 Global Financial management 

Exchange rates
 If purchasing form overseas, you need to purchase the currency from the country
where your item is being purchased to pay. This aspect of global financial
management creates uncertainty because exchange rates fluctuate and, as a result,
make it difficult for a business to plan
 Exchange rates fluctuate over time due to variations in supply and demand
 Depreciation of currency = there is a downward movement of A$ compared to other
currencies (need more money to pay for bills) better for exporter 
 Appreciation of currency = there is an upward movement of A$ compared to other
currencies (need less money to pay for bills) better for importer  
 Currency fluctuations, therefore, significantly impact on the profitability of global
businesses. When revenues and expenses are transferred between nations, the
exchange rate can either increase or decrease their value. Currency fluctuations will
also affect the business’s ability to meet their financial objectives. 

Interest rates
 Interest rates vary from country to country and managers can take advantage of this
by sourcing funds from overseas
 However need to be aware of the risks. Interest rates fluctuate and more importantly
loans sourced from overseas generally need to be paid in that foreign currency. This
means if exchange rates change, loan might be more expensive

Methods of international payments (in order of the least risk to highest risk for
exporter):
1. Payment in advance = method allows the exporter to receive payment and then
arrange for the goods to be sent. 
2. Letter of Credit = document that a buyer can request from their bank that
guarantees the payment of goods will be transferred to the seller. The letter of credit
is issued by the importer’s bank to the exporter promising to pay them a specified
amount once certain conditions have been met. 
3. Bill of exchange = document drawn up by the exporter demanding payment from
the importer at a specified time. Two types; Document against payment where the
importer can collect the goods only after paying, and document against acceptance
where the importer can collect the goods before paying
4. Clean payment = occurs when the exporter ships the goods directlyto the importer
before payment is received. 

Hedging 
 Spot exchange rate is the value of an exchange rate relative to another on a given
day. Leaving a business open to currency fluctuations. 
 Hedging is the process of minimising the risk of currency fluctuations. 
 Impacts on exchange rates include, election of Donald Trump, Tariffs on minerals
 Natural Hedging:
 Refers to the way a business is set up to minimize foreign exchange exposure
and may include:
 Establishing offshore subsidiaries
 Arranging for exports and imports to use the same currency, so
movements in currency are offset 
 Using marketing strategies that attempt to reduce the price sensitivity of
the exported products 
  Insisting on both import and export contracts denominated in Australian
dollars

Derivatives
 Financial instruments that may be used to lessen exporting risks and currency
fluctuations and include:
1. Forward exchange = contract to exchange one currency for another at an
agreed exchange rate for a given date in the future
2. Options contracts = option to by or sell foreign currency at a future date at a
given rate
3. Swap contracts = an agreement to exchange currency in the spot market with
an agreement to reverse that transaction at a date in the future. Works when
you are both an exporter and importer using a single foreign currency