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19model 10/6/2009 8:16 12/28/2002 Chapter 19. Model for Multinational Financial Management At the beginning of this textbook, we stated that one of the driving forces in financial management today is globalization. This chapter explores the unique challenges of a multinational corporation (one that operates in an integrated fashion in a number of countries. In theory, the concepts and procedures introduced in the first 18 chapters of this text apply equally for both domestic and multinational operations. However, there are six major factors that distinguish a global corporation from a firm operating entirely within one nation. First, multinational corporations must deal with different currency denominations. For this reason, a thorough exchange rate analysis is essential for any financial analysis. Second, the firm must be aware of the economic and legal ramifications of their actions in all of the countries that they operate in. Third, language barriers often exist, which make effective communication a challenge. Fourth, cultural differences present possible complications when dealing with employees, risk, and defining goals. Fifth, multinational firms must make decisions that account for political and other non-economic factors, which result from the role of governments. Lastly, the firm must be concerned with the political risk of the countries it deals in. This chapter will address the manner in which multinational corporations try to cope with these challenges. EXCHANGE RATES An exchange rate specifies the number of units of a given currency that can be purchased with another currency. In the United States, we are generally accustomed to looking at exchange rates as the rate of a foreign currency relative to the Direct Indirect Quotations Quotations Brazilian real 0.32470 3.07977 British pound 1.53980 0.64943 Canadian dollar 0.63 1.58529 Denmark krone 0.13020 7.68049 Euro 0.97 1.03455 Hungarian forint 0.00396 252.39778 Israeli shekel 0.21290 4.69704 Japanese yen 0.00827 120.87514 Mexican peso 0.10270 9.73710 South African rand 0.09430 10.60445 Swedish krona 0.1 9.68054 Swiss franc 0.66320 1.50784 Venezuelan bolivar 0.00074 1347.70889 Notice, that the exchange rates were quoted in two ways (direct and indirect). A direct quotation tells you how many U.S. dollars can be purchased per one unit of the foreign currency. The indirect quotation tells you how many units of foreign currency can be purchased per one U.S. dollar. Notice, these values are merely inverses of each other. Currency exchange is relatively simple in this context of relating all foreign currencies to the U.S. dollar. Calculating the currency conversion is a relatively simple mathematical operation. However, multinational corporations often operate in multiple countries, which causes them to collect revenues and incur expenses in several different currencies. In such situations, where the flow of money may spread across several borders, firms will want to know the values of foreign
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This note was uploaded on 05/31/2009 for the course MBA 4500 taught by Professor Eyupcetin during the Spring '09 term at Istanbul Technical University.

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19model - A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19...

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