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Financial Management Decisions

Welcome to class of International Financial Management by Dr. Satyendra Singh University of Winnipeg Canada. Financial Management Decisions. In what currency should capital be raised? How structured: equity, debt? What sources of capital? If capital market, which ones?

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Financial Management Decisions

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  1. Welcome to class ofInternational Financial ManagementbyDr. Satyendra SinghUniversity of WinnipegCanada

  2. 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?

  3. 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

  4. Cash Flow Management… • Multilateral Netting • Subsidiaries transfer net intracompany cash flows through a centralized clearing center

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. Hedges and Swaps as “Derivatives” • Contract whose value is tied to the performance of a financial instrument or commodity

  12. 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

  13. 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

  14. Transfer Pricing • Transfer Price • The cost of intracompany sale of goods or services

  15. 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

  16. Use of International Financial Reporting Standards

  17. Cultural Differences in Measurement and Disclosure for Accounting Systems

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