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international financial management

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Minimize currency conversion costs. Figure 18.3. Payment Flows without Netting. Minimizing Currency Conversion Costs. Bilateral. netting. Multilateral. netting ... – PowerPoint PPT presentation

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Title: international financial management


1
chapter 18
  • international financial management

2
Chapter Objectives 1
  • Analyze the advantages and disadvantages of the
    major forms of payment in international trade
  • Identify the primary types of foreign-exchange
    risk faced by international businesses
  • Describe the techniques used by firms to manage
    their working capital

3
Chapter Objectives 2
  • Evaluate the various capital budgeting techniques
    used for international investments
  • Discuss the primary sources of investment capital
    available to international businesses

4
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

5
Method of Payment
  • Payment in advance
  • Open account
  • Documentary collection
  • Letters of credit
  • Credit cards
  • Countertrade

6
Forms of Drafts Used with Documentary Collection
Sight draft
Time draft
7
Advantages/Disadvantages of Documentary Collection
  • Advantages
  • Reasonable fees
  • Enforceable debt instrument
  • Simple collections process
  • Prompt payments
  • Disadvantages
  • Refusal of shipments
  • Decline draft acceptance
  • Potential for default

8
Figure 18.1 Using a Sight Draft
9
Documentation for Letters of Credit
Export licenses
Certificates of product origin
Inspection certificates
10
Types of Letters of Credit
Advised letter of credit
Confirmed letter of credit
Irrevocable letter of credit
Revocable letter of credit
11
Figure 18.2 Using a Letter of Credit
12
Forms of Countertrade
Barter
Counterpurchase
Buy-back
Offset purchase
13
Map 18.1 Countertrade by Marc Rich
14
Foreign-Exchange Exposure
Transaction exposure
Translation exposure
Economic exposure
15
Transaction Exposure
  • A firm faces transaction exposure 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.

16
Transactions Leading to Transaction Exposure
Product purchases
Product sales
Credit extensions
Money borrowing
17
Options for Responding to Transaction Exposure
Go naked
Buy forward currency
Buy currency option
Acquire an offsetting asset
18
Go Naked
  • To go naked is to ignore transaction exposure
    and assume foreign-exchange risk.
  • Characteristics
  • Does not require advance capital
  • Offers potential for currency appreciation
  • Creates risk for depreciation of exchange
    currency
  • Avoids fees to intermediaries

19
Buy Forward Currency
  • Buying the exchange currency forward in the
    foreign-exchange market locks in the price to
    be paid.
  • Characteristics
  • Guarantees price
  • Protects against decline in value of currency
  • No capital up front
  • Eliminates potential for profits associated with
    currency appreciation
  • Requires fees to intermediaries

20
Buy Currency Option
  • Buying currency options gives buyer the
    opportunity, but not the obligation to buy
    currency at a given price in the future.
  • Characteristics
  • Guarantees price
  • May exercise option or let it expire depending
    upon currency values
  • More expensive than other hedging choices
  • Allows for appreciation benefits while avoiding
    risk of depreciation

21
Acquire an Offsetting Asset
  • Acquiring an offsetting asset of equivalent size
    denominated in purchase currency eliminates net
    transaction exposure.
  • Characteristics
  • Eliminates exposure
  • Requires effort and expense to arrange
    transaction
  • Lost opportunity for capital gain if home
    currency appreciates

22
Political uncertainty can affect transaction
exposure.
23
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.

24
Economic Exposure
  • Economic exposure is the impact on
    the value of a firms
    operations of unanticipated
    exchange rate changes.

25
Map 18.3 Changes in Currency Values Relative to
the U.S.
26
Corporate Financial Goals
Minimize working-capital balances
Minimize currency conversion costs
Minimize foreign-exchange risk
27
Figure 18.3 Payment Flows without Netting
28
Minimizing Currency Conversion Costs
Bilateral netting
Multilateral netting
29
Evaluating Investment Projects
Net present value
Payback period
Internal rate of return
30
Using the Net Present Value Approach
Risk adjustment
Choice of currency
Perspective
31
Figure 18.4 Internal Sources of Capital
32
External Sources of Funding
Investment bankers
Sale of stock
Loans
Swaps
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