公司理财Chap020

1、International Corporate FinanceChapter 20Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin20-1Interpret exchange rate quotes and describe their meaningDifferentiate between spot and forward ratesSpecify the distinction between purchasing power parity and interes

2、t rate parity, and the implications for changes in exchange ratesArticulate the basics of international capital budgetingDescribe the impact of political risk on international business investing20-220.1 Terminology20.2 Foreign Exchange Markets and Exchange Rates20.3 Purchasing Power Parity20.4 Inter

3、est Rate Parity, Unbiased Forward Rates, and the International Fisher Effect20.5 International Capital Budgeting20.6 Exchange Rate Risk20.7 Political Risk20-3American Depository Receipt (ADR): a security issued in the U.S. to represent shares of a foreign stockCross rate: the exchange rate between t

4、wo foreign currencies, e.g., the exchange rate between and Euro (): the single currency of the European Monetary Union which was adopted by Member States on 1 January 1999. Eurobonds: bonds denominated in a particular currency (usually the issuers home currency) and issued simultaneously in the bond

5、 markets of several countries20-4Eurocurrency: money deposited in a financial center outside the home country. Eurodollars are dollar deposits held outside the U.S.; Euroyen are yen denominated deposits held outside Japan.Foreign bonds: bonds issued in another nations capital market by a foreign bor

6、rower Gilts: British and Irish government securitiesLIBOR: the London Interbank Offer Rate is the rate most international banks charge one another for loans of Eurodollars overnight in the London market20-5Without a doubt, the foreign exchange market is the worlds largest financial market.In this ma

7、rket, one countrys currency is traded for anothers.Most of the trading takes place in a few currencies: U.S. dollar ($) British pound sterling () Japanese yen () Euro () 20-6The FOREX market is a two-tiered market: Interbank Market (Wholesale) About 700 banks worldwide stand ready to make a market i

8、n Foreign exchange. Nonbank dealers account for about 20% of the market. There are FX brokers who match buy and sell orders but do not carry inventory and FX specialists. Client Market (Retail)Market participants include international banks, their customers, nonbank dealers, FOREX brokers, and centr

9、al banks.20-7The price of one countrys currency in terms of another.Most currency is quoted in terms of dollars.Consider the following quote: Euro1.29167.77419 The first number (1.29167 ) is how many U.S. dollars it takes to buy 1 Euro The second number (.77419) is how many Euros it takes to buy $1

10、The two numbers are reciprocals of each other (1/1.1.29167 = .77419)20-8Suppose you have $10,000. Based on the rates in Figure 20.1, how many Swiss Francs can you buy? Exchange rate = 1.1181 Francs per dollar Buy 10,000(1.0441) = 10,441 FrancsSuppose you are visiting Bombay and you want to buy a sou

11、venir that costs 1,000 Indian Rupees. How much does it cost in U.S. dollars? Exchange rate = 45.851 rupees per dollar Cost = 1,000 / 45.851 = $21.8120-9Suppose that SDM(0) = .50 i.e., $1 = 2 DM in the spot marketand that S(0) = 100 i.e., $1 = 100What must the DM/ cross rate be?,$ sinceDMDM50 DM1or .

12、02 )0(5011$21001$/DMSDMDMDM20-10$Credit Lyonnais S(0) = 1.50Credit AgricoleS/(0) = 85BarclaysS(0) = 120Suppose we observe these banks posting these exchange rates.First calculate the implied cross rates to see if an arbitrage exists.20-11$Credit Lyonnais S(0) = 1.50Credit AgricoleS/(0) = 85BarclaysS

13、(0) = 120The implied S(/) cross rate is S(/) = 80Credit Agricole has posted a quote of S(/)=85, so there is an arbitrage opportunity.So, how can we make money?1.50$1$1120=18020-12$Credit Lyonnais S(0) = 1.50Credit AgricoleS/(0) = 85BarclaysS(0) =120As easy as 1 2 3:1. Sell our $ for , 2. Sell our fo

14、r , 3. Sell those for $.20-13Sell $100,000 for at S(0) = 1.50receive 150,000 Sell our 150,000 for at S/(0) = 85 receive 12,750,000Sell 12,750,000 for $ at S(0) = 120receive $106,250profit per round trip = $ 106,250 $100,000 = $6,25020-14Spot trade exchange currency immediately Spot rate the exchange

15、 rate for an immediate tradeForward trade agree today to exchange currency at some future date and some specified price (also called a forward contract) Forward rate the exchange rate specified in the forward contract If the forward rate is higher than the spot rate, the foreign currency is selling

16、at a premium (when quoted as $ equivalents). If the forward rate is lower than the spot rate, the foreign currency is selling at a discount.20-15Price of an item is the same regardless of the currency used to purchase it.Requirements for absolute PPP to hold: Transaction costs are zero No barriers t

17、o trade (no taxes, tariffs, etc.) No difference in the commodity between locationsFor most goods, Absolute PPP rarely holds in practice.20-16Provides information about what causes changes in exchange rates.The basic result is that exchange rates depend on relative inflation between countries: E(St )

18、 S01 + (hFC hUS)TBecause absolute PPP doesnt hold for many goods, we will focus on relative PPP from here on out.20-17Suppose the Canadian spot exchange rate is 1.18 Canadian dollars per U.S. dollar. U.S. inflation is expected to be 3% per year, and Canadian inflation is expected to be 2%. Do you ex

19、pect the U.S. dollar to appreciate or depreciate relative to the Canadian dollar? Since inflation is higher in the U.S., we would expect the U.S. dollar to depreciate relative to the Canadian dollar. What is the expected exchange rate in one year? E(S1) = 1.181 + (.02 - .03)1 = 1.168220-18IRP is an

20、arbitrage condition.If IRP did not hold, then it would be possible for an astute trader to make unlimited amounts of money exploiting the arbitrage opportunity.Since we dont typically observe persistent arbitrage conditions, we can safely assume that IRP holds.20-19Suppose you have $100,000 to inves

21、t for one year.You can either 1. Invest in the U.S. at i$. Future value = $100,000(1 + i$)2. Trade your dollars for yen at the spot rate, invest in Japan at i and hedge your exchange rate risk by selling the future value of the Japanese investment forward. FS (1 + i) = (1 + i$) FS (1 + i)Future valu

22、e = $100,000 Since both of these investments have the same risk, they must have the same future value:20-20Formally, IRP is sometimes approximated as FS (1 + i) = (1 + i$) FS=(1 + i$)(1 + i)or if you prefer, i$ i F SS20-21If IRP failed to hold, an arbitrage opportunity would exist. Its easiest to se

23、e this in the form of an example.Consider the following set of foreign and domestic interest rates and spot and forward exchange rates.Spot exchange rateS(0) = $1.25/360-day forward rateF(360) = $1.20/U.S. discount ratei$= 7.10%British discount rate i = 11.56%20-22A trader with $1,000 to invest coul

24、d invest in the U.S.; in one year his investment will be worth $1,071 = $1,000(1+ i$) = $1,000(1.071).Alternatively, this trader could: 1.exchange $1,000 for 800 at the prevailing spot rate, (note that 800 = $1,000$1.25/) 2.invest 800 at i = 11.56% for one year to achieve 892.48. 3.Translate 892.48

25、back into dollars at F(360) = $1.20/; the 892.48 will be exactly $1,071.20-23can invest in the U.S.In one year his investment will be worth $1,071 = $1,000(1.071) = $1,000(1+ i$)A trader with $1,000 to invest20-24$1,071 = 892.48 1$1.20Bring it on back to the U.S.A.$1,000800800= $1,0001$1.25Invest 80

26、0 at i = 11.56% In one year 800 will be worth 892.48 =$1,000(1+ i)Domestic FV = $1,071 and British FV = $1,07120-25Transactions Costs The interest rate available to an arbitrageur for borrowing, ib,may exceed the rate he can lend at, il. There may be bid-ask spreads to overcome, Fb/Sa F/S Thus(Fb/Sa

27、)(1 + il) (1 + i b) 0Capital Controls Governments sometimes restrict import and export of money through taxes or outright bans.20-26Combining PPP and UIP we can get the International Fisher Effect: RUS hUS = RFC hFCThe International Fisher Effect tells us that the real rate of return must be constan

28、t across countries.If it is not, investors will move their money to the country with the higher real rate of return.20-27Home Currency Approach Estimate cash flows in foreign currency Estimate future exchange rates using UIP Convert future cash flows to dollars Discount using domestic required retur

29、nForeign Currency Approach Estimate cash flows in foreign currency Use the IFE to convert domestic required return to foreign required return Discount using foreign required return Convert NPV to dollars using current spot rate20-28Your company is looking at a new project in Mexico. The project will

30、 cost 9 million pesos. The cash flows are expected to be 2.25 million pesos per year for 5 years. The current spot exchange rate is 9.08 pesos per dollar. The risk-free rate in the US is 4%, and the risk-free rate in Mexico 8%. The dollar required return is 15%. Should the company make the investmen

31、t?20-29Use the same information as the previous example to estimate the NPV using the Foreign Currency Approach Mexican inflation rate from the International Fisher Effect is 8% - 4% = 4% Required Return = 15% + 4% = 19% PV of future cash flows = 6,879,679 NPV = 6,879,679 9,000,000 = -2,120,321 peso

32、s NPV = -2,120,321 / 9.08 = -233,51620-30Short-Run ExposureLong-Run ExposureTranslation Exposure20-31Risk from day-to-day fluctuations in exchange rates and the fact that companies have contracts to buy and sell goods in the short run at fixed pricesManaging risk Enter into a forward agreement to gu

33、arantee the exchange rate. Use foreign currency options to lock in exchange rates if they move against you, but benefit from rates if they move in your favor.20-32Long-run fluctuations come from unanticipated changes in relative economic conditionsCould be due to changes in labor markets or governme

34、ntsMore difficult to hedgeTry to match long-run inflows and outflows in the currencyBorrowing in the foreign country may mitigate some of the problems20-33Income from foreign operations must be translated back to U.S. dollars for accounting purposes, even if foreign currency is not actually converte

35、d back to dollars.If gains and losses from this translation flowed through directly to the income statement, there would be significant volatility in EPS.Current accounting regulations require that all cash flows be converted at the prevailing exchange rates, with currency gains and losses accumulated in a special account within shareholders equity.20-34Large multinational firms may need to manage the exchange rate risk associated with several different currencies.The firm needs to consider its net exposure to currency risk instead o