International FinancialManagement 8国际财务管理课件.ppt

1 Chapter8 Short TermFinancing 2 Objectives Thischapterexplainsshort termliabilitymanagementofMNCs apartofmultinationalmanagementthatisoftenneglectedinothertextbooks Fromthischapter weshouldlearnthatcorrectfinancingdecisionscanreducethefirm scostsandmaximizethevalueoftheMNC Whileforeignfinancingcostscannotusuallybeperfectlyforecasted firmsshouldevaluatetheprobabilityofreducingcoststhroughforeignfinancing Thespecificobjectivesare 3 Objectives toexplainwhyMNCsconsiderforeignfinancing toexplainhowMNCsdeterminewhethertouseforeignfinancing andtoillustratethepossiblebenefitsoffinancingwithaportfolioofcurrencies 4 Pre classDiscussion Ifafirmconsistentlyexportstoacountrywithlowinterestratesandneedstoconsistentlyborrowfunds explainhowitcouldcoordinateitsinvoicingandfinancingtoreduceitsfinancingcosts Whatistheriskofborrowingalowinterestratecurrency AssumethatforeigncurrenciesX Y andZarehighlycorrelated Ifafirmdiversifiesitsfinancingamongthesethreecurrencies willitsubstantiallyreduceitsexchangerateexposure Explain 5 InternalFinancingbyMNCs BeforeanMNC sparentorsubsidiarysearchesforoutsidefunding itshoulddetermineifanyinternalfundsareavailable ParentsofMNCsmayalsoraisefundsbyincreasingtheirmarkupsonthesuppliesthattheysendtotheirsubsidiaries 6 SourcesofShort TermFinancing Euronotesareunsecureddebtsecuritieswithtypicalmaturitiesof1 3or6months Theyareunderwrittenbycommercialbanks MNCsmayalsoissueEuro commercialpaperstoobtainshort termfinancing MNCsutilizedirectEurobankloanstomaintainarelationshipwiththebankstoo 7 WhyMNCsConsiderForeignFinancing AnMNCmayfinanceinaforeigncurrencytooffsetanetreceivablespositioninthatforeigncurrency AnMNCmayalsoconsiderborrowingforeigncurrencieswhentheinterestratesonsuchcurrenciesareattractive soastoreducethecostsoffinancing 8 DeterminingtheEffectiveFinancingRate Theactualcostoffinancingdependsontheinterestrateontheloan andthemovementinthevalueoftheborrowedcurrencyoverthelifeoftheloan Example howtocomputetheeffectivefinancingrate 9 Howtocomputetheeffectivefinancingrate Example Dearborn Inc basedinMichigan obtainsaone yearloanof 1 000 000inNewZealanddollars NZ atthequotedinterestrateof8percent WhenDearbornreceivestheloan itconvertstheNZ toUS topayasupplierformaterials Theexchangerateatthattimeis 50 sotheNZ 1 000 000isconvertedto 500 000 1 000 000 50 Oneyearlater DearbornpaysbacktheloanofNZ 1 000 000plusinterestofNZ 80 000 8 NZ 1 000 000 Thus thetotalamountinNewZealanddollarsneededbyDearbornisNZ 1 080 000 1 000 000 80 000 AssumetheNewZealanddollarappreciatesfrom 50to 60bythetimetheloanistoberepaid Dearbornwillneedtoconvert 648 000 10 Howtocomputetheeffectivefinancingrate Example 1 080 000 60 tohavethenecessarynumberofNewZealanddollarsforloanrepayment Tocomputetheeffectivefinancingrate firstdeterminetheamountinU S dollarsbeyondtheamountborrowedthatwaspaidback ThendividebythenumberofU S dollarsborrowed afterconvertingtheNewZealanddollarstoU S dollars GiventhatDearbornborrowedtheequivalentof 500 000andpaidback 648 000fortheloan theeffectivefinancingrateinthiscaseis 148 000 500 000 29 6 11 DeterminingtheEffectiveFinancingRate Effectivefinancingraterf 1 if 1 St 1 S S 1whereif theinterestrateontheloanS beginningspotrateSt 1 endingspotrateTheeffectiveratecanberewrittenasrf 1 if 1 ef 1whereef the Dinthespotrate 12 CriteriaConsideredforForeignFinancing TherearevariouscriteriaanMNCmustconsiderinitsfinancingdecision includinginterestrateparity theforwardrateasaforecast andexchangerateforecasts 13 CriteriaConsideredforForeignFinancing InterestRateParity IRP IfIRPholds foreignfinancingwithasimultaneoushedgeofthatpositionintheforwardmarketwillresultinfinancingcostssimilartothosefordomesticfinancing 14 CriteriaConsideredforForeignFinancing TheForwardRateasaForecastIftheforwardrateisanaccurateestimateofthefuturespotrate theforeignfinancingratewillbesimilartothehomefinancingrate Iftheforwardrateisanunbiasedpredictorofthefuturespotrate thentheeffectivefinancingrateofaforeignloanwillonaveragebeequaltothedomesticfinancingrate Summaryoftheimplicationsofavarietyofscenariosrelatingtointerestrateparityandforwardrate 15 ImplicationsofIRPforFinancing IRPholds ScenarioTypeoffinancingFinancingcostsYesCoveredSimilarYesForwardrateaccuratelyUncoveredSimilarpredictsfuturespotrateYesForwardrateoverestimatesUncoveredLowerfuturespotrateYesForwardrateunderestimatesUncoveredHigherfuturespotrateNoForwardpremium discount CoveredHigherexceeds islessthan interestratedifferentialNoForwardpremium discount CoveredLowerislessthan exceeds interestratedifferential 16 CriteriaConsideredforForeignFinancing ExchangeRateForecastsFirmsmayuseexchangerateforecaststoforecasttheeffectivefinancingrateofaforeigncurrency ortheymaycomputethebreak evenexchangeratethatwillequatethedomesticandforeignfinancingrates Example Sarasota Inc needsfundsforoneyearandisawarethattheone yearinterestrateofU S dollaris12percentwhiletheinterestratefromborrowingSwissfrancsis8percent SarasotaforecaststhattheSwissFrancwillappreciatefromitscurrentrateof 45to 459 orby2percentoverthenextyear Theexpectedvalueforefwillthereforebe2percent Thus theexpectedeffective 17 CriteriaConsideredforForeignFinancing financingratewillbeE rf 1 if 1 E ef 1 1 08 1 02 1 1016 10 16 Thus financingisSwissfrancsisexpectedtobelessexpensivethanfinancinginU S dollars thoughstillwithuncertainty Todeterminewhatvalueofefwouldmaketheeffectiveratefromforeignfinancingthesameasdomesticfinancing wecouldusetheeffectivefinancingrateformulaandsolveforef 18 CriteriaConsideredforForeignFinancing ef 1 rf 1 if 1Inthisexample rfis12percentandifis8percent soef 1 12 1 08 1 037037 3 7037 ThissuggeststhattheSwissfrankwouldhavetoappreciatebyabout3 7percentovertheloanperiodtomaketheSwissfrancloanascostlyasaloaninU S dollar 19 CriteriaConsideredforForeignFinancing Sometimes itmaybeusefultodevelopprobabilitydistributions insteadofrelyingonsinglepointestimates Thefirmcancomparethisdistributiontotheknownfinancingrateofthehomecurrencytomakeitsfinancingdecision Example P480 481 20 ActualResultsFromForeignFinancing Thefactthatsomefirmsutilizeforeignfinancingsuggeststhattheybelievereducedfinancingcostscanbeachieved 21 FinancingwithaPortfolioofCurrencies Whileforeignfinancingcanresultinsignificantlylowerfinancingcosts thevarianceinthecostsishigher MNCsmaybeabletoachievelowerfinancingcostswithoutexcessiveriskbyfinancingwithaportfolioofcurrencies Example P483 485 22 FinancingwithaPortfolioofCurrencies Ifthechosencurrenciesarenothighlypositivelycorrelated theywillnotbelikelytoexperienceahighlevelofappreciationsimultaneously Thus thechancesthattheportfolio seffectivefinancingratewillexceedthedomesticfinancingratearereduced 23 FinancingwithaPortfolioofCurrencies Afirmthatrepeatedlyfinancesinacurrencyportfoliowillnormallyprefertocomposeafinancingpackagethatexhibitsasomewhatpredictableeffectivefinancingrateonaperiodicbasis Whencomparingdifferentfinancingpackages thevariancecanbeusedtomeasurehowvolatileaportfolio seffectivefinancingrateis 24 FinancingwithaPortfolioofCurrencies Foratwo currencyportfolio E rP wAE rA wBE rB whererP theeffectivefinancingrateoftheportfoliorX theeffectivefinancingrateofcurrencyXwX the oftotalfundsfinancedfromcurrencyX 25 FinancingwithaPortfolioofCurrencies Foratwo currencyportfolio Var rP wA2 A2 wB2 B2 2wAwB A BCORRAB X2 thevarianceofcurrencyX seffectivefinancingrateCORRAB thecorrelationcoefficientofthetwocurrencies effectivefinancerates 26 QuestionsandApplications 1 ExplainwhyanMNCparentwouldconsiderfinancingfromitssubsidiaries 2 Explainhowafirm sdegreeofriskaversionentersintoitsdecisionofwhethertofinanceinaforeigncurrencyoralocalcurrency Whatmotivatesthefirmtoevenconsiderfinancinginaforeigncurrency 27 QuestionsandApplications 3 Discusstheuseofspecifyingabreak evenpointwhenfinancinginaforeigncurrency 4 Boca Inc needs 4millionforoneyear ItcurrentlyhasnobusinessinJapanbutplanstoborrowJapaneseyenfromaJapanesebankbecausetheJapaneseinterestrateisthreepercentagepointslowerthantheU S rate Assumethatinterestrateparityexists alsoassumethatBocabelievesthattheone yearforwardrateoftheJapaneseyenwillexceedthefuturespotrateoneyearfromnow Willtheexpectedeffectivefinancingratebehigher lower orthesameasfinancingwithdollars Explain 28 QuestionsandApplications 5 AkronCo needsdollars Assumethatthelocalone yearloanrateis15percent whileaone yearloanrateoneurosis7percent ByhowmuchmusttheeuroappreciatetocausetheloanineurostobemorecostlythanaU S dollarloan 6 Missoula Inc decidestoborrowJapaneseyenforoneyear Theinterestrateontheborrowedyenis8percent Missoulahasdevelopedthefollowingprobability