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CHAPTER VI: INTERNATIONAL FINANCIAL MANAGEMENT AT MNCs 1. Multinational Corporation 2. International Management at MNCs 12/22/2010 1 B02013 - International Financial Management at MNCs 1. Multinational Corporation 1.1 What is MNCs? A corporation that has its facilities and other assets in at least one country other than its home country. They have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. 1.1 What is MNCs? A corporation that has its facilities and other assets in at least one country other than its home country. They have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. 12/22/2010 2 B02013 - International Financial Management at MNCs 1. Multinational Corporation 1.2 Characteristics • Centralize ownership • Use a wide and vary range of resources • Often chase after global management strategy Risk - Buy and sell of products - Financial Transfer 1.2 Characteristics • Centralize ownership • Use a wide and vary range of resources • Often chase after global management strategy Risk - Buy and sell of products - Financial Transfer 12/22/2010 3 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.1 Concept Manage and mitigate risks in transferring of financial products and services between countries, intercompany, bilateral or multilateral. 2.2 Manage Risks - Risks in transaction (A/R, A/P, ) - Risks in fluctuation (inflation…) - Risks in investments 2.1 Concept Manage and mitigate risks in transferring of financial products and services between countries, intercompany, bilateral or multilateral. 2.2 Manage Risks - Risks in transaction (A/R, A/P, ) - Risks in fluctuation (inflation…) - Risks in investments 12/22/2010 4 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.3 Tools and method of management  Choose a suitable management system - Self-managed subsidiaries - Central Management by Parent company Each system has there own costs and risks  Adjusted Present Value Approach - Calculate present value of return on investment to ensure the profitability 2.3 Tools and method of management  Choose a suitable management system - Self-managed subsidiaries - Central Management by Parent company Each system has there own costs and risks  Adjusted Present Value Approach - Calculate present value of return on investment to ensure the profitability 12/22/2010 5 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.3 Tools and method of management  Risk of foreign exchange fluctuations – Translation Exposure – difference between exposed assets and liabilities – Fluctuations in foreign exchange rates – Fluctuations in real value of firm in long-term  Fluctuations in exchange rate will change book value of MNC 2.3 Tools and method of management  Risk of foreign exchange fluctuations – Translation Exposure – difference between exposed assets and liabilities – Fluctuations in foreign exchange rates – Fluctuations in real value of firm in long-term  Fluctuations in exchange rate will change book value of MNC 12/22/2010 6 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.3 Tools and method of management  Risk of foreign exchange fluctuations How to mitigate risk? - Buy and sell of Forward, Future contract - Use strong currency in contract (less fluctuate) - Accept payment or storage of currency that is expected to be valuated - Other instruments 2.3 Tools and method of management  Risk of foreign exchange fluctuations How to mitigate risk? - Buy and sell of Forward, Future contract - Use strong currency in contract (less fluctuate) - Accept payment or storage of currency that is expected to be valuated - Other instruments 12/22/2010 7 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.3 Tools and method of management + Forward Hedge - Binding contract under which a commodity or financial instrument is bought or sold at the market price (spot price) as on today (date of making the contract), but is to be delivered on a stated future (forward) date in settlement of the contract. - Mitigate risks - Self-insurance in contract - IMM contract - Currency Options - Intra IC Hedge 2.3 Tools and method of management + Forward Hedge - Binding contract under which a commodity or financial instrument is bought or sold at the market price (spot price) as on today (date of making the contract), but is to be delivered on a stated future (forward) date in settlement of the contract. - Mitigate risks - Self-insurance in contract - IMM contract - Currency Options - Intra IC Hedge 12/22/2010 8 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.3 Tools and method of management + Credit/ Money Market Hedge The use of borrowing and lending transactions in foreign currencies to lock in the home currency value of a foreign currency transaction. + Choose time of payment Incase, home currency of importer is devaluatig compare to exporter’s one, he/she will try to pay promptly. But if the home currency is valuating, he/she will try to delay the payment process 2.3 Tools and method of management + Credit/ Money Market Hedge The use of borrowing and lending transactions in foreign currencies to lock in the home currency value of a foreign currency transaction. + Choose time of payment Incase, home currency of importer is devaluatig compare to exporter’s one, he/she will try to pay promptly. But if the home currency is valuating, he/she will try to delay the payment process 12/22/2010 9 B02013 - International Financial Management at MNCs 2. International Management at MNCs 2.3 Tools and method of management + Exposure Netting Offsetting exposures in one currency with exposures in the same or another currency, when exchange rates are expected to move in such a way that losses or gains on the first exposed position should be offset by gains or losses on the second currency exposure. Can be used in combination group of currency that have similar fluctuation or one weak currency and one strong currency 2.3 Tools and method of management + Exposure Netting Offsetting exposures in one currency with exposures in the same or another currency, when exchange rates are expected to move in such a way that losses or gains on the first exposed position should be offset by gains or losses on the second currency exposure. Can be used in combination group of currency that have similar fluctuation or one weak currency and one strong currency 12/22/2010 10 B02013 - International Financial Management at MNCs . settlement of the contract. - Mitigate risks - Self-insurance in contract - IMM contract - Currency Options - Intra IC Hedge 2.3 Tools and method of management + Forward Hedge - Binding contract under. (forward) date in settlement of the contract. - Mitigate risks - Self-insurance in contract - IMM contract - Currency Options - Intra IC Hedge 12/22/2010 8 B02013 - International Financial Management. Rate - FASB 52 - Inflation - Electronic Fund Management 2.3 Tools and method of management + Swaps contract + Bilateral loans contract + Bank Swap + Others issues - Floating Exchange Rate - FASB