HSC Business Studies - Finance - Global financial management

1. Global Financial
Management

2. Global Financial
Management
• In an increasingly globalised world it is difficult for any
business to avoid exposure to global financial risks.
These risks are generally more unpredictable than
domestic risks.

3. Interest Rates
• Possible to obtain lower interest rates from foreign
countries but there is also an exchange rate risk.

4. Methods of International
Payment
• Payment in Advance
o Exporter receives payment first, then sends the goods (or provides service). This
is risky for the importer but safe for the exporter.
• Letter of Credit
o A bank issues a letter of credit guaranteeing the buyer (importer) will pay once
the seller (exporter) provides proof of shipment
• Bill of Exchange
o A document drawn up by the exporter demanding payment from the importer at
the specified time. Since this is a method of payment where the risk is about even
for both the exporter and the importer, it is one of the most commonly used.
• Clean Payment
o The exporter ships the goods directly to the importer and then the importer pays.
This is the most risky method for the exporter.

5. Exchange Rates
• The foreign exchange rate is a measurement of one
currency in terms of another.
• When the Australian dollar appreciates (eg rises from US
$0.80 to US $0.90) it means Australian goods and
services are more expensive to foreigners (importers)
• A depreciation means Australian goods and services
becomes cheaper for foreigners (importers)

6. Hedging
• To reduce risk many businesses like to be certain about
the exchange rate being used on their transactions. This
is called hedging and can be used in different ways:
o Setting up business subsidiaries in key countries
o Keep all transactions in the same currency
o Use derivatives
Image source: http://commons.wikimedia.org/wiki/File:Big_conifer_hedge_green.jpg (author unknown)

7. Derivatives
• Derivatives are simple financial instruments that may be
used to lessen the risks associated with currency
fluctuations.
• There are three main derivatives available for exporters:
o Forward exchange contract – a contract to exchange one currency for another
currency at an agreed exchange rate on a future date (usually 30, 90 or 180 days)
o Options contract – gives the buyer (option holder) the right to buy or sell foreign
currency at some time in the future. If at the time the contract expires it is no
longer a good deal, the buyer does not need to go through with it.
o Swap contract – a currency swap is an agreement to exchange at the start of
the contract and then swap back at the end of the contract time
Image source:
http://en.wikipedia.org/wiki/
Economy_of_Greece