公司理财第十八章

公司理财第十八章

International Aspects of Financial ManagementChapter 18

McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Key Concepts and SkillsUnderstand how exchange rates are quoted and what they mean Know the difference between spot and forward rates Understand purchasing power parity and interest rate parity and the implications for changes in exchange rates Understand the types of exchange rate risk and how it can be managed Understand the impact of political risk on international business investing 18.1McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Chapter Outline Terminology Foreign

Exchange Markets and Exchange Rates Purchasing Power Parity Exchange Rates and Interest Rates Exchange Rate Risk Political Risk

18.2McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Domestic Financial Management and International Financial Management Considerations

in International Financial

ManagementHave to consider the effect of exchange rates when operating in more than one currency Have to consider the political risk associated with actions of foreign governments More financing opportunities when you consider the international capital markets and this may reduce the firm’s cost of capital 18.3McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

International Finance Terminology American Cross-rate Eurobond Eurocurrency

Depository Receipt (ADR)

(Eurodollars) Foreign bonds Gilts London Interbank Offer Rate (LIBOR) Swaps18.4McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Global Capital MarketsThe number of exchanges in foreign countries continues to increase, as does the liquidity on those exchanges Exchanges that allow for the flow of capital are extremely important to developing countries The United States has one of the most developed capital markets in the world, but foreign markets are becoming more competitive and are often willing to try more innovative ways to do business

18.5McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Work the Web Example Thinking

about going to Mexico for spring break or Japan for your summer vacation? How many pesos or yen can you get in exchange for $1000? Click on the web surfer to find out

18.6McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Exchange RatesThe price of one country’s currency in terms of another Most currency is quoted in terms of dollars Consider the following quote:

France (Franc) .1460 6.8479 The first number (.1460) is how many U.S. dollars it takes to buy 1 French Franc The second number (6.8479) is how many French Francs it takes to buy $1 The two

numbers are reciprocals of each other (1/6.8479 = .1460) 18.7McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Example: Exchange Rates

Suppose you have $10,000 . Based on the rates in Figure 18.1, how many Italian Lira can you buy?Exchange rate = 2021.37 Lira per U.S. dollar Buy 10,000(2021.37) = 20,213,700 Lira

Suppose you are visiting London and you want to buy a souvenir that costs 1000 British pounds. How much does it cost in U.S. dollars?Exchange rate = .6669 pounds per dollar Cost = 1000 / .6669 = $1499.48 18.8

McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Example: Triangle Arbitrage

We observe the following quotes10.00 FF per $1 2.00 DM per $1 4.00 FF per DM

What is the cross rate?

(10.00 FF/$1) / (2.00 DM/$1) = 5 FF per DM

We have $100 to invest; buy low, sell highBuy $100(10 FF/$1) = 1000 FF, use FF to buy DM Buy 1000FF / (4 FF/DM) = 250 DM, use DM to buy dollars Buy 250 DM / (2 DM/$1) = $125 Make $25 risk-free 18.9

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公司理财第十八章

Transaction Terminology

Spot trade – exchange currency immediately

Spot rate – the exchange rate for an immediate trade

Forward trade – agree today to exchange currency at some future date and some specified price (also called a forward contract)Forward rate – the exchange rate specified in the forward contract If the forward rate is higher than the spot rate, the foreign currency is selling at a premium (when quoted as $ equivalents) If the forward rate is lower than the spot rate, the foreign currency is selling at a discount 18.10

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公司理财第十八章

Absolute Purchasing Power Parity Price

of an item is the same regardless of the currency used to purchase it Requirements for absolute PPP to holdTransaction costs are zero No barriers to trade (no taxes, tariffs, etc.) No difference in the commodity between locations

Absolute

PPP rarely holds in practice for many

goods18.11McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Relative Purchasing Power Parity Provides

information about what causes changes in exchange rates The basic result is that exchange rates depend on relative inflation between countries E(St ) = S0[1 + (hFC – hUS)]t Because absolute PPP doesn’t hold for many goods, we will focus on relative PPP from here on out18.12McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Example: PPP Suppose

the Canadian spot exchange rate is 1.4680 Canadian dollars per U.S. dollar. U.S. inflation is expected to be 3% per year and Canadian inflation is expected to be 2%.

Do you expect the U.S. dollar to ap

preciate or depreciate relative to the Canadian dollar?

Since inflation is higher in the US, we would expect the US dollar to depreciate relative to the Canadian dollar. E(S1) = 1.4680[1 + (.02 - .03)]1 = 1.453318.13

What is the expected exchange in one year?

McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Covered Interest Arbitrage Examine

the relationship between spot rates, forward rates and nominal rates between countries Again, the formulas will assume that the exchange rates are quoted in terms of foreign currency per U.S. dollar The U.S. risk-free rate is assumed to be the T-bill rate18.14McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Example: Covered Interest Arbitrage

Consider the following informationS0 = 2 DM / $ F1 = 1.8 DM / $

RUS = 10% RG = 5%

What is the arbitrage opportunity?Borrow $100 at 10% Buy $100(2 DM/$) = 200 DM and invest at 5% for 1 year In 1 year, receive 200(1.05) = 210 DM and convert back to dollars 210 DM / (1.8 DM / $) = $116.67 and repay loan Profit = 116.67 – 100(1.1) = $6.67 risk free 18.15

McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Interest Rate Parity Based

on the previous example, there must be a forward rate that would prevent the arbitrage opportunity. Interest rate parity defines what that forward rate should beExact : F1 (1 RFC ) S0 (1 RUS )

F1 Approx.: 1 ( RFC RUS ) S018.16McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Short-Run Exposure Risk

from day-to-day fluctuations in exchange rates and the fact that companies have contracts to buy and sell goods in the short-run at fixed prices Managing riskEnter into a forward agreement to guarantee the exchange rate Use foreign currency options to lock in exchange rates if they move against you but benefit from rates if they move in your favor 18.17McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Long-Run Exposure Long-run

fluctuations come from unanticipated changes in relative economic conditions Could be due to changes in labor markets or governments More difficult to hedge Try to match long-run inflows and outflows in the currency Borrowing in the foreign country may mitigate some of the problems18.18McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Translation ExposureIncome from foreign operations has to be translated back to U.S. dollars for accounting purposes, even if foreign currency is not actually converted back to dollars If gains and losses from this translation flowed through directly to the income statement, there would be significant volatility in EPS Current accounting regulations require that all cash flows b

e converted at the prevailing exchange rates with currency gains and losses accumulated in a special account within shareholders equity 18.19McGraw-Hill/Irwin McGraw-Hill

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公司理财第十八章

Managing Exchange Rate Risk Large

multinational firms may need to manage the exchange rate risk associated with several different currencies The firm needs to consider its net exposure to currency risk instead of just looking at each currency separately Hedging individual currencies could be expensive and may actually increase exposure18.20McGraw-Hill/Irwin McGraw-Hill

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