Chapter 15 International Business Finance

1
Chapter 15International Business Finance
2
International Business Finance

• International Trade
• Multinational Corporation and Direct Foreign
  Investment
• International Portfolio Investment
• Globalization of Financial Markets

3
Exchange Rates

• Exchange rate is the price of foreign currency
  in terms of the domestic currency.
• For example, it takes 1.6084 to purchase one
  British pound ().
• It takes 64.71 to purchase one Canadian dollar.

4
How are exchange rates quoted?

• A direct quote indicates the number of units of
  the home currency required to buy one unit of the
  foreign currency.
• An indirect quote indicates the number of units
  of a foreign currency that can be bought for one
  unit of the home currency.

5
How are exchange rates quoted?

• Examples of direct quote
• / 1.6084 (it takes 1.6084 to exchange
  for 1 pound)
• / .00839
• Example of indirect quotes
• / .6217 (it takes .6217 pounds to
  exchange for 1)
• / 119.16

6
Direct vs. Indirect Quotes
7
Spot Exchange Rates

• In a spot transaction, one currency is traded for
  another currency today.
• The spot rate is the rate for a spot transaction,
  or the rate at which currencies can be
  immediately exchanged.

8
Forward Exchange Rates

• A forward transaction entails an agreement today
  to deliver one currency on a future date in
  exchange for another currency.
• The forward rate is the exchange rate for a
  forward transaction that is agreed on today.

9
Exchange Rate Risk

• Tomorrows exchange rate may differ from todays
  rate.
• An asset denominated in terms of a foreign
  currency will lose value if the foreign currency
  depreciates.
• Fluctuations in exchange rates affect the value
  of assets denominated in foreign currencies.

10
Exchange Rate Risk

• For an importer, the cost of doing business
  increases when the foreign currency appreciates.
• For an exporter, the cash flow from selling
  products to oversea markets decreases when the
  foreign currency depreciates.

11
Exchange Rate Risk

• For an American tourist, the vacation becomes
  more expensive when the foreign currency
  appreciates.
• How much does a hotel room cost per night in
  Tokyo?
• 33,000