International business 5th griffin chapter 18

international financial management international business, 5th 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 Chapter Objectives • Evaluate the various capital budgeting techniques used for international investments • Discuss the primary sources of investment capital available to international businesses 18-3 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 Method of Payment • Payment in advance • Open account • Documentary collection 18-5 • Letters of credit • Credit cards • Countertrade Forms of Drafts Used with Documentary Collection Sight draft 18-6 Time draft Advantages/Disadvantages of Documentary Collection Advantages Disadvantages • Reasonable fees • Refusal of shipments • Enforceable debt instrument • Simple collections process • Prompt payments 18-7 • Decline draft acceptance • Potential for default Figure 18.1 Using a Sight Draft 18-8 Documentation for Letters of Credit Export licenses Certificates of product origin 18-9 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 Go Naked 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 18-18 Buy Forward Currency Buying the exchange currency forward in the foreign-exchange market locks in the ‘price’ to be paid 18-19 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 Currency Option Buying currency options gives buyer the opportunity, but not the obligation to buy currency at a given price in the future 18-20 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 Acquire an Offsetting Asset 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 18-21 Political uncertainty can affect transaction exposure 18-22 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 Economic Exposure Economic exposure is the impact on the value of a firm’s operations of unanticipated exchange rate changes 18-24 Map 18.3 Changes in Currency Values Relative to the U.S $ 18-25 Corporate Financial Goals Minimize working-capital balances Minimize currency conversion costs Minimize foreign-exchange risk 18-26 Figure 18.3 Payment Flows without Netting 18-27 Minimizing Currency Conversion Costs Bilateral netting 18-28 Multilateral netting Evaluating Investment Projects Net present value Internal rate of return 18-29 Payback period Using the Net Present Value Approach Risk adjustment Choice of currency Perspective 18-30 Figure 18.4 Internal Sources of Capital 18-31 External Sources of Funding Investment bankers Sale of stock Loans Swaps 18-32 ... letter of credit 18- 10 Figure 18. 2 Using a Letter of Credit 18- 11 Forms of Countertrade Barter Counterpurchase Buy-back Offset purchase 18- 12 Map 18. 1 Countertrade by Marc Rich 18- 13 Foreign-Exchange... investments • Discuss the primary sources of investment capital available to international businesses 18- 3 Financial Issues in International Trade • Which currency to use for the transaction • When... payments 18- 7 • Decline draft acceptance • Potential for default Figure 18. 1 Using a Sight Draft 18- 8 Documentation for Letters of Credit Export licenses Certificates of product origin 18- 9 Inspection