CHAPTER 31

INTERNATIONAL
ASPECTS OF CORPORATE
FINANCE

continuation….
PURCHASING POWER PARITY

Purchasing Power Parity (PPP)

- is the relationship in which the same products cost roughly the same amount in different countries after taking into account the exchange rate.
- it is also referred to as the law of one price.
For example : if a pair of shoes cost $100 in the US and P4,300 in the Philippines, PPP implies that the exchange rate will be P43 per dollar.
The equation for purchasing power parity is as follows :

The spot market exchange rate is expressed as the number of units of home currency that can be exchanged for one unit of foreign currency (P43 per $1)
INFLATION, INTERESTS RATES AND
EXCHANGE RATES
When the dollar strengthens or appreciates , this means that the value of a dollar arises, so it
takes more foreign currency to buy a dollar.

Inflation rates in the home country compared with that in foreign countries influences in the
financing decisions and profitability of foreign investments of multinational firms.
1. They affect future production cost at home and abroad; and
2. They have significant impact on relative interest rates and exchange rates.
INTERNATIONAL MONEY AND CAPITAL
MARKETS
There are three major types of international credit markets:
1. EUROCREDITS
 this is the market for floating-rate bank loans whose rates are tied to LIBOR, which stands
for London Interbank Offer Rate.
 LIBOR is the interest rate offered by the largest and strongest banks on large deposits
 Usually issued for a fixed term with no early repayment
 Eurocredit exist for major trading currencies
 Example: Eurodollar deposit which is a U.S. dollar deposited in a bank outside the US
2. EUROBOND MARKET
 An international bond underwritten by an international syndicate of banks and sold to
investors in countries other than the one in whose money unit the bond is denominated.

3. FOREIGN BOND MARKET

 Are international bonds issued in the country in whose currency the bond is denominated, and
they are underwritten by investment bank in that country.
INTERNATIONAL SECURITY MATKET

Security markets can be classified in several ways.

1. Primary Markets
 this term is used to denote the market for original sale of securities by an issuer to the
public.
2. Secondary Markets
 after securities have been purchased in the primary markets, they can be traded in the
secondary markets. The security markets comprise the organized securities exchanges and
the over-the-counter (OTC) markets. The proceeds from sales of securities in the
secondary markets go to the owners (sellers) of the securities.
NEW YORK STOCK EXCHANGE
 the largest organized securities exchange in the world , NYSE is home to nearly 2,900
companies and it is a corporation with more than 1,400 members including about 1,366
members who owns a “seat”. Most of the seats are owned by brokerage firms.

AMERICAN STOCK EXCHANGE (AMEX)

 it uses a specialist trading system like the NYSE and processes trades in both listed equity
derivative securities such as options.

OVER-THE-COUNTER-MARKET
 NASDAQ MAKRET an electronic stock market without physical trading floor
POLITICAL RISK
Refers to the possibility that a country’s political decisions or events will adversely affect the
business climate
Some political risks to the assets and cash flows of multinational companies are:

1. Government seizure of a company’s assets in the country;

2. Expropriation with minimal compensation
3. Enactment of new taxation; and
4. Limiting or blocking the conversion of local currency to the multinational company’s
domestic currency
MEASURING COUNTRY RISK

 Country risk analysts use sophisticated models to measure risk, thus providing corporate
managers and investors with a way to judge both the relative and absolute risk of investing
the different countries.
 The higher a country’s score, the lower it’s country risk. The maximum possible score is
100.