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