课程《财务管理基础》英文课件ch24

1、Chapter 24International Financial Management Pearson Education Limited 2004Fundamentals of Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D.Carroll College, Waukesha, WIAfter studying Chapter 24, you should be able to:Explain why many firms invest in foreign operations.Explain why

2、foreign investment is different from domestic investment. Describe how capital budgeting, in an international environment, is similar or dissimilar to that in a domestic environment. Understand the types of exchange-rate exposure and how to manage exchange-rate risk exposure. Compute domestic equiva

3、lents of foreign currencies given the spot or forward exchange rates. Understand and illustrate the purchasing-power parity (PPP) and interest rate parity.Describe the specific instruments and documents used in structuring international trade transactions.Distinguish among countertrade, export facto

4、ring, and forfaiting.International Financial ManagementSome BackgroundTypes of Exchange-Rate Risk ExposureManagement of Exchange-Rate Risk ExposureStructuring International Trade TransactionsSome BackgroundFill product gaps in foreign markets where excess returns can be earned.To produce products in

5、 foreign markets more efficiently than domestically.To secure the necessary raw materials required for product production.What is a companys motivation to invest capital abroad?International Capital Budgeting1.Estimate expected cash flows in the foreign currency.2.Compute their U.S.-dollar equivalen

6、ts at the expected exchange rate.3.Determine the NPV of the project using the U.S. required rate of return, with the rate adjusted upward or downward for any risk premium effect associated with the foreign investment.How does a firm make an international capital budgeting decision?International Capi

7、tal BudgetingOnly consider those cash flows that can be “repatriated” (returned) to the home-country parent.The exchange rate is the number of units of one currency that may be purchased with one unit of another currency.For example, the current exchange rate might be 2.50 Freedonian marks per one U

8、.S. dollar.International Capital Budgeting ExampleA firm is considering an investment in Freedonia, and the initial cash outlay is 1.5 million marks.The project has 4-year project life with cash flows given on the next slide.The appropriate required return for repatriated U.S. dollars is 18%.The app

9、ropriate expected exchange rates are given on the next slide.International project details:International Capital Budgeting Example0 -1,500,000 2.50 -600,000 -600,0001 500,000 2.54 196,850166,8222 800,000 2.59 308,880221,8333 700,000 2.65 264,151160,7704 600,000 2.72 220,588113,777Net Present Value =

10、 63,202EndofYearExpectedCash Flow(marks)ExpectedCash Flow(U.S. dollars)Present Valueof Cash Flowsat 18%ExchangeRate (marksto U.S. dollar)International Capital BudgetingInternational diversification and risk reductionU.S. Government taxationTaxable income derived from non-domestic operations through

11、a branch or division is taxed under U.S. code.Foreign subsidiaries are taxed under foreign tax codes until dividends are received by the U.S. parent from the foreign subsidiary.Related issues of concern:International Capital BudgetingTax codes and policies differ from country to country, but all cou

12、ntries impose income taxes on foreign companies.The U.S. government provides a tax credit to companies to avoid the double taxation problem.A credit is provided up to the amount of the foreign tax, but not to exceed the same proportion of taxable earnings from the foreign country.Excess tax credits

13、can be carried forward. Foreign TaxationInternational Capital BudgetingExpropriation is the ultimate political risk.Developing countries may provide financial incentives to enhance foreign investment.Bottom line: Forecasting political instability.Protect the firm by hiring local nationals, acting re

14、sponsibly in the eyes of the host government, entering joint ventures, making the subsidiary reliant on the parent company, and/or purchasing political risk insurance. Political RiskImportant Exchange-Rate TermsCurrency risk can be thought of as the volatility of the exchange rate of one currency fo

15、r another (say British pounds per U.S. dollar).Spot Exchange Rate - The rate today for exchanging one currency for another for immediate delivery.Forward Exchange Rate - The rate today for exchanging one currency for another at a specific future date.Types of Exchange-Rate Risk ExposureTranslation E

16、xposure - Relates to the change in accounting income and balance sheet statements caused by changes in exchange rates. Transactions Exposure - Relates to settling a particular transaction at one exchange rate when the obligation was originally recorded at another. Economic Exposure - Involves change

17、s in expected future cash flows, and hence economic value, caused by a change in exchange rates.Management of Exchange-Rate Risk ExposureNatural hedgesCash managementAdjusting of intracompany accountsInternational financing hedgesCurrency market hedgesNatural HedgesBoth scenarios are natural hedges

18、as any gain (loss) from exchange rate fluctuations in pricing is reduced by an offsetting loss (gain) in costs in similar global markets. Globally Domestically Determined DeterminedScenario 1Pricing XCost XScenario 2PricingXCostXNatural Hedges - “Not!”Both of these scenarios are not natural hedges a

19、nd thus create a possible firm exposure to events that impact one market and not the other market. Globally Domestically Determined DeterminedScenario 3Pricing XCostXScenario 4Pricing XCost XCash ManagementExchange cash for real assets (inventories) whose value is in their use rather than tied to a

20、currency.Reduce or avoid the amount of trade credit that will be extended as the dollar value that the firm will receive is reduced and reduce any cash that does arrive as quickly as possible.Obtain trade credit or borrow in the local currency so that the money is repaid with fewer dollars.What shou

21、ld a firm do if it knew that a local foreign currency was going to fall in value (e.g., drop from $.70 per peso to $.60 per peso)?Cash ManagementGenerally, one cannot predict the future exchange rates, and the best policy would be to balance monetary assets against monetary liabilities to neutralize

22、 the effect of exchange-rate fluctuations.A reinvoicing center is a company-owned financial subsidiary that purchases exported goods from company affiliates and resells (reinvoices) them to other affiliates or independent customers.Cash ManagementGenerally, the reinvoicing center is billed in the se

23、lling units home currency and bills the purchasing unit in that units home currency.Allows better management of intracompany transactions.Netting - A system in which cross-border purchases among participating subsidiaries of the same company are netted so that each participant pays or receives only

24、the net amount of its intracompany purchases and sales.International Financing Hedges Foreign commercial banks perform essentially the same financing functions as domestic banks except:They allow longer term loans.Loans are generally made on an overdraft basis.Nearly all major commercial cities have

25、 U.S. bank branches or offices available for customers.The use of “discounting” trade bills is widely utilized in Europe versus minimal usage in the United States.1. Commercial Bank Loans and Trade BillsInternational Financing Hedges Eurodollars are bank deposits denominated in U.S. dollars but not

26、subject to U.S. banking regulations.This market is unregulated. Therefore, the differential between the rate paid on deposits and that charged on loans varies according to the risk of the borrower and current supply and demand forces.Rates are typically quoted in terms of the LIBOR.It is a major sou

27、rce of short-term financing for the working capital requirements of the multinational company.2. Eurodollar FinancingInternational Financing Hedges A Eurobond is a bond issued internationally outside of the country in whose currency the bond is denominated. The Eurobond is issued in a single currenc

28、y, but is placed in multiple countries.A foreign bond is issued by a foreign government or corporation in a local market. For example, Yankee bonds, and Samurai bonds.Many international debt issues are floating rate notes that carry a variable interest rate.3. International Bond FinancingInternation

29、al Financing Hedges Currency-option bonds provide the holder with the option to choose the currency in which payment is received. For example, a bond might allow you to choose between yen and U.S. dollars.Currency cocktail bonds provide a degree of exchange-rate stability by having principal and int

30、erest payments being a weighted average of a “basket” of currencies.Dual-currency bonds have their purchase price and coupon payments denominated in one currency, while a different currency is used to make principal payments.4. Currency-Option and Multiple-Currency bondsCurrencies and the EuroEach c

31、ountry has a representative currency like the $ (dollar) in the United States or the (pound) in Britain.On January 1, 1999, the “euro” started trading.The euro is the common currency of the European Monetary Union (EMU), which currently includes the following 12 European Union (EU) countries:Austria

32、, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.Euro The name given to the single European currency. Symbol is (much like the dollar, $).Currency Market Hedges A forward contract is a contract for the delivery of a commodity, foreign curr

33、ency, or financial instrument at a price specified now, with delivery and settlement at a specified future date. Spot rate $.168 per EFr 90-day forward rate .166 per EFrAs shown, the Elbonian franc (EFr) is said to sell at a forward discount as the forward price is less than the spot rate.If the for

34、ward rate is $.171, the EFr is said to sell at a forward premium.1. Forward Exchange MarketCurrency Market Hedges The firm has the option of selling 1 million Elbonian francs forward 90 days. The firm will receive $166,000 in 90 days (1 million Elbonian francs x $.166).Therefore, if the actual spot

35、price in 90 days is less than .166, the firm benefited from entering into this transaction. If the rate is greater than .166, the firm would have benefited from not entering into the transaction.Fillups Electronics has just sold equipment worth 1 million Elbonian francs with credit terms of “net 90.

36、” How can the firm hedge the currency risk?Currency Market Hedges Typical discount or premium ranges for stable currencies are from 0 to 8%, but may be as high as 20% for unstable currencies.How much does this “insurance” cost?Annualized cost of protection= ( $.002 )/( $.168 ) X ( 365 days / 90 days

37、)= .011905 X 4.0556= .0483 or 4.83%Currency Market Hedges A futures contract is a contract for the delivery of a commodity, foreign currency, or financial instrument at a specified price on a stipulated future date.A currency futures market exists for the major currencies of the world.Futures contra

38、cts are traded on organized exchanges.The clearinghouse of the exchange interposes itself between the buyer and the seller. Therefore, transactions are not made directly between two parties.Very few contracts involve actual delivery at expiration.2. Currency FuturesCurrency Market Hedges Sellers (bu

39、yers) cancel a contract by purchasing (selling) another contract. This is an offsetting position that closes out the original contract with the clearinghouse.Futures contracts are marked-to-market daily. This is different than forward contracts that are settled only at maturity.Contracts come in onl

40、y standard-size contracts (e.g., 12.5 million yen per contract).2. Currency Futures (continued)Currency Market Hedges A currency option is a contract that gives the holder the right to buy (call) or sell (put) a specific amount of a foreign currency at some specified price until a certain (expiratio

41、n) date.Currency options hedge only adverse currency movements (“one-sided” risk). For example, a put option can hedge only downside movements in the currency exchange rate.Options exist in both the spot and futures markets.The value depends on exchange rate volatility.3. Currency OptionsCurrency Ma

42、rket Hedges In a currency swap two parties exchange debt obligations denominated in different currencies. Each party agrees to pay the others interest obligation. At maturity, principal amounts are exchanged, usually at a rate of exchange agreed to in advance.The exchange is notional - only the cash

43、 flow difference is paid.Swaps are typically arranged through a financial intermediary, such as a commercial bank.A variety of (complex) arrangements are available.4. Currency SwapsMacro Factors Governing Exchange-Rate BehaviorThe idea that a basket of goods should sell for the same price in two cou

44、ntries, after exchange rates are taken into account.For example, the price of wheat in Canadian and U.S. markets should trade at the same price (after adjusting for the exchange rate). If the price of wheat is lower in Canada, then purchasers will buy wheat in Canada as long as the price is cheaper

45、(after accounting for transportation costs). Purchasing-Power Parity (PPP)Macro Factors Governing Exchange-Rate BehaviorThus, demand will fall in the U.S. and increase in Canada to bring prices back into equilibrium.The price elasticity of exports and imports influences the relationship between a co

46、untrys exchange rate and its purchasing-power parity.Commodity items and products in mature industries are more likely to conform to PPP.Frictions such as government intervention and trade barriers cause PPP not to hold.Purchasing-Power Parity (PPP continued)Macro Factors Governing Exchange-Rate Beh

47、aviorIt suggests that if interest rates are higher in one country than they are in another, the formers currency will sell at a discount in the forward market.Remember that the Fisher effect implies that the nominal rate of interest equals the real rate of interest plus the expected rate of inflatio

48、n.The international Fisher effect suggests that differences in interest rates between two countries serve as a proxy for differences in expected inflation.Interest-Rate ParityMacro Factors Governing Exchange-Rate BehaviorF = current forward exchange-rate in foreign currency per dollar.S = current sp

49、ot exchange-rate in foreign currency per dollar.rforeign = foreign interbank Euromarket interest raterdollar = U.S. interbank Euromarket interest rateInterest-Rate Parity (continued)The international Fisher effect suggests:FS=1 + rforeign1 + rdollarInterest-Rate Parity ExampleThe current German 90-d

50、ay interest rate is 4%.The current U.S. 90-day interest rate is 2%.The current spot rate is .706 Freedonian marks per U.S. dollar ($1.416 per mark).What is the implied 90-day forward rate? Interest-Rate Parity ExampleF = (1.04) x (.706) / (1.02)= .720Thus, the implied 90-day forward rate is .720 mar

51、ks per dollar.The implied 90-day forward rate is:F.706=1 + .041 + .02Structuring International Trade TransactionsIn international trade, sellers often have difficulty obtaining thorough and accurate credit information on potential buyers.Channels for legal settlement in cases of default are more com

52、plicated and costly to pursue.Key documents are (1) an order to pay (international trade draft), (2) a bill of lading, and (3) a letter of credit.International Trade DraftThe international trade draft (bill of exchange) is a written statement by the exporter ordering the importer to pay a specific a

53、mount of money at a specified time.Sight draft is payable on presentation to the party (drawee) to whom the draft is addressed.Time draft is payable at a specified future date after sight to the party (drawee) to whom the draft is addressed.Time Draft FeaturesAn unconditional order in writing signed

54、 by the drawer, the exporter.It specifies an exact amount of money that the drawee, the importer, must pay.It specifies the future date when this amount must be paid.Upon presentation to the drawee, it is accepted.Time Draft FeaturesThe acceptance can be by either the drawee or a bank.If the drawee accepts the draft, it is acknowledged in writing on the back of the draft the obligation to pay the amount so many specified days hence.It is th