International financial management has undergone a profound transformation in the past 40 years. As late as the mid-60s, the global environment was relatively stable and predictable. But the intense inflation, technology-driven change, and market deregulation experienced since have created a new world of often suddenly and intensely volatile markets. The number and scope of new financial instruments has also been little short of phenomenal.
Emeritus Professor of Finance Lee Remmers may well have unique insight into his subject. In the late 1960s, the author first began to analyse the suddenly far more critical impact of multinational corporations on the economies as well as on the institutional and social structures of the nations in which they operated. A request to contribute a paper to a conference prompted Remmers to explore the enormity of what has happened in the international financial management field since.
He begins with a thorough analysis of the environment of the 1960s, what may seem to many today a prehistoric era of ultra-tight monetary restrictions, non-floating currencies, and near-nonexistent capital markets when nearly no one had ever heard the term "derivative", or even "options". The author details the vast changes in much of the global economy since, from the massive reductions in almost all borrowing restrictions, to the totally changed current environment of hyper-competitiveness between financial institutions, to the greater volume and ease in sharing information among government entities.
Remmers believes the two most significant developments in the past four decades have been two tightly interconnected factors: advances in capital investment decision-making, and in risk management. He goes on to detail the tightly inter-related sets of information now usually needed for intelligent capital investment decisions. He then offers detailed insights into approaches now being used to forecast cash flows, and advice on how this might best be handled if projects are undertaken in foreign countries.
The author delves into another fundamental issue in corporate finance: how to measure the cost of capital when financing a project. Calling this task, which typically involves finding appropriate benchmarks, difficult and messy is generally a gross understatement, and Remmers reflects on the wealth of academic interest in this subject since the first systematic practical approaches to measuring the cost of capital emerged in the late 60s - the Capital Asset Pricing Model (CAPM). He then devotes extensive coverage to CAPM's fundamental and multifaceted practical significance as a risk assessment vehicle, including the differences between the "international" and the "domestic" CAPM.
While making comparisons with the fiscal world of 35 years ago, Remmers stops to ponder whether investment and financing decisions are generally being made better today than in that bygone era. In particular, has the widespread adoption of the CAPM improved the accuracy of estimating the cost of capital? Remmers explains how and why CAPM has proven itself over time to be a highly useful tool for measuring the "true" costs of capital and justify valuations.
The author devotes the remainder of his study to an exhaustive analysis of modern risk management, and how the types of risk-related concerns faced by corporate managers have changed so radically in the past four decades. In particular, he focuses on how the availability of risk management instruments began to grow exponentially in the 1980s, including what initiated this development: the heavy losses that frequently occurred when using some of the very complex derivative instruments that were popular at the time, and the consequent rapid rise in demand for hedging vehicles. Remmers concludes with a detailed discussion of both currency and interest rate risk management, involving how corporations began to attempt to understand and measure their exposure levels to possibly crippling losses more thoroughly and accurately.
International Business Review, April 2004