1. MNEs need access to capital Finance is integral to firm’s operating strategies Concern with access to capital in local and global markets Finance and Treasury Functions in the Internalization Process Chief Financial Officer (CFO)—vice president of finance Responsible for controllership and treasury functions Acquires financial resources Allocates financial resources Manages cash flows Multinational Finance Function

2. Location of Treasury Function in the Corporate Organizational Structure

3. Acquiring Financial Resources Borrowing Funds Back-to-BackLoansEurobondsForeignBonds

4. Acquiring Financial Resources AmericanDepositoryReceiptsVentureCapitalStockMarket Issuing Equity

5. Internal Sources of Funds Funds—working capital Sources of funds—MNEs have more complex arrangements due to the number of subsidiaries and the diverse environments in which they operate Loans Dividends Intercompany receivables and payables Investments through equity capital

6. Internal Sources of Funds (cont.) Global cash management Generates and invests cash through dealings with financial institutions Assesses a company’s cash needs using budgets and forecasts Involves decisions about the degree of centralization of cash

7. Internal Sources of Funds (cont.) Multilateral netting—company establishes one center to handle all internal cash, funds, and financial transactions Advantages include: –optimizing the use of excess cash –reducing interest expenses and maximizing interest yields –reducing costly foreign exchange, swap transactions, and intercompany transfers –minimizing administrative paperwork –centralizing and speeding information

8. Foreign-Exchange Risk Management Translation exposure Combined effect of the exchange-rate change is either a net gain or loss –does not represent an actual cash flow effect Transaction exposure Economic exposure (operating exposure)—potential for change in expected cash flows that arise from:

9. Exposure-Management Strategy Defining and measuring exposure MNE must forecast the degree of exposure in each major currency in which it operates Reporting system—substantial participation from foreign operations combined with central control Foreign input important to ensure forecasting effectiveness Central control of exposure protects resources more efficiently MNEs should devise uniform reporting system for its subsidiaries Time periods of reports vary Final reporting should be at corporate level

10. Exposure-Management Strategy (cont.) Centralized policy—top management should determine hedging policy Formulating hedging strategies—safest position has exposed assets equal to exposed liabilities Operational strategies—involve adjusting the flow of money and resources to reduce foreign-exchange risk

11. Exposure-Management Strategy (cont.) Formulating hedging strategies (cont.) Contractual arrangements –forward contract—establishes a fixed exchange rate for future transactions –foreign-currency option

12. Capital Budgeting Decision in an International Context Parent company needs to compare the net present value or internal rate of return of a foreign project with that of its other projects and with that of others available Unique aspects of capital budgeting for foreign projects Parent cash flows must be distinguished from project cash flows Remittance of funds to the parent affected by differing tax systems, and legal and political constraints on movement of funds Differing rates of inflation must be anticipated Parent must consider possible changes in exchange rates Must evaluate political risk in foreign market Terminal value is difficult to estimate