Part IV The Multinational Corporations Financial Decisions

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Part IV The Multinational CorporationsFinancial
Decisions

• Chapter 12 Multinational Treasury Management
• Chapter 13 The Rationale for Hedging Currency
  Risks
• Chapter 14 Transaction Exposure to Currency Risk
• Chapter 15 Operating Exposure to Currency Risk
• Chapter 16 Translation Exposure to Currency Risk
• Chapter 17 Multinational Capital Structure
• and Cost of Capital

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Chapter 12Multinational Treasury Management

• 12.1 Determining the Firms Financial Goals and
  Strategies
• 12.2 Managing the Corporations International
  Trade
• 12.3 Financing the Corporations International
  Trade
• 12.4 Managing the Corporations Cash Flows
• 12.5 Risk Management in the Multinational
  Corporation
• 12.6 Summary

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Functions of the modern treasury division

• Determine the firms overall financial goals
• Manage the risks of domestic and international
  transactions
• Arrange financing for domestic and international
  trade
• Consolidate and manage the financial flows of the
  firm
• Identify, measure, and manage the firms risk
  exposures

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Setting financial goals and strategies

• Identify the firms core competencies and
  potential growth opportunities
• Evaluate the business environment within which
  the firm operates
• Formulate a comprehensive strategic plan for
  turning the firms core competencies into
  sustainable competitive advantages
• Develop robust processes for implementing the
  strategic business plan

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Managing international trade

• If something can go wrong, it will.

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Managing international trade

• The problems of international trade include
• Exporters must assure themselves of timely
  payment
• Importers must assure themselves of timely
  delivery of quality goods
• Geographic and cultural distances involved in
  international trade are greater than in domestic
  trade
• Trade disputes span several legal jurisdictions

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Managing the risks of international shipments

• Cover your risks with trade documentation
• Commercial invoice
• Packing list
• Certificate of origin
• Shippers export declaration
• Export license
• Bill of lading
• Dock receipt
• Warehouse receipt
• Inspection certificate
• Insurance certificate
• Use a commercial freight forwarder (or freight
  shipper) to coordinate the logistics of trade

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International payments

• Open account Seller delivers goods and bills
  buyer under agreed-upon payment terms.
• Cash in advance Buyer pays for goods prior to
  shipment.
• Documentary collections Seller draws a draft
  (trade bill or bill of exchange) payable to
  itself on the buyer.
• Sight drafts payable on demand
• Time drafts payable at a specified future date
• Trade acceptances drawn on and accepted by buyer
• Bankers acceptances accepted by a commercial
  bank
• Documentary credits Letter of credit issued by
  buyers bank guarantees payment upon receipt of
  trade documents.

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The risks of international payment methods
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Payment through a bankers acceptance
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Payment through a confirmed letter of credit
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Export financing

• Open account Accounts receivable can be
  discounted or factored (sold) long-term
  receivables can be sold to a forfaiter.
• Cash in advance Buyer provides financing.
• Documentary collections Both trade acceptances
  and bankers acceptances can be discounted
• Documentary credits In some countries, letters
  of credit can be discounted or used as collateral
  for new borrowings. Other countries do not follow
  this practice.

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Managing multinational cash flows

• Cash management
• Multinational netting
• Forecasting funds needs
• Managing relations between operating divisions
  and external partners
• Credit management
• Transfer pricing
• Determination of hurdle rates on new investments

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A five-stepcurrency risk management program

• Anticipating and responding to changes in
  exchange rates
• identify the distribution of future exchange
  rates
• estimate the sensitivity of revenues and expenses
• determine the desirability of hedging
• evaluate hedging alternatives
• monitor the position and reevaluate

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Setting a risk management policy

• Risk management should complement the overall
  business plan

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Exchange rate forecasting

• Market-based exchange rate forecasts
• EStd/f Ftd/f
• EStd/f S0d/f (1id)/(1if)t
• EStd/f S0d/f (1pd)/(1pf)t
• Model-based exchange rate forecasts
• Technical analysis - uses the recent history of
  exchange rates to predict future exchange rates
• Fundamental analysis - uses macroeconomic data to
  predict future exchange rates

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The G30 Global Derivatives Study Group

• Determine at the highest level of policy and
  decision making the scope of involvement in
  derivatives activities.
• Value derivatives at market, at least for risk
  management purposes.
• Quantify market risk under adverse market
  conditions, perform stress simulations, and
  forecast cash investing and funding needs.
• Assess credit risk arising from derivatives
  activities based on measures of current and
  potential exposure against credit limits.
• Establish market and credit risk management
  functions with clear authority, independent of
  the dealing function.
• Authorize only professionals to transact and
  manage the risks, as well as to process, report,
  control, and audit derivatives activities.
• Establish management information systems to
  measure, manage, and report the risks of
  derivatives activities.
• Voluntarily adopt accounting and disclosure
  practices for international harmonization and
  greater transparency.