International bussiness 6th griffin pustay chapter 18

Chapter Objectives continued • Evaluate the various capital budgeting techniques used for international investments • Discuss the primary sources of investment capital available to int

Griffin & Pustay

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Chapter Objectives

• Analyze the advantages and

disadvantages of the major forms of payment in international trade

• Identify the primary types of

foreign-exchange risk faced by international businesses

• Describe the techniques used by firms to manage their working capital

Chapter Objectives (continued)

• Evaluate the various capital budgeting techniques used for international

investments

• Discuss the primary sources of

investment capital available to international businesses

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Financial Issues in International Trade

• Which currency to use for the transaction

• When and how to check credit

• Which form of payment to use

• How to arrange financing

Forms of Drafts Used with Documentary Collection

Sight Draft

Time Draft

• Decline draft acceptance

• Potential for default

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Figure 18.1 Using a Sight Draft

Documentation for Letters of Credit

Export Licenses

Certificates of Product Origin

Inspection Certificates

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Types of Letters of Credit

Advised letter of credit

Confirmed letter of credit

Irrevocable letter of credit

Revocable letter of credit

Forms of Countertrade

Barter

Buy-back

Offset purchase Counterpurchase

Countertrade: Turkmenistan cotton

exchanged for Indian Wheat

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Map 18.1 Countertrade by Marc Rich

Foreign-Exchange Exposure

Transaction Exposure

Translation Exposure Economic Exposure

Transaction Exposure

Transaction Exposure is when the

financial benefits and costs of an international transaction can be affected by exchange rate movements that occur after the firm is legally obligated to complete the

transaction

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Transactions Leading to Transaction Exposure

Product Purchases Product Sales

Credit Extensions Money Borrowing

Options for Responding to

Transaction Exposure

Go naked

Buy forward currency

Buy currency option

Acquire an offsetting asset

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Strategies for Managing Transaction

Exposure: Table 18.2

Translation Exposure

Translation Exposure is the impact on

the firm’s consolidated financial statements

of fluctuations in exchange rates that change the value of foreign subsidiaries as

measured in the parent’s currency

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AFLAC’s corporate treasurer manages the company’s

translation exposure to changes in the yen-dollar exchange

rate by using a balance sheet hedge.

Economic Exposure

Economic Exposure is the

impact on the value of a firm’s operations of unanticipated exchange rate changes

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Map 18.3 Changes in Currency Values

Relative to the U.S $ July 2003 vs July 2008

Management of Working Capital

Minimize working-capital balances

Minimize foreign-exchange risk Minimize currency conversion costs

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Figure 18.3 Payment Flows without Netting

Minimizing Currency Conversion Costs

Bilateral netting

Multilateral netting

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Table 18.3 Multilateral Netting

Evaluating Investment Projects

Net Present Value

Payback Period

Internal Rate of Return

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Using the Net Present Value Approach

Risk Adjustment

Choice of Currency

Perspective

Sources of International Investment Capital

• External Sources

• Internal Sources

• Strategic Use of Transfer Pricing

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External Sources of Funding

Investment Bankers

Sale of Stock

Loans

Swaps

Figure 18.4 Internal Sources of Capital

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Table 18.4 Strategic Use of

Nonmarket-Based Transfer Prices

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