of 14
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intern a
t
ionalbu
sin
ess,
5th
editi
o n
chapter 18international financial
management
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18-2
Chapter Objectives 1
• Analyze the advantages anddisadvantages of the major forms ofpayment in international trade
• Identify the primary types of foreign-exchange risk faced y international!sinesses
• "escrie the techni#!es !sed y firms tomanage their $orking capital
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18-%
Chapter Objectives 2
• &val!ate the vario!s capital !dgeting
techni#!es !sed for international
investments• "isc!ss the primary so!rces of
investment capital availale to
international !sinesses
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18-'
Financial Issues inInternational Trade
• (hich c!rrency to !se for the
transaction
• (hen and ho$ to check credit
• (hich form of payment to !se
• )o$ to arrange financing
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18-5
Method of Payment
• *ayment in
advance
• +pen acco!nt
• "oc!mentary
collection
• ,etters of credit
• redit cards
• o!ntertrade
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18-.
Forms of rafts !sed "ithocumentary Collection
/ight
draft
0ime
draft
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#dvanta$es%isadvanta$es ofocumentary Collection
#dvanta$es
• easonale fees
• &nforceale detinstr!ment
• /imple collections
process• *rompt payments
isadvanta$es
• ef!sal of
shipments• "ecline draft
acceptance
• *otential fordefa!lt
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Fi$ure 18&1 !sin$ a 'i$ht raft
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18-3
ocumentation for(etters of Credit
&xport
licenses
ertificates of
prod!ct origin
Inspection
certificates
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18-14
Types of (etters of Credit
Advised letter of credit
onfirmed letter of credit
Irrevocale letter of credit
evocale letter of credit
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18-11
Fi$ure 18&2 !sin$ a(etter of Credit
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18-12
Forms of Countertrade
arter
!y-ack
+ffset p!rchase
o!nterp!rchase
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18-1%
Map 18&1 Countertrade by Marc )ich
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18-1'
Forei$n*+,chan$e +,posure
0ransaction
expos!re
0ranslation
expos!re
&conomic
expos!re
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18-15
Transaction +,posure
A firm faces transaction e,posure $hen the financial enefits and costs
of an international transaction can eaffected y exchange rate movements
that occ!r after the firm is legally
oligated to complete the transaction6
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18-1.
Transactions (eadin$ toTransaction +,posure
*rod!ct p!rchases *rod!ct sales
redit extensions 7oney orro$ing
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18-1
Options for )espondin$ toTransaction +,posure
o naked
!y for$ard c!rrency
!y c!rrency option
Ac#!ire an offsetting asset
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18-18
-o .a/ed
0o 9go naked: is toignore transactionexpos!re and ass!meforeign-exchange risk6
Characteristics
• "oes not re#!ireadvance capital
• +ffers potential forc!rrency appreciation
• reates risk fordepreciation of
exchange c!rrency• Avoids fees to
intermediaries
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18-13
0uy For"ard Currency
!ying the exchangec!rrency for$ard in theforeign-exchange marketlocks in the 9price: to e
paid6
Characteristics
• !arantees price
• *rotects against decline
in val!e of c!rrency
• ;o capital !p front
• &liminates potential forprofits associated $ithc!rrency appreciation
• e#!ires fees tointermediaries
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18-24
0uy Currency Option
!ying c!rrency optionsgives !yer theopport!nity< !t not theoligation to !y c!rrency
at a given price in thef!t!re6
Characteristics
• !arantees price
• 7ay exercise option or
let it expire depending!pon c!rrency val!es
• 7ore expensive thanother hedging choices
• Allo$s for appreciationenefits $hile avoidingrisk of depreciation
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18-21
#cuire an Offsettin$ #sset
Ac#!iring an offsetting
asset of e#!ivalent
size denominated in
p!rchase c!rrencyeliminates net
transaction expos!re6
Characteristics
• &liminates expos!re
• e#!ires effort andexpense to arrange
transaction
• ,ost opport!nity for
capital gain if homec!rrency appreciates
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18-22
Political uncertainty can affecttransaction e,posure&
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18-2%
Translation +,posure
Translation e,posure is the impacton the firm:s consolidated financial
statements of fl!ct!ations inexchange rates that change the
val!e of foreign s!sidiaries as
meas!red in the parent:s c!rrency6
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18-2'
+conomic +,posure
+conomic e,posure is theimpact on the val!e of a
firm:s operations of!nanticipated exchange rate
changes6
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18-25
Map 18& Chan$es in Currency3alues )elative to the !&'& 4
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18-2.
Corporate Financial -oals
7inimize $orking-capital alances
7inimize foreign-exchange risk
7inimize c!rrency conversion costs
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18-2
Fi$ure 18&Payment Flo"s "ithout .ettin$
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18-28
Minimi5in$ Currency Conversion Costs
ilateral
netting
7!ltilateral
netting
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18-23
+valuatin$ Investment Projects
;et
present val!e
*ayack
period
Internal
rate of ret!rn
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18-%4
!sin$ the .et Present 3alue #pproach
isk adj!stment
hoice of c!rrency
*erspective
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18-%1
Fi$ure 18&6 Internal 'ources of Capital
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18 %2
+,ternal 'ources of Fundin$
Investment ankers
/ale of stock
,oans
/$aps
