International Financial Management Learning Goals: Reasons for international business Unique considerations of international business Exchange rates Eurocurrency and Eurocredit

Reasons for Multinational Corporations Nearly all large firms, and many smaller ones, are multinational corporations (MNCs): they produce and sell in many countries. Motivation for being an MNC:

Factors Affecting MNCs ________________________ differences Different legal systems and tax codes Language differences Cultural differences Different economic systems ________________________ risk

Currency differences Currency differences create two problems: ◦Currency must be _________________ ◦Exchange rates __________________

Exchange Rates The exchange rate is the value of one currency in terms of another. The exchange rate of currencies of most developed countries are set by market forces. Factors like inflation and level of interest rates affect the supply and demand for a particular currency and will cause the exchange rate to change.

Spot Rate The exchange rate of U.S. Dollars for British Pound can be shown two ways: ◦Direct quote: $1.7736/U.K Pound ◦It takes $ to buy one Pound ◦Or, the indirect quote.5638 U.K. Pound/$ ◦One is the inverse of the other

Forward Rates In addition to the spot rate, there are forward rates in the currency markets. They represent exchange rates for transactions to be made 1, 3 or 6 months in the future. Forward rates allow firms to hedge exchange rate risk.

Exchange Rate Risk As exchange rates vary, it can cause: ◦___________________ in revenue ◦___________________ in costs

Country Risk In addition to exchange rate risk, MNCs face country risk: the risk that a foreign government will ___________________ the firm’s assets or take other adverse actions.

Eurodollars For many years, most foreign trade has been conducted in U.S. dollars. Partly because of country risk, many foreign firms and governments prefer not to put their money in U.S. banks, however. This led to ____________________________ deposits: dollar denominated deposits held in banks outside the U.S.

Eurocurrency In recent years, the dollar is less dominant in foreign trade and the Eurocurrency market has developed. Eurocurrency is a deposit in a bank outside the country that issued the currency, for example, a firm can deposit U.K. Pounds in a Tokyo bank.

Eurocredit Market Eurocredit refers to a loan denominated in another country’s currency, for example, a U.S. firm can borrow U.K. Pounds from a German bank.