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Finance 3rd Edition

Cornett, Adair, and Nofsinger

19

Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

InternationalCorporate Finance

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Introduction

Todays business and financial environmentis global

Typical opportunities and risks are

magnified in this global environment

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Global Business

International Opportunities U.S. is the largest economy in the world

Developing economies that are growing faster

than the U.S. include China and India

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International Opportunities

The four largest export partners for the U.S. China

Canada

Mexico

Japan

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International Opportunities

Trade restrictions and tariffs

affect tradingactivity between countries

Trade Agreements

NAFTA

CAFTA

Mercosur

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International Opportunities

Trading Zones European Union

International organizations WTO and IMF

promote and facilitate unrestricted trade

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Corporate Expansion into Other Countries

Lowest level of corporate expansion issimple import and export operations

Highest level is direct capital involvement

through Multinational Corporations (MNCs)

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Foreign Currency Exchange

The FOREX market is one of largestfinancial markets in the world OTC

Commercial banks

Investment banks

Foreign exchange dealers and brokers

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Exchange Rates

The exchange rate is the price of onecurrency stated in terms of another

Currency transaction types

Spot transaction

Indirect quote

Direct quote

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Exchange Rate

Arbitrage Form of buying low and selling high

Opportunities to profit through exchange rate

mispricing

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Exchange Rate Risk

Potential for exchange rates to changeunfavorably over time

Freely-floating regime

Exchange rates are free to change according tosupply and demand for the currencies

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Exchange Rate Risk

Managed-floating regime Governments attempt to influence exchange rates

by buying or selling their currency to change supplyor demand

Fixed peg arrangement

A government fixes, or pegs, their currencys valueto another currency

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Forward Exchange Rate and Hedging

Spot exchange rates are for transactionsoccurring now

Exchange rate risk can be managed by

negotiating forward exchange rates

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Forward Exchange Rate and Hedging

Hedging strategies are used to reduceexchange rate risk

Minimizes firms need to exchange foreign

currency Locks in exchange rates using forward rates

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Interest Rate Parity

Difference between spot and forward ratesare due to differences in the interest ratesof two countries

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Purchasing Power Parity

Illustrates the relationship betweenexchange rate changes and inflation

Law of one price

Identical products should have the same price,adjusted for currency exchange, no matter

where in the world they sell

Pd= Pfx Spot rate

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Relative Purchasing Power Parity

Interest rate parity is the relationshipbetween current spot rate and forward rate

Relative purchasing power parity describes

how current spot rate will change in future

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Relative Form of PPP Equation

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Political Risks

Countrys political environment mayadversely affect investments

Government seizure of companys assets

Expropriation with minimal compensation Enactment of new taxation

Limiting or blocking currency conversion

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Minimizing the Impact of Political Risk

Use local financing Purchase country risk insurance

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International Capital Budgeting

Investing internationally comes withadditional sources of risk

Managers should use strategies to adjust forhigher risks

Hedging

Higher discount rate

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International Capital Budgeting

Cash flow estimates In foreign currency

Discount rate

Usually domestic country perspective

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International Capital Budgeting

Managers can adjust by Converting all estimated cash flows to domesticcurrency using estimated exchange rates

Adjusting the discount rate to an equivalent ratein the foreign country to account for differinginflation rates