International Financial Management

1

• International Financial Management
• 2) Working Capital Management for subsidiaries
• A) Intra-corporate fund
• a) loan (from parent)
• adv.1.
• 2.
• disadv.
• b) equity
• adv.
• disadv.

Bank
Parent
Sub
2

• c) Transfer Price
• Intra-corporate price charged on the
• goods services transacted among
• the affiliated units
• primary reason to use T/P is
  
• (
  ).
• Many ways to use T.P.
  
• 1. To provide working capital
• 2. To repatriate blocked fund
• 3. To reduce income tax
• 4. To reduce tariff (ad valorem)
  
• 5. To bolster credit rating
• 6. To increase profit sharing in J.V.
• 7. To increase profit under price control

parent
T/P
subsidiary
profit (5)
cost
3

• Problems
• 1.
• 2.
• 3.
• 4.

4

• B) External fund
• a) Sub. borrows in intl market (Euro
  market).
• (problem
  )
• b) Sub. borrows local loan from local bank.
• (most preferred by MNCs. Why?).
• Advantage
• 1.
• 2.
• 3.

5

• 3. Currency Risk (exposure) Management
• Three types of exposure
• a) Translation (Accounting) Exposure
• Degree to which a firms (
  ) is
• influenced by ex. rate fluctuation.
• e.g.
• Strategy

6

• b) Transaction Exposure
• Degree to which a firms actual (
  ) is
• influenced by ex. rate fluctuation.
• e.g.
• Strategy.
• c) Economic Exposure
• Degree to which a firms (
  ) is influenced
• by long term fundamental ex. rate
  change.
• e.g.
• strategy

7

• 4) Intl Capital Budgeting(Investment decision)
• NPV
• Due to ( ),
  future cash inflow
• must be discounted to present value by
  interest.
• (Cash inflow)
  (Cash outflow)
• NPV S(Rev. - Cost) (1- t) - Initial
  investment
• (1 r)n
• Factors 1)
• 2)
• 3)
• 4)

8

• 5) Payment methods for International Trade
• a) Cash in Advance
• b) Open Account
• c) Trade Draft (Bill of Exchange)
• Unconditional order of payment made by
• exporter to importer.

9

• DRAFT
• 1. shipment
• (S/D Bill of Lading)
• 2.
• 
  3.
• 
  4.
• 
  5.
• a. Sight Draft (D/P)
• b. Time Draft (D/A)
• Payment is still subject to (
  ).

Importer
Exporter
Bank
10

• d) Letter of Credit
• The instrument by which (
  )
• guarantees to pay exporter when (
• 
  ).

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• LETTER OF CREDIT
• L/C should be received before (
  ).
• The draft is to be drawn on (
  ).
• Types of L/C a. irrevocable L/C
• b. confirmed L/C

1.contract
Importer
Exporter
4.shipping(S/D)
2. L/C apply
5. S/D Bank Draft
3. L/C open
7.payment
8.S/D
6. payment
Exp. Bank
Imp. Bank
5.S/D draft
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• A) First stage look at the project from
  subsidiarys point of view
• 1) market forecast
• 2) exchange local inflation forecast
• 3) decide capital structure considering
• optimal standard
• 4) incorporate political risk
• B) Second stage sensitivity analysis
• 1) develop different scenarios
• 2) develop a distribution of NPV for the
  project through simulation

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• C) Third stage look at the project from
  global or parent point of view.
• 1) compare the project with other
  competing project
• 2) incorporate strategic factor
  considering symbiotic relationship with
  other units.
• 3) make final decision for global
  optimality

14

• Other Risk Management
• A. Commercial Risk
• Risk of nonpayment when extending credit to
• foreign customer.
• Strategy
• 1. collect fin. info. from many
  sources(bank,etc).
• 2. use safer instruments (draft L/C).

15

• B. Political Risk
• Risk of drastic changes in a countrys
  business
• environment caused by political
  instability.
• ( blockage on fund flow, operational
• restrictions, confiscation or
  nationalization)
• Strategy
• 1) indirect parental loan (fronting,etc.)
• 2) local loan from local bank
• 3) risk incorporated in capital budgeting.
• 4) shorten the payback period
• 5) transfer price