Académique Documents
Professionnel Documents
Culture Documents
CHAPTER 16
Multinational Financial Management Multinational vs. domestic financial management Exchange rates and trading in foreign exchange International monetary system International money and capital markets
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 2
16 - 3
Why do firms expand into other countries? 1. To seek new markets. 2. To seek raw materials. 3. To seek new technology. 4. To seek production efficiency. 5. To avoid political and regulatory hurdles. 6. To diversify.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 4
What are the six major factors that distinguish multinational from domestic financial management? 1. Different currency denominations. 2. Economic and legal ramifications. 3. Language differences. 4. Cultural differences. 5. Role of governments. 6. Political risk.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 5
Consider the following exchange rates: U.S. $ to buy 1 Unit Japanese yen 0.009 Australian dollar 0.650 Are these currency prices direct or indirect quotations? Since they are prices of foreign currencies expressed in dollars, they are direct quotations.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 6
The number of units of foreign currency needed to purchase one U.S. dollar, or the reciprocal of a direct quotation.
16 - 7
Calculate the indirect quotations for yen and Australian dollars. # of Units of Foreign Currency per U.S. $ Japanese yen 111.11 Australian dollar 1.5385 Yen: 1/0.009 = 111.11. A. Dollar: 1/0.650 = 1.5385.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 8
The exchange rate between any two currencies. Cross rates are actually calculated on the basis of various currencies relative to the U.S. dollar.
16 - 9
Calculate the two cross rates between yen and Australian dollars.
Cross rate =
Yen x U.S. Dollars U.S. Dollar A. Dollar = 111.11 x 0.650 = 72.22 yen/A. dollar.
Cross rate = A. Dollars x U.S. Dollars U.S. Dollar Yen = 1.5385 x 0.009 = 0.0138 A. dollars/yen.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 10
16 - 11
A firm can produce a liter of orange juice and ship it to Japan for $1.75. If the firm wants a 50% markup on the product, what should the juice sell for in Japan?
16 - 12
Now the firm begins producing the orange juice in Japan. The product costs 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars. What is the U.S. dollar profit on the sale? 250 yen = 250(0.0138) = 3.45 A. dollars. 6 3.45 = 2.55 Australian dollar profit. 1.5385 A. dollars = 1 U.S. dollar. Dollar profit = 2.55/1.5385 = $1.66.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 13
What is exchange rate risk? The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates. For example, in the last slide, a weakening Australian dollar (strengthening dollar) would lower the dollar profit.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 14
Describe the current and former international monetary systems. The current system is a floating rate system.
16 - 15
In 2002, the full implementation of the euro is expected to be complete. The national currencies of the 12 participating countries will be phased out in favor of the euro. The newly formed European Central Bank will control the monetary policy of the EMU.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 16
Austria
Belgium
Germany
Greece
Luxembourg
Netherlands
Finland
France
Ireland
Italy
Portugal
Spain
16 - 17
A currency is convertible when the issuing country promises to redeem the currency at current market rates.
Convertible currencies are traded in world currency markets.
16 - 18
What problems arise when a firm operates in a country whose currency is not convertible? It becomes very difficult for multinational companies to conduct business because there is no easy way to take profits out of the country. Often, firms will barter for goods to export to their home countries.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 19
Forward rates are the rates to buy currency at some agreed-upon date in the future.
16 - 20
When is the forward rate at a premium to the spot rate? If the U.S. dollar buys fewer units of a foreign currency in the forward than in the spot market, the foreign currency is selling at a premium. In the opposite situation, the foreign currency is selling at a discount. The primary determinant of the spot/forward rate relationship is relative interest rates.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 21
16 - 22
Assume 1 yen = $0.0095 in 30-day forward market and kNom for 30-day risk-free securities in Japan and U.S. = 4%. Does interest rate parity hold?
No. ft = $0.0095 kh = 4%/12 = 0.333% kf = 4%/12 = 0.333%
(More...)
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 23
Therefore, if interest rate parity holds then e0 = $0.0095. However, we were given earlier that e0 = $0.0090.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 24
16 - 25
Purchasing power parity implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.
Ph = Pf(e0) or e0 = Ph/Pf.
16 - 26
If grapefruit juice costs $2.00/liter in U.S. and PPP holds, what is the price of grapefruit juice in Australia?
16 - 27
What impact does relative inflation have on interest rates and exchange rates?
Lower inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms. However, currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries, so the effective interest cost increases over the life of the loan.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 28
Describe the international money and capital markets. Eurodollar markets a source of dollars outside the U.S. International bonds Foreign bonds: Sold by foreign borrower, but denominated in the currency of the country of issue. Eurobonds: Sold in country other than the one in whose currency the bonds are denominated.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 29
To what extent do average capital structures vary across different countries? Previous studies suggested that average capital structures vary among the large industrial countries. However, a recent study, which controlled for differences in accounting practices, suggests that capital structures are more similar across different countries than previously thought.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 30
What is the impact of multinational operations on each of the following topics? Cash Management
Distances are greater. Access to more markets for loans and for temporary investments. Cash is often denominated in different currencies.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 31
Capital Budgeting Decisions Foreign operations are taxed locally, and then funds repatriated may be subject to U.S. taxes.
Foreign projects are subject to political risk. Funds repatriated must be converted to U.S. dollars, so exchange rate risk must be taken into account.
Copyright 2002 by Harcourt, Inc. All rights reserved.
16 - 32
Credit Management
Credit is more important, because commerce to lesser-developed countries often relies on credit. Credit for future payment may be subject to exchange rate risk.
16 - 33
Inventory Management
Inventory decisions can be more complex, especially when inventory can be stored in locations in different countries.
Some factors to consider are shipping times, carrying costs, taxes, import duties, and exchange rates.
Copyright 2002 by Harcourt, Inc. All rights reserved.