Welcome to class of International Financial Management by Dr. Satyendra Singh University of Winnipeg Canada

Financial Management Decisions  In what currency should capital be raised?  How structured: equity, debt?  What sources of capital?  If capital market, which ones?  Are other sources of money available?  How much and for how long?

Capital Structure of the Firm  Retained earnings  Debt  Offshore financial center specializes in financing nonresidents, low taxes and few banking regulations  Equity  American depository receipts (ADRs): foreign shares held by a custodian in the issuer’s home market and traded in dollars on the U.S. exchange

Cash Flow Management…  Multilateral Netting  Subsidiaries transfer net intracompany cash flows through a centralized clearing center

Cash Flow Management  Leading and Lagging  Timing payments early (lead) or late (lag), depending on anticipated currency movements, so they have the most favorable impact

Foreign Exchange Risk Management  Transaction exposure  Change in the value of financial position created by foreign currency changes between establishment and settlement of contract  Translation exposure  Potential change in value of a company’s financial position due to exposure created during consolidation process  Economic exposure  Potential for value of future cash flows to be affected by unanticipated exchange rate movements

Transaction Exposure: Hedging  Hedging  process to reduce or eliminate financial risk  Forward market hedge  Foreign currency contract sold or bought forward in order to protect against foreign currency movement  Currency option hedge  Option to buy or sell specific amount of foreign currency at specific time to protect against foreign currency risk  Money market hedge  Method to hedge foreign currency exposure by borrowing and lending in domestic and foreign money markets

Transaction Exposure: Swaps…  Swap Contract  Spot sale/purchase of asset against future purchase/sale of equal amount in order to hedge financial position  Bank Swap  Swap made between banks to acquire temporary foreign currencies  Currency Swap  Exchange of debt service of loan or bond in one currency for debt service of loan or bond in another currency

Transaction Exposure: Swaps  Interest Rate Swap  Exchange of interest rate flows to manage interest rate exposure  Spot and Forward Market Swaps  Use spot and forward markets to hedge foreign currency exposure  Parallel Loans  Matched loans across currencies made to cover risk

Translation Approaches  Current Rate Method  Current assets and liabilities are valued at current spot rates and noncurrent assets and liabilities are translated at historic exchange rates  Temporal Method  Monetary accounts are valued at spot rate and accounts carried at historical cost are translated at historic exchange rates

Hedges and Swaps as “Derivatives”  Contract whose value is tied to the performance of a financial instrument or commodity

Sales Without Money…  Countertrade  The trade of goods or services for other goods or services (6 varieties)  Counterpurchase  Goods supplied do not rely on the goods imported  Compensation  Developing country makes payment in products produced by use of developed country equipment  Barter  Direct exchange of goods or services for goods or services

Sales Without Money  Switch Trading  Use of third party to market products received in countertrade  Offset  Trade arrangement that requires portion of the inputs be supplied by receiving country  Clearing account arrangements  Process to settle trading account within specified time

Transfer Pricing  Transfer Price  The cost of intracompany sale of goods or services

International Accounting Standards International Accounting Standards Board (IASB) –International Financial Reporting Standards (IFRS) Triple bottom line standard (3BL) A results or impact report on the environmental, social, and financial impacts of the business

Use of International Financial Reporting Standards

Cultural Differences in Measurement and Disclosure for Accounting Systems