International business 5th griffin chapter 18

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... Transaction

Chapter Objectives 1

• 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

• Discuss the primary sources of

investment capital available to international businesses

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

Figure 18.1 Using a Sight Draft

Documentation for Letters of Credit

Export licenses

Certificates of product origin

Inspection certificates

Types of Letters of Credit

Advised letter of credit

Confirmed letter of credit

Irrevocable letter of credit

Revocable letter of credit

Figure 18.2 Using a

Letter of Credit

Forms of Countertrade

Barter

Buy-back Offset purchase Counterpurchase

Map 18.1 Countertrade by Marc Rich

Foreign-Exchange Exposure

Transaction exposure

Translation exposure Economic exposure

Transaction Exposure

A firm faces transaction exposure 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

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

• Avoids fees to intermediaries

Buy Forward Currency

Buying the exchange

currency forward in the

• Requires fees to intermediaries

Buy Currency Option

Buying currency options

gives buyer the

opportunity, but not the

obligation to buy currency

at a given price in the

• More expensive than other hedging choices

• Allows for appreciation benefits while avoiding risk of depreciation

• Lost opportunity for capital gain if home currency appreciates

Political uncertainty can affect

transaction exposure.

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

Economic Exposure

Economic exposure is the impact on the value of a

firm’s operations of unanticipated

exchange rate changes

Map 18.3 Changes in Currency Values Relative to the U.S $

Corporate Financial Goals

Minimize working-capital balances

Minimize foreign-exchange risk Minimize currency conversion costs

Figure 18.3 Payment Flows without Netting

Minimizing Currency Conversion Costs

Bilateral netting

Multilateral netting

Evaluating Investment Projects

Net present value

Payback period Internal

rate of return

Using the Net Present Value Approach

Risk adjustment

Choice of currency

Perspective

Figure 18.4 Internal Sources of Capital

External Sources of Funding

Investment bankers

Sale of stock

Loans

Swaps