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c hapter 18

c hapter 18. international financial management. 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

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c hapter 18

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  1. chapter 18 international financial management

  2. 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 18-2

  3. Chapter Objectives 2 • Evaluate the various capital budgeting techniques used for international investments • Discuss the primary sources of investment capital available to international businesses 18-3

  4. 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 18-4

  5. Payment in advance Open account Documentary collection Letters of credit Credit cards Countertrade Method of Payment 18-5

  6. Forms of Drafts Used with Documentary Collection Sight draft Time draft 18-6

  7. Advantages Reasonable fees Enforceable debt instrument Simple collections process Prompt payments Disadvantages Refusal of shipments Decline draft acceptance Potential for default Advantages/Disadvantages of Documentary Collection 18-7

  8. Figure 18.1 Using a Sight Draft 18-8

  9. Documentation for Letters of Credit Export licenses Certificates of product origin Inspection certificates 18-9

  10. Types of Letters of Credit Advised letter of credit Confirmed letter of credit Irrevocable letter of credit Revocable letter of credit 18-10

  11. Figure 18.2 Using a Letter of Credit 18-11

  12. Forms of Countertrade Barter Counterpurchase Buy-back Offset purchase 18-12

  13. Map 18.1 Countertrade by Marc Rich 18-13

  14. Foreign-Exchange Exposure Transaction exposure Translation exposure Economic exposure 18-14

  15. Transaction Exposure A firm faces transaction exposure when the 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. 18-15

  16. Transactions Leading to Transaction Exposure Product purchases Product sales Credit extensions Money borrowing 18-16

  17. Options for Responding to Transaction Exposure Go naked Buy forward currency Buy currency option Acquire an offsetting asset 18-17

  18. To ‘go naked’ is to ignore transaction exposure and assume foreign-exchange risk. Characteristics Does not require advance capital Offers potential for currency appreciation Creates risk for depreciation of exchange currency Avoids fees to intermediaries Go Naked 18-18

  19. Buying the exchange currency forward in the foreign-exchange market locks in the ‘price’ to be paid. Characteristics Guarantees price Protects against decline in value of currency No capital up front Eliminates potential for profits associated with currency appreciation Requires fees to intermediaries Buy Forward Currency 18-19

  20. Buying currency options gives buyer the opportunity, but not the obligation to buy currency at a given price in the future. Characteristics Guarantees price May exercise option or let it expire depending upon currency values More expensive than other hedging choices Allows for appreciation benefits while avoiding risk of depreciation Buy Currency Option 18-20

  21. Acquiring an offsetting asset of equivalent size denominated in purchase currency eliminates net transaction exposure. Characteristics Eliminates exposure Requires effort and expense to arrange transaction Lost opportunity for capital gain if home currency appreciates Acquire an Offsetting Asset 18-21

  22. Political uncertainty can affect transaction exposure. 18-22

  23. Translation Exposure Translation exposure is the 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. 18-23

  24. Economic Exposure Economic exposure is the impact on the value of a firm’s operations of unanticipated exchange rate changes. 18-24

  25. Map 18.3 Changes in Currency Values Relative to the U.S. $ 18-25

  26. Corporate Financial Goals Minimize working-capital balances Minimize currency conversion costs Minimize foreign-exchange risk 18-26

  27. Figure 18.3 Payment Flows without Netting 18-27

  28. Minimizing Currency Conversion Costs Bilateral netting Multilateral netting 18-28

  29. Evaluating Investment Projects Net present value Internal rate of return Payback period 18-29

  30. Using the Net Present Value Approach Risk adjustment Choice of currency Perspective 18-30

  31. Figure 18.4 Internal Sources of Capital 18-31

  32. External Sources of Funding Investment bankers Sale of stock Loans Swaps 18-32

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