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Chapter 18
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 1
International Financial
Man...
Learning Objectives
• Analyze the pros and cons of major
payment forms in international trade
• Identify types of foreign-...
Financial Issues in Foreign
Trade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 3
Choice of Currency
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 4
Importer’s Currency...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 5
Credit Checking
Credit
References
Esta...
Methods of Payment
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 6
Advance Payment
Doc...
Advance Payment
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 7
Use of Cash Lower Risk...
Open Account: Importer’s
Point of View
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 8...
Open Account: Exporter’s
Point of View
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 9...
Other Payment Methods
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 10
Documentary Col...
Documentary Collection:
Advantages
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 11
R...
Documentary Collection:
Disadvantages
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 12...
Letter of Credit
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 13
Bank Guarantees Paym...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 14
Invoice
Bill of Lading
Proof of Insur...
Letters of Credit Take
Different Forms
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 1...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 16
Credit Cards
•Retailers
•Consumers
Countertrade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 17
Trade by Bartering
Count...
Facilitate Countertrade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 18
Clearinghouse...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 19
Countertrade by Marc Rich
Financing Trade
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 20
• Exporting Firms
• B...
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 21
Managing Foreign
Exchange Risk
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 22
Transaction Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 23
•Buying
•Selling...
Responding to Transaction
Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 24
St...
Translation Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 25
Financial Statem...
Economic Exposure
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 26
Unexpected Exchange...
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 27
Management of Working
Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 28
Minimize Working Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 29
•Opportunity...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 30
Cash Management
•Cash Holdings
•Cash ...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 31
Currency Conversion
Minimizing Costs
...
Multilateral Netting In Action
(all quantities in Millions of USD equivalents)
Copyright © 2013 Pearson Education, Inc. pu...
Minimize Foreign-Exchange
Risk
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 33
Leads ...
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 34
International Capital
Budgeting
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 35
Net Present Value
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 36
•Cash Flows
•Discou...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 37
Net Present Value for
International P...
Internal Rate of Return
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 38
1. Estimate C...
Payback Period
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 39
Long-Run
Profits
Simpl...
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 40
Sources of International
Investment Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 1...
• Investment Banks
• Stock Markets
• Borrowed Funds
• Swap Market
Copyright © 2013 Pearson Education, Inc. publishing as P...
Internal Sources of
Investment Capital
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 43
Strategic Transfer Pricing
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 44
•Market
•N...
Market-Based Method
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 45
Reduce Intra-
Cor...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 46
AdvantagesDisadvantages
Foment Confli...
Tax Havens
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 47
Minimal Corporate Income ...
Government Response
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 48
Arm’s
Length
Test...
Summary of Discussion
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 49
Chapter 18
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 50
International Financial
Ma...
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 51
All rights reserved. No part of this ...
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MBA 713 - Chapter 18

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MBA 713 - Chapter 18

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MBA 713 - Chapter 18

  1. 1. Chapter 18 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 1 International Financial Management
  2. 2. Learning Objectives • Analyze the pros and cons of major payment forms in international trade • Identify types of foreign-exchange risk faced by international businesses • Learn how firms manage working capital • Evaluate capital budgeting techniques • Explore sources of investment capital Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 2
  3. 3. Financial Issues in Foreign Trade Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 3
  4. 4. Choice of Currency Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 4 Importer’s Currency Exporter’s Currency Third Currency
  5. 5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 5 Credit Checking Credit References Established Sources Banking Operations Government Agencies
  6. 6. Methods of Payment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 6 Advance Payment Documentary Collection Credit Cards Open Accounts Letters of Credit Countertrade
  7. 7. Advance Payment Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 7 Use of Cash Lower Risks Higher Risks Faster Payment Importer Exporter
  8. 8. Open Account: Importer’s Point of View Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 8 Expedites the Receipt of Goods Offers Short-Term Financing Eliminates Fees for Bank Services Requires Less Paperwork
  9. 9. Open Account: Exporter’s Point of View Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 9 Increases Risk of Non-Payment Waives Expertise of Bankers Lacks Supporting Documentation Requires Use of Working Capital
  10. 10. Other Payment Methods Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 10 Documentary Collection Sight Drafts and Time Drafts Trade Acceptances Banker’s Acceptances Bills of Lading
  11. 11. Documentary Collection: Advantages Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 11 Reasonable Bank Fees Enforceable Debt Instruments Simplified Collection Process Reduced Costs of Financing
  12. 12. Documentary Collection: Disadvantages Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 12 Importer May Refuse Shipment Costs for Unaccepted Goods Importer May Default on Payment Legal Recourse May Be Expensive
  13. 13. Letter of Credit Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 13 Bank Guarantees Payment
  14. 14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 14 Invoice Bill of Lading Proof of Insurance Certificate of Origin Customs Documents Packing List Export License Inspection Certificates Documents Needed for Letters of Credit
  15. 15. Letters of Credit Take Different Forms Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 15 •Advised •Confirmed •Irrevocable •Revocable
  16. 16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 16 Credit Cards •Retailers •Consumers
  17. 17. Countertrade Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 17 Trade by Bartering Counterpurchase Buy-Back Arrangements Off-Set Purchase Agreements
  18. 18. Facilitate Countertrade Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 18 Clearinghouse Accounts Switching Arrangements
  19. 19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 19 Countertrade by Marc Rich
  20. 20. Financing Trade Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 20 • Exporting Firms • Banks and Lenders • Government Sponsors
  21. 21. Summary of Discussion Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 21
  22. 22. Managing Foreign Exchange Risk Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 22
  23. 23. Transaction Exposure Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 23 •Buying •Selling •Lending •Borrowing
  24. 24. Responding to Transaction Exposure Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 24 Strategy Benefit(s) Cost(s) •Go Naked No Capital Outlay Potential Loss of Capital •Forward Currency No Exposure Fees, Opportunity Cost •Currency Future No Exposure Fees, Opportunity Cost •Currency Option No Exposure Up-Front Premium, Inflexible •Offsetting Asset No Exposure Time, Opportunity Cost
  25. 25. Translation Exposure Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 25 Financial Statements of Parent and Subsidiary Accounting Exposure: Assets and Liabilities Presented in Different Currencies Balance Sheet Hedge: Assets and Liabilities Presented in the Same Currency Risk of Exposure Higher Lower
  26. 26. Economic Exposure Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 26 Unexpected Exchange-Rate Changes Operational Hedge Exchange-Rate Expertise
  27. 27. Summary of Discussion Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 27
  28. 28. Management of Working Capital Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 28
  29. 29. Minimize Working Capital Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 29 •Opportunity Cost •Needs for Cash
  30. 30. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 30 Cash Management •Cash Holdings •Cash Flows
  31. 31. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 31 Currency Conversion Minimizing Costs Bilateral Netting Multilateral Netting
  32. 32. Multilateral Netting In Action (all quantities in Millions of USD equivalents) Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 32 Payments Owed by S. Korean Subsidiary Mexican Subsidiary British Subsidiary Total Receipts Net Transfer S. Korean Subsidiary — 5 4 9 + 1 Receipts Due to Mexican Subsidiary 2 — 3 5 – 1 British Subsidiary 6 1 — 7 0 Total Payments 8 6 7 21
  33. 33. Minimize Foreign-Exchange Risk Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 33 Leads and Lags Strategy Currency Value Expected to Rise Currency Value Expected to Fall Net Holdings Increase Decrease
  34. 34. Summary of Discussion Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 34
  35. 35. International Capital Budgeting Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 35
  36. 36. Net Present Value Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 36 •Cash Flows •Discount Rate
  37. 37. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 37 Net Present Value for International Projects Risk Adjustment Currency Selection Choice of Perspective
  38. 38. Internal Rate of Return Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 38 1. Estimate Cash Flows 2. Calculate Interest Rate 3. Compare to Hurdle Rate
  39. 39. Payback Period Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 39 Long-Run Profits Simple to Use
  40. 40. Summary of Discussion Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 40
  41. 41. Sources of International Investment Capital Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 41
  42. 42. • Investment Banks • Stock Markets • Borrowed Funds • Swap Market Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 42 External Sources of Investment Capital
  43. 43. Internal Sources of Investment Capital Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 43
  44. 44. Strategic Transfer Pricing Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 44 •Market •Nonmarket
  45. 45. Market-Based Method Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 45 Reduce Intra- Corporate Conflict Promote Overall Profitability
  46. 46. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 46 AdvantagesDisadvantages Foment Conflict Reduce Efficiency Reduce Tariffs and Taxes Repatriate Profits Nonmarket Method
  47. 47. Tax Havens Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 47 Minimal Corporate Income Tax Stable Political and Business Climate Efficient Court System Banking and Communications
  48. 48. Government Response Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 48 Arm’s Length Testing Advance Pricing Agreement
  49. 49. Summary of Discussion Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 49
  50. 50. Chapter 18 Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 50 International Financial Management
  51. 51. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 51 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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