etc) Develop motivation to be a self learner. Why?• Skills needed change.• Will change type of job.

Have certain skills (for example computer). • Features of software program.• When to use these features.• How to design.

Education: Role of teacher

Facilitator, points the direction. More time grading and assisting than lecturing. Motivate students.

Teacher, Facilitator, Blogs

BaselineScenario• http://baselinescenario.com/• Simon Johnson, Economics Professor, MIT, IMF

Economist’s View• http://economistsview.typepad.com/• Mark Thoma, Economics Professor, Oregon

The Conscience of a Liberal• http://krugman.blogs.nytimes.com/• Paul Krugman, Economics Professor, Nobel Prize,

Princeton, Op-ed New York Times.

PowerPoint: Does it make us stupid?

http://www.itsunderstood.com/docs/PowerPointMinifesto.pdf

http://www.kmentor.com/socio-tech-info/2004/01/does-powerpoint-make-us-stupid.html

Visualize Information: Charts & Tables

Stephen Few, Perceptual Edge

http://www.perceptualedge.com/

Research Paper

Choose topic• No later than tomorrow, 9.6.09• At least four complete pages (using double spacing

and not counting page with references)• Draft no later than 23:59 Monday, 15.6.09• Can discuss on Tuesday, 16.6.09, 9:00 to 14:00• Deadline for final version is Saturday, 20.6.09 (must

submit grades by 22.6.09)

Paper format• Submit electronically• Use Microsoft Word 2003

Research Paper

Paper format: See pdf file, link on course web site Draft• Use Editor Serenity Software• Use tablet computer• Return three files

2 from Editor One Word

http://www.serenity-software.com/

Research Paper

Research: • Can start with Wikipedia• Use google• Relate to issues discussed in class• Be consistent with what is discussed in class• Consult with teacher – check e-mail.

8.6.09 through 8.12.09 (Monday through Friday) 16.6.09 (Tuesday) 18.6.09 through 20.6.09 (Thursday through Saturday)

Research Paper

Research: • Economic variables (start of 2007 and as current as

possible in 2009) GDP Unemployment Exports Bankruptcy, non financial firms

• Financial variables (start of 2007 and as current as possible in 2009) Stock market Exchange rate Bankruptcy, financial firms Interest rates

Research Paper: Serenity Software

http://www.serenity-software.com/

Topics

Current Economic & Financial Crisis: How what happens in U.S.A. impacts Czech Republic (or other countries),

Current and future structure of financial institutions worldwide,

Recent financial innovations and their importance,

What role does finance play in international trade,

Marketing Financial Services. What should and what do financial institutions do to market their services,

http://homepages.wmich.edu/~balik/VSE/27

International Finance: Background

What is your net worth? What is the price of a financial asset? What is a firm’s primary objective? For large firm’s who are shareholder’s agents. What is financial leverage? What is operating leverage? What is Modigliani-Miller theorem?

What is Modigliani-Miller theorem?

The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market,

the value of a firm is unaffected by how that firm is financed. It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle.

http://en.wikipedia.org/wiki/Modigliani-Miller_theorem

International Finance: Background

What is systematic risk? What is systemic risk?

What is systemic risk?

Systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries".

When did this almost happen? September 2008

What is Efficient Market Hypothesis?

Efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets (e.g., stocks, bonds, or property) already reflect all known information, and rapidly change to reflect new information. Therefore it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.

http://en.wikipedia.org/wiki/Efficient_market_hypothesis

What is a bubble?

Real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements.

Don’t know until after.

http://en.wikipedia.org/wiki/Housing_bubble

What is an externality?

In economics, an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service. A positive impact is called an external benefit, while a negative impact is called an external cost.

One of greatest externalities: Global warming.

http://en.wikipedia.org/wiki/Externalities

What is “too big to fail”?

Too Big to Fail policy is the idea that in economic regulation the largest and most interconnected businesses are "too big to [let] fail." This means that it might encourage recklessness since the government would pick up the pieces in the event it was about to go out of business. The phrase has also been more broadly applied to refer to a government's policy to bail out any corporation. It raises the issue of moral hazard in business operations.

Examples: AIG, Citicorp.

http://en.wikipedia.org/wiki/Too_Big_to_Fail_policy

What is moral hazard?

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk. In insurance, moral hazard that occurs without conscious or malicious action is called morale hazard.

Other issues:Information asymmetryPrincipal – agent

http://en.wikipedia.org/wiki/Moral_hazard

Current Crisis• Ideas• Political (economic & financial policies)• Financial• Economic

What not to blame for crisis• Greed• Stupidity• Irresponsibility

Why? Always present

Video• http://economistsview.typepad.com/economistsview/video/• Joseph Stiglitz• Robert Solow• Robert Johnson• Title: 100 Days and the Road Ahead• April 29, 2009• 26 minutes and 41 seconds

Joke about economist• USSR• May day parade• Mikhail Gorbachev• Men in suits behind the last artillery pieces.• Who are they?• Our most powerful weapon.• Economist.• Have you seen the damage they can do?

Illustration of what has happened

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom 41

The EndBy Michael LewisVideohttp://paul.kedrosky.com/archives/2009/01/29/video_michael_l.html

Importance of financeMention of IcelandHow to think about saving3 minutes and 15 seconds Joke: How to make a small fortune?What questions to ask.

Mikhail Gorbachev, Washington Post, 7.6.09

The "Washington Consensus," the dogma of free markets, deregulation and balanced budgets at any cost, was force-fed to the rest of the world.

But then came the economic crisis of 2008 and 2009, and it became clear that the new Western model was an illusion that benefited chiefly the very rich.

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/05/AR2009060501966.html

Crisis, Evidence, Anecdotes

In United States Chrysler, Ford and General Motors were frequently described as the Big Three.

Chrysler and General Motors have gone bankrupt.

Why not Ford?

Crisis, Evidence, Anecdotes

GM's application on June 1, 2009 for Chapter 11 protection from its creditors, triggered the biggest industrial bankruptcy in history. Until 2008, when it was overtaken by Toyota, GM was the world's biggest carmaker, producing well over 9 million cars and trucks a year in 34 different countries. It has 463 subsidiaries and employs 234,500 people, 91,000 of them in America, where it also provides health-care and pension benefits for 493,000 retired workers. In America alone, it spends $50 billion a year buying parts and services from a network of 11,500 vendors and pays $476 million in salaries each month (Economist)

Crisis, Evidence

http://www.voxeu.org/index.php?q=node/3421

Crisis, Evidence

Crisis, Evidence (continued previous page)

Crisis, Evidence

Crisis, Evidence, Response

Simon JohnsonProfessor MITLecture2.12.08Seminar Series: Real Time Deep Dive into the Global

Crisis as it EvolvesEuropeAbout 30 minutesStarts at 37 minuteshttp://mitsloan.mit.edu/newsroom/video-johnson.php

Joseph StiglitzNobel Prize EconomicsNobel Laureate Meetings at LindauAugust 200849 minutes and 30 secondshttp://lindau-nobel.de/LecturesOnline.AxCMS?

ActiveID=1173Scroll down to Stiglitz lectureClick on image to start video

International Finance Good afternoon Dobré odpoledne 1.

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