IFM10 Ch27 Lecture

IFM10 Ch27 Lecture - CHAPTER27 Management 1 TopicsinChapter...

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  1 CHAPTER 27 Multinational Financial  Management
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  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
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  3 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. 
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  4 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.
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  5 Major Factors Distinguishing Multinational  from Domestic Financial Management Currency differences Economic and legal differences Language differences Cultural differences Government roles Political risk
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  6 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
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  7 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.
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  8 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
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  9 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.
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  10 Calculate the two cross rates between euros and kronor. Kronor Dollars Dollar Euros × Cross Rate = = 6.7522 x 1.2500 = 8.3334 Kronor/Euro
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  11 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
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  12 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. 
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IFM10 Ch27 Lecture - CHAPTER27 Management 1 TopicsinChapter...

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