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1. Introduction to International Financial Management
1. Scope of International Finance. We truly are living in a global economy. Economic difficulties in the country of one of our major trade partners surely affect the U.S. and corporations within the U.S. U.S. corporations find themselves more intertwined across national borders than ever before. See Slide 3 (44.0K) for a breakdown of foreign sales for some of our major corporations. Multinational corporations (MNC) are companies that do business across national boundaries.
2. The Multinational Corporation
1. Types of multinational corporations. There are four major types of MNCs. First, the ________ Key Term is an MNC that could produce a product domestically and export some of that product to one or more foreign markets. This website is a guide to exporting for U.S. corporations. This is probably the least risky form of international business for U.S. companies. Some firms have licensing agreements with foreign governments. The MNC will export knowledge and technology to the foreign government if imports of the actual product are banned. A _____ Key Termwith a local government in a foreign country has the least amount of political risk and is preferred by most business firms. Take a look at this website that tries to match up joint venture partners for small and medium businesses. A fully owned foreign subsidiary is becoming uncommon, as firms prefer joint ventures. See Slide Multinational Corporations (58.0K)
3. Foreign Exchange Rates
1. What is an exchange rate? An _____ Key Term is the relationship between the values of the currency of two countries. For an exercise in converting currencies based on up-to-the-minute exchange rates, look at this website.
2. Factors that influence exchange rates. A number of factors influence exchange rates. See Slide Exchange Rates (53.0K) for a list of factors that influence exchange rates. When a country's rate of inflation changes, so does the relationship between the value of its currency and the value of the currency of other countries. The same is true for interest rates. The balance of payments, or the economic transactions that flow between two countries, impact exchange rates. The monetary policy of other countries impact their exchange rate, as does a pronounced and extended stock market rally in a country.
4. Spot Rates and Forward Rates
1. What is a spot rate? The spot rate is the exchange rate at one point in time.
2. What is a forward rate? The ____ Key Term is a spot rate that is estimated for a future point in time that reflects expectations about the value of the currency at that future time. It may be more or less than the spot rate. See Slide Spot Rates for Forward Rates (47.0K)
3. What is a cross rate? The cross rate is the exchange rates for two countries other than the U.S. and their relationship.
5. Managing Foreign Exchange Risk
1. What is foreign exchange risk? Since MNCs make transactions in two different currencies, there is always increased risk because of factors that affect not only one country, but two.
2. Accounting or translation exposure.Critical Concept
3. Transaction exposure. Transaction exposure occurs from gains and losses resulting from international transactions.
4. Strategies for minimizing transaction exposure. MNCs can use three different strategies to minimize transaction exposure. See Slide Managing Foreign Exchange Risk (65.0K)
6. Foreign Investment Decisions
1. Four reasons are offered for foreign investment by MNCs. These are avoidance of import tariffs, lower production costs overseas, superior American technology and tax implications. Foreign investment can also provide an important component of portfolio diversification.
2. Political Risk. MNCs face significant political risk when establishing an overseas presence. Governments may change hands during their tenure overseas. MNCs can establish political risk umbrella insurance policies though they are not cheap. Joint ventures also help minimize political risk.
7. Financing International Business Operations
1. Credit. Where governments are fairly stable and MNCs are well known to each other, transactions may take place on credit just like transactions between domestic companies.
2. Funding of Transactions. There are several forms that funding of transactions can take. See Slide Financing International Business Operations (56.0K)