MBA 713 - Chapter 18

Chapter 18 - 1

Chapter 18

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

International Financial Management

Chapter 18 - 2

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


Chapter 18 - 3

Financial Issues in Foreign Trade


Chapter 18 - 4

Choice of Currency


Importer’s Currency

Exporter’s Currency

Third Currency

Chapter 18 - 5Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall

Credit Checking

Credit References

EstablishedSources

BankingOperations

GovernmentAgencies

Chapter 18 - 6

Methods of Payment


Advance Payment

Documentary Collection

Credit Cards

Open Accounts

Letters of Credit

Countertrade

Chapter 18 - 7

Advance Payment


Use of Cash Lower Risks

Higher Risks Faster Payment

Importer Exporter

Chapter 18 - 8

Open Account: Importer’s Point of View


Expedites the Receipt of Goods

Offers Short-Term Financing

Eliminates Fees for Bank Services

Requires Less Paperwork

Chapter 18 - 9

Open Account: Exporter’s Point of View


Increases Risk of Non-Payment

Waives Expertise of Bankers

Lacks Supporting Documentation

Requires Use of Working Capital

Chapter 18 - 10

Other Payment Methods


Documentary Collection

Sight Drafts and Time Drafts

Trade Acceptances

Banker’s Acceptances

Bills of Lading

Chapter 18 - 11

Documentary Collection: Advantages


Reasonable Bank Fees

Enforceable Debt Instruments

Simplified Collection Process

Reduced Costs of Financing

Chapter 18 - 12

Documentary Collection: Disadvantages


Importer May Refuse Shipment

Costs for Unaccepted Goods

Importer May Default on Payment

Legal Recourse May Be Expensive

Chapter 18 - 13

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

Chapter 18 - 15

Letters of Credit Take Different Forms


•Advised

•Confirmed

•Irrevocable

•Revocable


Credit Cards

•Retailers•Consumers

Chapter 18 - 17

Countertrade


Trade by Bartering

Counterpurchase

Buy-Back Arrangements

Off-Set Purchase Agreements

Chapter 18 - 18

Facilitate Countertrade


ClearinghouseAccounts

SwitchingArrangements


Countertrade by Marc Rich

Chapter 18 - 20

Financing Trade


•Exporting Firms

•Banks and Lenders

•Government Sponsors

Chapter 18 - 21

Summary of Discussion


Chapter 18 - 22

Managing Foreign Exchange Risk


Chapter 18 - 23

Transaction Exposure


•Buying•Selling•Lending•Borrowing

Chapter 18 - 24

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

Chapter 18 - 25

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 ofExposure

Higher

Lower

Chapter 18 - 26

Economic Exposure


Unexpected Exchange-Rate Changes

Operational Hedge

Exchange-Rate Expertise

Chapter 18 - 27



Chapter 18 - 28

Management of Working Capital


Chapter 18 - 29

Minimize Working Capital


•Opportunity Cost•Needs for Cash


Cash Management

•Cash Holdings•Cash Flows


Currency Conversion

Minimizing Costs

Bilateral Netting

Multilateral Netting

Chapter 18 - 32

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


Payments Owed byS. Korean Subsidiary

Mexican Subsidiary

British Subsidiary

Total Receipts

Net Transfer

S. Korean Subsidiary — 5 4 9 + 1

Receipts Due to

Mexican Subsidiary 2 — 3 5 – 1

British Subsidiary 6 1 — 7 0

Total Payments 8 6 7 21

Chapter 18 - 33

Minimize Foreign-Exchange Risk


Leads and Lags Strategy

Currency Value Expected to Rise

Currency Value Expected to Fall

Net Holdings

Increase

Decrease

Chapter 18 - 34



Chapter 18 - 35

International Capital Budgeting


Chapter 18 - 36

Net Present Value


•Cash Flows

•Discount Rate


Net Present Value for International Projects

Risk Adjustment

Currency Selection

Choice of Perspective

Chapter 18 - 38

Internal Rate of Return


1. Estimate Cash Flows

2. Calculate Interest Rate

3. Compare to Hurdle Rate

Chapter 18 - 39

Payback Period


Long-RunProfits

Simpleto Use

Chapter 18 - 40



Chapter 18 - 41

Sources of International Investment Capital


Chapter 18 - 42

• Investment Banks

• Stock Markets

• Borrowed Funds

• Swap Market


External Sources of Investment Capital

Chapter 18 - 43

Internal Sources of Investment Capital


Chapter 18 - 44

Strategic Transfer Pricing


•Market•Nonmarket

Chapter 18 - 45

Market-Based Method


Reduce Intra-Corporate Conflict

Promote Overall

Profitability


AdvantagesDisadvantages

Foment Conflict

Reduce Efficiency

Reduce Tariffs and Taxes

Repatriate Profits

Nonmarket Method

Chapter 18 - 47

Tax Havens


Minimal Corporate Income Tax

Stable Political and Business Climate

Efficient Court System

Banking and Communications

Chapter 18 - 48

Government Response


Arm’s Length Testing

Advance Pricing

Agreement

Chapter 18 - 49



Chapter 18 - 50

Chapter 18


International Financial Management


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MBA 713 - Chapter 18

Economy & Finance

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