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FOF IM CHAPTER 17 - 6th - CHAPTER 17 International Business...

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CHAPTER 17 International Business Finance CHAPTER ORIENTATION This chapter introduces some of the financial techniques and strategies necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk. We also cover working-capital management and direct foreign investment for international firms. CHAPTER OUTLINE I. The globalization of product and financial markets A. World trade has grown faster over the last few decades than has aggregate world GNP. B. In less-developed countries, long-run overseas investments of the United States’ companies have yielded high returns. C. Many American multinational corporations (MNC) have significant assets, sales, and profits attributable to foreign investments. D. Many foreign MNCs have significant operations in the United States. E. Many firms, investment companies, and individuals invest in the capital markets of foreign companies to receive: 1. Higher returns than those available in domestic capital markets. 2. Reduced portfolio risk through international diversification. F. Companies are increasingly turning to the Eurodollar market to raise funds. In 1985, U.S. companies raised almost $40 billion in foreign financial markets. 28
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II. Exchange rates A. Recent history of exchange rates 1. Exchange rates between the major currencies were fixed from 1949 to 1970. 2. Countries were required to set a parity rate with the U.S. dollar, around which the daily exchange rate could narrowly fluctuate. 3. In order to affect a major adjustment, a currency either had to undergo a devaluation (reducing the cost relative to the dollar) or an up- valuation/revaluation (increasing the cost relative to the U.S. dollar). 4. Since 1973, a floating rate international currency system has operated, wherein the currencies are allowed to fluctuate freely. 5. Two major types of transactions now occur in the foreign exchange markets: spot and forward transactions . 6. Beginning January 1, 1999, 11 countries in the European Union introduced a new, single currency – the Euro. On July 1, 2002, the national currencies in the 11 countries using the Euro will disappear. The reason the European Union has gone to a single currency is to make it easier for goods, people, and services to travel across national boarders. B. Spot exchange rates 1. The rate at which one currency can be immediately exchanged for another currency. 2.
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FOF IM CHAPTER 17 - 6th - CHAPTER 17 International Business...

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