Part IV The Multinational Corporation’s Financial Decisions

1. Part IV The Multinational Corporation’sFinancial Decisions Chapter 12 Multinational Treasury Management Chapter 13 The Rationale for Hedging Currency Risks Chapter 14 Transaction Exposure to Currency Risk Chapter 15 Operating Exposure to Currency Risk Chapter 16 Translation Exposure to Currency Risk Chapter 17 Multinational Capital Structure and Cost of Capital

2. Chapter 12Multinational Treasury Management 12.1 Determining the Firm’s Financial Goals and Strategies 12.2 Managing the Corporation’s International Trade 12.3 Financing the Corporation’s International Trade 12.4 Managing the Corporation’s Cash Flows 12.5 Risk Management in the Multinational Corporation 12.6 Summary

3. Functions of the modern treasury division Determine the firm’s overall financial goals Manage the risks of domestic and international transactions Arrange financing for domestic and international trade Consolidate and manage the financial flows of the firm Identify, measure, and manage the firm’s risk exposures

4. Setting financial goals and strategies Identify the firm’s core competencies and potential growth opportunities Evaluate the business environment within which the firm operates Formulate a comprehensive strategic plan for turning the firm’s core competencies into sustainable competitive advantages Develop robust processes for implementing the strategic business plan

5. Managing international trade If something can go wrong, it will.

6. Managing international trade The problems of international trade include: Exporters must assure themselves of timely payment Importers must assure themselves of timely delivery of quality goods Geographic and cultural distances involved in international trade are greater than in domestic trade Trade disputes span several legal jurisdictions

7. Managing the risks of international shipments Cover your risks with trade documentation Commercial invoice Packing list Certificate of origin Shipper’s export declaration Export license Bill of lading Dock receipt Warehouse receipt Inspection certificate Insurance certificate Use a commercial freight forwarder (or freight shipper) to coordinate the logistics of trade

8. International payments Open account: Seller delivers goods and bills buyer under agreed-upon payment terms. Cash in advance: Buyer pays for goods prior to shipment. Documentary collections: Seller draws a draft (trade bill or bill of exchange) payable to itself on the buyer. Sight drafts: payable on demand Time drafts: payable at a specified future date Trade acceptances: drawn on and accepted by buyer Banker’s acceptances: accepted by a commercial bank Documentary credits: Letter of credit issued by buyer’s bank guarantees payment upon receipt of trade documents.

9. The risks of international payment methods

10. Payment through a banker’s acceptance

11. Payment through a confirmed letter of credit

12. Export financing Open account: Accounts receivable can be discounted or factored (sold); long-term receivables can be sold to a forfaiter. Cash in advance: Buyer provides financing. Documentary collections: Bothtrade acceptances and banker’s acceptances can be discounted Documentary credits: In some countries, letters of credit can be discounted or used as collateral for new borrowings. Other countries do not follow this practice.

13. Managing multinational cash flows Cash management Multinational netting Forecasting funds needs Managing relations between operating divisions and external partners Credit management Transfer pricing Determination of hurdle rates on new investments

14. A five-stepcurrency risk management program Anticipating and responding to changes in exchange rates identify the distribution of future exchange rates estimate the sensitivity of revenues and expenses determine the desirability of hedging evaluate hedging alternatives monitor the position and reevaluate

15. Setting a risk management policy Risk management should complement the overall business plan

16. Exchange rate forecasting • Market-based exchange rate forecasts • E[Std/f] = Ftd/f • E[Std/f] = S0d/f [(1+id)/(1+if)]t • E[Std/f] = S0d/f [(1+pd)/(1+pf)]t • Model-based exchange rate forecasts • Technical analysis - uses the recent history of exchange rates to predict future exchange rates • Fundamental analysis - uses macroeconomic data to predict future exchange rates

17. The G30 Global Derivatives Study Group • Determine at the highest level of policy and decision making the scope of involvement in derivatives activities. • Value derivatives at market, at least for risk management purposes. • Quantify market risk under adverse market conditions, perform stress simulations, and forecast cash investing and funding needs. • Assess credit risk arising from derivatives activities based on measures of current and potential exposure against credit limits. • Establish market and credit risk management functions with clear authority, independent of the dealing function. • Authorize only professionals to transact and manage the risks, as well as to process, report, control, and audit derivatives activities. • Establish management information systems to measure, manage, and report the risks of derivatives activities. • Voluntarily adopt accounting and disclosure practices for international harmonization and greater transparency.