1、15-1nFactors that make multinational financial management differentnExchange rates and tradingnInternational monetary systemnInternational financial marketsnSpecific features of multinational financial managementCHAPTER 15Multinational Financial Management15-2What is a multinational corporation?nA m
2、ultinational corporation is one that operates in two or more countries.nAt one time,most multinationals produced and sold in just a few countries.nToday,many multinationals have world-wide production and sales.15-3Why do firms expand into other countries?nTo seek new markets.nTo seek new supplies of
3、 raw materials.nTo gain new technologies.nTo gain production efficiencies.nTo avoid political and regulatory obstacles.nTo reduce risk by diversification.15-4What are the major factors that distinguish multinational from domestic financial management?nCurrency differencesnEconomic and legal differen
4、cesnLanguage differencesnCultural differencesnGovernment rolesnPolitical risk15-5Are these currency prices direct or indirect quotations?Since they are prices of foreign currencies expressed in U.S.dollars,they are direct quotations(dollars per currency).Consider the following exchange rates:U.S.$to
5、 buy 1 Unit Euro 0.8000Swedish krona 0.100015-6What is an indirect quotation?nAn indirect quotation gives the amount of a foreign currency required to buy one U.S.dollar(currency per dollar).nNote than an indirect quotation is the reciprocal of a direct quotation.15-7Calculate the indirect quotation
6、sfor euros and kronas.#of Units of Foreign Currency per U.S.$Euro 1.25Swedish krona 10.00Euro:1/0.8000=1.25.Krona:1/0.1000=10.00.15-8What is a cross rate?nA cross rate is the exchange rate between any two currencies not involving U.S.dollars.nIn practice,cross rates are usually calculated from direc
7、t or indirect rates.That is,on the basis of U.S.dollar exchange rates.15-9nCross rate=x=1.25 x 0.1000=0.125 euros/krona.nCross rate=x=10.00 x 0.8000=8.00 kronas/euro.Calculate the two cross ratesbetween euros and kronas.Euros Dollars Dollar Krona Kronas Dollars Dollar Euros15-10nThe two cross rates
8、are reciprocals of one another.nThey can be calculated by dividing either the direct or indirect quotations.Note:15-11Target price=($1.75)(1.50)=$2.625Spanish price=($2.625)(1.25 euros/$)=3.28.Assume the firm can produce a liter oforange juice in the U.S.and ship it to Spain for$1.75.If the firm wan
9、ts a 50%markup on the product,what should the juice sell for in Spain?15-122.0 euros(8.0 kronas/euro)=16 kronas.20-16=4.0 kronas profit.Dollar profit=4.0 kronas(0.1000 dollars per krona)=$0.40.Now the firm begins producing theorange juice in Spain.The product costs 2.0 euros to produce andship to Sw
10、eden,where it can be soldfor 20 kronas.What is the dollarprofit on the sale?15-13Exchange rate risk is the risk that the value of a cash flow in one currency translated from another currency will decline due to a change in exchange rates.For example,in the last slide,a weakening krona(strengthening
11、dollar)would lower the dollar profit.What is exchange rate risk?15-14nThe current system is a floating rate system.nPrior to 1971,a fixed exchange rate system was in effect.lThe U.S.dollar was tied to gold.lOther currencies were tied to the dollar.Describe the current and formerinternational monetar
12、y systems.15-15The European Monetary UnionIn 2002,the full implementation of the“euro”is expected to be complete.The national currencies of the 11 participating countries will be phased out in favor of the“euro.”The newly formed European Central Bank will control the monetary policy of the EMU.15-16
13、The 12 Member Nations of theEuropean Monetary UnionAustriaBelgiumFinlandFranceGermanyIrelandItalyLuxembourgNetherlandsPortugalSpainGreeceEuropean Union countries not in the EMU:Britain Sweden Denmark15-17nA currency is convertible when the issuing country promises to redeem the currency at current m
14、arket rates.nConvertible currencies are traded in world currency markets.What is a convertible currency?15-18nIt becomes very difficult for multi-national companies to conduct business because there is no easy way to take profits out of the country.nOften,firms will barter for goods to export to the
15、ir home countries.What problems arise when a firmoperates in a country whose currency is not convertible?15-19nA spot rate is the rate applied to buy currency for immediate delivery.nA forward rate is the rate applied to buy currency at some agreed-upon future date.What is the difference between spo
16、t rates and forward rates?15-20When is the forward rate at a premium to the spot rate?nIf the U.S.dollar buys fewer units of a foreign currency in the forward than in the spot market,the foreign currency is selling at a premium.nIn the opposite situation,the foreign currency is selling at a discount
17、.nThe primary determinant of the spot/forward rate relationship is relative interest rates.15-21What is interest rate parity?Interest rate parity implies that investors should expect to earn the same return on similar-risk securities in all countries:Forward and spot rates are direct quotations.rh=p
18、eriodic interest rate in the home country.rf=periodic interest rate in the foreign country.Forward rateSpot rate=1+rh1+rf.15-22Spot rate=$0.8000.rh=6%/2=3%.rf=4%/2=2%.(More.)Assume 1 euro=$0.8100 in the180-day forward market and and 180-day risk-free rate is 6%in the U.S.and 4%in Spain.Does interest
19、 rate parity hold?15-23Forward rate 0.8000If interest rate parity holds,the implied forward rate,0.8078,would equal the observed forward rate,0.8100;so parity doesnt hold.Forward rateSpot rate=1+rh1+rf=1.031.02Forward rate=0.8078.15-24nA U.S.investor could directly invest in the U.S.security and ear
20、n an annualized rate of 6%.nAlternatively,the U.S.investor could convert dollars to euros,invest in the Spanish security,and then convert profit back into dollars.If the return on this strategy is higher than 6%,then the Spanish security has the higher rate.Which 180-day security(U.S.or Spanish)offe
21、rs the higher return?15-25What is the return to a U.S.investor in the Spanish security?nBuy$1,000 worth of euros in the spot market:$1,000(1.25 euros/$)=1,250 euros.nSpanish investment return(in euros):1,250(1.02)=1,275 euros.(More.)15-26nBuy contract today to exchange 1,275 euros in 180 days at for
22、ward rate of 0.8100 dollars/euro.nAt end of 180 days,convert euro investment to dollars:1,275(0.8100$/)=$1,032.75.nCalculate the rate of return:$32.75/$1,000=3.275%per 180 days =6.55%per year.(More.)15-27The Spanish security has the highest return,even though it has a lower interest rate.nU.S.rate i
23、s 6%,so Spanish securities at 6.55%offer a higher rate of return to U.S.investors.nBut could such a situation exist for very long?15-28ArbitragenTraders could borrow at the U.S.rate,convert to pesetas at the spot rate,and simultaneously lock in the forward rate and invest in Spanish securities.nThis
24、 would produce arbitrage:a positive cash flow,with no risk and none of the traders own money invested.15-29Impact of Arbitrage ActivitiesnTraders would recognize the arbitrage opportunity and make huge investments.nTheir actions would tend to move interest rates,forward rates,and spot rates to parit
25、y.15-30What is purchasing power parity?Purchasing power parity implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.Ph=Pf(Spot rate),or Spot rate=Ph/Pf.15-31If grapefruit juice costs$2.00/liter in the U.S.and purchasing power parity hol
26、ds,what is price in Spain?Spot rate=Ph/Pf.$0.8000=$2.00/Pf Pf=$2.00/$0.8000 =2.5 euros.nDo interest rate and purchasing power parity hold exactly at any point in time?15-32nLower inflation leads to lower interest rates,so borrowing in low-interest countries may appear attractive to multinational fir
27、ms.nHowever,currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries,so the true interest cost increases over the life of the loan.What impact does relativeinflation have on interest ratesand exchange rates?15-33nEurodollar marketslDollars held outside
28、the U.S.lMostly Europe,but also elsewherenInternational bondslForeign bonds:Sold by foreign borrower,but denominated in the currency of the country of issue.lEurobonds:Sold in country other than the one in whose currency it is denominated.Describe the international money and capital markets.15-34To
29、what extent do capital structures vary across different countries?nEarly studies suggested that average capital structures varied widely among the large industrial countries.nHowever,a recent study,which controlled for differences in accounting practices,suggests that capital structures are more sim
30、ilar across different countries than previously thought.15-35nDistances are greater.nAccess to more markets for loans and for temporary investments.nCash is often denominated in different currencies.What is the impact of multinationaloperations on each of the following topics?Cash Management15-36nFo
31、reign operations are taxed locally,and then funds repatriated may be subject to U.S.taxes.nForeign projects are subject to political risk.nFunds repatriated must be converted to U.S.dollars,so exchange rate risk must be taken into account.Capital Budgeting Decisions15-37nCredit is more important,bec
32、ause commerce to lesser-developed countries often relies on credit.nCredit for future payment may be subject to exchange rate risk.Credit Management15-38nInventory decisions can be more complex,especially when inventory can be stored in locations in different countries.nSome factors to consider are shipping times,carrying costs,taxes,import duties,and exchange rates.Inventory Management
