International Short-Term Financing and Investment Chapter 15 International Short-Term Financing and Investment

Slides prepared by Afaf Moosa Objectives To explain why short-term foreign currency financing and investment are considered. To consider the choice between domestic and foreign currency financing and investment. To identify the costs and benefits of financing/investment with a portfolio. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Slides prepared by Afaf Moosa Internal Financing A multinational can utilise internal financing by: Requesting a transfer of funds from a subsidiary Increasing mark-ups on supplies sent to subsidiaries Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Sources of External Financing Standby Eurocredits: Eurocurrency lines and revolving commitments Euronotes: note issuance facilities and Euro-commercial papers Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Why Foreign Currency Financing? Foreign currency financing introduces FX risk only if there is no exposure already. It may be cheaper. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Three-Month Interest Rates Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Three-Month Interest Rates (cont.) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Three-Month Interest Rates (cont.) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Three-Month Interest Rates (cont.) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Three-Month Interest Rates (cont.) Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

International Short-Term Investment International short-term investment is the placement of excess funds in short-term investments denominated in various currencies. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Short-Term Investment Time deposits Certificates of deposit: Tap CDs Tranche CDs Rollover CDs Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

The Effective Financing Rate Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

The Effective Rate of Return Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

The Effect of Changes in the Exchange Rate Foreign currency appreciation Foreign currency depreciation No change Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

The Effective Financing Rate with Bid-Offer Spread Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

The Effective Rate of Return with Bid-Offer Spread Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Slides prepared by Afaf Moosa Implications of CIP If covered interest parity (CIP) holds, the effective financing rate and the rate of return will be equal to the domestic interest rate. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Measuring Risk: Probability Distributions Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Measuring Risk: Historical Data Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Financing with and Investment in a Portfolio of Currencies Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Centralised Versus Decentralised Cash Management Centralised: receipts and payments in various currencies are managed by a central body. Decentralised: receipts and payments are managed by branches and subsidiaries. Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Advantages of Centralised Cash Management Netting Currency diversification Pooling Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

When is Decentralised Management Preferred? When delays are expected in transferring funds to countries with inefficient banking systems When local representation is necessary Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa

Factors Determining Where Cash Balances are Held Whether or not funds are needed in the future Whether or not there is a forward market Political risk Liquidity considerations Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 2e by Imad A. Moosa Slides prepared by Afaf Moosa