CHAPTER 15 Multinational Financial Management Factors that make multinational financial management different Exchange rates and trading International monetary system International financial markets Specific features of multinational financial management What is a multinational corporation?
What are the major factors that distinguish multinational from domestic financial management?
U.S. $ to buy
Swedish krona 0.1000
Are these currency prices direct or indirect quotations?
Since they are prices of foreign currencies expressed in U.S. dollars, they are direct quotations (dollars per currency).
for euros and kronas.
# of Units of Foreign
Currency per U.S. $
Swedish krona 10.00
Euro: 1 / 0.8000 = 1.25.
Krona: 1 / 0.1000 = 10.00.
between euros and kronas.
Euros Dollars Dollar Krona
= 1.25 x 0.1000 =0.125 euros/krona.
= 10.00 x 0.8000 = 8.00 kronas/euro.
Kronas Dollars Dollar Euros
orange juice in the U.S. and ship it to Spain for $1.75. If the firm wants a 50% markup on the product, what should the juice sell for in Spain?
Target price = ($1.75)(1.50)=$2.625
Spanish price = ($2.625)(1.25 euros/$)
orange juice in Spain. The product
costs 2.0 euros to produce and
ship to Sweden, where it can be sold
for 20 kronas. What is the dollar
profit on the sale?
2.0 euros (8.0 kronas/euro) = 16 kronas.
20 - 16 = 4.0 kronas profit.
Dollar profit = 4.0 kronas(0.1000 dollars per krona) = $0.40.
Exchange rate risk is the risk that the value of a cash flow in one currency translated from another currency will decline due to a change in exchange rates.
For example, in the last slide, a weakening krona (strengthening dollar) would lower the dollar profit.
international monetary systems.
In 2002, the full implementation of the “euro” is expected to be complete. The national currencies of the 11 participating countries will be phased out in favor of the “euro.” The newly formed European Central Bank will control the monetary policy of the EMU.
European Monetary Union
European Union countries not in the EMU: Britain Sweden Denmark
operates in a country whose
currency is not convertible?
spot rates and forward rates?
1 + rf
=What is interest rate parity?
Interest rate parity implies that investors should expect to earn the same return on similar-risk securities in all countries:
Forward and spot rates are direct quotations.
rh = periodic interest rate in the home country.
rf = periodic interest rate in the foreign country.
Assume 1 euro = $0.8100 in the180-day forward market and and 180-day risk-free rate is 6% in the U.S. and 4% in Spain. Does interest rate parity hold?
Spot rate = $0.8000.
rh = 6%/2 = 3%.
rf = 4%/2 = 2%.
1 + rf
Forward rate = 0.8078.
If interest rate parity holds, the implied forward rate, 0.8078, would equal the observed forward rate, 0.8100; so parity doesn’t hold.
$1,000(1.25 euros/$) = 1,250 euros.
1,250(1.02)= 1,275 euros.
€1,275 (0.8100 $/€) = $1,032.75.
$32.75/$1,000 = 3.275% per 180 days
= 6.55% per year.
Purchasing power parity implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.
Ph = Pf(Spot rate),
Spot rate = Ph/Pf.
Spot rate = Ph/Pf.
$0.8000 = $2.00/Pf
Pf = $2.00/$0.8000
= 2.5 euros.
inflation have on interest rates
and exchange rates?
operations on each of the