Griffin ib7 inppt_18
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Transcript of Griffin ib7 inppt_18
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Chapter 18
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International Financial Management
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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
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Financial Issues in Foreign Trade
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Choice of Currency
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Importer’s Currency
Exporter’s Currency
Third Currency
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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Chapter 18 - 5
Credit Checking
Credit
References
Established
Sources
Banking
Operations
Government
Agencies
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Methods of Payment
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Advance Payment
Documentary
Collection
Credit Cards
Open Accounts
Letters of Credit
Countertrade
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Advance Payment
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Use of Cash Lower Risks
Higher Risks Faster Payment
Importer Exporter
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Open Account: Importer’s Point of View
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Expedites the Receipt of Goods
Offers Short-Term Financing
Eliminates Fees for Bank Services
Requires Less Paperwork
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Open Account: Exporter’s Point of View
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Increases Risk of Non-Payment
Waives Expertise of Bankers
Lacks Supporting Documentation
Requires Use of Working Capital
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Other Payment Methods
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Documentary Collection
Sight Drafts and
Time Drafts
Trade
Acceptances
Banker’s
Acceptances
Bills of Lading
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Documentary Collection: Advantages
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Reasonable Bank Fees
Enforceable Debt Instruments
Simplified Collection Process
Reduced Costs of Financing
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Documentary Collection: Disadvantages
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Importer May Refuse Shipment
Costs for Unaccepted Goods
Importer May Default on Payment
Legal Recourse May Be Expensive
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Letter of Credit
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Bank Guarantees Payment
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Invoice
Bill of Lading
Proof of Insurance
Certificate of Origin
Customs Documents
Packing List
Export License
Inspection Certificates
Documents Needed for Letters of Credit
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Letters of Credit Take Different Forms
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•Advised
•Confirmed
•Irrevocable
•Revocable
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Credit Cards
•Retailers•Consumers
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Countertrade
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Trade by Bartering
Counterpurchase
Buy-Back Arrangements
Off-Set Purchase Agreements
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Facilitate Countertrade
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Clearinghouse
Accounts
Switching
Arrangements
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Countertrade by Marc Rich
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Financing Trade
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• Exporting Firms
• Banks and Lenders
• Government Sponsors
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Summary of Discussion
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Managing Foreign Exchange Risk
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Transaction Exposure
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•Buying
•Selling
•Lending
•Borrowing
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Responding to Transaction Exposure
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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
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Translation Exposure
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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
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Economic Exposure
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Unexpected Exchange-Rate
Changes
Operational
Hedge
Exchange-Rate
Expertise
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Summary of Discussion
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Management of Working Capital
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Minimize Working Capital
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•Opportunity Cost
•Needs for Cash
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Cash Management
•Cash Holdings
•Cash Flows
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Currency Conversion
Minimizing Costs
Bilateral Netting
Multilateral Netting
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Multilateral Netting In Action (all quantities in Millions of USD equivalents)
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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
Subsidiary2 — 3 5 – 1
British
Subsidiary6 1 — 7 0
Total
Payments8 6 7 21
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Minimize Foreign-Exchange Risk
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Leads and Lags Strategy
Currency Value Expected to Rise
Currency Value Expected to Fall
Net
Holdings
Increase
Decrease
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Summary of Discussion
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International Capital Budgeting
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Net Present Value
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•Cash Flows
•Discount Rate
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Net Present Value for International Projects
Risk Adjustment
Currency Selection
Choice of Perspective
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Internal Rate of Return
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1. Estimate Cash Flows
2. Calculate Interest Rate
3. Compare to Hurdle Rate
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Payback Period
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Long-Run
ProfitsSimple
to Use
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Summary of Discussion
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Sources of International Investment Capital
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• Investment Banks
• Stock Markets
• Borrowed Funds
• Swap Market
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External Sources of Investment Capital
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Internal Sources of Investment Capital
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Strategic Transfer Pricing
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•Market
•Nonmarket
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Market-Based Method
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Reduce Intra-
Corporate
Conflict
Promote
Overall
Profitability
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AdvantagesDisadvantages
Foment Conflict
Reduce Efficiency
Reduce Tariffs and
Taxes
Repatriate Profits
Nonmarket Method
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Tax Havens
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Minimal Corporate Income Tax
Stable Political and Business Climate
Efficient Court System
Banking and Communications
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Government Response
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Arm’s Length Testing
Advance Pricing
Agreement
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Summary of Discussion
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Chapter 18
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International Financial Management
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