Griffin ib7 inppt_18

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


Financial Issues in Foreign Trade


Choice of Currency


Importer’s Currency

Exporter’s Currency

Third Currency


Credit Checking

Credit

References

Established

Sources

Banking

Operations

Government

Agencies

Methods of Payment


Advance Payment

Documentary

Collection

Credit Cards

Open Accounts

Letters of Credit

Countertrade

Advance Payment


Use of Cash Lower Risks

Higher Risks Faster Payment

Importer Exporter

Open Account: Importer’s Point of View


Expedites the Receipt of Goods

Offers Short-Term Financing

Eliminates Fees for Bank Services

Requires Less Paperwork

Open Account: Exporter’s Point of View


Increases Risk of Non-Payment

Waives Expertise of Bankers

Lacks Supporting Documentation

Requires Use of Working Capital

Other Payment Methods


Documentary Collection

Sight Drafts and

Time Drafts

Trade

Acceptances

Banker’s

Acceptances

Bills of Lading

Documentary Collection: Advantages


Reasonable Bank Fees

Enforceable Debt Instruments

Simplified Collection Process

Reduced Costs of Financing

Documentary Collection: Disadvantages


Importer May Refuse Shipment

Costs for Unaccepted Goods

Importer May Default on Payment

Legal Recourse May Be Expensive

Letter of Credit


Bank Guarantees Payment


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


•Advised

•Confirmed

•Irrevocable

•Revocable


Credit Cards

•Retailers•Consumers

Countertrade


Trade by Bartering

Counterpurchase

Buy-Back Arrangements

Off-Set Purchase Agreements

Facilitate Countertrade


Clearinghouse

Accounts

Switching

Arrangements


Countertrade by Marc Rich

Financing Trade


• Exporting Firms

• Banks and Lenders

• Government Sponsors

Summary of Discussion


Managing Foreign Exchange Risk


Transaction Exposure


•Buying

•Selling

•Lending

•Borrowing

Responding to Transaction Exposure


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


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


Unexpected Exchange-Rate

Changes

Operational

Hedge

Exchange-Rate

Expertise

Management of Working Capital


Minimize Working Capital


•Opportunity Cost

•Needs for Cash


Cash Management

•Cash Holdings

•Cash Flows


Currency Conversion

Minimizing Costs

Bilateral Netting

Multilateral Netting

Multilateral Netting In Action (all quantities in Millions of USD equivalents)


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


Leads and Lags Strategy

Currency Value Expected to Rise

Currency Value Expected to Fall

Net

Holdings

Increase

Decrease

International Capital Budgeting


Net Present Value


•Cash Flows

•Discount Rate


Net Present Value for International Projects

Risk Adjustment

Currency Selection

Choice of Perspective

Internal Rate of Return


1. Estimate Cash Flows

2. Calculate Interest Rate

3. Compare to Hurdle Rate

Payback Period


Long-Run

ProfitsSimple

to Use

Sources of International Investment Capital


• Investment Banks

• Stock Markets

• Borrowed Funds

• Swap Market


External Sources of Investment Capital

Internal Sources of Investment Capital


Strategic Transfer Pricing


•Market

•Nonmarket

Market-Based Method


Reduce Intra-

Corporate

Conflict

Promote

Overall

Profitability


AdvantagesDisadvantages

Foment Conflict

Reduce Efficiency

Reduce Tariffs and

Taxes

Repatriate Profits

Nonmarket Method

Tax Havens


Minimal Corporate Income Tax

Stable Political and Business Climate

Efficient Court System

Banking and Communications

Government Response


Arm’s Length Testing

Advance Pricing

Agreement

Chapter 18


International Financial Management


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