INTERNATIONAL FINANCIAL MANAGEMENT 4

Chapter 18: International Financial Management International Business, 4th Edition Griffin & Pustay 18-1 ©2004 Prentice Hall Chapter Objectives_1  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 ©2004 Prentice Hall 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 ©2004 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 ©2004 Prentice Hall Method of Payment  Payment in advance  Open account  Documentary collection  Letters of credit  Credit cards  Countertrade 18-5 ©2004 Prentice Hall Forms of Drafts  Sight draft: requires payment upon transfer of title to the goods from the exporter to the importer  Time draft: extends credit to the importer by requiring payment at some specified time – Date draft: specifies particular date 18-6 ©2004 Prentice Hall Figure18.1 Using a Sight Draft 18-7 ©2004 Prentice Hall Documentation for Letters of Credit  Export licenses  Certificates of product origin  Inspection certificates 18-8 ©2004 Prentice Hall Types of Letters of Credit  Advised letter of credit  Confirmed letter of credit  Irrevocable letter of credit  Revocable letter of credit 18-9 ©2004 Prentice Hall Figure 18.2 Using a Letter of Credit 18-10 ©2004 Prentice Hall Go Naked Benefits  No capital outlay  Potential for capital gain if home currency rises in value 18-19 Costs  Potential for capital loss if home currency falls in value ©2004 Prentice Hall Buy Forward Currency Benefits  Elimination of transaction exposure  Flexibility in size and timing of contract 18-20 Costs  Fees to banks  Lost opportunity for capital gain if home currency rises in value ©2004 Prentice Hall Buy Currency Future Benefits  Elimination of transaction exposure  Ease and relative inexpensiveness of futures contracts 18-21 Costs  Small brokerage free  Inflexibility in size and timing of contract  Lost opportunity for capital gain if home currency rises in value ©2004 Prentice Hall Buy Currency Option Benefits Costs  Elimination of  Premium paid up front transaction exposure for option because of its “heads I win; tail I  Potential for capital don’t lose” nature gain if home currency  Inflexibility in size rises in value and timing of option 18-22 ©2004 Prentice Hall Acquire Offsetting Asset Benefits  Elimination of transaction exposure 18-23 Costs  Effort or expense of arranging offsetting transaction  Lost opportunity for capital gain if home currency rises in value ©2004 Prentice Hall Translation Exposure  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  Reduce translation exposure through the use of a balance sheet hedge 18-24 ©2004 Prentice Hall Economic Exposure  Impact on the value of a firm’s operations of unanticipated exchange rate changes – Affects all areas of operations  Management of economic exposure involves analyzing likely changes in exchange rates 18-25 ©2004 Prentice Hall Map 18.3 Changes in Currency Values Relative to the U.S $, July 2003 18-26 ©2004 Prentice Hall Management of Working Capital  Corporate Financial Goals – Minimizing working-capital balances – Minimizing currency conversion costs – Minimizing foreign-exchange risk 18-27 ©2004 Prentice Hall Figure 18.3 Payment Flows Without Netting 18-28 ©2004 Prentice Hall Evaluating Investment Projects  Net Present Value  Internal Rate of Return  Payback period 18-29 ©2004 Prentice Hall Net Present Value Approach  A dollar today is worth more than a dollar in the future  Estimate the cash flows the project will generate and then discount them back to the present 18-30 ©2004 Prentice Hall Other Factors to Consider When Using Net Present Value Approach  Risk Adjustment  Choice of Currency  Whose Perspective: Parent’s or Project’s? 18-31 ©2004 Prentice Hall Before investing $500 million in this Chilean copper mine, Placer Dome carefully analyzed the risks 18-32 ©2004 Prentice Hall Figure 18.4 Internal Sources of Capital for International Businesses 18-33 ©2004 Prentice Hall ... techniques used for international investments  Discuss the primary sources of investment capital available to international businesses 18-3 ©20 04 Prentice Hall Financial Issues in International Trade... exchange rates 18-25 ©20 04 Prentice Hall Map 18.3 Changes in Currency Values Relative to the U.S $, July 2003 18-26 ©20 04 Prentice Hall Management of Working Capital  Corporate Financial Goals – Minimizing... Placer Dome carefully analyzed the risks 18-32 ©20 04 Prentice Hall Figure 18 .4 Internal Sources of Capital for International Businesses 18-33 ©20 04 Prentice Hall