Professional Documents
Culture Documents
International Bussiness Chapter 18
International Bussiness Chapter 18
International Bussiness Chapter 18
management
chapter 18
Chapter Objectives 1
Analyze the advantages and
disadvantages of the major forms of
payment in international trade
Identify the primary types of foreignexchange risk faced by international
businesses
Describe the techniques used by firms to
manage their working capital
18-2
Chapter Objectives 2
Evaluate the various capital budgeting
techniques used for international
investments
Discuss the primary sources of
investment capital available to
international businesses
18-3
Financial Issues in
International Trade
Which currency to use for the
transaction
When and how to check credit
Which form of payment to use
How to arrange financing
18-4
Method of Payment
Payment in
advance
Open account
Documentary
collection
18-5
Letters of credit
Credit cards
Countertrade
Sight
draft
18-6
Time
draft
Advantages/Disadvantages of
Documentary Collection
Advantages
Disadvantages
Reasonable fees
Refusal of
shipments
Enforceable debt
instrument
Simple collections
process
Prompt payments
18-7
Decline draft
acceptance
Potential for
default
18-8
Documentation for
Letters of Credit
Export
licenses
Certificates of
product origin
18-9
Inspection
certificates
18-11
Forms of Countertrade
Barter
Counterpurchase
Buy-back
Offset purchase
18-12
18-13
Foreign-Exchange Exposure
Transaction
exposure
Translation
exposure
Economic
exposure
18-14
Transaction Exposure
A firm faces transaction exposure
when the financial benefits and costs
of an international transaction can be
affected by exchange rate movements
that occur after the firm is legally
obligated to complete the transaction.
18-15
Transactions Leading to
Transaction Exposure
18-16
Product purchases
Product sales
Credit extensions
Money borrowing
Go naked
Buy forward currency
Buy currency option
Acquire an offsetting asset
18-17
Go Naked
To go naked is to
ignore transaction
exposure and assume
foreign-exchange risk.
Characteristics
Does not require
advance capital
Offers potential for
currency appreciation
Creates risk for
depreciation of
exchange currency
Avoids fees to
intermediaries
18-18
18-19
Characteristics
Guarantees price
No capital up front
Requires fees to
intermediaries
18-20
Characteristics
Guarantees price
Characteristics
Eliminates exposure
Requires effort and
expense to arrange
transaction
Lost opportunity for
capital gain if home
currency appreciates
18-21
18-22
Translation Exposure
Translation exposure is the impact
on the firms consolidated financial
statements of fluctuations in
exchange rates that change the
value of foreign subsidiaries as
measured in the parents currency.
18-23
Economic Exposure
Economic exposure is the
impact on the value of a
firms operations of
unanticipated exchange rate
changes.
18-24
18-25
18-26
Figure 18.3
Payment Flows without Netting
18-27
Bilateral
netting
18-28
Multilateral
netting
Net
present value
Internal
rate of return
18-29
Payback
period
Risk adjustment
Choice of currency
Perspective
18-30
18-31
18-32