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Part IV The Multinational Corporation’s Financial 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

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part iv the multinational corporation s financial decisions

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

chapter 12 multinational treasury management

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

functions of the modern treasury division

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

setting financial goals and strategies

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

managing international trade
Managing international trade

If something can go wrong, it will.

managing international trade1

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

managing the risks of international shipments

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

international payments

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.

export financing

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.

managing multinational cash flows

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

a five step currency risk management program

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

setting a risk management policy

Setting a risk management policy

Risk management should complement the overall business plan

exchange rate forecasting
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
the g30 global derivatives study group
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.
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