chapter 15 international business finance l.
Skip this Video
Loading SlideShow in 5 Seconds..
Chapter 15 International Business Finance PowerPoint Presentation
Download Presentation
Chapter 15 International Business Finance

Loading in 2 Seconds...

play fullscreen
1 / 23

Chapter 15 International Business Finance - PowerPoint PPT Presentation

  • Uploaded on

Chapter 15 International Business Finance. Key sections Factors affecting exchange rates Nature of exchange risk and types How control exchange risk?. Introduction. Globalization –to make something worldwide in scope/application

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

PowerPoint Slideshow about 'Chapter 15 International Business Finance' - andrew

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 15 international business finance
Chapter 15International Business Finance

Key sections

  • Factors affecting exchange rates
  • Nature of exchange risk and types
  • How control exchange risk?

Globalization –to make something worldwide in scope/application

  • In finance, integration of countries’ financial and product markets
  • Increases availability of funds and liquidity
  • Made possible by computer and communications technologies
multinational corporations
Multinational Corporations

Multinational corporations or MNC’s

  • Have operations in more than one country
  • Problems: different languages, currencies

financial markets, taxes, cultures, etc.

world trade
World Trade

Trade growing rapidly, capital flows even faster

US Balance of Trade Deficit – 2004- $600 billion, up from less than $500 billion in 2003.

-We are a deficit nation and have to borrow from other countries – Japan and China

- Will they continue to lend? Pressure on the dollar?

exchange rates x rates
Exchange Rates (X-rates)

Price of a foreign currency in terms of the domestic currency

Exchange risk – future rates may be different

Exchange markets –method of transferring purchasing power

  • Extremely active market -trades $1.9 trillion/day
market evolution
Market Evolution

1949-1970 – exchange rates fixed (more or less)

Since 1973 – floating rates

Determined by supply/demand; change minute by minute

Most exchange controls eliminated

the euro
The Euro

1999 – 11 European countries adopted common currency, the Euro (€)

No more DM, FF, Lira

Easier to travel and trade goods and services

Eliminates price differences

Broadens/deepens capital markets

exchange terminology
Exchange Terminology

Devaluation – currency made cheaper

  • Revaluation – becomes more expensive

Direct quote = number of units of home currency to buy one unit of foreign currency

  • 50 US cents to buy one Australian dollar

Indirect – foreign units per home unit

    • Two Aussies for each US$1.
more terminology
More Terminology

Spot rate – rate agreed today for exchange in two days

Forward rate – rate agreed today for future exchange

Cross rates – two foreign currencies for each other

How many yen per British pound?

what determines x rates
What Determines X- Rates?

Market conditions (supply/demand)

Economic situation – growth or no-growth

Balance of Payments – surplus or deficit?

Relative interest rates – high rates attract capital flows

Relative inflation rates

All based on “perceived value”

forward contracts
Forward Contracts

Forward contract requires delivery at a fixed date of fixed amounts of two currencies at a fixed exchange rate

  • This locks in the exchange rate (cost)

Most active markets – 30, 60, 90 day periods but up to ten years

british pound forwards
British Pound Forwards

Direct ($/£)Indirect (£/$)

Spot $1.5315 £ .6530

1 month 1.5285 .6542

3 months 1.5231 .6566

6 months 1.5149 .6601

how do we use forwards
How Do We Use Forwards?

Can buy £ forward today and will know the precise amount due

. Locks in exchange rates

. Protects against future fluctuations

risk and its control
Risk and Its Control

Owe UK supplier £1 million in six months

. Risk comes from writing contract in foreign currency

. One of us is going to have to take risk

forward contract example
£ Forward Contract Example

Spot rate (two day delivery) = $1.5315

Six month forward = $1.5149

Owe £1,000,000 in six months

Buy forward, locks in $1,514,900

  • What if spot is $1.60 in six months without forward?

Cost is $1,600,000 or $85,100 more

  • But what if spot is $1.50? Could have saved $14,900 (if willing to speculate)
hedging risk
Hedging Risk

Hedge – take action to offset risk

Prepay? Gives up interest.

Buy foreign currency denominated asset (bank account)? Probably OK.

Buy forward? Very flexible – customized

Use futures or options? Another possibility

other sources of risk
Other Sources of Risk

Foreign currency receivables

Foreign currency securities in a portfolio

Foreign subsidiaries have foreign currency revenue/expenses and asset/liabilities

measuring exposure to risk
Measuring Exposure to Risk

Assets in foreign currency depreciate if currency devalues

Liabilities also decline

What is the net exposed position?

Translation exposure – translating accounting statements into dollars

Transactions exposure – when receipts or payments are in foreign currency

economic exposure
Economic Exposure

Overall impact on value of the firm or its competitive position

What happens to GM if yen appreciates?

  • Raise prices without losing sales?

- Affected by product, market structure and price elasticity

portfolio investment
Portfolio Investment

Purchase of foreign security – Portfolio

Return unknown – risky

  • In local currency return might be –2% to +8%
  • Exchange rate could change from –4% to +6%
  • For US investor return could range between –6% and +14%

Exchange rates introduce greater variability

direct investment
Direct Investment

Purchase of a company or factory

Worldwide foreign direct investment was $1.4 trillion in 2000

Assets (balance sheet) and income statement kept in local currency

Profits returned in dollars

  • Risk applies to dollar value of assets and the home currency profit stream.
  • Additional risks – business, financial and political
political risk
Political Risk



Changes in taxes

Government controls such as required local equity participation

May be possible to hedge with insurance, government or private