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Transcript of Ed4 09
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8/2/2019 Ed4 09
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9-1
Chapter 9Multinational Treasury Management
Learning objectives
Setting financial goals and strategies
Managing operations Managing international trade
Financing international trade
Managing the firms cash flows
Currency risk management
Currency exposures and forward hedges
Implementing a risk management policy
Butler, Multinational Finance, 4e
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9-2
Functions of the modern treasury
Treasury serves as a corporate bank
- Determine the firms overall financial goals
- Manage the risks of domestic and internationaltransactions
- Arrange financing for domestic and internationaltrade
-Consolidate and manage financial flows
- Identify, measure, and manage riskexposures
Setting financial goals and strategies
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9-3
Setting financial goals & strategies
Identify the firms core competencies andpotential growth opportunities
Evaluate the business environment within
which the firm operates
Formulate a strategicplan for achievingsustainable competitive advantages
Develop processes for implementing thestrategic business plan
Setting financial goals and strategies
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9-4
The problems of international trade
Exporters must assure timely payment
Importers must assure timely delivery of
quality goods
Geographic and cultural distances aregreater than in domestic trade
Trade disputes span several legaljurisdictions
Managing international trade
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Murphys Law applies to
international business
If something can go wrong, itwill.
Managing international trade
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9-6
Managing the risksof international shipments
Trade documentationreduces exposures tooperating and financial risks
- Commercial invoice - Packing list
- Certificate of origin - Export declaration
- Export license - Bill of lading
- Dock receipt - Warehouse receipt
- Insurance certificate - Inspection certificate
Freight forwarders (shippers)
can coordinate the logistics of trade
Managing international trade
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9-7
International payment methods
Cash in advance
- Buyer pays for goods prior to shipment
- Buyer provides the financing
Open account
- Seller delivers goods and bills buyer underagreed-upon payment terms
-Receivables can be discounted or factored(sold); long-term receivables can be sold toa forfaiter
Financing international trade
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International payment methods
Documentary credits
- A letter of credit(L/C) issued by the buyersbank guarantees payment upon receipt of
trade documents- In some countries, letters of credit can be
discounted or used as collateral for newborrowings
- Other countries do not follow this practice
Financing international trade
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International payment methods
Documentary collection
- Sight drafts payable on demand
- Time drafts payable at specified date
Trade acceptances are drawn on andaccepted by the buyer
Bankers acceptances accepted by a
commercial bank- Trade acceptances and bankers
acceptances can be discounted
Financing international trade
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Payment with a bankers acceptance
Financing international trade
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9-11
All-in cost is the internal rate of return of theincremental cash flows associated with afinancing alternative
Periodic all-in cost
= (Foregone cash flow) / (Discounted value)-1
All-in cost of trade finance
Foregonecash flow
Discountedvalue
Financing international trade
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A percent acceptance fee is charged on a1 millionbankers acceptance that is due in three months,
which is sold at a discount of 1 percent
Solution:
-The 0.5% fee is deducted at maturity, so theacceptance returns995,000 at maturity
- This acceptance can be sold today for995,000/(1.01) =985,149
The all-in cost is then (1,000,000/985,149)-1
= 1.51 percent per 3 months, or
APR = (1.0151)4-1 = 6.17 percent
All-in cost example
Financing international trade
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International payment methods
Countertrade - exchange of goodsor services not involving cash
- Counterpurchase
- Offset
Delivery and payment depend on theterms of trade
Financing international trade
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9-14
Managing multinational cash flows
Cash management- Multinational netting
- Forecasting funds needs
Relationship management- between thefirms operating divisions and external
partners
-Credit management
- Transfer pricing
- Determination of hurdle rates
Managing the MNCs cash flows
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An example of fx exposure
A U.S. firm expects to receive 40,000Polish zlotys (Z) in one year
The spot rate expected to prevail in oneyear is E[S1
$/Z] = $0.25/Z
What effect will an actual spot rate of S1$/Z
= $0.20/Z have on the firm?
Currency risk management
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Expected receiptat E[S1
$/Z] = $0.25/Z
Actual exchange
at S1$/Z = $0.20/Z
Net loss from
original position
Risk (or payoff) profileof underlying exposure
DV$/Z
DS$/Z-$0.05/Z
-$0.05/Z
+ slope
-$2,000
+Z40,000 +$8,000 at $0.20/Z
+Z40,000
+$10,000 at $0.25/Z
An example of fx exposure
Currency risk management
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9-18
Net currency exposure
Underlying position(long zlotys)
Sell zlotys forward
(short zlotys and long dollars)
Net position
Net exposureDV$/Z
long zlotys
DS$/Z
short zlotys
+Z40,000
+$10,000
-Z40,000
+$10,000
Currency risk management
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Types of exposure to currency risk
Economic exposureChange in the value of all future cash flows fromunexpected changes in exchange rates
- Transaction exposureChange in the value of contractualcashflowsfrom unexpected changes in exchange rates
- Operating exposure
Change in the value of noncontractualcashflows from unexpected changes in exchangerates
Currency risk management
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Types of exposure to currency risk
Translation (accounting) exposure
Change in financial statements fromunexpected changes in exchange rates
Currency risk management
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Economic exposure
Real
assets
Monetaryassets
Commonequity
MonetaryLiabilities
Economic exposure
= Change in the value of all future cash flows
from unexpected changes in exchange rates= Transaction exposure + Operating exposure
Exposure of common equity
= Net monetary exposure+Operating exposure
Currency risk management
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A survey of corporate treasurers
Transaction exposure 1.4
Operating exposure 1.8
Translation exposure 2.4
Mean score
Key: 1 = strongly agree ... 3 = neutral
5 = strongly disagree
Managing ______ is important.
Currency risk management
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Transaction exposure is viewed by
corporate treasurers as the most importantcurrency risk exposure
Source: Jesswein, Kwok and Folks, Adoption of Innovative
Products in Currency Risk Management: Effects of ManagementOrientations and Product Characteristics, Journal of Applied
Corporate Finance(1995).
A survey of corporate treasurers
Currency risk management
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A 5-step currency riskmanagement program
Anticipating and responding to changes inforeign exchange rates
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Identify the distribution of future exchangerates
- Estimate the sensitivity of revenues andexpenses
-Determine the desirability of hedging
- Evaluate hedging alternatives
- Monitor the position and reevaluate
Currency risk management
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Market-based forecasts
- Forward parity
E[Std/f] = Ftd/f
- Relative purchasing power parity
E[Std/f] = S0
d/f [(1+id)/(1+if)]t
- with equal real interest rates
E[Std/f] = S0
d/f [(1+pd)/(1+pf)]t
Exchange rate forecasting
Currency risk management
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Model-based forecasts
- Technical analysis - uses the recent
history of exchange rates to predictexchange rates
- Fundamental analysis - uses
macroeconomic data to predictexchange rates
Exchange rate forecasting
Currency risk management
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Risk management should complement theoverall business plan
Risk management policy
Passivemanagement
Activemanagement
Static approach Dynamicapproach
Technicalforecasts
Fundamentalforecasts
Currency risk management