INTERNATIONAL ASPECTS

OF BUSINESS FINANCE
 OBJECTIVES
 the nature of international business
 foreign exchange markets
 exchange rate, economic and translation risk
 foreign environment
 WHY BUSINESSES
INTERNATIONALISE?

Importing and Overseas Financing

Exporting and Investment
Internationalisation and Risk Reduction

Internationalisation and
Shareholder’s Wealth
 FOREIGN EXCHANGE
The Foreign Exchange, also termed as Forex, refers to
the conversion of one’s currency into another
country’s currency
The market in which one currency is converted into
another is known as the foreign exchange market
MAIN PLAYERS OF THE FOREIGN
MARKET
 DEALING IN FOREIGN EXCHANGE

Spot Rate – the currencies can be exchanged

immediately, at today’s rate
Forward Rate – contracts can be to exchange the
currencies at some specified future date, at a rate
determined today.
 PROBLEMS OF
INTERNATIONALISATION
1. Exchange Rate Risk
– is the risk that the rate of exchange between two
currencies will move adversely to the particular
business under consideration.
1. Transaction risk = problem that the
exchange rate will alter during a credit
period leading to a loss.
Can be tackled in various ways:

Do nothing:
– On average, a business will gain as often as
it loses from foreign exchange movements.
Trade in the business’s home currency: –
Often difficult to make sales in other than the
customer’s home currency, so there may be
cost

Maintain a foreign currency bank account:

– Use it to make payments and bank receipts in
the foreign currency concerned. – Make
transfers to and from it (by converting from or
to home currency) when the exchange rate is
favourable.
Net transactions:
– Set payments for purchases against sales receipts
in the same currency, perhaps using a bank account
in the currency.
– Requires equal and opposite transactions in the
same currency, which would be unusual – could
work partially.

Use the forward market: – Deal done today at an

agreed (forward) rate, but the currencies are not
exchanged until a specified future date, when the
foreign debt or obligation is due
Use currency futures: – Exactly the same as forward
contracts, except they are for standard amounts and
dates, which means that there can be a market for
them.

Use the spot market and a money market (borrowing

or lending) hedge.

Buy currency options – a right but not an obligation to

exchange specified amounts of specified currencies
on a specified date at a specified rate.
 PROBLEMS OF
INTERNATIONALISATION
2. Economic risk - Similar to transaction risk, but
long term. Can be tackled in various ways:
– Strategic approaches, such as avoiding being too
exposed in a particular currency.
– Currency swaps: two businesses with borrowings in
different currencies agree to service each other’s debt
in, what is, each one’s home currency
 PROBLEMS OF
INTERNATIONALISATION
3. Translation risk
Possibility that assets held abroad will lose value
in the home currency with an exchange rate
movement and so the shareholders’ wealth
reduced.
 INTERNATIONAL
INVESTMENT APPRAISAL
Raises problems additional to home country
investment, for example assess- ment and
estimating future exchange rates, foreign
taxes, inability to repatri- ate investment
returns.
 INTERNATIONAL
PORTOFLIO THEORY
International security investment should
increase the benefits of diversification because
returns from securities in different countries
tend to be relatively uncorrelated.
 WTO - VIDEO

..\..\Downloads\The World Trade Organization (

WTO) Explained in One Minute.mp4

https://slideplayer.com/slide/11001289/
https://businessjargons.com/foreign-exchange-m
arket.html
https://slideplayer.com/slide/3203038/
 VIDEOS FOR WTO
• ..\..\Downloads\The World Trade Organization (
WTO) Explained in One Minute.mp4
•
..\..\Downloads\The WTO celebrates its 25th anni
versary.mp4
 REFERENCES

 https://www.slideshare.net/thabisomphuthi/9-reas
ons-why-firms-internationalize
 https://www.travelexae.com/AE/Foreign-
Currency/Rates/Online-Rates/Currency-
Exchange-Rates-Explained/