Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,19-,1,Copyright 2001 by Harcourt,Inc.All rights reserved.,Multinational vs.domestic financial management,Exchange rates and trading in foreign exchange,International monetary system,International money and capital markets,CHAPTER 19,Multinational Financial Management,What is a multinational corporation?,A corporation that operates in two or more countries.,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 hurdles.,6.To diversify.,Why do firms expand into other,countries?,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 factors that distinguish multinational from domestic financial management?,U.S.$to buy,1 Unit,Japanese yen 0.009,Australian dollar 0.650,Are these currency prices direct or indirect quotations?,Since they are prices of foreign currencies expressed in dollars,they are,direct quotations,.,Consider the following exchange rates:,The number of units of foreign currency needed to purchase one U.S.dollar,or the reciprocal of a direct quotation.,What is an indirect quotation?,Calculate the indirect quotations,for yen and Australian dollars.,#of Units of Foreign,Currency per U.S.$,Japanese yen 111.11,Australian dollar1.5385,Yen:1/0.009=111.11.,A.Dollar:1/0.650=1.5385.,The exchange rate between any two currencies.Cross rates are actually calculated on the basis of various currencies relative to the U.S.dollar.,What is a cross rate?,Cross rate=x,=111.11 x 0.650,=72.22 yen/A.dollar.,Cross rate=x,=1.5385 x 0.009,=0.0138 A.dollars/yen.,Calculate the two cross rates,between yen and Australian dollars.,Yen,U.S.Dollars,U.S.Dollar A.Dollar,A.Dollars,U.S.Dollars,U.S.Dollar Yen,The two cross rates are reciprocals of one another.,They can be calculated by dividing either the direct or indirect quotations.,Note:,Price=(1.75)(1.50)(111.11),=,291.66 yen,.,The firm can produce a liter of,orange juice and ship it to Japan for,$1.75.If the firm wants a 50%markup,on the product,what should the,juice sell for in Japan?,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 the,orange juice in Japan.The product,costs 250 yen to produce and ship,to Australia,where it can be sold,for 6 Australian dollars.What is,the dollar profit on the sale?,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(strengthening dollar)would lower the dollar profit.,What is exchange rate risk?,The current system is a,floating rate,system.,Prior to 1971,a,fixed exchange rate,system was in effect.,The U.S.dollar was tied to gold.,Other currencies were tied to the dollar.,Describe the current and former,international monetary systems.,The European Monetary Union,In 2002,the full implementation of the“euro is expected to be complete.The national currencies of the 11 participating countries will be phased out in favor of the“euro.The newly formed European Central Bank will control the monetary policy of the EMU.,The 11 Member Nations of the,European Monetary Union,Austria,Belgium,Finland,France,Germany,Ireland,Italy,Luxembourg,Netherlands,Portugal,Spain,European Union countries not in the EMU:Britain Sweden Denmark Greece,A currency is convertible when the issuing country promises to redeem the currency at current market rates.,Convertible currencies are traded in world currency markets.,What is a convertible currency?,It becomes very difficult for multi-national companies to conduct business because there is no easy way to take profits out of the country.,Often,firms will barter for goods to export to their home countries.,What problems arise when a firm,operates in a country whose,currency is not convertible?,Spot rates,are the rates to buy currency for immediate delivery.,Forward rates,are the rates to buy currency at some agreed-upon date in the future.,What is the difference between,spot rates and forward rates?,When is the forward rate at a premium to the spot rate?,If 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.,In the opposite situation,the foreign currency is selling at a discount.,The primary determinant of the spot/forward rate relationship is relative interest rates.,What is interest rate parity?,Interest rate parity holds that investors should expect to earn the same return in all countries after adjusting for risk.,f,t,=t-period forward exchange rate,e,0,=todays spot rate,k,h,=periodic interest rate in the home country,k,f,=periodic interest rate in the for