BASICS EXCHANGE RATES.......................................................................................................3
Globalization process → why/how do firms become multinationals?...................................... 3
Foreign exchange rate definitions............................................................................................3
Currency quotes: $/€ vs. EUR/USD.............................................................................3
Appreciation/Depreciation (floating currency).............................................................. 3
Revaluation/Devaluation (fixed currency).................................................................... 4
Bid/ask rates:........................................................................................................................... 4
Cross rates.............................................................................................................................. 5
Forward exchange rate and forward points............................................................................. 6
Exchange rate regimes: fixed vs floating:................................................................................ 6
Impossible trinity - states that country can only have 2 out of 3:............................................. 6
EXCHANGE RATE DETERMINATION & FORECASTING.......................................................... 7
International Parity conditions..................................................................................................7
Balance of payments............................................................................................................... 8
Basics of BOP..............................................................................................................8
J-curve Adjustment Path..............................................................................................9
Asset market Approach......................................................................................................... 10
FOREIGN EXCHANGE RISK MANAGEMENT.......................................................................... 11
Transaction exposure.............................................................................................................11
Receivables/payables in foreign currency (purchasing/selling)................................. 11
Funds loaned or borrowed in foreign currency.......................................................... 12
Currency Risk Management.................................................................................................. 12
1. Unhedged (uncovered risk)..........................................................................................12
2. Hedging Options.......................................................................................................... 13
1. Forward Market Hedge.......................................................................................... 13
2. Money Market Hedge (Balance Sheet Hedge)...................................................... 13
3. Option Market Hedge.............................................................................................15
Foreign currency options....................................................................................................... 16
Option Fundamentals.......................................................................................................16
Basic Types of Options:............................................................................................. 16
Key Players:...............................................................................................................16
Three Price Elements................................................................................................ 17
Premium Payment..................................................................................................... 17
Options Position Classification...................................................................................17
Intrinsic and time value.................................................................................................... 18
Comparing the costs of different hedges................................................................... 19
SPECULATIONS IN MARKETS............................................................................................ 20
INTEREST RATE & CURRENCY SWAPS................................................................................. 21
, Operating Exposure...............................................................................................................21
How to hedge?.................................................................................................................21
Common operating or financing policies:.........................................................................21
Interest rate risk..................................................................................................................... 22
How to hedge?.................................................................................................................22
Swaps.................................................................................................................................... 22
Currency swap................................................................................................................. 22
Interest swap....................................................................................................................22
INTERNATIONAL TRADE FINANCE......................................................................................... 24
Credit Risks associated with international trade.................................................................... 24
3 Key Documents to Minimize Risk....................................................................................... 24
1. Letter of credit (L/C)..................................................................................................... 24
2. Bill of lading..................................................................................................................24
3. Drafts........................................................................................................................... 25
The Bank as intermediary: The Process of minimising risk in international trade................. 25
Benefits of the System (3 – Key Documents)........................................................................ 25
The Trade Transaction Time-Line and Structure................................................................... 26
Government Programs to Help Finance Exports................................................................... 27
MULTINATIONAL CAPITAL BUDGET....................................................................................... 28
Multinational Capital Budgeting Steps................................................................................... 28
Project vs Parent viewpoint:.................................................................................................. 28
Project viewpoint..............................................................................................................28
Parent viewpoint.............................................................................................................. 28
Foreign Project Budgeting Complexities................................................................................28
Standard methods of discounted cash flow analysis............................................................. 29
Sensitivity analysis.................................................................................................................29
Project Viewpoint Measurement...................................................................................... 29
Parent Viewpoint Measurement.......................................................................................30
Real Option Analysis............................................................................................................. 30
,BASICS EXCHANGE RATES
Globalization process → why/how do firms become multinationals?
Market seekers – produce in foreign markets to satisfy demand/ export to markets other than their own
Raw material seekers – cheaper raw materials outside domestic market
Production efficiency – produce in countries where 1+ factors of production cheaper
Knowledge seekers – gain access to new technologies or managerial expertise
Political safety seekers – establish operations in countries where gov is unlikely to take over/ mess with
private business
The Globalisation Process:
Phase 1: company not yet international/global
Global Transition 1 – domestic to international trade
- begin importing materials & exporting products internationally
Challenges:
a) Financial Demands (demand of financial management above traditional)
b) Foreign exchange risks now born by firms
c) Credit Risk Management begins, potential for non-payment/non-delivery
Global Transition Phase 2: Trade to multinational Phase
● Comp. establishes foreign sales/service affiliates
● Comp. establishes manufacturing operations abroad by licensing foreign firms to
produce/service AKA CHILD LABOUR ‘N SHIT
● Firm must identify sources of competitive advantage
Foreign exchange rate definitions
Currency quotes: $/€ vs. EUR/USD
Currency Quote – the price of one currency in terms of another
Appreciation/Depreciation (floating currency)
- Appr. Currency becomes more expensive
- Depr. Currency becomes weaker
, Revaluation/Devaluation (fixed currency)
– change in exchange rate determined by government/bank.
- Devaluation it weakens,
- revaluation it strengthens
Bid/ask rates:
EUR/USD 1.2500/05
- Not sure whether to use the bid or ask rate? Do whatever benefits the bank most.
Bid rate – price at which bank will buy currency
Ask rate – price at which bank will Sell currency
Globalization process → why/how do firms become multinationals?...................................... 3
Foreign exchange rate definitions............................................................................................3
Currency quotes: $/€ vs. EUR/USD.............................................................................3
Appreciation/Depreciation (floating currency).............................................................. 3
Revaluation/Devaluation (fixed currency).................................................................... 4
Bid/ask rates:........................................................................................................................... 4
Cross rates.............................................................................................................................. 5
Forward exchange rate and forward points............................................................................. 6
Exchange rate regimes: fixed vs floating:................................................................................ 6
Impossible trinity - states that country can only have 2 out of 3:............................................. 6
EXCHANGE RATE DETERMINATION & FORECASTING.......................................................... 7
International Parity conditions..................................................................................................7
Balance of payments............................................................................................................... 8
Basics of BOP..............................................................................................................8
J-curve Adjustment Path..............................................................................................9
Asset market Approach......................................................................................................... 10
FOREIGN EXCHANGE RISK MANAGEMENT.......................................................................... 11
Transaction exposure.............................................................................................................11
Receivables/payables in foreign currency (purchasing/selling)................................. 11
Funds loaned or borrowed in foreign currency.......................................................... 12
Currency Risk Management.................................................................................................. 12
1. Unhedged (uncovered risk)..........................................................................................12
2. Hedging Options.......................................................................................................... 13
1. Forward Market Hedge.......................................................................................... 13
2. Money Market Hedge (Balance Sheet Hedge)...................................................... 13
3. Option Market Hedge.............................................................................................15
Foreign currency options....................................................................................................... 16
Option Fundamentals.......................................................................................................16
Basic Types of Options:............................................................................................. 16
Key Players:...............................................................................................................16
Three Price Elements................................................................................................ 17
Premium Payment..................................................................................................... 17
Options Position Classification...................................................................................17
Intrinsic and time value.................................................................................................... 18
Comparing the costs of different hedges................................................................... 19
SPECULATIONS IN MARKETS............................................................................................ 20
INTEREST RATE & CURRENCY SWAPS................................................................................. 21
, Operating Exposure...............................................................................................................21
How to hedge?.................................................................................................................21
Common operating or financing policies:.........................................................................21
Interest rate risk..................................................................................................................... 22
How to hedge?.................................................................................................................22
Swaps.................................................................................................................................... 22
Currency swap................................................................................................................. 22
Interest swap....................................................................................................................22
INTERNATIONAL TRADE FINANCE......................................................................................... 24
Credit Risks associated with international trade.................................................................... 24
3 Key Documents to Minimize Risk....................................................................................... 24
1. Letter of credit (L/C)..................................................................................................... 24
2. Bill of lading..................................................................................................................24
3. Drafts........................................................................................................................... 25
The Bank as intermediary: The Process of minimising risk in international trade................. 25
Benefits of the System (3 – Key Documents)........................................................................ 25
The Trade Transaction Time-Line and Structure................................................................... 26
Government Programs to Help Finance Exports................................................................... 27
MULTINATIONAL CAPITAL BUDGET....................................................................................... 28
Multinational Capital Budgeting Steps................................................................................... 28
Project vs Parent viewpoint:.................................................................................................. 28
Project viewpoint..............................................................................................................28
Parent viewpoint.............................................................................................................. 28
Foreign Project Budgeting Complexities................................................................................28
Standard methods of discounted cash flow analysis............................................................. 29
Sensitivity analysis.................................................................................................................29
Project Viewpoint Measurement...................................................................................... 29
Parent Viewpoint Measurement.......................................................................................30
Real Option Analysis............................................................................................................. 30
,BASICS EXCHANGE RATES
Globalization process → why/how do firms become multinationals?
Market seekers – produce in foreign markets to satisfy demand/ export to markets other than their own
Raw material seekers – cheaper raw materials outside domestic market
Production efficiency – produce in countries where 1+ factors of production cheaper
Knowledge seekers – gain access to new technologies or managerial expertise
Political safety seekers – establish operations in countries where gov is unlikely to take over/ mess with
private business
The Globalisation Process:
Phase 1: company not yet international/global
Global Transition 1 – domestic to international trade
- begin importing materials & exporting products internationally
Challenges:
a) Financial Demands (demand of financial management above traditional)
b) Foreign exchange risks now born by firms
c) Credit Risk Management begins, potential for non-payment/non-delivery
Global Transition Phase 2: Trade to multinational Phase
● Comp. establishes foreign sales/service affiliates
● Comp. establishes manufacturing operations abroad by licensing foreign firms to
produce/service AKA CHILD LABOUR ‘N SHIT
● Firm must identify sources of competitive advantage
Foreign exchange rate definitions
Currency quotes: $/€ vs. EUR/USD
Currency Quote – the price of one currency in terms of another
Appreciation/Depreciation (floating currency)
- Appr. Currency becomes more expensive
- Depr. Currency becomes weaker
, Revaluation/Devaluation (fixed currency)
– change in exchange rate determined by government/bank.
- Devaluation it weakens,
- revaluation it strengthens
Bid/ask rates:
EUR/USD 1.2500/05
- Not sure whether to use the bid or ask rate? Do whatever benefits the bank most.
Bid rate – price at which bank will buy currency
Ask rate – price at which bank will Sell currency
