CHAPTER 19Multinational Financial Management.ppt

CHAPTER 19Multinational Financial Management Multinational vs. domestic financial management Exchange rates and trading in foreign exchange International money and capital markets What is a multinational corporation? A corporation that operates in two or more countries. Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in. Why do firms expand into other countries? To seek new markets. To seek raw materials. To seek new technology. To seek production efficiency. To avoid political and regulatory hurdles. To diversify. What factors distinguish multinational financial management from domestic financial management? Different currency denominations. Economic and legal ramifications. Language differences. Cultural differences. Role of governments. Political risk. Consider the following exchange rates US $ to buy 1 unit Japanese yen 0.009 Australian dollar 0.650 Are these currency prices direct or indirect quotations? Since they are prices of foreign currencies expressed in dollars, they are direct quotations. What is an indirect quotation? The number of units of a foreign currency needed to purchase one U.S. dollar, or the reciprocal of a direct quotation. Are you more likely to observe direct or indirect quotations? Most exchange rates are stated in terms of an indirect quotation. Except the British pound, which is usually in terms of a direct quotation. Calculate the indirect quotations for yen and Australian dollar # of units of foreign currency per US $ Japanese yen 111.11 Australian dollar 1.5385 Simply find the inverse of the direct quotations. What is a cross rate? The exchange rate between any two currencies. Cross rates are actually calculated on the basis of various currencies relative to the U.S. dollar. Cross rate between Australian dollar and the Japanese yen. Cross rate = (Yen / US Dollar) x (US Dollar / A. Doll