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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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