International Financial Management Griffin & Pustay 18-1 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Business, 6th Edition chapter 18 Chapter Objectives • Analyze the advantages and disadvantages of the major forms of payment in international trade • Identify the primary types of foreignexchange risk faced by international businesses • Describe the techniques used by firms to manage their working capital 18-2 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Chapter Objectives (continued) • Evaluate the various capital budgeting techniques used for international investments • Discuss the primary sources of investment capital available to international businesses 18-3 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Method of Payment • Payment in Advance • Open Account • Documentary Collection 18-5 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Letters of Credit • Credit Cards • Countertrade Forms of Drafts Used with Documentary Collection Sight Draft 18-6 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Time Draft Advantages/Disadvantages of Documentary Collection Advantages Disadvantages • Reasonable fees • Refusal of shipments • Enforceable debt instrument • Simple collections process • Prompt payments 18-7 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall • Decline draft acceptance • Potential for default Figure 18.1 Using a Sight Draft 18-8 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Documentation for Letters of Credit Export Licenses Certificates of Product Origin 18-9 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Inspection Certificates Types of Letters of Credit Advised letter of credit Confirmed letter of credit Irrevocable letter of credit Revocable letter of credit 18-10 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 18-21 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall AFLAC’s corporate treasurer manages the company’s translation exposure to changes in the yen-dollar exchange rate by using a balance sheet hedge 18-22 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Economic Exposure Economic Exposure is the impact on the value of a firm’s operations of unanticipated exchange rate changes 18-23 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Map 18.3 Changes in Currency Values Relative to the U.S $ July 2003 vs July 2008 18-24 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Management of Working Capital Minimize working-capital balances Minimize currency conversion costs Minimize foreign-exchange risk 18-25 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 18.3 Payment Flows without Netting 18-26 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Minimizing Currency Conversion Costs Bilateral netting 18-27 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Multilateral netting Table 18.3 Multilateral Netting 18-28 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Evaluating Investment Projects Net Present Value Internal Rate of Return 18-29 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Payback Period Using the Net Present Value Approach Risk Adjustment Choice of Currency Perspective 18-30 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Sources of International Investment Capital • External Sources • Internal Sources • Strategic Use of Transfer Pricing 18-31 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall External Sources of Funding Investment Bankers Sale of Stock Loans Swaps 18-32 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 18.4 Internal Sources of Capital 18-33 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 18.4 Strategic Use of NonmarketBased Transfer Prices 18-34 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2010 Pearson Education, Inc publishing as Prentice Hall ... as Prentice Hall Map 18. 1 Countertrade by Marc Rich 18- 14 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 18. 1 Payment Method for International Trade 18- 15 Copyright 2010... working capital 18- 2 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Chapter Objectives (continued) • Evaluate the various capital budgeting techniques used for international. .. sources of investment capital available to international businesses 18- 3 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Financial Issues in International Trade • Which currency to