Chapter 21 International Financial Management. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-1 FIGURE 21-1 1 euro.

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Chapter 21 International Financial Management

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-1 FIGURE euro (E) to the U.S. $ and the British pound

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-2 TABLE 21-1 International sales of selected U.S. companies

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-3 FIGURE 21-2 Exchange rates to the dollar

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-4 TABLE 21-2 Key currency cross rates (late New York trading, Wednesday, April 30, 2003)

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-5 FIGURE 21-3 Risk reduction from international diversification

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. PPT 21-4 TABLE 21A-1 Cash flow analysis of a foreign investment

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 21 - Outline LT 21-1 Multinational Corporations (MNCs) Exchange Rates Spot Rates and Forward Rates Managing Foreign Exchange Risk Financing International Business Operations

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Multinational Corporations LT 21-2 Multinational Corporations (MNCs) –firms doing business in more than one country Often 30% or more of a firm’s business activities are carried on outside its national borders 4 basic forms of multinational corporations: – Exporter – Licensing Agreement – Joint Venture – Fully Owned Foreign Subsidiary

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Exchange Rates LT 21-3 The exchange rate is the price or value of one currency in terms of another Published daily in The Wall Street Journal Factors Influencing Exchange Rates: – Supply of and Demand for each Currency – Inflation – Interest Rates – Balance of Payments – Government Policies – Other Factors

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Spot Rates and Forward Rates LT 21-4 Spot Rate: – the exchange rate between currencies for immediate delivery –“on-the-spot” rate Forward Rate: – the exchange rate that is established for future delivery – deals with a specified future time

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Managing Foreign Exchange Risk LT 21-5 Foreign Exchange Risk refers to the risk involved in fluctuating or changing exchange rates It affects importers, exporters, investors, and multinational firms Strategies for Dealing with Foreign Exchange Risk: – Forward Exchange Market Hedge – Money Market Hedge – Currency Futures Market Hedge – Foreign Asset Management Programs

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. Financing International Business Operations LT 21-6 There are several ways of funding foreign transactions: – Eximbank (Export-Import Bank) – Loans from the Parent Company or a Sister Affiliate – Eurodollar Loans – Eurobond Market – International Equity Markets – The International Finance Corporation (IFC)