mba 713 - chapter 18
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MBA 713 - Chapter 18TRANSCRIPT
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Chapter 18 - 1
Chapter 18
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International Financial Management
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Chapter 18 - 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
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Chapter 18 - 3
Financial Issues in Foreign Trade
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Chapter 18 - 4
Choice of Currency
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Importer’s Currency
Exporter’s Currency
Third Currency
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Chapter 18 - 5Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Credit Checking
Credit References
EstablishedSources
BankingOperations
GovernmentAgencies
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Chapter 18 - 6
Methods of Payment
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Advance Payment
Documentary Collection
Credit Cards
Open Accounts
Letters of Credit
Countertrade
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Chapter 18 - 7
Advance Payment
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Use of Cash Lower Risks
Higher Risks Faster Payment
Importer Exporter
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Chapter 18 - 8
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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Chapter 18 - 9
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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Chapter 18 - 10
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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Chapter 18 - 11
Documentary Collection: Advantages
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Reasonable Bank Fees
Enforceable Debt Instruments
Simplified Collection Process
Reduced Costs of Financing
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Chapter 18 - 12
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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Chapter 18 - 13
Letter of Credit
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Bank Guarantees Payment
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Chapter 18 - 14Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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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Chapter 18 - 15
Letters of Credit Take Different Forms
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•Advised
•Confirmed
•Irrevocable
•Revocable
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Chapter 18 - 16Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Credit Cards
•Retailers•Consumers
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Chapter 18 - 17
Countertrade
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Trade by Bartering
Counterpurchase
Buy-Back Arrangements
Off-Set Purchase Agreements
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Chapter 18 - 18
Facilitate Countertrade
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ClearinghouseAccounts
SwitchingArrangements
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Chapter 18 - 19Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Countertrade by Marc Rich
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Chapter 18 - 20
Financing Trade
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•Exporting Firms
•Banks and Lenders
•Government Sponsors
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Chapter 18 - 21
Summary of Discussion
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Chapter 18 - 22
Managing Foreign Exchange Risk
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Chapter 18 - 23
Transaction Exposure
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•Buying•Selling•Lending•Borrowing
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Chapter 18 - 24
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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Chapter 18 - 25
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 ofExposure
Higher
Lower
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Chapter 18 - 26
Economic Exposure
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Unexpected Exchange-Rate Changes
Operational Hedge
Exchange-Rate Expertise
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Chapter 18 - 27
Summary of Discussion
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Chapter 18 - 28
Management of Working Capital
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Chapter 18 - 29
Minimize Working Capital
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•Opportunity Cost•Needs for Cash
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Chapter 18 - 30Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Cash Management
•Cash Holdings•Cash Flows
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Chapter 18 - 31Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Currency Conversion
Minimizing Costs
Bilateral Netting
Multilateral Netting
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Chapter 18 - 32
Multilateral Netting In Action (all quantities in Millions of USD equivalents)
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Payments Owed byS. 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
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Chapter 18 - 33
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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Chapter 18 - 34
Summary of Discussion
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Chapter 18 - 35
International Capital Budgeting
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Chapter 18 - 36
Net Present Value
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•Cash Flows
•Discount Rate
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Chapter 18 - 37Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Net Present Value for International Projects
Risk Adjustment
Currency Selection
Choice of Perspective
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Chapter 18 - 38
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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Chapter 18 - 39
Payback Period
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Long-RunProfits
Simpleto Use
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Chapter 18 - 40
Summary of Discussion
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Chapter 18 - 41
Sources of International Investment Capital
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Chapter 18 - 42
• Investment Banks
• Stock Markets
• Borrowed Funds
• Swap Market
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External Sources of Investment Capital
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Chapter 18 - 43
Internal Sources of Investment Capital
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Chapter 18 - 44
Strategic Transfer Pricing
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•Market•Nonmarket
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Chapter 18 - 45
Market-Based Method
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Reduce Intra-Corporate Conflict
Promote Overall
Profitability
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Chapter 18 - 46Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
AdvantagesDisadvantages
Foment Conflict
Reduce Efficiency
Reduce Tariffs and Taxes
Repatriate Profits
Nonmarket Method
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Chapter 18 - 47
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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Chapter 18 - 48
Government Response
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Arm’s Length Testing
Advance Pricing
Agreement
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Chapter 18 - 49
Summary of Discussion
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Chapter 18 - 50
Chapter 18
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International Financial Management
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Chapter 18 - 51Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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.