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International Business : The Challenge of Global Competition, 8/e
Donald Ball
Wendell H. McCulloch, California State University Long Beach
Paul L. Frantz, California State University Long Beach
Michael Geringer, California Polytechnic State University
Michael S. Minor, University of Texas Pan American
Financial Management

E Learning Session

  1. Fluctuating exchange rates PowerPoint (31.0K)
    1. Whenever IC business is transacted, fluctuating exchange rates must be considered
      • The fluctuating values of currencies in relation to one another Concept Check
      • Also consider the value of each currency in terms of home country currency value or the financial and tax-reporting country
    2. Transaction risks PowerPoint (35.0K)
      • Usually involve a receivable or a payable denominated in a foreign currency
      • Risks arise from business transactions
      • Risks may be reduced by hedging, trying to protect yourself against losses due to currency exchange rate fluctuations Concept Check
      • Forward hedging
        1. Involve a contract in foreign exchange market
        2. Contract to deliver fixed amount of one currency in exchange for a fixed amount of another currency at some future, specified date
        3. Many forward hedge contracts are with an IC's bank
        4. Example of Norwegian Krone is offered in the text
      • The IMM contract is a futures hedge
        1. IMM (International Monetary Market) contracts are futures, not forward contracts
        2. IMM treats currencies as a commodity
      • Currency options hedges
        1. Since 1982 some stock exchanges have traded currency futures
        2. In addition and over-the-counter currency options market exists for banks
        3. Intra-IC hedge
          1. A growing practice is for IC to seek internal hedge through parent or subsidiary companies
          2. For example when payables of one unit are due about the same time as the receivables from another unit
          3. The payables can be hedged against the receivable without fees charged by IMM or other hedging processes
        4. Covered position
          1. When you have funds at the time you enter a hedge contract or receivables are due prior to the hedge delivery date, it is called a covered position
        5. An uncovered position
          1. A financial manager can predict the rise of fall of currency value and base hedge on reduced amounts of cash
          2. Can establish shorts or longs in the money markets
          3. An uncovered position occurs as a result of selling currency when you do not have cash in hand or valid contract for receivables
      • Credit or money market hedge
        1. Credit or money market hedge involves credit
        2. Company desiring hedge is the borrower
        3. Interest rates in countries of trade should be evaluated carefully to ensure the least cost in the hedge
      • Acceleration or delay of payment
        1. If importer expects currency in his country to depreciate, early purchase of foreign currency is motivated
        2. Which way will the exchange rates go?
          1. If currency is predicted to change, it influences the desire of the importer to accelerate or delay payment
          2. Payment accelerations or delays are called leads or lags
        3. Unrelated companies
          1. Although fluctuating rates are immaterial to thee exporter who has a contract for delivery of a specific amount in a specific currency at a defined time, the importer bears more risk
        4. Within an IC
          1. Two types of IC might be involved in acceleration or delay: those with highly integrated host country operations and those where each component of the IC is a separate profit center
          2. The same situation as unrelated companies exists for separate operating units of a single IC
          3. An integrated IC can benefit though leads and lags
          4. The overall objective is to get funds into the strongest currencies in the various units
          5. An integrated IC can more easily manipulate the time for payment to the most advantages to currency value
        5. Effects of leads and lags on foreign exchange markets
          1. When a buyer in a weak currency buys from a supplier in a strong currency, the strategy is to hedge immediately
          2. The opposite is done when the buyer is in the strong currency and the seller is in a weaker currency
        6. Objectives of intra-IC payments
          1. Within laws and restrictions on working capital, ICs can maximize currency strengths while minimizing currency weaknesses
          2. Objectives are
            • Keep as much money as possible in counties with high interest rates
            • Keep as much money as possible in countries were credit is difficult to obtain
            • Maximize holdings of hard, strong currencies, and minimize holdings in countries with weak currencies
            • Minimize currency holdings subject to currency exchange controls or that may be subject to them during the period the company will hold them
      • Exposure netting
        1. The acceptance of open positions in two or more currencies that are considered to balance one another
        2. Currency groups
          1. Some currency groups tend to move with one another even during float rate periods
          2. The Euro, common currency of the EU, offers this type of exposure netting
        3. Combinations or strong and weak currencies
          1. Involve to payables or two receivables, one in a strong currency, the other in a weaker currency
          2. One advantage of exposure netting is that it avoids the costs of hedging
      • Price adjustments
        1. Sometime sales are destined for countries with currencies about to be devalued
        2. Finance people want to avoid this situation
        3. Price adjustments to raise prices may be a tool to offset potential devaluation
        4. Price adjustments within an IC
          1. For an integrated IC, selling prices can easily be adjusted to achieve advantage in anticipation of currency rate changes
        5. Government reactions to intra-enterprise price adjustments
          1. Such intra-IC adjustments are used to
            • Realize higher profit in countries with lower tax rates
            • Decrease import duty
      • Only for big business? Concept Check
        1. Generally, only larger companies can afford the expertise and deal in large enough amounts of money to make currency risk hedging practical
        2. New banking regulations that allow US banks to hold foreign currency make the possibility more feasible for smaller US companies
      • Translation risks
        1. Financial reports must be stated in terms of one currency
        2. Translation risk occur when currency values change for foreign investments
        3. Realistic information
          1. Constant valuation of foreign investments is required.
          2. Decision cannot be made under an assumption that currencies do not fluctuate
        4. Management fears
          1. Management fears that stakeholders will misinterpret fluctuations due to translation events
        5. Neutralizing the balance sheet
          1. This means to have monetary assets in a given currency approximate liabilities in that currency
          2. A fall in currency values of assets will be matched by a fall in currency values of liabilities
          3. Maximizing profit should take precedence over avoiding translation risk if they conflict
    3. Swaps PowerPoint (30.0K)Concept Check
      • Trades of assets and liabilities in different currencies or interest rate structures to lessen risks or lower costs
      • May be used to protect against translation risks
      • More likely to be used to raise or lower transfer capital
      • Spot and forward market swaps
        1. Buying currency in the spot market for loan to a subsidiary
        2. Parent will short the same amount of currency (buying US$ for forward delivery)
        3. Position is covered by repayment from subsidiary
      • Parallel loans
        1. Independent parties make loans to in-country subsidiaries of alliance partners
        2. A US company makes a loan to an American subsidiary of an Italian parent while the Italian parent makes a loan to the American company's Italian subsidiary
      • Bank swaps
        1. Typically a bank swap is used to expand an ICs overseas operations
        2. Similar to parallel loans except that banks hold the funds and make the loans
  2. Capital raising and investing
    1. Decisions
      • The currency in which the capital will be raised
      • Long-term estimate of the strength or weakness of that currency
      • How much of the money raised should be equity capital and how much should be debt capital
      • Whether the money should be borrowed from (a) commercial bank, (b) a bank as part of a swap, (c) another company as part of a swap, (d) another part of the IC, (e) a public offering in a capital market
      • If a capital market is to be used, which market achieves its objectives for least cost
      • How much money is needed and for how long
      • Are company resources available
    2. Interest rate swaps
      • Outgrowth of currency swaps
      • Arbitrage between fixed rate and floating rate interest markets
      • Bank-intermediated "plain vanilla" swaps
        1. A BBB-rated US company is paired with an AAA-rated foreign bank
        2. The US rating would make usual borrowing too costly
        3. The US company wants to borrow at fixed rate
        4. The Euro bank wants to borrow at floating rate
        5. Because of low rating, US company can borrow on floating rate market
        6. Euro bank can borrow at a fixed rate that is lower than could be obtained by the US company
        7. The company and the bank swap interest rates
        8. The company lures the bank to do this by discounting the floating rate to the bank
      • Advantages include
        1. Swaps give corporation flexibility to transfer floating-rate debt to fixed rate debt
        2. Potential rate savings
        3. Swaps may be based on outstanding debt to avoid increasing liabilities
        4. Swaps provide alternative sources of funding
        5. Swaps are private transactions
        6. No Securities and Exchange commission reporting or registration required
        7. Swap contract is simple and straight forward
        8. Rating agencies take a neutral to positive position on corporate swaps
        9. Tax treatment on swaps is uncomplicated
    3. Currency swaps
      • Used when currency is needed in country where the firm may not be well known
    4. Hedges and swaps as "derivatives"
      • Derivatives are financial instruments such as futures options, and swaps, the values of which are tied to price movements of underlying commodities or other instruments
      • Are derivatives safe?
        1. Used properly they can be remarkably effective
        2. They can, and have been, abused
        3. Risk management is three stage process
          1. Identify where the risks lie
          2. Design an appropriate strategy for managing them
          3. Select the right tools to execute the strategy
      • Fickle currency markets cause derivative demand
        1. Profit hits and warnings have motivated more firms to look at derivative to hedge
      • Derivatives against fickle whether
        1. US treasury department suggests tat 70% of American companies are affected by weather
        2. Derivatives can be used to hedge against unusual weather and its subsequent effect on firm profit
    5. Financial executive' datebooks: Networking
      • Finding partners for swaps is challenging
      • International banks provide many opportunities to connect
      • Trade Conferences for financial executives
  3. Sales without money
    1. Countertrade PowerPoint (29.0K)
      • Usually involves two or more contracts, one for purchase of developed country products and one or more for purchase of developing country products
      • Six varieties of countertrade Concept Check
        1. Counter purchase
          1. The goods supplied by the developing country are not produced by or out of the goods or products imported from the developed country
        2. Compensation
          1. Payment by developing country in products produced on developed countries' equipment
        3. Barter
          1. Simplest type
          2. Goods are exchanged
        4. Switch
          1. When goods delivered by the developing country are not usable or salable in the developed country, a third party is brought in to dispose of them
        5. Offset
          1. When the importing national requires that a portion of the materials or parts of product be procured in the importer's market
        6. Clearing account arrangements
          1. Facilitate exchange of products
          2. When the period of agreement ends, the outstanding balance must be cleared by purchase of additional goods or settled by cash payment
      • How important is countertrade?
        1. Usually not reported publicly
        2. Value of countertrade is estimated to be very large
        3. US government's positions on countertrade
          1. Some elements of government are for, some are against
          2. Congress has introduced legislation to limit countertrade
        4. Other governments' positions on countertrade
          1. Most developing counties encourage countertrade
          2. As do some developed nations
        5. Twin problems
          1. Quality of developing country products is of concern
          2. Third-party inspection of goods before leaving developing country can help concern
        6. New directions
          1. Developing country to developing country countertrade is growing
    2. Industrial cooperation PowerPoint (30.0K)
      • Industrial cooperation is the long-term relationship between developed country and developing country plants in which some or all production is done in the developing country plant
      • Five types
        1. Joint ventures
          1. Two or more companies or state agencies combine to form a distinct new business entity
        2. Coproduction and specialization
          1. The factory in the developing country produces agreed upon components of a product
          2. Product is assembled at both locations for local distribution
        3. Subcontracting
          1. Developing country plant produces components delivered to the developed country plant for assemble and distribution
        4. Licensing
          1. An agreement for developing country plant to produce product for distribution
          2. The developed country company is paid a fee to permit agreement
        5. Turnkey plants
          1. Developed country entity has responsibility to build entire plant, starting it, training employees, and eventually turning over the keys to the developing country
  4. International finance center Concept Check
    1. Handle most or all international financial transactions for all units of an IC
    2. On the increase because
      • Volatile, floating currency exchange rates
        1. Specialization in monitoring techniques make financial center effective in taking advantage of volatile currency exchange rates
      • Capital and exchange markets
        1. The specialists monitor capital and exchange markets to be effective for IC when capital acquisition is needed
      • Inflation rates
        1. Monitoring of international inflation rates prepares financial centers to respond accordingly
      • Electronic cash management
        1. New technology allows worldwide markets to develop
        2. Complexity and quantity create need for specialist
      • Using derivatives correctly
        1. Growing use suggests that specialist can make them effective for firm
        2. Specialist ensure they are used correctly
      • Other uses of international finance center
        1. Handle internal and external invoicing
        2. Help weak currency affiliates
        3. Strengthen affiliate evaluation and reporting systems




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