Investment Notes

-T-Bills: Treasury bills (or T-bills) mature in one year or less. Like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity.
-Federal Funds: overnight borrowings between banks and other entities to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions.
-Eurodollars: are time deposits denominated in U.S. dollars at banks outside the U.S. and thus are not under the jurisdiction of the Federal Reserve.
-The term was originally coined for U.S. dollars in European banks.
-There is no connection with the euro currency or Eurozone.
-FRA: a forward rate agreement (FRA) is a forward contract, an over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date.
-Investing in International shares:
-Carry trade: is a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. This strategy is very common in the foreign exchange market
-Counter-trade: an umbrella term used to describe many different types of transactions, each “in which the seller provides a buyer with goods or services and promises in return to purchase goods or services from the buyer”
-Forfaiting: is a type of medium-term trade financing used to finance the sale of capital goods. Forfaiting involves the sale of promissory notes signed by the importer in favor of the exporter. The forfait, usually a bank, buys the notes at a discount from the face value from the exporter. In this way the forfait does not have recourse against the exporter in the event of default by the importer. -usually of $500,000 or more
-EXIM Bank: founded in 1934, chartered in 1945, as an independent government agency to facilitate and finance U.S. export trade. Purpose is to provide financing in situations where private financial institutions are unable or unwilling to because: 1. the loan maturity is too long 2. the amount of loan is too large 3. the loan risk is too great 4. the importing firm has difficulty obtaining hard currency for payment
-Bill of Lading: a document issued by the common carrier specifying that it has received the goods for shipment -can serve as a title to the goods
-Letter of Credit: a guarantee from the importers bank that it will act on behalf of the importer and pay the exporter for the merchandise if all relevant documents specified in the L/C are presented according to the terms of the L/C.
-importer’s bank is substituting its creditworthiness for that of the unknown U.S. importer
-Time Draft: a written order instructing the importer or his agent, the importers bank, to pay the amount specified on its face on a certain date date=the end of the credit period in a foreign trade transaction
-Tax Neutrality: foundations in the principles of economic efficiency and equity, determined by three criteria 1. Capital-export neutrality 2. National neutrality 3. Capital-import neutrality
-Cost of Capital: the minimum rate of return an investment project must generate in order to pay its financing costs.
-if project is equal to the CoC, undertaking the project will leave the -firms value unaffected
-if project generates a return exceeding its CoC, the firms value will increase
-Foreign Direct Investment (FDI): is a controlling ownership in a business enterprise in one country by an entity based in another country -American company taking a majority stake in a company in China.
-Ford, which acquired effective control of Mazda, a Japanese car manufacturer
-Acquisitions: a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume control of the target firm.
-often made as a part of a company’s growth strategy whereby it is more beneficial to take over an existing firm’s operations and niche compared to expanding on its own.
-often paid in cash, the acquiring company’s stock, or combo of both
-Mergers: the combing of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of stock
-Greenfield Investment: a form of foreign direct investment where a parent company starts a new venture in a foreign country by building brand-new production facilities from the ground up -creates new long-term jobs in the foreign country by hiring new employees
-Leveraged Buyout (LBO): acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost acquisition
-allows companies to make large acquisitions without having to commit a lot of capital
-Basel: a set of international banking regulations put forth by the Basel Committee on Bank Supervision, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit. -named after the Swiss city in which it is headquartered
-banks that operate international are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets
-Less Developed Countries (LDC): a country with a lower GDP relative to other countries. Characterized by little industry and sometimes a comparatively high dependence on foreign aid.
-often undertake programs of development, with greater or lesser interventions on the part of the national governments
-CAPM: Capital Asset Pricing Model, states that the equilibrium expected rate of return on stock is a linear function of the systematic risk inherent in the security. Describes the relationship between risk and expected return and that is used in the pricing of risky securities
-Poison Pill: a strategy used by corporations to discourage hostile takeovers, the target company attempts to make its stock less attractive to the acquirer. Two Types:
1. “flip-in” allows existing shareholders (except the acquirer) to buy more shares at a discount
2. “flip-over” allows stockholders to buy the acquirers shares at a discounted price after the merger
-White Knight: an individual or company that acquires a corporation on the verge of being taken over by forces deemed undesirable by company officials
-while target company doesn’t remain independent, a white knight is viewed as a preferred option to the hostile company completing their takeover.
-unlike a hostile takeover, current management typically remains in place in a white knight scenario, and investor receive better compensation for their shares
-sometimes referred to as a “black knight”
-Raiders: an individual or organization that tries to take over a company by initiating a hostile takeover bid. Raiders look for companies with undervalued assets and then attempt a hostile takeover by purchasing enough shares to gain a controlling interest
-Objective is to generate huge profits quickly by breaking up the target company and selling of its assets, rather than attempting to turn its operations around and unlock value over the long haul.
-Green Mail: the practice of purchasing enough shares in a firm to challenge a firm's management or leadership and even threaten a corporate takeover, thereby forcing the target firm to buy those shares back at a premium (the greenmail payment) in order to suspend the potential takeover or to take other actions that remove equity from the target firm and return it to the greenmailer. -like blackmail

Short Answer

-Long or short on FRA problem: A bank sells a “three against six” $3,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a six-month Eurodollar deposit. The agreement rate with the buyer is 5.5 percent. There are actually 92 days in the three-month FRA period. Assume that three months from today the settlement rate is 4 7/8 percent. Determine how much the FRA is worth and who pays who--the buyer pays the seller or the seller pays the buyer.

Solution: Since the settlement rate is less than the agreement rate, the buyer pays the seller the absolute value of the FRA. The absolute value of the FRA is: $3,000,000 x [(.04875-.055) x 92/360]/[1 + (.04875 x 92/360)] = $3,000,000 x [-.001597/(1.012458)] = $4,732.05 -Risks associated with FDI:
Risk to be considered include:
(1) the host country’s political and government system;
(2) track record of political parties and their relative strength;
(3) the degree of integration into the world system;
(4) the host country’s ethnic and religious stability;
(5) regional security;
(6) key economic indicators

-Problem on Bankers Acceptance: Assume the time from acceptance to maturity on a $2,000,000 banker’s acceptance is 90 days. Further assume that the importing bank’s acceptance commission is 1.25 percent and that the market rate for 90-day B/As is 7 percent. Determine the amount the exporter will receive if he holds the B/A until maturity and also the amount the exporter will receive if he discounts the B/A with the importer’s bank. Solution: The exporter will receive $1,993,750 = $2,000,000 x [1 - (.0125 x 90/360)] if he holds the B/A to maturity. The acceptance commission is $6,250. The exporter will receive $1,958,750 = $2,000,000 x [1 - ((.0700 + .0125) x 90/360)] if he discounts the B/A with the importer’s bank.

-VAT Calculation
Value-added tax (VAT) is an indirect national tax levied on the value added in the production of a good (or service) as it moves through the various stages of production There are three production stages required before a pair of skis produced by Fjord Fabrication can be sold at retail for NOK2,300. Fill in the following table to show the value added at each stage in the production process and the incremental and total VAT. The Norwegian VAT rate is 25 percent. _______________________________________________________________________ Production Selling Value Incremental Stage Price Added VAT _______________________________________________________________________ 1 NOK 450 2 NOK1,900 3 NOK2,300 ------------------------------------------------- Total VAT

-Tax Havens -A tax haven country is one that has a low corporate income tax rate and low withholding tax rates on passive income.
-Tax havens were once useful as locations for an MNC to establish a shell company
-The Tax Reform Act of 1986 greatly diminished the need for and ability of U.S. corporations to profit from the use of tax havens

-Corporations shares listed on more than one exchange
-Cross-listing refers to a firm having its equity shares listed on one or more foreign exchanges.
-The number of firms doing this has exploded in recent years. * It expands the investor base for a firm. * Very important advantage for firms from emerging market countries with limited capital markets. * Establishes name recognition for the firm in new capital markets, paving the way for new issues. * May offer marketing advantages. * Cross-listing into developed markets with strict securities regulations and information discloser may signal investors that improved corporate governance is forthcoming. * May mitigate possibility of hostile takeovers.

Product Life Cycle:
According to the product life-cycle theory, firms undertake FDI at a particular stage in the life-cycle of the products that they initially introduced. When a new product is introduced, the firm chooses to keep production at home, close to customers. But when the product become mature and foreign demands develop, the firm may be induced to start production in foreign countries, especially in low-cost countries, to serve the local markets as well as to export the product back to the home country. As can be inferred from the boxed reading on Singer in the text, the product life-cycle theory can explain historical development of FDI quite well. In recent years, however, the international system of production has become too complicated to be explained neatly by the life-cycle theory. For example, new products are often introduced simultaneously in many countries and production facilities may be located in many countries at the same time.

-2 open ended questions