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Chapter 18: International Financial Management. International Business, 4 th Edition Griffin & Pustay. Chapter Objectives_1. Analyze the advantages and disadvantages of the major forms of payment in international trade
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Chapter 18:InternationalFinancial Management International Business, 4th Edition Griffin & Pustay ©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 foreign-exchange risk faced by international businesses • Describe the techniques used by firms to manage their working capital ©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 ©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 ©2004 Prentice Hall
Method of Payment • Payment in advance • Open account • Documentary collection • Letters of credit • Credit cards • Countertrade ©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 ©2004 Prentice Hall
Figure18.1 Using a Sight Draft ©2004 Prentice Hall
Documentation for Letters of Credit • Export licenses • Certificates of product origin • Inspection certificates ©2004 Prentice Hall
Types of Letters of Credit • Advised letter of credit • Confirmed letter of credit • Irrevocable letter of credit • Revocable letter of credit ©2004 Prentice Hall
Figure 18.2 Using a Letter of Credit ©2004 Prentice Hall
Countertrade • Occurs when a firm accepts something other than money as payment for its goods or services • Forms • Barter • Counterpurchase (parallel barter) • Buy-back • Offset purchase ©2004 Prentice Hall
Map 18.1 Countertrade by Marc Rich ©2004 Prentice Hall
Table 18.1 Payment Methods for International Trade ©2004 Prentice Hall
The Itaipu Dam the Parana River between Brazil an Paraguay ©2004 Prentice Hall
Foreign-Exchange Exposure • Transaction exposure • Translation exposure • Economic exposure ©2004 Prentice Hall
Transaction Exposure • Financial benefits and costs of an international transaction can be affected by exchange rate movements that occur after the firm is legally obligated to complete the transaction • Transactions • Purchase of goods, services, or assets • Sales of goods, services, or assets • Extension of credit • Borrowing of money ©2004 Prentice Hall
Options for Responding to Transaction Exposure • Go naked • Buy forward currency • Buy currency future • Buy currency option • Acquire an offsetting asset ©2004 Prentice Hall
Political uncertainty can affect transaction exposure ©2004 Prentice Hall
Benefits No capital outlay Potential for capital gain if home currency rises in value Costs Potential for capital loss if home currency falls in value Go Naked ©2004 Prentice Hall
Benefits Elimination of transaction exposure Flexibility in size and timing of contract Costs Fees to banks Lost opportunity for capital gain if home currency rises in value Buy Forward Currency ©2004 Prentice Hall
Benefits Elimination of transaction exposure Ease and relative inexpensiveness of futures contracts Costs Small brokerage free Inflexibility in size and timing of contract Lost opportunity for capital gain if home currency rises in value Buy Currency Future ©2004 Prentice Hall
Benefits Elimination of transaction exposure Potential for capital gain if home currency rises in value Costs Premium paid up front for option because of its “heads I win; tail I don’t lose” nature Inflexibility in size and timing of option Buy Currency Option ©2004 Prentice Hall
Benefits Elimination of transaction exposure Costs Effort or expense of arranging offsetting transaction Lost opportunity for capital gain if home currency rises in value Acquire Offsetting Asset ©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 ©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 ©2004 Prentice Hall
Map 18.3 Changes in Currency Values Relative to the U.S. $, July 2003 ©2004 Prentice Hall
Management of Working Capital • Corporate Financial Goals • Minimizing working-capital balances • Minimizing currency conversion costs • Minimizing foreign-exchange risk ©2004 Prentice Hall
Figure 18.3 Payment Flows Without Netting ©2004 Prentice Hall
Evaluating Investment Projects • Net Present Value • Internal Rate of Return • Payback period ©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 ©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? ©2004 Prentice Hall
Before investing $500 million in this Chilean copper mine, Placer Dome carefully analyzed the risks ©2004 Prentice Hall
Figure 18.4 Internal Sources of Capital for International Businesses ©2004 Prentice Hall