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1、19-1Copyright 2001 by Harcourt,Inc.All rights reserved.nMultinational vs.domestic financial managementnExchange rates and trading in foreign exchangenInternational monetary systemnInternational money and capital marketsCHAPTER 19Multinational Financial Management19-2Copyright 2001 by Harcourt,Inc.Al
2、l rights reserved.What is a multinational corporation?A corporation that operates in two or more countries.19-3Copyright 2001 by Harcourt,Inc.All rights reserved.1.To seek new markets.2.To seek raw materials.3.To seek new technology.4.To seek production efficiency.5.To avoid political and regulatory
3、 hurdles.6.To diversify.Why do firms expand into othercountries?19-4Copyright 2001 by Harcourt,Inc.All rights reserved.1.Different currency denominations.2.Economic and legal ramifications.3.Language differences.4.Cultural differences.5.Role of governments.6.Political risk.What are the six major fac
4、tors that distinguish multinational from domestic financial management?19-5Copyright 2001 by Harcourt,Inc.All rights reserved.U.S.$to buy 1 Unit Japanese yen 0.009Australian dollar 0.650nAre these currency prices direct or indirect quotations?lSince they are prices of foreign currencies expressed in
5、 dollars,they are direct quotations.Consider the following exchange rates:19-6Copyright 2001 by Harcourt,Inc.All rights reserved.The number of units of foreign currency needed to purchase one U.S.dollar,or the reciprocal of a direct quotation.What is an indirect quotation?19-7Copyright 2001 by Harco
6、urt,Inc.All rights reserved.Calculate the indirect quotationsfor yen and Australian dollars.#of Units of Foreign Currency per U.S.$Japanese yen 111.11Australian dollar1.5385Yen:1/0.009=111.11.A.Dollar:1/0.650=1.5385.19-8Copyright 2001 by Harcourt,Inc.All rights reserved.The exchange rate between any
7、 two currencies.Cross rates are actually calculated on the basis of various currencies relative to the U.S.dollar.What is a cross rate?19-9Copyright 2001 by Harcourt,Inc.All rights reserved.nCross rate=x=111.11 x 0.650=72.22 yen/A.dollar.nCross rate=x=1.5385 x 0.009=0.0138 A.dollars/yen.Calculate th
8、e two cross ratesbetween yen and Australian dollars.Yen U.S.Dollars U.S.Dollar A.Dollar A.Dollars U.S.Dollars U.S.Dollar Yen19-10Copyright 2001 by Harcourt,Inc.All rights reserved.nThe two cross rates are reciprocals of one another.nThey can be calculated by dividing either the direct or indirect qu
9、otations.Note:19-11Copyright 2001 by Harcourt,Inc.All rights reserved.Price=(1.75)(1.50)(111.11)=291.66 yen.The firm can produce a liter oforange juice and ship it to Japan for$1.75.If the firm wants a 50%markupon the product,what should the juice sell for in Japan?19-12Copyright 2001 by Harcourt,In
10、c.All rights reserved.250 yen=250(0.0138)=3.45 A.dollars.6 3.45=2.55 Australian dollar profit.1.5385 A.dollars=1 U.S.dollar.Dollar profit=2.55/1.5385=$1.66.Now the firm begins producing theorange juice in Japan.The product costs 250 yen to produce and shipto Australia,where it can be soldfor 6 Austr
11、alian dollars.What is the dollar profit on the sale?19-13Copyright 2001 by Harcourt,Inc.All rights reserved.The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates.For example,in the last slide,a weakening Australian dollar
12、(strengthening dollar)would lower the dollar profit.What is exchange rate risk?19-14Copyright 2001 by Harcourt,Inc.All rights reserved.nThe current system is a floating rate system.nPrior to 1971,a fixed exchange rate system was in effect.lThe U.S.dollar was tied to gold.lOther currencies were tied
13、to the dollar.Describe the current and formerinternational monetary systems.19-15Copyright 2001 by Harcourt,Inc.All rights reserved.The European Monetary UnionIn 2002,the full implementation of the“euro”is expected to be complete.The national currencies of the 11 participating countries will be phas
14、ed out in favor of the“euro.”The newly formed European Central Bank will control the monetary policy of the EMU.19-16Copyright 2001 by Harcourt,Inc.All rights reserved.The 11 Member Nations of theEuropean Monetary UnionAustriaBelgiumFinlandFranceGermanyIrelandItalyLuxembourgNetherlandsPortugalSpainE
15、uropean Union countries not in the EMU:Britain Sweden Denmark Greece19-17Copyright 2001 by Harcourt,Inc.All rights reserved.nA currency is convertible when the issuing country promises to redeem the currency at current market rates.nConvertible currencies are traded in world currency markets.What is
16、 a convertible currency?19-18Copyright 2001 by Harcourt,Inc.All rights reserved.nIt becomes very difficult for multi-national companies to conduct business because there is no easy way to take profits out of the country.nOften,firms will barter for goods to export to their home countries.What proble
17、ms arise when a firmoperates in a country whose currency is not convertible?19-19Copyright 2001 by Harcourt,Inc.All rights reserved.nSpot rates are the rates to buy currency for immediate delivery.nForward rates are the rates to buy currency at some agreed-upon date in the future.What is the differe
18、nce between spot rates and forward rates?19-20Copyright 2001 by Harcourt,Inc.All rights reserved.When is the forward rate at a premium to the spot rate?nIf the U.S.dollar buys fewer units of a foreign currency in the forward than in the spot market,the foreign currency is selling at a premium.nIn th
19、e opposite situation,the foreign currency is selling at a discount.nThe primary determinant of the spot/forward rate relationship is relative interest rates.19-21Copyright 2001 by Harcourt,Inc.All rights reserved.What is interest rate parity?Interest rate parity holds that investors should expect to
20、 earn the same return in all countries after adjusting for risk.ft=t-period forward exchange ratee0=todays spot ratekh=periodic interest rate in the home countrykf=periodic interest rate in the foreign countryfte0=1+kh1+kf.19-22Copyright 2001 by Harcourt,Inc.All rights reserved.Assume 1 yen=$0.0095
21、in 30-day forward market and kNom for 30-day risk-free securities in Japan and U.S.=4%.Does interest rate parity hold?No.ft=$0.0095kh=4%/12=0.333%kf=4%/12=0.333%(More.)19-23Copyright 2001 by Harcourt,Inc.All rights reserved.Therefore,if interest rate parity holds then e0=$0.0095.However,we were give
22、n earlier that e0=$0.0090.fte0=1+kh1+kf=1.00331.0033$0.0095e0$0.0095e0=1.19-24Copyright 2001 by Harcourt,Inc.All rights reserved.What security offers highest return?Japanese security.1.Convert$1,000 to yen in spot market.$1,000 x 111.111=111,111 yen.2.Invest 111,111 yen in 30-day Japanese security.I
23、n 30 days receive 111,111 yen x 1.00333=111,481 yen.3.Agree today to exchange 111,481 yen 30 days from now at forward rate.111,481/105.2632=$1,059.07.4.30-day return=$59.07/$1,000=5.907%,nominal annual return=12 x 5.907%=70.88%.19-25Copyright 2001 by Harcourt,Inc.All rights reserved.What is purchasi
24、ng power parity(PPP)?Purchasing power parity implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries.Ph=Pf(e0)or e0=Ph/Pf.19-26Copyright 2001 by Harcourt,Inc.All rights reserved.If grapefruit juice costs$2.00/liter in U.S.and PPP holds,wha
25、t is the price of grapefruit juice in Australia?PPP=e0=Ph/Pf$0.6500=$2.00/Pf Pf=$2.00/$0.6500=3.0769 Australian dollars.19-27Copyright 2001 by Harcourt,Inc.All rights reserved.nLower inflation leads to lower interest rates,so borrowing in low-interest countries may appear attractive to multinational
26、 firms.nHowever,currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries,so the effective interest cost increases over the life of the loan.What impact does relative inflation have on interest rates and exchange rates?19-28Copyright 2001 by Harcourt,Inc
27、.All rights reserved.nEurodollar marketsla source of dollars outside the U.S.nInternational bondslForeign bonds:Sold by foreign borrower,but denominated in the currency of the country of issue.lEurobonds:Sold in country other than the one in whose currency the bonds are denominated.Describe the inte
28、rnationalmoney and capital markets.19-29Copyright 2001 by Harcourt,Inc.All rights reserved.To what extent do average capital structures vary across different countries?nPrevious studies suggested that average capital structures vary among the large industrial countries.nHowever,a recent study,which
29、controlled for differences in accounting practices,suggests that capital structures are more similar across different countries than previously thought.19-30Copyright 2001 by Harcourt,Inc.All rights reserved.nDistances are greater.nAccess to more markets for loans and for temporary investments.nCash
30、 is often denominated in different currencies.What is the impact of multinationaloperations on each of the following topics?Cash Management19-31Copyright 2001 by Harcourt,Inc.All rights reserved.nForeign operations are taxed locally,and then funds repatriated may be subject to U.S.taxes.nForeign pro
31、jects are subject to political risk.nFunds repatriated must be converted to U.S.dollars,so exchange rate risk must be taken into account.Capital Budgeting Decisions19-32Copyright 2001 by Harcourt,Inc.All rights reserved.nCredit is more important,because commerce to lesser-developed countries often r
32、elies on credit.nCredit for future payment may be subject to exchange rate risk.Credit Management19-33Copyright 2001 by Harcourt,Inc.All rights reserved.nInventory decisions can be more complex,especially when inventory can be stored in locations in different countries.nSome factors to consider are
33、shipping times,carrying costs,taxes,import duties,and exchange rates.Inventory Management19-34Copyright 2001 by Harcourt,Inc.All rights reserved.Capital Budgeting in Foreign CountriesCountrySingaporeIndia&ThailandMethodAverageAccounting Return(AAR)Payback PeriodCommentDivides the averageNet Income of aproject by thatprojects averagebook value of equity.Preferred by Indianand Thai financialmanagers because of relative simplicity.