...MFI 442 International Finance-Individual Assignments II Name Institution MFI 442 International Finance-Individual Assignments II Over the years, global businesses are increasing rapidly because most countries are attractive and have lucrative policies that attract foreign direct investments (FDIs). Foreign direct investments are simply business entities operated by a corporation in one country (the home country) but with subsidiaries in the foreign markets (the host countries) (Agarwal, 2009).A perfect example for FDIs is Multinational Corporations (MNCs) which have their parent company located in their home country but with subsidiaries in foreign markets. In most cases, FDIs are operated through joint ventures, franchises or mergers where the parent company of the MNC acquires other businesses in overseas markets (Chaurasia, 2008). The objective of this assignment, therefore, is to discuss and explain further the operations of MNCs and issues surrounding these corporations. Hedging Transaction Exposure Four of the Hedging Techniques Available To MNCs Hedging simply means minimizing or mitigating the effect of the exchange rate exposure. This risk is of three types namely, translation exposure, economic exposure and transaction exposure (Luo, 2001). A transaction exposure is a form of foreign exchange risk which results to loss or gains when operations are carried out or denominated in foreign currency (Hill, 2005). It is a short-term exposure that arises...
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...Chapter 17 International Accounting and Financial Management True / False Questions 1. The purpose of all accounting is to provide internal and external decision-makers with the financial data they need to make their decisions. True False 2. There are three points at which operating in a foreign currency raises accounting issues: when transactions are made in foreign currencies, when foreign subsidiaries consolidate their results to the parent company, and when debt is acquired in foreign currencies. True False 3. FASB 52 requires that companies record foreign currency based transactions at the spot rate at the time of the transaction. True False 4. Consolidation is when a company's various results are aggregated into one report. True False 5. The current rate translation method translates current assets at the rate in effect when they were acquired. True False 6. The temporal method of translation translates fixed assets at the rates in effect the day the assets were acquired. True False 7. Whether to use the current or temporal rates depends on the functional currency of the foreign operation. True False 8. Accounting is an objective, fact-based discipline and not influenced by culture. True False 9. Accounting standard convergence is unlikely, given the complexities of the systems, all of which would require harmonization. True False 10. With convergence...
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...(a)3 Transaction exposure 3 Translation exposure 4 Economic exposure 5 Question (b)5 International debt financing6 International equity financing 5 International trade financing5 Part II 4 Question (a)5 Question (b)6 Question (c)5 Question (d)6 References: 4 Part I Question (a): Transaction exposure The firm faces with transaction exposure when the exchange rate movements can affect to the financial results in international transaction after the firm is legally obligated to complete transactions (Shapiro, 2010). Typical of transactions that expose the firm to transaction exposure include sales of good and purchases, service or assets, borrowing of money and extension of credit. For example, Honda Motor Cycles in China, that company sells the cars to consumers comes with forward contract, it is included the price adjustment clauses. In order to reflect certain exchange rates changes it’s based on the adjusted price. The forward contract also brings more benefit to the consumers that helps them can get lower price. Furthermore, Honda Company has used policy such as purchasing foreign currency by using the currency swaps. This helps to fix the price of the car across currency contract in advance. In the foreign market from Japan’s Honda Co. the car is priced in Yen that means the company faces with foreign exchange risk. Thus, above solution is helpfully to protect subsidiary and reduce transaction exposure. Translation...
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...economic environment. 1.2 What is country risk? Describe several types of country risk one might face when conducting business in another country. Country risks refer to the political and financial risks of conducting business in a particular foreign country. Country risks include foreign exchange risk, political risk, and cultural risk. 1.3 What is foreign exchange risk? Foreign exchange (or currency) risk is the risk of unexpected changes in foreign currency exchange rates. 1.4 What is political risk? Political risk is the risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate. 1.5 In what ways do cultural differences impact the conduct of international business? Because they define the rules of the game, national business and popular cultures impact each of the functional disciplines of business from research and development right through to marketing, production, and distribution. 1.6 What is the goal of financial management? How might this goal be different in different countries? How might the goal of financial management be different for the multinational corporation than for the domestic corporation? The goal of financial management is to make decisions that maximize the value of the enterprise to some group of stakeholders. The...
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...managed. There is a veritable sea of benefits in international portfolio investment. These include participation in the growth of other countries, hedging against exchange rate exposure to risk, diversification benefits and advantages (abnormal returns) of market segmentation on a global scale. However, we cannot be so overwhelmed by the payoff of international portfolio investment as to overlook the bitter side of it. In an international environment, financial investments are not only subject to currency risk and political risk, but also to many institutional constraints and barriers. What are crucial in international portfolio investment are optimal portfolio allocation and the associated market and currency risks. Diversification into multiple securities can practically eliminate potential severe losses from any individual security. However, domestic diversification cannot remove systematic market risk due to high correlations among most domestic securities. Since market risk differs from country to country, international diversification can reduce substantially the overall risk exposure of investment portfolios. Introduction and Overview Increased global competition and opportunity have attracted many national economies and individual domestic businesses to the international markets. In recent years international investing has received a boost from rapid advancements in international transport and communication, globalization of national...
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...believe that the heart of the brand comes from its performance in manufacturing and engineering. Porsche is therefore, by far the most exposed company among other European-based auto manufactures to changes in exchange rates. While the other manufacturers increase their amount of natural hedging by conducting more manufacturing in their countries of large sales Porsche increase their put option hedging. According to their 2006 model year they are going to fully hedged all their sales. This is done even though Porsche has the largest US exposure among the manufactures. Their hedging strategy has been criticized for being more lucky than thoughtful. Porsche also differ with their extreme anti-debt attitude. Porsche have a strong competitive position and another aspect that is very specific for Porsche’s products is the exchange rate pass-through. They pass through the changes of exchange rate upon the final consumer. Chapter 9 Operating Exposure ( End-of-Chapter Questions 1....
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...FIN 4604: Sample Questions III 1). Assume that the Swiss franc has an annual interest rate of 8% and is expected to depreciate by 6% against the dollar. From a U.S. perspective, the effective financing rate from borrowing francs is: a) 8% b) 14.48% c) 2% d) 1.52% e) 14% 2). Assume that the U.S. interest rate is 11% while the interest rate on euros is 7%. If euros are borrowed by a U.S. firm, they would have to ________ against the dollar by _______ in order to have the same effective financing rate from borrowing dollars. a) Depreciate; 3.74% b) Appreciate; 3.74% c) Appreciate; 4.53% d) Depreciate; 4.53% 3). When a U.S. firm borrows a foreign currency and has no offsetting position in this currency, it will incur an effective financing rate that is always above the _______ if the currency ________. a) Foreign currency’s interest rate; appreciates b) Foreign currency’s interest rate; depreciates c) Domestic interest rate; depreciates d) Domestic interest rate; appreciates 4). If a firm repeatedly borrows a portfolio of foreign currencies, the variability of the portfolio’s effective financing rate will be highest if the correlations between currencies in the portfolio are _______ and the individual variability of each currency is _________. a) High; low b) High; high c) Low; low d) Low; high 5). Assume the annual British interest rate is above the annual U.S. interest rate...
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...exchange exposure Transaction exposure: : value of outstanding financial obligations incurred prior to change in exchange rates but not due to be settled until after the exchange rates change(deals with changes in cash flows that result from existing contractual obligation) Ex: when a firm buys a forward exchange rate contract it deliberately creates a transaction exposure. 4 option available to manage the exposure 1. Remain unhedged(might gain or lose) 2. Hedge in the forward market(forward contract and a source of funds to fulfil,covered risk) 3. Hedge in the money market(loan contract similar for forward) 4. Hedge in the option market(purchasing a put option) 6 commonly used policies for Transaction and translation exposure 1. Matched currency cash flows(exposure cash flow is constant and predictable over time) 2. Risk sharing agreements(buyer-seller agree to share or split currency movements impact) 3. Back to back loans(parallel loan or credit swap; borrow each other’s currency;specific time) 4. Currency swaps(similar to back to back loan but does not appear on firms balance sheet) 5. Leads and lags(lead;pay early, lag is to pay late) 6. Reinvoicing centers: separate corp subsidiary that serves as middlemen;parent;geographic region Operating exposure(economic exposure; competitive exposure; strategic exposure): change in the present value of the firm resulting from any changes in expected future operating cash flows of the firm...
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...MFI 442 International Finance-Individual Assignments I Name Institution MFI 442 International Finance-Individual Assignments I Most corporations expand beyond their local boundaries to become multinationals. There are myriad reasons behind this (Wells & Wint, 2000). The biggest of all these reasons is to gain access to international markets and perhaps invest in economic zones that have high investment returns as compared to home countries (Fu, 2000). The trend of globalization has made most firms become multinational corporations. The most common method for MNCs is through franchises (Jones, 2005). In line with this, economists have put up theories explaining why businesses expand beyond their national boundaries (Hicks, 2000). My primary objective in this paper, therefore, is to discuss international finance and other macroeconomics policies. To foresee this goal, I will delve into foreign exchange market and operations of multinational corporations (MNCs). Theories Explaining Why Corporations Expand to become Multinationals a). Financial economists have brought forward three key arguments that enumerate why companies expand their operations to global markets. These theories are; the imperfect markets theory, the comparative advantage theory and the product cycle theory (Levi, 2004). i).The Comparative Advantage Theory This theory is among the most important concepts in international trade. It states that economic welfare increases when countries specialize...
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...Reebok International Ltd.'s stock at $59.00 per share, for a total of $3.8 billion. Upon announcement, Reebok stock rose 30% while Adidas climbed 7%. As stated by Herbert Hainer, CEO of Adidas, "This is a once-in-a-lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry. Together, we will expand our geographic reach, particularly in North America, and create a footwear, apparel and hardware offering that addresses a broader spectrum of consumers and demographics" (Adidas.com). The three leading sportswear companies in the world are Nike, Adidas and Reebok. In August 2005, Nike was the leader in global market share with 32.9% compared to the recently constituted Adidas-Reebok organisation that had 26.3% market share. In the largest market in the world, the United States (US), Nike had 36.3% market share in August 2005. Following the acquisition of Reebok in August 2005, the market share of Adidas-Reebok in the US jumped to 21.1% from 8.9%. A primary goal of the acquisition has been to challenge industry leader Nike for a higher share of the United States sporting goods market as well as the global sporting goods market. The acquisition has prompted much discussion as to what the future holds for the sporting goods industry and its major players. Today, the sportswear trade is a vast and dynamic operation involving huge economies of scale. The low-cost countries are gaining foothold in international markets...
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...Executive Summary: According to the 2010 Interbrand Best Global Brands report, “McDonalds Corporation is the 6th most valuable brand globally”. The calculated value of the iconic golden arches logo has an estimated net worth of $33.58 billion (Interbrand, 2010) The company is ranked as the #1 restaurant brand and on an average day will provide food and beverage service to 60 million customers around the world. This corporation is a pioneer in global expansion and emulated by many competitors. Since the opening of the first McDonalds in California in 1940, the company has continued on its journey to continually enhance the brand and support higher sales. In July of 1966, McDonalds listed on the NYSE. By 1970 they surpassed $1 billion in annual sales; the corporation’s vision for growth and their unique business model paved the way for a global footprint that would stir media frenzy. As a global economic presence, McDonalds is a superpower. There are famous stories reported across the globe such as when McDonalds served 30,000 hungry Russians on the opening day of McDonalds Moscow in 1990. This paper will demonstrate the global reach that McDonalds has by reporting and analyzing on the global FX and debt markets and how changes in currency rates and interest rates impact the company’s financials. The analysis will provide an overview of the firm and then delve deeper into the current global presence of the organization and breakdown certain specifics by region globally...
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...countries, and explain how corporate and country characteristics are considered by an MNC when it establishes its capital structure. l l An MNC finances its operations by using a mixture of fixed interest borrowing and equity financing that can minimize the overall cost of capital (the weighted average of its interest rate and dividend payments). By minimizing the cost of capital used to finance a given size and risk of operations, financial managers can maximize the value of the company and therefore maximize shareholder wealth. 25 26 MULTINATIONAL COST OF CAPITAL AND CAPITAL STRUCTURE BACKGROUND ON COST OF CAPITAL Apart from working capital, a firm’s capital consists of equity (retained earnings and funds obtained by issuing shares) and debt (borrowed funds). With these funds a firm invests in a portfolio of projects, each project potentially offering different risks and different returns. The interest rate that the firm applies or charges to these projects (the cost of using the firm’s capital) will therefore vary according to the project’s particular risk. Profitable investment in this context is where the firm invests in projects that achieve returns greater than that required by their risk. A project that achieves a 20% return from investing in car parks (safe) is arguably a better performer than a project achieving a 25% return from financing a musical show (risky) in that many of the musical shows will fail and most of the investments in car parks will succeed – it is...
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...of Business North South University International financial management is a popular concept which means management of finance in an international business environment which means, doing of trade and making money through the exchange of foreign currency. The international financial activities help the organizations to connect with international dealings with overseas business partners- customers, suppliers, lenders etc. It is also used by government organization and non-profit institutions. Before doing this course though I have some idea about finance but now I can feel that I have learnt many things which I didn’t know earlier in details. Important things that I have learnt are given in the following. The first chapter has been about the International Financial environment where main objectives have been about the goal of the MNC’s, key theories and common methods of doing international business. In this chapter I have learnt about the detailed agency problems, various forms of corporate control which result in reducing agency costs. Along with the constraints which confront the managers to maximize the shareholder’s wealth, it has also been learnt how comparative advantages, imperfect market and product cycle theory details motivate the managers to expand business internationally. Several methods have been learnt like franchising, licensing, DFI, joint ventures, acquisitions etc. The risks which are acquainted with the international business have also been explained in this...
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...Sixth Edition INTERNATIONAL FINANCIAL MANAGEMENT Cheol S. Eun Bruce G. Resnick International Financial Management Sixth Edition The McGraw-Hill/Irwin Series in Finance, Insurance, and Real Estate Stephen A. Ross Franco Modigliani Professor of Finance and Economics Sloan School of Management Massachusetts Institute of Technology Consulting Editor FINANCIAL MANAGEMENT Adair Excel Applications for Corporate Finance First Edition Block, Hirt, and Danielsen Foundations of Financial Management Fourteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Tenth Edition Brealey, Myers, and Allen Principles of Corporate Finance, Concise Second Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Sixth Edition Brooks FinGame Online 5.0 Bruner Case Studies in Finance: Managing for Corporate Value Creation Sixth Edition Chew The New Corporate Finance: Where Theory Meets Practice Third Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory First Edition Cornett, Adair, and Nofsinger Finance: M Book First Edition DeMello Cases in Finance Second Edition Grinblatt (editor) Stephen A. Ross, Mentor: Influence through Generations Grinblatt and Titman Financial Markets and Corporate Strategy Second Edition Higgins Analysis for Financial Management Ninth Edition Kellison Theory of Interest Third Edition Kester, Ruback, and Tufano Case Problems in Finance Twelfth Edition Ross, Westerfield, and Jaffe Corporate Finance Ninth Edition...
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...exchange can take place * Money acts as a medium of exchange and solves the divisibility problem. (e.g. bag of potatoes might be worth half of the left rump, but a person would not just take off a rump from a living cow and directly exchange). Other roles include store of value (saving of individuals’ surplus earning). The funds saved by surplus units- those savers with current excess funds- can be put to use by those whose current demand for goods and services is greater than their current available funds. (Deficit units) * Financial institutions and markets facilitate financial transactions between the providers of funds and the users of funds. * Financial assets are represented by financial instrument that states how much has been borrowed, and when and how much is to be repaid by the borrower. E.g. money invested in a term deposit with a bank, the bank will issue a term deposit receipt. This is a financial instrument. * Buyers of financial instruments are lenders that have excess funds today and want to invest and transfer that purchasing power to the future. The sellers of the instruments are those deficit units that are short of funds today, but expect to have a surplus amount in the future which will enable the repayment. * A...
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