International Financial

Management

Griffin & Pustay

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International Business, 6th Edition

chapter 18

Chapter Objectives
Analyze the advantages and
disadvantages of the major forms of
payment in international trade
Identify the primary types of foreignexchange risk faced by international
businesses
Describe the techniques used by firms to
manage their working capital

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Chapter Objectives (continued)

Evaluate the various capital budgeting
techniques used for international
investments
Discuss the primary sources of
investment capital available to
international businesses

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Financial Issues in
International Trade
Which currency to use for the
transaction
When and how to check credit
Which form of payment to use
How to arrange financing

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Method of Payment
Payment in
Advance
Open Account
Documentary
Collection

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Letters of Credit
Credit Cards
Countertrade

Forms of Drafts Used with

Documentary Collection

Sight
Draft

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Time
Draft

Advantages/Disadvantages of
Documentary Collection
Advantages

Disadvantages

Reasonable fees

Refusal of
shipments

Enforceable debt
instrument
Simple collections
process
Prompt payments

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Decline draft
acceptance
Potential for
default

Figure 18.1 Using a Sight Draft

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Documentation for
Letters of Credit
Export
Licenses

Certificates of
Product Origin

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Inspection
Certificates

Types of Letters of Credit

Advised letter of credit

Confirmed letter of credit

Irrevocable letter of credit

Revocable letter of credit

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Figure 18.2 Using a

Letter of Credit

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Forms of Countertrade
Barter
Counterpurchase
Buy-back
Offset purchase

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Countertrade: Turkmenistan cotton

exchanged for Indian Wheat

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Map 18.1 Countertrade by Marc Rich

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Table 18.1 Payment Method for

International Trade

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Foreign-Exchange Exposure
Transaction
Exposure
Translation
Exposure
Economic
Exposure
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Transaction Exposure
Transaction Exposure is when the
financial benefits and costs of an
international transaction can be affected by
exchange rate movements that occur after
the firm is legally obligated to complete the
transaction.
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Transactions Leading to
Transaction Exposure

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Product Purchases

Product Sales

Credit Extensions

Money Borrowing

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Options for Responding to

Transaction Exposure
Go naked
Buy forward currency
Buy currency option
Acquire an offsetting asset

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Strategies for Managing Transaction

Exposure: Table 18.2

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Translation Exposure
Translation Exposure is the impact on
the firms consolidated financial statements
of fluctuations in exchange rates that
change the value of foreign subsidiaries as
measured in the parents currency.

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AFLACs corporate treasurer manages the companys

translation exposure to changes in the yen-dollar exchange
rate by using a balance sheet hedge.

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Economic Exposure
Economic Exposure is the
impact on the value of a firms
operations of unanticipated
exchange rate changes.

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Map 18.3 Changes in Currency Values

Relative to the U.S. $ July 2003 vs. July 2008

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Management of Working Capital

Minimize working-capital balances

Minimize currency conversion costs

Minimize foreign-exchange risk

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Figure 18.3
Payment Flows without Netting

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Minimizing Currency Conversion Costs

Bilateral
netting

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Multilateral
netting

Table 18.3 Multilateral Netting

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Evaluating Investment Projects

Net
Present Value
Internal
Rate of Return

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Payback
Period

Using the Net Present Value Approach

Risk Adjustment

Choice of Currency

Perspective

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Sources of International Investment Capital

External Sources
Internal Sources
Strategic Use of Transfer Pricing

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External Sources of Funding

Investment Bankers
Sale of Stock
Loans
Swaps

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Figure 18.4 Internal Sources of Capital

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Table 18.4 Strategic Use of NonmarketBased Transfer Prices

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Copyright 2010 Pearson Education, Inc.

publishing as Prentice Hall