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- 1. NORTHCENTRAL UNIVERSITY ASSIGNMENT COVER SHEET Fin-7016 Financial Management for International Business THIS FORM MUST BE COMPLETELY FILLED IN Please Follow These Procedures: If requested by your mentor, use an assignment cover sheet as the first page of the word processor file. Keep a Photocopy or Electronic Copy of Your Assignments: You may need to re- submit assignments if your mentor has indicated that you may or must do so. Academic Integrity: All work submitted in each course must be the Learner’s own. Dr. Ana Machuca Assignment 8: Signature assignment Faculty Use Only <Faculty comments here> <Faculty Name> <Grade Earned> <Writing Score> <Date Graded>
- 2. By:Jose A Vega Cotto MBA, MA 2
- 3. • Introduction…………………………………………….5 • International finance ………………………...……….6 • International monetary system ………………………..7 • Balance of payments …………………………………...8 • Foreign exchange market ………………………………9 • Bond yields ……………………………………………10 • Currency futures ……………………………………….11 • Credit default swaps markets ...……………………….12 • Management of foreign exchange risk ………………13 • Different types of risk …….…………………………...14 • Good financial strategy ……………………………….15 3
- 4. • Capital Budgeting in Multinational Organizations …...16 • Financial impact of sourcing debt ……….…………….17 • Financial impact of sourcing equity globally ………...18 • Strategy to source equity globally ……………………19 • Foreign investment theory …………………………….20 • Foreign investment strategy …………………………21 • Foreign investment assessment ……………………...22 • Foreign investment management ..……………………23 • Becoming a multinational company ……………………25 • Conclusion …….………………………………………26 • References …………………………………………….27 4
- 5. This presentation explains different aspects of international finance and their relation with the economic globalization process. It is important to emphasize the consideration which recognizes this process as a whole in the development of humanity in this century. The international economic environment is now increasingly characterized by its dynamism and globalization. 5
- 6. International finance divided in 2 categories: International Economics: Exchange rate, balance of payments, exchange rate regimes, interest rates. Corporate finance: They provide sources of obtaining financing in the short and long term study of financial markets and financial derivatives (futures, options, swaps [swap cash flow]). 6
- 7. International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states (wikipedia, 2012). 7
- 8. The balance of payments (BOP) is an accounting of a country's international transactions for a particular time period (Federal Reserve Bank, 2009). Retrieved 2/18/2012 from http://www.developing8.org/2009/10/26/bangladeshs- july-balance-of-payments-surplus-reaches-694-mln/ 8
- 9. The foreign exchange market is the market in which currencies are traded (Go currency, 2012) Bond Yields Currency Futures Credit Default Swap Markets Retrieved 2/18/2012 from http://www.itnnews.lk/latest/?p=28607 9
- 10. Currency and bond markets are very closely related. The direction of both investment assets is widely dependent on a country's economic environment and Retrieved 2/18/2012 from: http://bondyields.org/ monetary policy (Lee, 2011). 10
- 11. According to lee (2011) derivative instruments like currency futures are also great in confirming short term trends in foreign exchange rates. In the equity markets, stock brokers and traders will look towards market volume in confirming Retrieved 2/18/2012 from: http://www.forum4finance.com/2010/08/11/now-nbfcs- can-trade-in-currency-futures/?replytocom=10329 momentum. 11
- 12. According to lee (2011) A relatively unknown market, credit default swaps or CDS instruments can be great in showing long-term sentiment for individual currencies. Retrieved 2/18/2012 from : http://money.howstuffworks.com/credit- default-swap1.htm 12
- 13. According to Flicker (1990): Participation in international markets Pricing Settlement Forward contract Control foreign exchange risk 13
- 14. A company must evaluate the risks utilizing various methods such as risk avoidance and loss reduction; also the corporation must be ready to cover any losses in case there is no way to deal with the loss. Risk Management in a Manage Risk Multinational Company 14
- 15. Prepare sales forecast. Projected income Statement. International overhead Expenses. International and local tax. Foreign currency. Projected cash flow. Future need for liquidity. Assets to liabilities ratio. Financing options Financial Retrieved 2/18/2012 from: http://www.ehow.com/about_7394216_personal-financial- strategy.html 15
- 16. Intellectual activities. The social process. Organizational resources and the environment change. Retrieved 2/18/2012 from: http://cs.gmu.edu/~eclab/research.html According to Szpiro & Diminik (1997) capital budgeting is a process that involves: 16
- 17. Firms seeking to exploit The joint venture cross country differences in American Depository Receipts production cost interact International debt markets with suppliers operating in Capital investment environments with varying Portfolio investment level of institutional quality Direct investment (Carluccio & Fally, 2008). Indirect investment Foreign investment Financial investment Methods of sourcing debt 17
- 18. Gaining access to global capital markets lowers a firm's marginal cost of capital and increase its availability by improving its market liquidity of its shares and by overcoming market segmentation (Kottolli, 2006). 18
- 19. Designing a capital sourcing strategy An investment bank Potential foreign investors. Retrieved 2/20/2012 from: http://www.cash4impact.com/small-business- financing/debt-or-equity/ 1- 19
- 20. Foreign Portfolio Investment Foreign Direct Investment Opportunity Cost Retrieved from http://www.google.com.pr/imgres 20
- 21. The developing countries that have the most potential as a foreign investment starts with deciding what products and services the companies provide and how it can be brought to the market for a profit (Investing, 2009). Retrieved from: http://bizcovering.com/investing/foreign-investment-strategies- picking-profitable-companies/ 21
- 22. An investor must be concerned with the environmental and cultural issues when investing in a foreign company. 22
- 23. The investment management industry is even more globally focused as it faces emerging capital markets, deregulation and tremendous advances in technology (PWC, 2012). 23
- 24. Export Foreign Production Direct Investment Location Rules of Foreign Countries Retrieved 2/20/2012 from: http://www.google.com.pr/imgres? q=Becoming+a+Multinational+Enterprise 24
- 25. The main objective of international financial management is to maximize shareholder wealth of the multinational firm by developing the best financial policies and consequent decision of the best decisions of this nature. The knowledge of the area of international finance has grown enormously in recent years, it has a greater understanding of many problems that previously seemed puzzling. The study of international finance is part of the international training of executives and entrepreneurs, important given the increasing globalization of the economy. The knowledge of international finance allows financial executive to understand how international events affect their companies and must be mediated to avoid the dangers and seize the opportunities offered by changes in the international environment. 25
- 26. Antiphas, T. (1999). Environmental impact assessment of foreign investment projects: Retrieved 2/20/2012 from http://www.leat.or.tz/publications/foreign.investment/ Both, L. D. (1982). Capital Budgeting Frameworks for the Multinational Corporation. Journal of International Business Studies, 13(2), 113. Federal Reserve Bank. (2009, May). Balance of payments. Retrieved 2/18/2012 from http://www.newyorkfed.org/aboutthefed/fedpoint/fed40.html Desai, M., Foley, F., & Hines, J. J. (2004). A multinational perspective on capital structure. The journal of finance, LIX(6), 2-5. Flicker, S. R. (1990). Managing foreign currency exchange risk. Journal of Accountancy, 170(1), 2-5. Fuentes, G. (2012). What is international investment theory? Retrieved 2/20/2012 from http://www.ehow.com/facts_5905368_international-investment-theory_.html Ghoshal, S. (1987). Global Strategy: An Organizing Framework Strategic Management Journal, 8 (5), 425-440 Go currency. (2012). The 9 best stock to own now. Retrieved 2/18/2012 from http://www.gocurrency.com/articles/forex-for-beginners.htm 26
- 27. Investing, R. (2009). Foreign Investment Strategies Picking Profitable Companies. Retrieved 2/20/2012 from http://bizcovering.com/investing/foreign-investment- strategies-picking-profitable-companies Kottolli, A. (2006). Raising equity globally. Retrieved 2/20/2012 from http://www.geocities.ws/akottolli/raising_equity_globally.html Lee, R. (2011). 3 Key Markets To Follow When Trading FX. Retrieved 2/18/2012 from http://www.investopedia.com/articles/forex/11/3-markets-follow-trading- fx.asp#axzz1mmdgMEBH PWC. (2012). Investment management. Retrieved 2/20/2012 from http://www.pwc.com/my/en/industry/investment-management.jhtml Stephens, D. (1999, July). The Globalization of Information Technology in Multinational Corporations. Information Management Journal, 1(1), 1-5 Szpiro, D. A., & Dimnik, T. (1996). Capital budgeting in multinational organizations: Exploring the strategic context. Managerial Finance, 22 (1), 58-74 http://search.proquest.com.proxy1.ncu.edu/docview/212595236?accountid=28180 wikipedia. (2012). International monetary system. Retrieved 2/17/2012 from http://en.wikipedia.org/wiki/International_monetary_systems 27
Notas do Editor
- Northcentral University assignment cover sheet.
- They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment (wikipedia, 2012) .
- The balance of payments is an accounting of a country's international transactions over a certain time period, typically a calendar quarter or year (Federal Reserve Bank, 2009) . It shows the sum of the transactions, purely financial ones, as well as those involving goods or services, between individuals, businesses and government agencies in that country and those in the rest of the world (Federal Reserve Bank, 2009) . Every international transaction results in a credit and a debit (Federal Reserve Bank, 2009) . Transactions that cause money to flow into a country are credits, and transactions that cause money to leave a country are debits (Federal Reserve Bank, 2009) . For instance, if someone in England buys a South Korean stereo, the purchase is a debit to the British account and a credit to the South Korean account (Federal Reserve Bank, 2009) . If a Brazilian company sends an interest payment on a loan to a bank in the United States, the transaction represents a debit to the Brazilian BOP account and a credit to the U.S. BOP account (Federal Reserve Bank, 2009) .
- Currency Trading is the world's largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow (Go currency, 2012) . Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets (Go currency, 2012) . In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter (Go currency, 2012) . Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices (Go currency, 2012) . Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients (Go currency, 2012) . The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers (Go currency, 2012) .
- If an economy is showing strength, global investors will buy bonds that are being offered by a particular country always looking for stable and high rates of return (Lee, 2011) . This will cause demand for the country's currency to increase, thus appreciating the value of the currency (Lee, 2011) . Global investors interested in investing in the country (and its infrastructure) will always have to transact in the country's currency (Lee, 2011) . This is the reason why money managers will watch short-term bond yield patterns for confirmation of a forming trend in the currency market (Lee, 2011) . A movement in one asset can foretell or confirm the move in another asset (Lee, 2011) .
- In the equity markets, stock brokers and traders will look towards market volume in confirming momentum (Lee, 2011) . Currency traders, instead, will use currency future open interest in gauging the market's demand for a particular currency (Lee, 2011) . This type of information can be used to predict the future demand not only for currencies, but commodities as well (Lee, 2011) . Although some analysts or strategists look at both non-commercial and commercial transactions the key is to look at non-commercial positioning (Lee, 2011) . Non-commercial positioning is usually done by entities that are speculating in the market (Lee, 2011) . The trick here is to see pent-up demand in a particular currency in confirming or hinting at a potential direction in the market (Lee, 2011) . For instance, significant interest in a currency means that a good portion of the market is on one side of the market making the opposite outcome more probable (Lee, 2011) .
- Introduced and widely used in the last 14 years, credit default swaps are contracts protecting a buyer's position against a potential credit event (Lee, 2011) . For example, a money manager can insure the creditworthiness of $100 million in Japanese government bonds by paying an insurance premium (Lee, 2011) . In the event of a default or debt crisis, the money manager would be able to recoup the value of their bonds (Lee, 2011) . So, much like currency futures, credit default swaps are a great way of telling how bullish or bearish the market is on a particular currency (Lee, 2011) .
- Participation in international markets may result in a foreign exchange risk known as transaction exposure (Flicker, 1990). This risk occurs when a company has a payable (or receivable) denominated in a foreign currency (Flicker, 1990). The risk lies in the fluctuation of the FC exchange rate (Flicker, 1990). Pricing is the most fundamental of the strategies to control risk is pricing, or controlling the billing currency (Flicker, 1990). Exchange risk is eliminated if the company bills customers in the company's reporting currency (Flicker, 1990). Settlement is commonly used when a company cannot bill in the reporting currency, the settlement strategy can be used to help mitigate foreign exchange risk (Flicker, 1990). This strategy requires that management consistently negotiate or offer discounts for the early settlement of payables or receivables denominated in an FC (Flicker, 1990). Forward contracts is commonly used when the company does not wish to settle early and it cannot control the billing or payment currency, it must use other techniques to control future cash flows (Flicker, 1990).
- The investment in a multinational corporation requires good managers who focus his efforts in dealing with currency exchange risk, financial risk and investment risk. One important issue with risks is that they change over time, and the strategic task is to consider these risks jointly in the context of particular strategic decisions (Ghosal, 1987). It is the risks that cannot be diversified in a global environment that should be of most concern (Ghosal).
- The projected financial strategy of a new company should focus their efforts in determining the options of success for the company. This could be done by preparing a sales forecast that shows the future sales of the company. A projected income statement considering international overhead expenses and the local and international taxes that apply to the location of the company. The risk that the company could have in the currency exchange should be anticipated to avoid losses when buying products. And the liquidity of the company could be determined by a projected cash flow considering the assets to liabilities ratio to know how well the company’s assets compare to their liabilities. And, finally evaluate the financing options for the company as bonds, stocks, etc.
- Capital budgeting is one of the most important of management functions. Through capital budgeting decisions management determines the structural cost drivers of the firm and enacts the strategies that define the way in which a firm competes. Capital budgeting involves the intellectual activities of perception, analysis, and choice which are often subsumed under the rubric decision making, the social process of implementing formulated policies by means of organizational structure, systems of measurement and allocation, and systems for reward or punishment, and finally the dynamic process of revising policy as changes in organizational resources and the environment change the context of the original policy problem.
- Local financial markets are not the only source of finance for suppliers and there is also evidence of capital flows from multinational firms to affiliate as potential channels to overcome imperfections in local market (Desai, Foley, & Hines, 2004). Sourcing equity funds in the financial market involves adding the maximum value; enhance performance and growing in the market. Growth targets can occur through mergers, acquisitions, technology granting, designs, trademarks and patents, franchise, joint venture, outsourcing vs. downsizing, etc.
- To access global capital markets, a firm must design a strategy to attract international investors, which requires identifying and choosing alternative paths to access global markets improving the quality and level of its disclosure making its accounting and reporting standards more transparent to potential foreign investors (Kottolli, 2006).
- Designing a capital sourcing strategy requires that management agree upon a long-run financial objective and then choose among the various alternative paths to get there (Kottolli, 2006). An investment bank often acts as an official advisor to the firm (Kottolli, 2006). Investment bankers are in touch with potential foreign investors and know what they currently require, and can also help navigate the numerous institutional and regulatory barriers in place (Kottolli, 2006).
- Foreign investment theory explains the flow of investment capital into and out of a country by investors who want to maximize the return on their investments (Fuentes, 2012). One of the major factors that influences international investment is the potential return on alternative investments in the home country or other foreign markets (Fuentes, 2012).
- Investors are looking across the world to find emerging markets for a long-term asset building opportunity (Investing, 2009).Foreign and domestic acquisitions of emerging markets are where savvy investors are putting their money (Investing, 2009). Promising investments in Japanese stocks, promising growth in South Korea, economic profitability in China, and revenue generating markets in India and Israel, has traders looking at world wide business decisions (Investing, 2009). With the right long term investment strategy it will be better to weather a bear market by studying national economies for growth and industrialization (Investing, 2009).
- The concept of Environmental Impact Assessment (EIA) refers to the examination, analysis and assessment of planned activities with a view to ensuring their environmental soundness and sustainable development (Antiphas, 1999). It is said to be a valuable means of promoting the integration of environmental and natural resource issues into planning and program implementation (Antiphas, 1999) .
- According to Kottolli ( 2006) b y cross listing or raising new equity in foreign markets, a firm typically tries to accomplish one or more of the following objectives: Improve the liquidity of its existing shares and support a liquid secondary market for new equity issues in foreign markets. Increase its share price by overcoming mispricing in a segmented and illiquid home capital market. Increase the firm's visibility and political acceptance to its customers, suppliers, creditors and foreign governments. Establish a secondary market for shares used to acquire other firms in the foreign market. Create a secondary market for shares that can be used to compensate local management and employees in foreign affiliate
- Choosing to enter new sectors and deciding the means of income. Initiate actions to improve the performance of the business combination. Further opportunities to leverage the relationships between value chain business and strategic matches on competitive advantage. Establish investment priorities direct resources to the business units more attractive. The Multinational company must familiarize with the politics and rules of the foreign country.