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International Financial Management

25 Agu

Chapter 18:
International
Financial
Management

Download International Financial Management

International Business, 4th Edition

Griffin & Pustay

Chapter Objectives_1

Analyze the advantages and disadvantages of the major forms of payment in international trade

Identify the primary types of foreign-exchange risk faced by international businesses

Describe the techniques used by firms to manage their working capital

Chapter Objectives_2

Evaluate the various capital budgeting techniques used for international investments

Discuss the primary sources of investment capital available to international businesses

Financial Issues in International Trade

Which currency to use for the transaction

When and how to check credit

Which form of payment to use

How to arrange financing

Method of Payment

Payment in advance

Open account

Documentary collection

Letters of credit

Credit cards

Countertrade

Forms of Drafts

Sight draft: requires payment upon transfer of title to the goods from the exporter to the importer

Time draft: extends credit to the importer by requiring payment at some specified time

Date draft: specifies particular date

Figure18.1 Using a Sight Draft

Documentation for Letters of Credit

Export licenses

Certificates of product origin

Inspection certificates

Types of Letters of Credit

Advised letter of credit

Confirmed letter of credit

Irrevocable letter of credit

Revocable letter of credit

Figure 18.2 Using a Letter of Credit

Countertrade

Occurs when a firm accepts something other than money as payment for its goods or services

Forms

Barter

Counterpurchase (parallel barter)

Buy-back

Offset purchase

Map 18.1 Countertrade by Marc Rich

Table 18.1 Payment Methods for International Trade

The Itaipu Dam the Parana River
between Brazil an Paraguay

Foreign-Exchange Exposure

Transaction exposure

Translation exposure

Economic exposure

Transaction Exposure

Financial benefits and costs of an international transaction can be affected by exchange rate movements that occur after the firm is legally obligated to complete the transaction

Transactions

Purchase of goods, services, or assets

Sales of goods, services, or assets

Extension of credit

Borrowing of money

Options for Responding to
Transaction Exposure

Go naked

Buy forward currency

Buy currency future

Buy currency option

Acquire an offsetting asset

Political uncertainty can affect transaction exposure

Go Naked

Benefits

No capital outlay

Potential for capital gain if home currency rises in value

Costs

Potential for capital loss if home currency falls in value

Buy Forward Currency

Benefits

Elimination of transaction exposure

Flexibility in size and timing of contract

Costs

Fees to banks

Lost opportunity for capital gain if home currency rises in value

Buy Currency Future

Benefits

Elimination of transaction exposure

Ease and relative inexpensiveness of futures contracts

Costs

Small brokerage free

Inflexibility in size and timing of contract

Lost opportunity for capital gain if home currency rises in value

Buy Currency Option

Benefits

Elimination of transaction exposure

Potential for capital gain if home currency rises in value

Costs

Premium paid up front for option because of its “heads I win; tail I don’t lose” nature

Inflexibility in size and timing of option

Acquire Offsetting Asset

Benefits

Elimination of transaction exposure

Costs

Effort or expense of arranging offsetting transaction

Lost opportunity for capital gain if home currency rises in value

Translation Exposure

Impact on the firm’s consolidated financial statements of fluctuations in exchange rates that change the value of foreign subsidiaries as measured in the parent’s currency

Reduce translation exposure through the use of a balance sheet hedge

Economic Exposure

Impact on the value of a firm’s operations of unanticipated exchange rate changes

Affects all areas of operations

Management of economic exposure involves analyzing likely changes in exchange rates

Map 18.3 Changes in Currency Values Relative to the U.S. $, July 2003

Management of Working Capital

Corporate Financial Goals

Minimizing working-capital balances

Minimizing currency conversion costs

Minimizing foreign-exchange risk

Figure 18.3 Payment Flows Without Netting

Evaluating Investment Projects

Net Present Value

Internal Rate of Return

Payback period

Net Present Value Approach

A dollar today is worth more than a dollar in the future

Estimate the cash flows the project will generate and then discount them back to the present

Other Factors to Consider When Using Net Present Value Approach

Risk Adjustment

Choice of Currency

Whose Perspective: Parent’s or Project’s?

Before investing $500 million in this Chilean copper mine, Placer Dome carefully analyzed the risks

Figure 18.4 Internal Sources of Capital for International Businesses

 

 
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Ditulis oleh pada 25/08/2012 in Akutansi International

 

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