Welcome to class ofInternational Financial Management

byDr. Satyendra Singh

University of WinnipegCanada

Financial Management Decisions

In what currency should capital be raised? How structured: equity, debt? What sources of capital? If capital market, which ones? Are other sources of money available? How much and for how long?

Capital Structure of the Firm

Retained earnings Debt

Offshore financial center specializes in financing nonresidents, low taxes and few banking regulations

Equity American depository receipts (ADRs): foreign shares held by

a custodian in the issuer’s home market and traded in dollars on the U.S. exchange

Cash Flow Management… Multilateral Netting

Subsidiaries transfer net intracompany cash flows through a centralized clearing center

Cash Flow Management

Leading and Lagging Timing payments early (lead) or late (lag),

depending on anticipated currency movements, so they have the most favorable impact

Foreign Exchange Risk Management

Transaction exposure Change in the value of financial position created by foreign currency

changes between establishment and settlement of contract Translation exposure

Potential change in value of a company’s financial position due to exposure created during consolidation process

Economic exposure Potential for value of future cash flows to be affected by

unanticipated exchange rate movements

Transaction Exposure: Hedging Hedging process to reduce or eliminate financial risk

Forward market hedge Foreign currency contract sold or bought forward in order to protect against foreign currency

movement Currency option hedge Option to buy or sell specific amount of foreign currency at specific time to protect against

foreign currency risk Money market hedge Method to hedge foreign currency exposure by borrowing and lending in domestic and foreign

money markets

Transaction Exposure: Swaps…

Swap Contract Spot sale/purchase of asset against future purchase/sale of equal

amount in order to hedge financial position

Bank Swap Swap made between banks to acquire temporary foreign currencies

Currency Swap Exchange of debt service of loan or bond in one currency for debt

service of loan or bond in another currency

Transaction Exposure: Swaps

Interest Rate Swap Exchange of interest rate flows to manage interest rate

exposure Spot and Forward Market Swaps

Use spot and forward markets to hedge foreign currency exposure

Parallel Loans Matched loans across currencies made to cover risk

Translation Approaches

Current Rate Method Current assets and liabilities are valued at current spot rates and

noncurrent assets and liabilities are translated at historic exchange rates

Temporal Method Monetary accounts are valued at spot rate and accounts carried

at historical cost are translated at historic exchange rates

Hedges and Swaps as “Derivatives”

Contract whose value is tied to the performance of a financial instrument or commodity

Sales Without Money…

Countertrade The trade of goods or services for other goods or services (6

varieties) Counterpurchase

Goods supplied do not rely on the goods imported Compensation

Developing country makes payment in products produced by use of developed country equipment

Barter Direct exchange of goods or services for goods or services

Sales Without Money

Switch Trading Use of third party to market products received in

countertrade Offset

Trade arrangement that requires portion of the inputs be supplied by receiving country

Clearing account arrangements Process to settle trading account within specified time

Transfer Pricing

Transfer Price The cost of intracompany sale of goods or services

International Accounting Standards

• International Accounting Standards Board (IASB)– International Financial Reporting Standards

(IFRS)

Triple bottom line standard (3BL) A results or impact report on the environmental, social, and financial impacts of the business

Use of International Financial Reporting Standards

Cultural Differences in Measurement and Disclosure for Accounting Systems