International Corporate Finance

Course Introduction

International finance explains for the fluctuations of foreign

exchange rates.
Then, the course discusses micro issues embracing corporations
in international financial environment. Two topics will be
covered:
Ø Exchange rate risk management, tools to hedge transaction risk, economic risk
and translation risk.
Ø Payment methods for international trade, trade finance method.

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 Discussing Uncertainty in international business

1. Exposure to international economic conditions – If

economic conditions in a foreign country weaken, purchase
of products decline and MNC sales in that country may be
lower than expected.
2. Exposure to international political risk – A foreign
government may increase taxes or impose barriers on the
MNC’s subsidiary.
3. Exposure to exchange rate risk – If foreign currencies
related to the MNC subsidiary weaken against the U.S.
dollar, the MNC will receive a lower amount of dollar cash
flows than was expected.

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 Discussing determinants of exchange rates

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 Discussing hedging tools to hedge exchange
rate risks

Available hedging tools in forex markets:

n Forward, Future contracts
n Money market hedge
n Option contract
n Swap

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 Discussing international trade, trade finance methods

Five basic methods of payment are used to settle

international transactions, each with a different degree
of risk to the exporter and importer:
■ Prepayment
■ Letters of credit (L/C)
■ Drafts (sight/time)
■ Consignment
■ Open account

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 1International Corporate Finance
Chapter 1 – MNCs and International Finance

n Identify the management goal and organizational

structure of the Multinational Corporation (MNC).
n Explain the common methods used to conduct
international business

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 1International Corporate Finance
Chapter Objectives

n Identify the management goal and organizational structure of

the Multinational Corporation (MNC).
n Explain the common methods used to conduct international
business
n International Financial markets
n Managing foreign exchange rate risk to maximize
shareholders’ value
n Financing international trading

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 International Corporate Finance
11th Edition
by Jeff Madura

Course lecturers:

Dr. Nguyen Thu Hien

Lecturer, Finance Department, SIM,
HCMUT, VNU-HCM

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 Managing the MNC

1. Managers are expected to make decisions that

will maximize the stock price.
2. Focus of this text: MNCs whose parents fully
own foreign subsidiaries (U.S. parent is sole
owner of subsidiary.)
3. Finance decisions are influenced by other
business discipline functions:
n Marketing
n Management
n Accounting and information systems

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 Management Structure of MNC

1. Centralized (See Exhibit 1.1a)

Allows managers of the parent to control
foreign subsidiaries and therefore reduce the
power of subsidiary managers
2. Decentralized (See Exhibit 1.1b)
Gives more control to subsidiary managers
who are closer to the subsidiary’s operation
and environment

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 Why Firms Pursue International Business

1. Theory of Competitive Advantage: specialization

increases production efficiency.
2. Imperfect Markets Theory: factors of production are
somewhat immobile providing incentive to seek out
foreign opportunities.
3. Product Cycle Theory: as a firm matures, it
recognizes opportunities outside its domestic
market.

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 Exhibit 1.2 International Product Life Cycles

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 How Firms Engage in International Business

1. International trade
2. Licensing
3. Franchising
4. Joint Ventures
5. Acquisitions of existing operations
6. Establishing new foreign subsidiaries

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 Exhibit 1.3 Cash Flow Diagrams for MNCs

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 Exhibit 1.3 Cash Flow Diagrams for MNCs

n The first diagram reflects an MNC that engages in

international trade. International cash flows result from
paying for imports or receiving cash flow from exports.
n The second diagram reflects an MNC that engages in some
international arrangements. Outflows include expenses
such as expenses incurred from transferring technology or
funding partial investment in a franchise or joint venture.
Inflows are receipts from fees.
n The third diagram reflects an MNC that engages in direct
foreign investment. Cash flows exist between the parent
company and the foreign subsidiary.

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 Valuation Model for an MNC:
Domestic Model

ì [E (CF$,t )]ü
n
V = åí t ý
t =1 î (1 + k ) þ

Where
§ V represents present value of expected cash flows
§ E(CF$,t) represents expected cash flows to be received at the
end of period t,
§ n represents the number of periods into the future in which
cash flows are received, and
§ k represents the required rate of return by investors.

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 Valuation Model for an MNC:
Multinational Model

E (CF$,t ) = å E (CF j ,t )´ E (S j ,t ) [ ]
m

j =1
Where
§ CFj,t represents the amount of cash flow denominated in a
particular foreign currency j at the end of period t,

§ Sj,t represents the exchange rate at which the foreign currency

(measured in dollars per unit of the foreign currency) can be
converted to dollars at the end of period t.

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 Valuation Model for an MNC
An MNC that uses two or more currencies

E (CF$,t ) = å E (CF j ,t )´ E (S j ,t ) [ ]
m

j =1
§ Derive an expected dollar cash flow value for each currency
§ Combine the cash flows among currencies within a given
period

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 Uncertainty Surrounding MNC Cash Flows

1. Exposure to international economic conditions – If

economic conditions in a foreign country weaken, purchase
of products decline and MNC sales in that country may be
lower than expected.
2. Exposure to international political risk – A foreign
government may increase taxes or impose barriers on the
MNC’s subsidiary.
3. Exposure to exchange rate risk – If foreign currencies
related to the MNC subsidiary weaken against the U.S.
dollar, the MNC will receive a lower amount of dollar cash
flows than was expected.

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 Exhibit 1.4 How an MNC’s Valuation is Exposed to
Uncertainty

Uncertainty in international activities lead to higher required return

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 Exhibit 1.5 Organization of Chapters

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