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ch21 - Chapter 21 International Financial Management...

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Chapter 21 International Financial Management Learning Objectives 1. Discuss how the basic principles of finance apply to international financial transactions. 2. Differentiate among the spot rate, the forward rate, and the cross rate in the foreign exchange markets, perform foreign exchange and cross rate calculations, and hedge an asset purchase where payment is made in a foreign currency. 3. Identify the major factors that distinguish international from domestic capital budgeting, explain how the capital budgeting process can be adjusted to account for these factors, and compute the NPV for a typical international capital project. 4. Discuss the importance of the Euromarkets to large U.S. multinational firms, and calculate the cost of borrowing in the Eurobond market. 5. Explain how large U.S. money center banks make and price Eurocredit loans to their customers and compute the cost of a Eurocredit bank loan. I. Chapter Outline 21.1 Introduction to International Finance Management A. Globalization of the World Economy 1
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Globalization refers to the removal of barriers to free trade and the closer integration of national economies. Consumers in many countries buy goods that are purchased from a number of countries, other than just their own. The production of goods and services has also become highly globalized. Like product markets, the financial system has also become highly integrated. B. The Rise of Multinational Corporations A multinational corporation is a business firm that operates in more than one country. Multinational corporations may purchase raw materials from one country, obtain financing from a capital market in another country, produce finished goods with labor and capital equipment from a third country, and sell finished goods in a number of other countries. Multinationals are owned by a mixture of domestic and foreign stockholders. Transnational corporations, regardless of the location of their headquarters, are managed from a global perspective rather than the perspective of a firm residing in a particular country. Exhibit 21.1 lists the top 15 multinational business firms ranked by total revenues. C. Factors Affecting International Financial Management 2
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Six factors can cause international business transactions to differ from domestic deals. The uncertainty of future exchange rate movements is called foreign exchange rate risk , or just exchange rate risk . Differences in legal systems and tax codes can also impact the way firms operate in foreign countries. There are two important levels of communication in international business deals: business communication and social communication. o Although English is the official business language, it is not the world’s social language.
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