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Chapter 18
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 1
International Financial Management
Learning Objectives
• Analyze the pros and cons of major
payment forms in international trade
• Identify types of foreign-exchange risk
faced by international businesses
• Learn how firms manage working capital
• Evaluate capital budgeting techniques
• Explore sources of investment capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 2
Financial Issues in Foreign Trade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 3
Choice of Currency
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 4
Importer’s Currency
Exporter’s Currency
Third Currency
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 5
Credit Checking
Credit
References
Established
Sources
Banking
Operations
Government
Agencies
Methods of Payment
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 6
Advance Payment
Documentary
Collection
Credit Cards
Open Accounts
Letters of Credit
Countertrade
Advance Payment
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 7
Use of Cash Lower Risks
Higher Risks Faster Payment
Importer Exporter
Open Account: Importer’s Point of View
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 8
Expedites the Receipt of Goods
Offers Short-Term Financing
Eliminates Fees for Bank Services
Requires Less Paperwork
Open Account: Exporter’s Point of View
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 9
Increases Risk of Non-Payment
Waives Expertise of Bankers
Lacks Supporting Documentation
Requires Use of Working Capital
Other Payment Methods
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 10
Documentary Collection
Sight Drafts and
Time Drafts
Trade
Acceptances
Banker’s
Acceptances
Bills of Lading
Documentary Collection: Advantages
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 11
Reasonable Bank Fees
Enforceable Debt Instruments
Simplified Collection Process
Reduced Costs of Financing
Documentary Collection: Disadvantages
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 12
Importer May Refuse Shipment
Costs for Unaccepted Goods
Importer May Default on Payment
Legal Recourse May Be Expensive
Letter of Credit
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 13
Bank Guarantees Payment
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 14
Invoice
Bill of Lading
Proof of Insurance
Certificate of Origin
Customs Documents
Packing List
Export License
Inspection Certificates
Documents Needed for Letters of Credit
Letters of Credit Take Different Forms
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 15
•Advised
•Confirmed
•Irrevocable
•Revocable
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 16
Credit Cards
•Retailers•Consumers
Countertrade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 17
Trade by Bartering
Counterpurchase
Buy-Back Arrangements
Off-Set Purchase Agreements
Facilitate Countertrade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 18
Clearinghouse
Accounts
Switching
Arrangements
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 19
Countertrade by Marc Rich
Financing Trade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 20
• Exporting Firms
• Banks and Lenders
• Government Sponsors
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 21
Managing Foreign Exchange Risk
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 22
Transaction Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 23
•Buying
•Selling
•Lending
•Borrowing
Responding to Transaction Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 24
Strategy Benefit(s) Cost(s)
•Go Naked No Capital Outlay Potential Loss of Capital
•Forward Currency No Exposure Fees, Opportunity Cost
•Currency Future No Exposure Fees, Opportunity Cost
•Currency Option No Exposure Up-Front Premium, Inflexible
•Offsetting Asset No Exposure Time, Opportunity Cost
Translation Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 25
Financial Statements of Parent and
Subsidiary
Accounting Exposure: Assets and Liabilities
Presented in Different Currencies
Balance Sheet Hedge: Assets and Liabilities
Presented in the Same Currency
Risk of
Exposure
Higher
Lower
Economic Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 26
Unexpected Exchange-Rate
Changes
Operational
Hedge
Exchange-Rate
Expertise
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 27
Management of Working Capital
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Minimize Working Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 29
•Opportunity Cost
•Needs for Cash
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Cash Management
•Cash Holdings
•Cash Flows
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 31
Currency Conversion
Minimizing Costs
Bilateral Netting
Multilateral Netting
Multilateral Netting In Action (all quantities in Millions of USD equivalents)
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 32
Payments Owed by
S. Korean
Subsidiary
Mexican
Subsidiary
British
Subsidiary
Total
Receipts
Net
Transfer
S. Korean
Subsidiary— 5 4 9 + 1
Receipts
Due to
Mexican
Subsidiary2 — 3 5 – 1
British
Subsidiary6 1 — 7 0
Total
Payments8 6 7 21
Minimize Foreign-Exchange Risk
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 33
Leads and Lags Strategy
Currency Value Expected to Rise
Currency Value Expected to Fall
Net
Holdings
Increase
Decrease
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 34
International Capital Budgeting
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 35
Net Present Value
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 36
•Cash Flows
•Discount Rate
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 37
Net Present Value for International Projects
Risk Adjustment
Currency Selection
Choice of Perspective
Internal Rate of Return
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 38
1. Estimate Cash Flows
2. Calculate Interest Rate
3. Compare to Hurdle Rate
Payback Period
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 39
Long-Run
ProfitsSimple
to Use
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 40
Sources of International Investment Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 41
• Investment Banks
• Stock Markets
• Borrowed Funds
• Swap Market
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 42
External Sources of Investment Capital
Internal Sources of Investment Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 43
Strategic Transfer Pricing
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•Market
•Nonmarket
Market-Based Method
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Reduce Intra-
Corporate
Conflict
Promote
Overall
Profitability
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 46
AdvantagesDisadvantages
Foment Conflict
Reduce Efficiency
Reduce Tariffs and
Taxes
Repatriate Profits
Nonmarket Method
Tax Havens
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 47
Minimal Corporate Income Tax
Stable Political and Business Climate
Efficient Court System
Banking and Communications
Government Response
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 48
Arm’s Length Testing
Advance Pricing
Agreement
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 49
Chapter 18
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 50
International Financial Management
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 51
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.