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International vs Domestic Financial Management

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What new problems and factors are encountered in international as opposed to domestic financial management?

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What new problems and factors are encountered in international as opposed to domestic financial management?

International financial must consider fluctuating exchange rates. The fluctuating values of currencies in terms of each other. The fluctuations create currency value risks. These may be categorized as (1) transaction exposure (2) translation exposure 3) economic exposure
Transaction exposure
It is the extent to which given exchanges rate change will change the value of foreign currency denominated transactions already entered into.
Measurement of Transaction Exposure

* Transaction exposure measures gains or losses that arise from the settlement of existing financial obligations, namely
o Purchasing or selling on credit goods or services when prices are stated in foreign currencies
o Borrowing or lending funds when repayment is to be made in a foreign currency
o Being a party to an unperformed forward contract and
o Otherwise acquiring assets or incurring liabilities denominated in foreign currencies
http://www.businessfaculty.utoledo.edu/pkozlowski/FINA3500/ch08.ppt.
Translation (Accounting) exposure
The change in the value of a firm's foreign currency denominated accounts due to a change in exchange rates.

Economic exposure
It measures how greatly a firm's present value of future cash flows is affected by unexpected exchange rate fluctuations.

Hence Exchange rate exposure may affect financing costs volatile cash flow from exchange rate changes increases risk. Transaction exposure reflects the exposure of an MNC's future cash transactions to exchange rate movements ...

Solution Summary

Almost 1000 words explain new problems and factors in international management that domestic doesn't encounter.

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Financial management: Discuss arbitrage profits, exchange risk, forward contract, futures, options

For your job as the business reporter for a local newspaper, you are given the assignment of putting together a series of articles on the multinational finance and the international currency markets for your readers. Much recent local press coverage had been given to losses in the foreign exchange markets by JGAR, a local firm that is the subsidiary of Daedlufetarg, a large German manufacturing firm. Your editor would like you to address several specific questions dealing with multinational finance.

Prepare responses to problems 1-4:

1. What new problems and factors are encountered in international as opposed to domestic financial management?

2. What does the term arbitrage profits mean?

3. What can a firm do to exchange risk?

4. What are the differences between a forward contract, a futures contract, and options?

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