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International Finance

Corporations that operate in more than one country are often referred to as international corporations or multinational corporations. These corporations must consider many financial factors that do not affect purely domestic firms. These include foreign exchange rate (currency) risk, different interest rates that vary between country to country, complex accounting methods for foreign operations and compliancy risk, foreign tax rates, and political risk that could result in changes to regulation, expropriation and corruption. 

The basic principles of corporate finance apply to international corporations: firms look to invest in projects that create value for shareholders, look to finance these projects by raising capital at the lowest possible cost, and look to reduce risk, or balance risk with returns. However, multinational corporations often find it more complicated to apply capital budgeting and net present value analysis principles to foreign operations. 

Three Areas of International Corporate Finance:
1. Foreign exchange rates and hedging exchange rate risk
2. International capital budgeting
3. International financing decisions

International financing decisons typically involve a choice between three basic choices of financing: (1) export cash from the business's domestic operations to the foreign operation, (2) borrow in the country where the investment is located, or (2) borrow in a third country. There are also more complicated options such as interest rate swaps that allow international companies to manage risk. International corporations typically use hedging strategies to protect against foreign exchange rate risk as well. 

There is some important terminology in international finance that corporate finance students should know.

Euro: The Euro is the single monetary unit used by 17 countries in the European Union. It has been in use since January 2002.

Cross Rate: The cross rate is the exchange rate between two currencies, neither of which is the currency of the country in which the exchange rate was quoted. For example, a U.S. newspaper reports the cross rate between the Japanese Yen and the Euro. Typically exchange rates are quoted in relation to the US dollar; as a result, cross rates typically refer to an exchange rate between two currencies rather then the USD. 

Eurobonds: Eurobonds are bonds that are denominated in a currency not native to the corporation which issued them, and which are issued in the bond markets of several countries simultaneously. Eurobonds are typically named after the currency they are denominated in: ie. the Euroyen bonds or Eurodollar bonds. 

Eurocurrency: Eurocurrency is money deposited in a financial centre outside of the country whose currency is involved. Eurodollars are American dollars deposited in foreign insitutions, and are the most commonly used Eurocurrency. 

Foreign bonds: Foreign bonds are corporate bonds issued in one country only, typically in the currency of that country. Foreign corporation bonds are typically distinguished from bonds issued in that country by its domestic corporations because of different tax rates, etc. Foreign bonds are typically nicknamed for the country where they are issued. For example, American foreign bonds are often called Yankee bonds. 

American Depository Receipts (ADR): Shares of many non-US companies that trade on a US stock exchange are often traded through ADRs. ADRs are negotiable securities that represent securities of non-US companies. American depository receipts are only one form of depository receipt, as these reciepts are used to sell foreign shares in new markets in countries other than just the US. The benefit of ADRs is that it allows investors to buy shares of a foreign corporation without the same currency exchange and border considerations. When a broker purchases foreign shares in the foreign market and deposits them in a foreign bank, a domestic custodian bank will issue the depository receipts to be traded in the domestic market. 

The London Interbank Offered Rate (LIBOR): LIBOR is the estimated average interest rate that the major London banks would be charged if borrowing from other banks. The LIBOR rate (along with the Euribor) is the benchmark used for short-term interst rates around the world. 
 

Categories within International Finance

Foreign Exchange Rates

Postings: 717

Foreign exchange rates are the price of one currency expressed in relation to the currency of another country.

Currency Exchange: International Finance

1. Assume that foreign currencies X, Y, and Z are highly correl¬ated. If a firm diversifies its financing among these three currencies, will it substantially reduce its exchange rate exposure (as opposed to borrowing all funds from one of these foreign currencies)? Explain. 2. Assume that your company needs dollars. It borr

Bonds in Benchmark Market Rates

1.Bonds generally refer to a benchmark market rate. If a firm expects to have additional financial requirements in the future, would you recommend that it uses convertibles or bonds with warrants? What factors would influence your decision? 2.Technology has been responsible for major changes in many industries over time. Devel

International Finance Statements

1. Political risk management strategies should be managed carefully and integrated with other risk management structure. Who in your point of view should be in charge of the political risk management and how should that strategy be handled? 2. Once a project is accepted, country risk analysis for the foreign country involved i

Capital structure of U.S. and Japan

1. Describe general difference between the capital structures of firms based in the United States and those of firms based in Japan. Please give further explanation for the differences 2. What are some of the political risks that faced Multinational corporations? Explain with examples

Capital Project Analysis, Market, WACC, Cost of Capital

1. Evaluating the potential market is an important part of the capital project analysis. If there is no market, the chances of success will be minimal so this is something that should be evaluated before any project is started. Do you agree with these remarks? 2. The WACC that should be used in capital budgeting is the firm's m

Direct Foreign Investment

Respond to the following statements 1. Develop some of the motives for Direct Foreign Investment. Direct Foreign Investment can be viewed as one of the alternative means available to a business for picking up a particular opportunity and for acquiring an internationally nontransferable foreign asset in an indirect way. Some

Hedging Relationship Statements

Respond to following statements. 1. All hedging relationships must be "highly effective" to qualify for special financial treatment. What is meant by the term highly effective and why is its measurement important for financial managers? Hedge accounting can be defined as a method of reflecting a commercially hedged position

translation exposure and transaction exposure

1. It is, generally, not possible to completely eliminate both translation exposure and transaction exposure. In some cases, the elimination of one exposure will also eliminate the other. But in other cases, the elimination of one exposure actually creates the other. Discuss which exposure might be viewed as the most important t

Arbitrage, Interest Rate Parity and Forecasting Exchange Rates

Respond to following statements. 1. Explain the concept of locational arbitrage and the scenario necessary for it to be plausible. Locational arbitrage can occur when the spot rate of a given currency varies among locations, specifically the ask rate at one location must be lower than the bid rate at another location. The disp

Responses to foreign exchange rate questions

Respond to the following statements. 1. Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations, spot, forward etc. which do you favor and why? Is your view the same when you add local inflation to the budgeting process? The process that I like the most is fo

Stocks and foreign exchange rates

1. Many companies grant stocks or stock options to the managers. Discuss the benefits and possible costs of using this kind of incentive compensation scheme. 2. It has been shown that foreign companies listed in the U.S. stock exchange are valued more than those from the same countries that are not listed in the U.S. Explain th

Foreign Exchange Pair

1. Should foreign companies seeking to issue securities in the United States be required to disclose as much as U.S. companies issuing securities in the United States? 2. Foreign exchange rates are used to establish budgets and track actual performance. Of the various exchange rate combinations, which do you favor and why? Is

Arguments for and against the alternative exchange rate regimes

1. There are arguments for and against the alternative exchange rate regimes a. List the advantages of the flexible exchange rate regime. b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. c. Rebut the above criticism from the viewpoint of the proponents of t

Internationalization of Global Finance

Respond to following statements 1. What contemporary factors are contributing to the internationalization of the subject of Finance? The factors contributing to the internationalization of the subject of finance include the increasing number of cross-border mergers and acquisition that occur in information technology and the i

Connection with balance of payments framework and exchange rates

1. Propose the connection between the balance of payments framework and exchange rates. 2. Propose the similarities and differences of current account and financial account in the balance of payments structure. In doing so, apply your analysis to explain the trade balance between U.S, and China. 3. Critique and assess the gold

Critical Analysis: ISO and Services

How does ISO in terms of manufacturing relate to an industry that only offers services? How do you think 'standardization' would be imparted to the customer?

The Story of a High-Tech Entrepreneur in a Low-Tech World

Please look up this Case Study called "Dream Deferred: The Story of a High-Tech Entrepreneur in a Low-Tech World" and provide your thoughts on these questions below, also provide APA references and in text citations if necessary. 1. What are the infrastructure-related challenges faced by Adesemi? 2. What are the political/

Foreign Corrupt Practices Act - Impact

1. Why might bribery become a problem for U.S. managers working in foreign countries? 2. What are the major features of the Foreign Corrupt Practices Act (FCPA)? 3. Why might the Foreign Corrupt Practices Act create a competitive disadvantage for U.S. firms? 4. Describe the three non-Western traditions that can lead to confus

International Finance of RMB vs. USD

The Chinese currency is considered undervalued by many other countries, including the U.S. Prior to July 2005, the Chinese RMB (yuan) was pegged at 8.28 RMB to 1 U.S. dollar. It went off the peg in July 2005 and now the exchange rate is 6.12 RMB to 1 U.S. dollar. The paper should address the following: 1. Has the RMB appre

Insights into investing in an Asian country

Foreign direct investment is very risky and companies may end up losing money in the global market. However, this is not to say that a company cannot succeed in the global market through direct investments. Respond to the following: Why might an American company want to invest in "your country"? What are the main risks an

Export-Import Bank on International Trade

Financing Foreign Trade For foreign trade to occur, there needs to be a buyer to buy the goods and a seller to sell the goods. There are various ways to finance foreign trade including discounting, bankers' acceptances, forfaiting, and factoring. With discounting, a financial institution takes exporters' drafts and converts t

Foreign Trade Financing Between China And The US

What are the main products traded between your country (in this case, China) and the U.S.? What are some of the major issues involved in financing trade between your country (China) and the U.S.? Based on analysis and findings, what would you recommend to American companies? How can American companies protect themselves agains

Foreign Trade with Bangladesh and its Risks

The Bangladeshi market is a risky market. A foreign company may end up losing capital in the Bangladeshi market. Using Bangladesh as an example and learning tool to appreciate the complexities of international trade financing. Draft info about American companies that may like to start exporting goods to Bangladesh using t

Exchange Rate: Effects on Profitability and Hedging Risk

The exchange rate risk is the risk to which investors are exposed because changes in exchange rates may have an effect on investments that they have made. Because of the risk, an investor can lose capital in the currency trading market. Therefore, it important to hedge the currency risk. What is the value of your $202,995 por

Managing Exchange Rate Risk with VAR

Exchange rate risk is a risk that businesses with international operations experience when there's a change in the value of one currency compared to another currency. Exchange rate risk is also known as currency risk. There are various types of exchange rate risk including translation exposure, transaction exposure, contingent e

Living Standards in India on a US Dollar Based Salary

Introduction to International Financial System International financial system refers to the Global Financial System. The Global Financial System refers to those financial institutions and regulations that act on the international level, as opposed to those that act on a national or regional level. The main players in the inte

Spartan, Inc. Net present value analysis

4. Spartan Inc. (a US based MNC) is planning to open a subsidiary in Switzerland to manufacture  shoes. The new plant will cost SF 1.1 billion. The salvage value of the plant at the end of the 4 yr  economic life is estimated to be SF 200 million net of any tax effects. This

Research Assignment 5

The most popular way for international expansion is for a local firm to acquire foreign companies. One of the most benefits for international expansion is global distribution capability that helps expanding the market share. In the meantime, domestic trade is far less risky than International trade. In International trade, th

Would you personally invest in El Al Airlines?

International airlines always receive a large portion of their revenues from a variety of different currencies due to their international reach and global range of customers. Furthermore, their risk may depend on political/economic developments in other countries. Furthermore airlines need to purchase oil at world market price