international finance
DESCRIPTION
Materi Asistensi Keuangan Internasional Credit to Ross and David PSTRANSCRIPT
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Pertemuan 7
21 November 2012
By:
David Parlindungan Siregar
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INTERNATIONAL FINANCING
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Terminology
• Cross rate
• Eurobond
• Eurocurrency
• Foreign Bonds
• LIBOR (London Interbank Offer Rate)
• Swap
– Currency
– Interest rate
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Foreign Exchange Markets and Exchange Rates
• Exchange rate
– Direct Quotation
– Indirect Quotation
• Cross-Rates and Triangle Arbitrage
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Types of Transactions
• Spot Trade
– Spot Exchange Rate
• Forward Trade
– Forward Exchange Rate
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Purchasing Power Parity
• Definition
– Exchange rates adjusts to keep purchasing power constant among currencies
• Type
– Absolute Purchasing Power Parity
– Relative Purchasing Power Parity
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Absolute PPP
• Assumption:
– No transaction cost (transportation, insurance, spoilage, etc.)
– No barriers (tariffs, taxes, etc.)
– Identical goods
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Absolute PPP
• Example:
• P$ = dollar price standard community basket
• P£ = pound price standard community basket
• If
– P$ = $225
– P£ = $150
• Exchange rate = $1,5/ £
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Relative PPP
• Main relation : relative inflation rate
• Tells what determines the change in the exchange rate over time, not the absolute level of the exchange rates
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Relative PPP
• Example:
• Inflation rate in France is 3%, where US has 5%. The expected spot currency rates for the next year is 1,20 €/USD and today spot rate is 0.70 €/USD. Explain whether PPP relatives hold or not?
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Interest Rate Parity
• Definition
• Covered Interest Arbitrage
– The condition applied
• Formula for interest rate parity
• Forward rates determination based on IRP
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Example
• r$ = 2.24%
• r€ = 2.70%
• S = 1.2017 €/$
• F = 1.19854 €/$
Assume we invest $1000. Illustrate whether interest rate parity is hold or not?
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Fisher Effect
• Fisher effect state that real interest rates are equal across the world
• Uncovered Interest Parity – Condition stating that the expected percentage
change in the exchange rate is equal to the difference in interest rate
• Combination of PPP, IRP, and UFR (unbiased forward rates condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate
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Fisher Effect
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International Capital Budgeting
• 2 methods for counting the NPV of such capital budgeting:
– The home currency approach
– The foreign currency approach
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Home Currency Approach
• Convert all the foreign currency cash flow to functional currency and discount the cash flow with local discount rate
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Foreign Currency Approach
• Determine the required return on foreign investments and discount the foreign cash flow with the foreign required return. Finally, convert the NPV into the functional currency
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Exchange Rate Risk
• Short-Run Exposure
– Use forward or other derivatives
• Long-Run Exposure
– Use fundamental hedging
• Translation exposure
– Just accounting matter
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Latihan Soal
• Diandra Corp, sebuah perusahaan AS sedang mengevaluasi pilihan investasinya senilai € 30 juta untuk membuka operasi di Perancis. Investasi ini akan memberikan perusahaan cash inflow sebesar €12 juta selama 4 tahun. Diketahui nilai tukar spot untuk euro adalah €0,5 dan return US T-Bill dan risk free aset di Perancis adalah 5% dan 8%. WACC perusahaan adalah sebesar 12%. Hitung NPV dari investasi ini!