Professional Documents
Culture Documents
ch24
ch24
International
Financial
Management
24-1
24-2
International
Financial Management
24-3
Some Background
Types of Exchange-Rate Risk
Exposure
Management of Exchange-Rate
Risk Exposure
Structuring International Trade
Transactions
Some Background
What is a companys motivation to
invest capital abroad?
24-4
International
Capital Budgeting
How does a firm make an international
capital budgeting decision?
24-5
1.
2.
3.
International
Capital Budgeting
24-6
International Capital
Budgeting Example
International project details:
24-7
International Capital
Budgeting Example
End
of
Year
Expected
Cash Flow
(marks)
Exchange
Rate (marks
to U.S. dollar)
Expected
Cash Flow
(U.S. dollars)
-1,500,000
2.50
-600,000
-600,000
500,000
2.54
196,850
166,822
800,000
2.59
308,880
221,833
700,000
2.65
264,151
160,770
600,000
2.72
220,588
113,777
Present Value
of Cash Flows
at 18%
63,202
International
Capital Budgeting
Related issues of concern:
24-9
International
Capital Budgeting
24-10
Foreign Taxation
International
Capital Budgeting
24-11
Political Risk
Important
Exchange-Rate Terms
Spot Exchange Rate -- The rate today for
exchanging one currency for another for
immediate delivery.
delivery
Forward Exchange Rate -- The rate today
for exchanging one currency for another at
a specific future date.
date
24-12
24-13
24-14
Natural hedges
Cash management
Adjusting of intracompany
accounts
International financing hedges
Currency market hedges
Natural Hedges
Globally
Determined
Scenario 1
Pricing
Cost
Scenario 2
Pricing
Cost
24-15
Domestically
Determined
X
X
X
X
24-16
Domestically
Determined
X
X
X
X
Cash Management
What should a firm do if it knew that a local foreign
currency was going to fall in value (e.g., drop from
$.70 per peso to $.60 per peso)?
24-17
Cash Management
24-18
Cash Management
Netting -- A system in which cross-border
purchases among participating subsidiaries of
the same company are netted so that each
participant pays or receives only the net amount
of its intracompany purchases and sales.
24-19
International
Financing Hedges
1. Commercial Bank Loans and Trade Bills
24-20
International
Financing Hedges
2. Eurodollar Financing
24-21
International
Financing Hedges
3. International Bond Financing
24-22
International
Financing Hedges
4. Currency-Option and Multiple-Currency bonds
24-23
24-24
24-25
24-26
24-27
24-28
24-29
24-30
24-31
24-33
24-34
1 + rforeign
1 + rdollar
Interest-Rate
Parity Example
Interest-Rate
Parity Example
The implied 90-day forward rate is:
F
.706
1 + .04
1 + .02
F = (1.04) x (.706)
.706 / (1.02)
= .720
Thus, the implied 90-day forward
rate is .720 marks per dollar.
dollar
24-37
Structuring International
Trade Transactions
24-38
24-39
24-40
24-41
Bill of Lading
Bill of Lading -- A shipping document
indicating the details of the shipment and
delivery of goods and their ownership.
24-42
Letter of Credit
Letter of Credit - A promise from a third party
(usually a bank) for payment in the event that
certain conditions are met. It is frequently used
to guarantee payment of an obligation.
24-43
Countertrade
Countertrade -- Generic term for barter and
other forms of trade that involve the
international sale of goods or services that are
paid for -- in whole or in part -- by the transfer
of goods or services from a foreign country.
24-44
Forfaiting
Forfaiting -- The selling without recourse of
medium- to long-term export receivables to a
financial institution, the forfaiter. A third party,
usually a bank or governmental unit,
guarantees the financing.
24-45