Summary International
Financial Management (IFI1)
Book: Fundamentals of Multinational finance (6th edition)
Chapters included; 1,2,3,6,7,8,9,10,12,16,18
Lianne H. Bosma
HANZE HOGESCHOOL, UNIVERSITY OF APPLIED SCIENCES | IBS Y4 MINOR F&A
,Contents
Chapter 1 Multinational Financial Management Opportunities and Challenges.................................... 3
Chapter 6 International Parity Conditions .............................................................................................. 4
6.1.1 Law of one price ..................................................................................................................... 4
6.1.2 PPP; Purchasing Power parity ................................................................................................ 4
6.1.3 Relative purchasing power parity ........................................................................................... 5
6.2 Interest rates and Exchange rates ................................................................................................. 6
6.2.1 Fisher effect ............................................................................................................................ 6
6.2.2 International Fisher Effect ...................................................................................................... 6
6.2.3 Forward rate ........................................................................................................................... 6
6.2.4 Interest Rate Parity (IRP) ........................................................................................................ 7
6.2.5 Covered interest arbitrage (CIA)............................................................................................. 8
6.2.6 Uncovered interest arbitrage (UIA) ........................................................................................ 8
Chapter 5 The Foreign Exchange Market .............................................................................................. 11
Chapter 2 The International Monetary Systems ................................................................................... 12
Chapter 3 The Balance of Payments ..................................................................................................... 13
3.1 Balance of payments ............................................................................................................. 13
3.1.1 Fixed exchange rate countries.............................................................................................. 13
3.1.2 Floating exchange rate countries ......................................................................................... 13
3.2 Trade balances and exchange rates ...................................................................................... 14
3.2.1 The J-Curve ........................................................................................................................... 14
Chapter 9 Foreign Exchange Rate Determination and Intervention ..................................................... 15
9.1 Monetary approach ..................................................................................................................... 15
9.2 Asset market approach ............................................................................................................... 15
9.3 Forecasting in Practice ................................................................................................................ 16
Chapter 10 Operating Exposure ............................................................................................................ 17
10.1 Hedging...................................................................................................................................... 17
Chapter 7 Currency Options .................................................................................................................. 19
7.1 Foreign currency option .............................................................................................................. 19
Chapter 12 Operating Exposure ............................................................................................................ 21
12.1 Management of operating exposure ........................................................................................ 22
Chapter 8 Currency Swaps .................................................................................................................... 24
8.1 Interest rate swap ....................................................................................................................... 24
8.2 Currency swap ............................................................................................................................. 24
8.3 Unwinding swap agreement ....................................................................................................... 27
8.4 Counterparty risk - Bankruptcy ................................................................................................... 27
1
,Chapter 16 International Trade Finance ............................................................................................... 28
16.1 Key documents .......................................................................................................................... 29
16.1.1 Letter of credit (L/C ............................................................................................................ 29
16.1.2 Draft.................................................................................................................................... 30
16.1.3 Bill of Lading (B/L)............................................................................................................... 30
16.2 Government programs to help finance exports ........................................................................ 30
16.2.1 Export credit insurance ...................................................................................................... 30
16.3 Trade financing alternatives ...................................................................................................... 31
16.3.1 Bankers’ Acceptances ......................................................................................................... 31
16.3.2 Trade Acceptances ............................................................................................................. 32
16.3.3 factoring ............................................................................................................................. 32
16.3.4 Securitization ...................................................................................................................... 32
16.3.5 Bank credit lines ................................................................................................................. 32
16.3.6 Commercial paper .............................................................................................................. 32
16.4 Forfaiting ................................................................................................................................... 32
Chapter 18 Multinational Capital Budgeting and Cross-Border Acquisitions ....................................... 33
18.1 Complexities of budgeting for a foreign project ....................................................................... 33
18.2 Parent View on Cash Flows ....................................................................................................... 33
18.3 Project View on Cash Flows ....................................................................................................... 33
18.3.1 Showcased in example ....................................................................................................... 34
18.4 Sensitivity analysis ..................................................................................................................... 37
18.4.1 Project viewpoint measurement ........................................................................................ 37
18.4.2 Parent viewpoint measurement......................................................................................... 37
18.5 Real option analysis ................................................................................................................... 37
18.6 Rest of Chapter .......................................................................................................................... 38
2
, Chapter 1 Multinational Financial Management Opportunities and
Challenges
Firms become multinational for one or several of the following reasons:
• Market seekers – produce in foreign markets either to satisfy local demand or export to
markets other than their own.
• Raw material seekers – search for cheaper or more raw materials outside their own market
• Production efficiency seekers – produce in countries where one or more of the factors of
production are cheaper
• Knowledge seekers – gain access to new technologies or managerial expertise
• Political safety seekers – establish operations in countries considered unlikely to expropriate
or interfere with private enterprise
3
Financial Management (IFI1)
Book: Fundamentals of Multinational finance (6th edition)
Chapters included; 1,2,3,6,7,8,9,10,12,16,18
Lianne H. Bosma
HANZE HOGESCHOOL, UNIVERSITY OF APPLIED SCIENCES | IBS Y4 MINOR F&A
,Contents
Chapter 1 Multinational Financial Management Opportunities and Challenges.................................... 3
Chapter 6 International Parity Conditions .............................................................................................. 4
6.1.1 Law of one price ..................................................................................................................... 4
6.1.2 PPP; Purchasing Power parity ................................................................................................ 4
6.1.3 Relative purchasing power parity ........................................................................................... 5
6.2 Interest rates and Exchange rates ................................................................................................. 6
6.2.1 Fisher effect ............................................................................................................................ 6
6.2.2 International Fisher Effect ...................................................................................................... 6
6.2.3 Forward rate ........................................................................................................................... 6
6.2.4 Interest Rate Parity (IRP) ........................................................................................................ 7
6.2.5 Covered interest arbitrage (CIA)............................................................................................. 8
6.2.6 Uncovered interest arbitrage (UIA) ........................................................................................ 8
Chapter 5 The Foreign Exchange Market .............................................................................................. 11
Chapter 2 The International Monetary Systems ................................................................................... 12
Chapter 3 The Balance of Payments ..................................................................................................... 13
3.1 Balance of payments ............................................................................................................. 13
3.1.1 Fixed exchange rate countries.............................................................................................. 13
3.1.2 Floating exchange rate countries ......................................................................................... 13
3.2 Trade balances and exchange rates ...................................................................................... 14
3.2.1 The J-Curve ........................................................................................................................... 14
Chapter 9 Foreign Exchange Rate Determination and Intervention ..................................................... 15
9.1 Monetary approach ..................................................................................................................... 15
9.2 Asset market approach ............................................................................................................... 15
9.3 Forecasting in Practice ................................................................................................................ 16
Chapter 10 Operating Exposure ............................................................................................................ 17
10.1 Hedging...................................................................................................................................... 17
Chapter 7 Currency Options .................................................................................................................. 19
7.1 Foreign currency option .............................................................................................................. 19
Chapter 12 Operating Exposure ............................................................................................................ 21
12.1 Management of operating exposure ........................................................................................ 22
Chapter 8 Currency Swaps .................................................................................................................... 24
8.1 Interest rate swap ....................................................................................................................... 24
8.2 Currency swap ............................................................................................................................. 24
8.3 Unwinding swap agreement ....................................................................................................... 27
8.4 Counterparty risk - Bankruptcy ................................................................................................... 27
1
,Chapter 16 International Trade Finance ............................................................................................... 28
16.1 Key documents .......................................................................................................................... 29
16.1.1 Letter of credit (L/C ............................................................................................................ 29
16.1.2 Draft.................................................................................................................................... 30
16.1.3 Bill of Lading (B/L)............................................................................................................... 30
16.2 Government programs to help finance exports ........................................................................ 30
16.2.1 Export credit insurance ...................................................................................................... 30
16.3 Trade financing alternatives ...................................................................................................... 31
16.3.1 Bankers’ Acceptances ......................................................................................................... 31
16.3.2 Trade Acceptances ............................................................................................................. 32
16.3.3 factoring ............................................................................................................................. 32
16.3.4 Securitization ...................................................................................................................... 32
16.3.5 Bank credit lines ................................................................................................................. 32
16.3.6 Commercial paper .............................................................................................................. 32
16.4 Forfaiting ................................................................................................................................... 32
Chapter 18 Multinational Capital Budgeting and Cross-Border Acquisitions ....................................... 33
18.1 Complexities of budgeting for a foreign project ....................................................................... 33
18.2 Parent View on Cash Flows ....................................................................................................... 33
18.3 Project View on Cash Flows ....................................................................................................... 33
18.3.1 Showcased in example ....................................................................................................... 34
18.4 Sensitivity analysis ..................................................................................................................... 37
18.4.1 Project viewpoint measurement ........................................................................................ 37
18.4.2 Parent viewpoint measurement......................................................................................... 37
18.5 Real option analysis ................................................................................................................... 37
18.6 Rest of Chapter .......................................................................................................................... 38
2
, Chapter 1 Multinational Financial Management Opportunities and
Challenges
Firms become multinational for one or several of the following reasons:
• Market seekers – produce in foreign markets either to satisfy local demand or export to
markets other than their own.
• Raw material seekers – search for cheaper or more raw materials outside their own market
• Production efficiency seekers – produce in countries where one or more of the factors of
production are cheaper
• Knowledge seekers – gain access to new technologies or managerial expertise
• Political safety seekers – establish operations in countries considered unlikely to expropriate
or interfere with private enterprise
3
