chapter 19 multinational financial management l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
CHAPTER 19 Multinational Financial Management PowerPoint Presentation
Download Presentation
CHAPTER 19 Multinational Financial Management

Loading in 2 Seconds...

play fullscreen
1 / 27

CHAPTER 19 Multinational Financial Management - PowerPoint PPT Presentation


  • 303 Views
  • Uploaded on

CHAPTER 19 Multinational Financial Management. Multinational vs. domestic financial management Exchange rates and trading in foreign exchange International money and capital markets. What is a multinational corporation?. A corporation that operates in two or more countries.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'CHAPTER 19 Multinational Financial Management' - Gideon


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
chapter 19 multinational financial management

CHAPTER 19Multinational Financial Management

Multinational vs. domestic financial management

Exchange rates and trading in foreign exchange

International money and capital markets

what is a multinational corporation
What is a multinational corporation?
  • A corporation that operates in two or more countries.
  • Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in.
why do firms expand into other countries
Why do firms expand into other countries?
  • To seek new markets.
  • To seek raw materials.
  • To seek new technology.
  • To seek production efficiency.
  • To avoid political and regulatory hurdles.
  • To diversify.
what factors distinguish multinational financial management from domestic financial management
What factors distinguish multinational financial management from domestic financial management?
  • Different currency denominations.
  • Economic and legal ramifications.
  • Language differences.
  • Cultural differences.
  • Role of governments.
  • Political risk.
consider the following exchange rates
Consider the following exchange rates

US $ to buy 1 unit

Japanese yen 0.009

Australian dollar 0.650

  • Are these currency prices direct or indirect quotations?
    • Since they are prices of foreign currencies expressed in dollars, they are direct quotations.
what is an indirect quotation
What is an indirect quotation?
  • The number of units of a foreign currency needed to purchase one U.S. dollar, or the reciprocal of a direct quotation.
  • Are you more likely to observe direct or indirect quotations?
    • Most exchange rates are stated in terms of an indirect quotation.
    • Except the British pound, which is usually in terms of a direct quotation.
calculate the indirect quotations for yen and australian dollar
Calculate the indirect quotations for yen and Australian dollar

# of units of foreign

currency per US $

Japanese yen 111.11

Australian dollar 1.5385

  • Simply find the inverse of the direct quotations.
what is a cross rate
What is a cross rate?
  • The exchange rate between any two currencies. Cross rates are actually calculated on the basis of various currencies relative to the U.S. dollar.
  • Cross rate between Australian dollar and the Japanese yen.
    • Cross rate = (Yen / US Dollar) x (US Dollar / A. Dollar)

= 111.11 x 0.650

= 72.22 Yen / A. Dollar

    • The inverse of this cross rate yields:

0.0138 A. Dollars / Yen

slide9

Calculate the two cross rates

between yen and Australian dollars.

  • Cross rate = x

= 111.11 x 0.650= 72.22 yen/A. dollar.

  • Cross rate = x

= 1.5385 x 0.009= 0.0138 A. dollars/yen.

Yen x U.S. Dollars U.S. Dollar A. Dollar

A. Dollars x U.S. Dollars U.S. Dollar Yen

orange juice project setting the appropriate price
Orange juice project:Setting the appropriate price
  • A firm can produce a liter of orange juice and ship it to Japan for $1.75 per unit. If the firm wants a 50% markup on the project, what should the juice sell for in Japan?

Price = (1.75)(1.50)(111.11)

= 291.66 yen

orange juice project determining profitability
Orange juice project:Determining profitability
  • The product will cost 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars. What is the U.S. dollar profit on the sale?
    • Cost in A. dollars = 250 yen (0.0138)

= 3.45 A. dollars

    • A. dollar profit = 6 – 3.45 = 2.55 A. dollars
    • U.S. dollar profit = 2.55 / 1.5385 = $1.66
what is exchange rate risk
What is exchange rate risk?
  • The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates.
  • For example, in the last slide, a weakening Australian dollar (strengthening dollar) would lower the dollar profit.
  • The current international monetary system is a floating rate system.
european monetary union
European Monetary Union
  • In 2002, the full implementation of the “euro” was completed. The national currencies of the 12 participating countries were phased out in favor of the “euro.” The newly formed European Central Bank controls the monetary policy of the EMU.
member nations of the emu
Member nations of the EMU
  • Austria
  • Belgium
  • Finland
  • France
  • Germany
  • Greece
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Portugal
  • Spain
  • Notable European Union countries not in the EMU:
    • Britain, Sweden, and Denmark, Switzerland
what is difference between spot rates and forward rates
What is difference between spot rates and forward rates?
  • Spot rates are the rates to buy currency for immediate delivery.
  • Forward rates are the rates to buy currency at some agreed-upon date in the future.
when is the forward rate at a premium to the spot rate
When is the forward rate at a premium to the spot rate?
  • If the U.S. dollar buys fewer units of a foreign currency in the forward than in the spot market, the foreign currency is selling at a premium.
  • In the opposite situation, the foreign currency is selling at a discount.
  • The primary determinant of the spot/forward rate relationship is relative interest rates.
what is interest rate parity
What is interest rate parity?
  • Interest rate parity holds that investors should expect to earn the same return in all countries after adjusting for risk. (h/f=$/Y)
evaluating interest rate parity
Evaluating interest rate parity
  • Suppose one yen buys $0.0095 in the 30-day forward exchange market and kNOM for a 30-day risk-free security in Japan and in the U.S. is 4%.
    • ft = 0.0095
    • kh = 4% / 12 = 0.333%
    • kf = 4% / 12 = 0.333%
does interest rate parity hold
Does interest rate parity hold?
  • Therefore, for interest rate parity to hold, e0 must equal $0.0095, but we were given earlier that e0 = $0.0090.
which security offers the highest return
Which security offers the highest return?
  • The Japanese security.
    • Convert $1,000 to yen in the spot market. $1,000 x 111.111 = 111,111 yen.
    • Invest 111,111 yen in 30-day Japanese security. In 30 days receive 111,111 yen x 1.00333 = 111,481 yen.
    • Agree today to exchange 111,481 yen 30 days from now at forward rate, 111,481/105.2632 = $1,059.07.
    • 30-day return = $59.07/$1,000 = 5.907%, nominal annual return = 12 x 5.907% = 70.88%.
what is purchasing power parity ppp
What is purchasing power parity (PPP)?
  • Purchasing power parity implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.

Ph = Pf(e0)

-OR-

e0 = Ph/Pf

slide24
If grapefruit juice costs $2.00 per liter in the U.S. and PPP holds, what is the price of grapefruit juice in Australia?

e0 = Ph/Pf

$0.6500 = $2.00/Pf

Pf = $2.00/$0.6500

= 3.0769 Australian dollars.

what impact does relative inflation have on interest rates and exchange rates
What impact does relative inflation have on interest rates and exchange rates?
  • Lower inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms.
  • However, currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries, so the effective interest cost increases over the life of the loan.
international money and capital markets
International money and capital markets
  • Eurodollar markets
    • a source of dollars outside the U.S.
  • International bonds
    • Foreign bonds – sold by foreign borrower, but denominated in the currency of the country of issue.
    • Eurobonds – sold in country other than the one in whose currency the bonds are denominated.
to what extent do average capital structures vary across different countries
To what extent do average capital structures vary across different countries?
  • Previous studies suggested that average capital structures vary among the large industrial countries.
  • However, a recent study, which controlled for differences in accounting practices, suggests that capital structures are more similar across different countries than previously thought.