Ch 17 Slide Show

Ch 17 Slide Show - 1 CHAPTER 17 Multinational Financial...

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Unformatted text preview: 1 CHAPTER 17 Multinational Financial Management 2 Topics in Chapter Factors that make multinational financial management different Exchange rates and trading International monetary system International financial markets Specific features of multinational financial management 3 4 What is a multinational corporation? A multinational corporation is one that operates in two or more countries. At one time, most multinationals produced and sold in just a few countries. Today, many multinationals have world- wide production and sales. 5 Why do firms expand into other countries? To seek new markets. To seek new supplies of raw materials. To gain new technologies. To gain production efficiencies. To avoid political and regulatory obstacles. To reduce risk by diversification. 6 Major Factors Distinguishing Multinational from Domestic Financial Management Currency differences Economic and legal differences Language differences Cultural differences Government roles Political risk 7 Consider the following exchange rates: Are these currency prices direct or indirect quotations? Since they are prices of foreign currencies expressed in U.S. dollars, they are direct quotations (dollars per currency). U.S. $ to buy 1 Unit Euro 1.2500 Swedish Krona 0.1481 8 What is an indirect quotation? An indirect quotation gives the amount of a foreign currency required to buy one U.S. dollar (currency per dollar). Note than an indirect quotation is the reciprocal of a direct quotation. Euros and British pounds are normally quoted as direct quotations. All other currencies are quoted as indirect. 9 Calculate the indirect quotations for euros and kronor. Euro: 1 / 1.2500 = 0.8000 Krona: 1 / 0.1481 = 6.7522 Direct Quote: U.S. $ per foreign currency Indirect Quotes: # of Units of Foreign Currency per U.S. $ Euro 1.2500 0.8000 Swedish krona 0.1481 6.7522 10 What is a cross rate? A cross rate is the exchange rate between any two currencies not involving U.S. dollars. In practice, cross rates are usually calculated from direct or indirect rates. That is, on the basis of U.S. dollar exchange rates. 11 Calculate the two cross rates between euros and kronor. Kronor Dollars Dollar Euros Cross Rate = = 6.7522 x 1.2500 = 8.3334 Kronor/Euro 12 Euros/Krona Cross Rate Euros/Krona cross rate is reciprocal of the Kronor/Euro cross rate: Euros/Krona cross rate = 1/(8.3334) = 0.1185 13 Example of International Transactions Assume a firm can produce a liter of orange juice in the U.S. and ship it to Spain for $1.75. If the firm wants a 50% markup on the...
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This note was uploaded on 02/02/2011 for the course FINC 350 taught by Professor Johnson during the Spring '11 term at UCLA.

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Ch 17 Slide Show - 1 CHAPTER 17 Multinational Financial...

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