1. Chapter 19 - Financial Management
International Business
by Ball, McCulloch, Frantz,
Geringer, and Minor

2. Chapter Objectives
Realize that the currencies of countries change in value in terms of each other
Understand how currency value changes affect international business transactions
Know about financial management tools
Understand the growing use of derivatives as hedging devices
Understand why exporters sometimes accept payment in forms other than money
Differentiate between hard, convertible currencies and soft, nonconvertible ones.

3. Fluctuating Currency Exchange Rates
Transaction risks
Usually involve a receivable or a payable denominated in a foreign currency.
These risks arise from transactions, such as
a purchase from a foreign supplier or a sale to a foreign customer.
Methods of protection against transaction risks.
Engage in hedging or accelerate or delay payments or provisions of payments.

4. Transaction Risks Forward Hedge
The international company contracts with another party to deliver to that party at an agreed future date
a fixed amount of one currency in return for a fixed amount of another currency.
The great majority of forward hedge contracts are with the company’s bank or banks.

5. Transaction Risks Currency Option Hedges A covered position
If a financial manager has funds when entering the hedge contract or they are due from another business transaction on or before the due date under the hedge contract.

6. Transaction Risks Currency Option Hedges An Uncovered Position
When a financial manager uses the foreign exchange market to take advantage of an expected rise or fall in the relative value of a currency.

7. Transaction Risks Acceleration or Delay of Payment
If an importer expects the currency in its country to depreciate in terms of the currency of its foreign supplier
It probably will be motivated to buy the necessary foreign currency as soon as it can.
This assumes the importer must pay in the currency of the exporter.
Payment accelerations or delays are frequently called leads or lags.

8. Transaction Risks Acceleration or Delay of Payment Leads
Immediate purchases of a foreign currency to satisfy a future need because the buyer believes it will strength vis-à-vis the home currency.

9. Transaction Risks Acceleration or Delay of Payment Lags
Delayed purchases of a foreign currency to satisfy a future need because the buyer believes it will weaken vis-à-vis the home currency.

10. Transaction Risks Objectives of Intra-international Company Payments
Within the strictures of applicable laws and the minimum working capital requirements of the parent and affiliates
ICs can maximize their currency strength and minimize their currency weaknesses.

11. Transaction Risks Objectives of Intra-international Company Payments
Keep as much money as is reasonably possible in countries with high interest rates.
Keep as much money as is reasonably possible in countries where credit is difficult to obtain.
Maximize holdings of hard, strong currencies.
Minimize holding of currencies that are subject to currency controls.

12. Transaction Risks Exposure Netting
Taking open positions in two currencies that are expected to balance each other.
Two ways to accomplish exposure netting.
Currency groups.
A combination of a strong currency and a weak currency.

13. Transaction Risks Exposure Netting Currency Groups
Some groups of currencies tend to move in close conjunction with one another even during floating rate periods.
For example, some developing country currencies are pegged to the currency of their most important developed country trading partner.

14. Transaction Risks Exposure Netting
A Strong Currency and a Weak Currency
A second exposure netting possibility involves two payables (or two receivables), one in a currently strong currency and the other in a weaker one.
The hope is that weakness in one will offset the strength of the other.

15. Transaction Risks Exposure Netting An advantage of exposure netting.
Avoids the costs of hedging.
However, is also more risky.
The currencies may not behave as expected during the periods of the open receivables or payables.

16. Transaction Risks Exposure Netting Price Adjustments
Sales management often desires to make sales in a country whose currency is expected to be devalued.
In such a situation, financial management finds that neither hedging nor exposure netting is possible or economical.

17. Translation Risks Translation Risks
The losses or gains that can result form restating the values of the asset and liabilities arising from investments abroad
from one currency to another.

18. Translation Risks Realistic Information
Management must base important decisions on the updating of all asset and earnings values.
It is unrealistic for management to base key decisions on the assumption that exchange rates have not changed and will not change.

19. Translation Risks Management Fears
Managers fear that shareholders and analysts will regard translated and reported foreign exchange losses
as speculation or bad management.
It is difficult to explain that reported losses are irrelevant or should be ignored.

20. Translation Risks Neutralizing the Balance Sheet
Having monetary assets in amounts approximately equal to monetary liabilities.
In that condition, a fall in the currency value of assets will be matched by the fall in payment obligations.
Translation risk is avoided.

21. Swaps
Swaps
Trades of assets and liabilities in different currencies or interest rate structures to lessen risks or lower costs.
There are several types of swaps.
Spot and forward market swaps.
Parallel loans.
Bank swaps.

22. Swaps Capital Raising and Investing
When a company wishes to raise capital, its financial management must make a number of decisions.
The currency in which the capital will be raised.
Long-term estimate of the strength or weakness of that currency.
How much of the money raised should be equity capital and how much should be debt capital.

23. Swaps Capital Raising and Investing Decisions (cont’d)
How should the money be borrowed.
If the decision is made to use one of the world’s capital markets
management must decide in which market it can achieve its objective at the lowest cost.
How much money the company need and for how long.
Whether other sources of money are available.

24. Swaps Capital Raising and Investing Equity Capital Debt Capital
Capital raised by selling common stock representing ownership of the company.
Debt Capital
Capital raised by selling bonds representing debt of the company.

25. Interest Rate Swaps Basic Advantages to Interest Rate Swaps
Swaps give the corporation the flexibility to transform floating-rate debt to fixed-rate.
There are potential rate savings.
Swaps may be based on outstanding debt and may thus avoid increasing liabilities.
Swaps provide alternative sources of financing.
Swaps are private transactions.

26. Interest Rate Swaps Basic Advantages (cont’d)
There are no Securities and Exchange Commission reporting or registration requirements yet.
The swap contract is simple and straightforward.
Rating agencies, such as Standard and Poor’s, take a neutral to positive position on corporate swaps.
Tax treatment on swaps in uncomplicated

27. Currency Swaps Companies use currency swap markets
when they need to raise money in a currency issued by a country in which they are not well known
and must therefore pay a higher interest rate than would be available to a local or better-known borrower.

28. Currency Swaps Are derivatives Safe?
Proper management of derivatives s a tricky, three-stage process.
Identify where the risks lie.
Design an appropriate strategy for managing these risks.
Select the right tools to execute the strategy.

29. Sales Without Money
A number of countries desire goods and products for which they do not have the convertible currency to pay.
There are two nonmonetary trade themes.
Countertrade.
Industrial cooperation.

30. Countertrade Countertrade
International trade in which at least part of the payment is in some form other than hard, convertible currency.
There are six varieties of countertrade.
Counterpurchase.
Compensation.
Barter.
Switch.
Offset
Clearing account arrangements.

31. Countertrade Counterpurchase
In counterpurchase situations, the goods supplied by the developing country
are not produced by or out of goods or products imported from the developed country.

32. Countertrade Compensation
Call for payment by the developing country in products produced by developed country equipment.
Products made in the developing country by the developed country equipment are shipped to the development country in payment for the equipment.

33. Countertrade
Barter
An ancient form of commerce and the simplest sort of countertrade.
The developing country sends products to the developed country that are equal in value
to the products delivered by the developed country to the developing country.

34. Countertrade
Switch
Frequently, the goods delivered by the developing country are not easily usable or salable.
A third party in brought in to dispose of them. This process is called switch trading.

35. Countertrade
Offset
Occurs when the importing nation requires a portion of the materials, components, or subasemblies of a product
to be procured in the local market.
The exporter may set up or cooperate in setting up a parts manufacturing and assembly facility in the importing country.

36. Countertrade Clearing Account Arrangements
Used to facilitate the exchange of products over a specific time period.
When the period ends, any balance outstanding must be cleared by the purchase of additional goods or settled by a cash payment.

37. Industrial Cooperation
Long-term relationships between developed country companies and developing country plants
in which some or all production is done in the developing country plant.

38. Industrial Cooperation
There are five different industrial cooperation methods.
Joint venture.
Coproduction and specialization.
Subcontracting.
Licensing.
Turnkey plants.

39. International Finance Center
International Finance Centers
New developments in international financial management.
Floating exchange rates.
Growth in the number of capital exchange markets.
Different and changing inflation rates among countries.
Advances in electronic cash management systems.
Realization that increased yields result from innovative management of temporarily idle cash of international company units.
The explosive growth of the use of derivatives to protect against risks.