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c hapter 18. international financial management. 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

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C hapter 18 l.jpg

chapter 18

international financial management


Chapter objectives 1 l.jpg
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

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Chapter objectives 2 l.jpg
Chapter Objectives 2

  • Evaluate the various capital budgeting techniques used for international investments

  • Discuss the primary sources of investment capital available to international businesses

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Financial issues in international trade l.jpg
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

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Method of payment l.jpg

Payment in advance

Open account

Documentary collection

Letters of credit

Credit cards

Countertrade

Method of Payment

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Forms of Drafts Used with Documentary Collection

Sight

draft

Time

draft

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Advantages disadvantages of documentary collection l.jpg

Advantages

Reasonable fees

Enforceable debt instrument

Simple collections process

Prompt payments

Disadvantages

Refusal of shipments

Decline draft acceptance

Potential for default

Advantages/Disadvantages of Documentary Collection

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Documentation for Letters of Credit

Export

licenses

Certificates of

product origin

Inspection

certificates

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Types of Letters of Credit

Advised letter of credit

Confirmed letter of credit

Irrevocable letter of credit

Revocable letter of credit

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Figure 18 2 using a letter of credit l.jpg
Figure 18.2 Using a Letter of Credit

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Forms of Countertrade

Barter

Counterpurchase

Buy-back

Offset purchase

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Foreign-Exchange Exposure

Transaction

exposure

Translation

exposure

Economic

exposure

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Transaction exposure l.jpg
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.

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Transactions Leading to Transaction Exposure

Product purchases

Product sales

Credit extensions

Money borrowing

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Options for Responding to Transaction Exposure

Go naked

Buy forward currency

Buy currency option

Acquire an offsetting asset

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Go naked l.jpg

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

Go Naked

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Buy forward currency l.jpg

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

Buy Forward Currency

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Buy currency option l.jpg

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

Buy Currency Option

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Acquire an offsetting asset l.jpg

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

Acquire an Offsetting Asset

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Political uncertainty can affect transaction exposure. in purchase currency eliminates net transaction exposure.

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Translation Exposure in purchase currency eliminates net transaction exposure.

Translation exposure is the impact on the firm’s consolidated financial statements of fluctuations in exchange rates that change the value of foreign subsidiaries as measured in the parent’s currency.

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Economic exposure l.jpg
Economic Exposure in purchase currency eliminates net transaction exposure.

Economic exposure is the impact on the value of a firm’s operations of unanticipated exchange rate changes.

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Map 18 3 changes in currency values relative to the u s l.jpg
Map 18.3 Changes in Currency Values Relative to the U.S. $ in purchase currency eliminates net transaction exposure.

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Corporate Financial Goals in purchase currency eliminates net transaction exposure.

Minimize working-capital balances

Minimize currency conversion costs

Minimize foreign-exchange risk

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Figure 18 3 payment flows without netting l.jpg
Figure 18.3 in purchase currency eliminates net transaction exposure.Payment Flows without Netting

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Minimizing currency conversion costs l.jpg
Minimizing Currency Conversion Costs in purchase currency eliminates net transaction exposure.

Bilateral

netting

Multilateral

netting

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Evaluating investment projects l.jpg
Evaluating Investment Projects in purchase currency eliminates net transaction exposure.

Net

present value

Internal

rate of return

Payback

period

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Using the net present value approach l.jpg
Using the Net Present Value Approach in purchase currency eliminates net transaction exposure.

Risk adjustment

Choice of currency

Perspective

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Figure 18 4 internal sources of capital l.jpg
Figure 18.4 Internal Sources of Capital in purchase currency eliminates net transaction exposure.

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External Sources of Funding in purchase currency eliminates net transaction exposure.

Investment bankers

Sale of stock

Loans

Swaps

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