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CHAPTER 22 International Business Finance
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DescriptionInternational Business Finance
International Business Finance
This chapter introduces some of the financial techniques and strategies necessary to the efficient operations of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk. We also cover multinational working capital management and direct foreign investment for international firms.
I. The globalization of product and financial markets
A. World trade has grown faster over the last few decades than has aggregate world GNP.
B. In less-developed countries, long-run overseas investments of the United States' companies have yielded high returns.
C. Many American multinational corporations (MNC) have significant assets, sales, and profits attributable to foreign investments.
D. Many foreign MNCs have significant operations in the United States.
E. Many firms, investment companies, and individuals invest in the capital markets of foreign companies to receive
1. Higher returns than those available in domestic capital markets
2. Reduced portfolio risk through international diversification
F. Companies are increasingly turning to the Eurodollar market to raise funds.
II. Exchange rates
A. Recent history of exchange rates
1. Exchange rates between the major currencies were fixed from 1949 and 1970.
2. Countries were required to set a parity rate with the U.S. dollar, around which the daily exchange rate could narrowly fluctuate.
3. In order to effect a major adjustment, a currency either had to undergo a devaluation (reducing the cost relative to the dollar) or an up-valuation/revaluation (increasing the cost relative to the U.S. dollar).
4. Since 1973, a floating rate international currency system has operated, wherein the currencies are allowed to fluctuate freely.
5. Two major types of transactions now occur in the foreign exchange markets: spot and forward transactions.
B. The Euro
1. Beginning January 1, 1999, 11 countries in the European Union introduced a single currency, the Euro.
2. This should make it easier for goods and services to cross borders, and, as a result, economies should flourish.
3. It also eliminates the uncertainty associated with currency fluctuations.
4. For the United States, it also means that competition should be stronger.
C. Spot exchange rates
1. The rate at which one currency can be immediately exchanged for another currency
2. Direct quote expresses the exchange rate in the units of home currency required to buy one unit of foreign currency. For example, 1.4845 U.S. dollars per pound.
3. Indirect quotes indicate the number of foreign currency units needed to purchase one unit of home currency. For example, .6691 pounds per U.S. dollar.
Using the rates listed above, how many dollars would a U.S. manufacturer pay for a part costing 250 pounds?
250 (pounds) x 1.4845 ($/pound) = $371.13
4. The direct and indirect quotes should have a reciprocal relationship. In formula
Direct Quote =
Indirect Quote =
5. When these quotes are not equal, arbitrage will occur, where a ...
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