FM12 Ch 26 Tool Kit - Chapter 26 Tool Kit for Multinational...

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2/25/2007 Chapter 26. Tool Kit for Multinational Financial Management This chapter will address the manner in which multinational corporations try to cope with these challenges. Table 26-1 Exchange rates of select major currencies, relative to the U.S. dollar Direct Indirect Quotations Quotations (1) (2) Canadian dollar 0.8930 1.1198 Japanese yen 0.0087 115.1145 Mexican peso 0.0919 10.8778 Swiss franc 0.8157 1.2259 British pound 1.9069 0.5244 Euro 1.2841 0.7788 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 25 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. EXCHANGE RATES (Section 26.3) 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 U.S. dollar. Some examples of exchange rates can be seen below. Note: The pound and euro are quoted as direct quotations (column 1). Their indirect quotations (column 2) are found by taking the inverse of the direct quotations. All other currency are quoted as indirect quotations (column 2). Their direct quotations (column 1) are found by taking the inverse of their indirect quotations. Source: The Wall Street Journal ,; quotes for August 7, 2006. 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. Column 1 and column 2 are inverses, subject to rounding.
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CROSS RATES 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,
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FM12 Ch 26 Tool Kit - Chapter 26 Tool Kit for Multinational...

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