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Welcome to class of International Financial Management by Dr. Satyendra Singh University of Winnipeg Canada. Financial Management Decisions. In what currency should capital be raised? How structured: equity, debt? What sources of capital? If capital market, which ones?
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Welcome to class ofInternational Financial ManagementbyDr. Satyendra SinghUniversity of WinnipegCanada
Financial Management Decisions • In what currency should capital be raised? • How structured: equity, debt? • What sources of capital? • If capital market, which ones? • Are other sources of money available? • How much and for how long?
Capital Structure of the Firm • Retained earnings • Debt • Offshore financial center specializes in financing nonresidents, low taxes and few banking regulations • Equity • American depository receipts (ADRs): foreign shares held by a custodian in the issuer’s home market and traded in dollars on the U.S. exchange
Cash Flow Management… • Multilateral Netting • Subsidiaries transfer net intracompany cash flows through a centralized clearing center
Cash Flow Management • Leading and Lagging • Timing payments early (lead) or late (lag), depending on anticipated currency movements, so they have the most favorable impact
Foreign Exchange Risk Management • Transaction exposure • Change in the value of financial position created by foreign currency changes between establishment and settlement of contract • Translation exposure • Potential change in value of a company’s financial position due to exposure created during consolidation process • Economic exposure • Potential for value of future cash flows to be affected by unanticipated exchange rate movements
Transaction Exposure: Hedging • Hedging • process to reduce or eliminate financial risk • Forward market hedge • Foreign currency contract sold or bought forward in order to protect against foreign currency movement • Currency option hedge • Option to buy or sell specific amount of foreign currency at specific time to protect against foreign currency risk • Money market hedge • Method to hedge foreign currency exposure by borrowing and lending in domestic and foreign money markets
Transaction Exposure: Swaps… • Swap Contract • Spot sale/purchase of asset against future purchase/sale of equal amount in order to hedge financial position • Bank Swap • Swap made between banks to acquire temporary foreign currencies • Currency Swap • Exchange of debt service of loan or bond in one currency for debt service of loan or bond in another currency
Transaction Exposure: Swaps • Interest Rate Swap • Exchange of interest rate flows to manage interest rate exposure • Spot and Forward Market Swaps • Use spot and forward markets to hedge foreign currency exposure • Parallel Loans • Matched loans across currencies made to cover risk
Translation Approaches • Current Rate Method • Current assets and liabilities are valued at current spot rates and noncurrent assets and liabilities are translated at historic exchange rates • Temporal Method • Monetary accounts are valued at spot rate and accounts carried at historical cost are translated at historic exchange rates
Hedges and Swaps as “Derivatives” • Contract whose value is tied to the performance of a financial instrument or commodity
Sales Without Money… • Countertrade • The trade of goods or services for other goods or services (6 varieties) • Counterpurchase • Goods supplied do not rely on the goods imported • Compensation • Developing country makes payment in products produced by use of developed country equipment • Barter • Direct exchange of goods or services for goods or services
Sales Without Money • Switch Trading • Use of third party to market products received in countertrade • Offset • Trade arrangement that requires portion of the inputs be supplied by receiving country • Clearing account arrangements • Process to settle trading account within specified time
Transfer Pricing • Transfer Price • The cost of intracompany sale of goods or services
International Accounting Standards • International Accounting Standards Board (IASB) • International Financial Reporting Standards (IFRS) • Triple bottom line standard (3BL)A results or impact report on the environmental, social, and financial impacts of the business
Cultural Differences in Measurement and Disclosure for Accounting Systems