Title: international financial management
1 chapter 18
- international financial management
2Chapter 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
3Chapter Objectives 2
- Evaluate the various capital budgeting techniques
used for international investments - Discuss the primary sources of investment capital
available to international businesses
4Financial 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
5Method of Payment
- Payment in advance
- Open account
- Documentary collection
- Letters of credit
- Credit cards
- Countertrade
6Forms of Drafts Used with Documentary Collection
Sight draft
Time draft
7Advantages/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
8Figure 18.1 Using a Sight Draft
9Documentation for Letters of Credit
Export licenses
Certificates of product origin
Inspection certificates
10Types of Letters of Credit
Advised letter of credit
Confirmed letter of credit
Irrevocable letter of credit
Revocable letter of credit
11Figure 18.2 Using a Letter of Credit
12Forms of Countertrade
Barter
Counterpurchase
Buy-back
Offset purchase
13Map 18.1 Countertrade by Marc Rich
14Foreign-Exchange Exposure
Transaction exposure
Translation exposure
Economic exposure
15Transaction 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.
16Transactions Leading to Transaction Exposure
Product purchases
Product sales
Credit extensions
Money borrowing
17Options for Responding to Transaction Exposure
Go naked
Buy forward currency
Buy currency option
Acquire an offsetting asset
18Go 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
19Buy 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
20Buy 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
21Acquire 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
22Political uncertainty can affect transaction
exposure.
23Translation 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.
24Economic Exposure
- Economic exposure is the impact on
the value of a firms
operations of unanticipated
exchange rate changes.
25Map 18.3 Changes in Currency Values Relative to
the U.S.
26Corporate Financial Goals
Minimize working-capital balances
Minimize currency conversion costs
Minimize foreign-exchange risk
27Figure 18.3 Payment Flows without Netting
28Minimizing Currency Conversion Costs
Bilateral netting
Multilateral netting
29Evaluating Investment Projects
Net present value
Payback period
Internal rate of return
30Using the Net Present Value Approach
Risk adjustment
Choice of currency
Perspective
31Figure 18.4 Internal Sources of Capital
32External Sources of Funding
Investment bankers
Sale of stock
Loans
Swaps