Summary Fundamentals of Multinational Business Finance - International Financial Management (IFI) - Exam Preparation
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Course
Fundamentals of International Finance (IFI)
Institution
Hanzehogeschool Groningen (Hanze)
Book
Fundamentals of Multinational Finance
This summary offers an in-depth explanation of the main aspects of international finance management that can be asked in examinations. Use this as your guide to prepare yourself for all the topics. Includes examples, images, and even some YouTube videos for further explanation. The topics covered a...
Fundamentals of Multinational Finance - International Financial Management (IFI) - Foreign Exchange Risk Management (Hedging Strategies)
Fundamentals of Multinational Finance - International Financial Management (IFI) - Exchange Rates (BID-ASK, FORWARD MARKET ETC)
Fundamentals of Multinational Finance - International Financial Management (IFI) - Exchange Rate Determination and Forecasting
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Hanzehogeschool Groningen (Hanze)
International Business and Management Studies
Fundamentals of International Finance (IFI)
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BASICS EXCHANGE RATES.......................................................................................................3
Globalization process → why/how do firms become multinationals?...................................... 3
Foreign exchange rate definitions............................................................................................3
Currency quotes: $/€ vs. EUR/USD.............................................................................3
Appreciation/Depreciation (floating currency).............................................................. 3
Revaluation/Devaluation (fixed currency).................................................................... 4
Bid/ask rates:........................................................................................................................... 4
Cross rates.............................................................................................................................. 5
Forward exchange rate and forward points............................................................................. 6
Exchange rate regimes: fixed vs floating:................................................................................ 6
Impossible trinity - states that country can only have 2 out of 3:............................................. 6
EXCHANGE RATE DETERMINATION & FORECASTING.......................................................... 7
International Parity conditions..................................................................................................7
Balance of payments............................................................................................................... 8
Basics of BOP..............................................................................................................8
J-curve Adjustment Path..............................................................................................9
Asset market Approach......................................................................................................... 10
FOREIGN EXCHANGE RISK MANAGEMENT.......................................................................... 11
Transaction exposure.............................................................................................................11
Receivables/payables in foreign currency (purchasing/selling)................................. 11
Funds loaned or borrowed in foreign currency.......................................................... 12
Currency Risk Management.................................................................................................. 12
1. Unhedged (uncovered risk)..........................................................................................12
2. Hedging Options.......................................................................................................... 13
1. Forward Market Hedge.......................................................................................... 13
2. Money Market Hedge (Balance Sheet Hedge)...................................................... 13
3. Option Market Hedge.............................................................................................15
Foreign currency options....................................................................................................... 16
Option Fundamentals.......................................................................................................16
Basic Types of Options:............................................................................................. 16
Key Players:...............................................................................................................16
Three Price Elements................................................................................................ 17
Premium Payment..................................................................................................... 17
Options Position Classification...................................................................................17
Intrinsic and time value.................................................................................................... 18
Comparing the costs of different hedges................................................................... 19
SPECULATIONS IN MARKETS............................................................................................ 20
INTEREST RATE & CURRENCY SWAPS................................................................................. 21
, Operating Exposure...............................................................................................................21
How to hedge?.................................................................................................................21
Common operating or financing policies:.........................................................................21
Interest rate risk..................................................................................................................... 22
How to hedge?.................................................................................................................22
Swaps.................................................................................................................................... 22
Currency swap................................................................................................................. 22
Interest swap....................................................................................................................22
INTERNATIONAL TRADE FINANCE......................................................................................... 24
Credit Risks associated with international trade.................................................................... 24
3 Key Documents to Minimize Risk....................................................................................... 24
1. Letter of credit (L/C)..................................................................................................... 24
2. Bill of lading..................................................................................................................24
3. Drafts........................................................................................................................... 25
The Bank as intermediary: The Process of minimising risk in international trade................. 25
Benefits of the System (3 – Key Documents)........................................................................ 25
The Trade Transaction Time-Line and Structure................................................................... 26
Government Programs to Help Finance Exports................................................................... 27
MULTINATIONAL CAPITAL BUDGET....................................................................................... 28
Multinational Capital Budgeting Steps................................................................................... 28
Project vs Parent viewpoint:.................................................................................................. 28
Project viewpoint..............................................................................................................28
Parent viewpoint.............................................................................................................. 28
Foreign Project Budgeting Complexities................................................................................28
Standard methods of discounted cash flow analysis............................................................. 29
Sensitivity analysis.................................................................................................................29
Project Viewpoint Measurement...................................................................................... 29
Parent Viewpoint Measurement.......................................................................................30
Real Option Analysis............................................................................................................. 30
,BASICS EXCHANGE RATES
Globalization process → why/how do firms become multinationals?
Market seekers – produce in foreign markets to satisfy demand/ export to markets other than their own
Raw material seekers – cheaper raw materials outside domestic market
Production efficiency – produce in countries where 1+ factors of production cheaper
Knowledge seekers – gain access to new technologies or managerial expertise
Political safety seekers – establish operations in countries where gov is unlikely to take over/ mess with
private business
The Globalisation Process:
Phase 1: company not yet international/global
Global Transition 1 – domestic to international trade
- begin importing materials & exporting products internationally
Challenges:
a) Financial Demands (demand of financial management above traditional)
b) Foreign exchange risks now born by firms
c) Credit Risk Management begins, potential for non-payment/non-delivery
Global Transition Phase 2: Trade to multinational Phase
● Comp. establishes foreign sales/service affiliates
● Comp. establishes manufacturing operations abroad by licensing foreign firms to
produce/service AKA CHILD LABOUR ‘N SHIT
● Firm must identify sources of competitive advantage
Foreign exchange rate definitions
Currency quotes: $/€ vs. EUR/USD
Currency Quote – the price of one currency in terms of another
, Revaluation/Devaluation (fixed currency)
– change in exchange rate determined by government/bank.
- Devaluation it weakens,
- revaluation it strengthens
Bid/ask rates:
EUR/USD 1.2500/05
- Not sure whether to use the bid or ask rate? Do whatever benefits the bank most.
Bid rate – price at which bank will buy currency
Ask rate – price at which bank will Sell currency
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