International Financial

Management
 THE MULTINATIONAL
CORPORATION

 The MNC: A Definition

 a company with production and
distribution facilities in more than one
country.
 with a parent company located in the home
country
 at least five or six foreign subsidiaries
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
 RISE OF THE MULTINATIONAL
CORPORATION
 A. Forces Changing Global Markets
 Massive deregulation
 Collapse of communism
 Privatizations of state-owned industries
 Revolution in information technology
 Wave of M&A
 Emergence of free market policies in Third
World Nations
 Countless nations accepting the standards
of free market capitalism
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 THE RISE OF THE MULTINATIONAL
CORPORATION
B. The Prime Transmitter of Competitive


Forces in the Global Economy

 emphasizes group performance such as
 Global coordinated allocation of

resources
 Market – entry strategy

 Ownership of foreign operations

 Production, marketing and financial

activities

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THE RISE OF THE MULTINATIONAL
CORPORATION
 C. The MNC’s Evolution
 Reasons to Go Global:
 1. More raw materials
 2. New markets
 3. Minimize costs of production

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THE RISE OF THE MULTINATIONAL
CORPORATION

 RAW MATERIAL SEEKERS

 exploit markets in other countries
 historically first to appear
 modern-day counterparts
 British Petroleum

 Exxon

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 THE RISE OF THE MULTINATIONAL
CORPORATION
 MARKET SEEKERS
 Produce and sell in foreign markets
 Have heavy foreign direct investors
 Represented today by firms such as:
 IBM

 MacDonald’s

 Nestle

 Levi Strauss

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 THE RISE OF THE MULTINATIONAL
CORPORATION
 COST MINIMIZERS
 seek lower-cost production abroad
 Their motive: to remain cost competitive
 Represented today by firms such as:
 Texas Instruments

 Intel

 Seagate Technology

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THE RISE OF THE MULTINATIONAL
CORPORATION

D. What is the MNC?

From a Behavioral View - it’s a
state of mind committed to globally
 producing,
 investing,
 marketing, and
 financing.

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THE RISE OF THE MULTINATIONAL
CORPORATION

E. THE GLOBAL MANAGER:

1. Understands political and
economic differences;
2. Searches for most cost-
effective suppliers;
3. Evaluates changes on value
of the firm.

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MULTINATIONAL FINANCIAL
MANAGEMENT: THEORY AND
PRACTICE

I. The MNC’s Policies

A. Main Objective of MNC:
Maximize shareholder wealth

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MFM: THEORY AND PRACTICE

II. FUNCTIONS OF FINANCIAL

MANAGEMENT
A. Two Basic Functions:
1. Financing
2. Investing

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MFM: THEORY AND PRACTICE

B. Additional Factors Facing the

MNC Executive
1. Political risk
2. Economic risk
these two are combined to measure
country risk

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MFM: THEORY AND PRACTICE

B. Importance of Total Risk

1. Adverse Impact - lower sales and

higher costs
2. Justifies hedging activities of MNC

3. Diversification reduces risk

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The Determination of
Exchange Rates
Equilibrium Exchange Rates

I. SETTING THE EQUILIBRIUM

A. The exchange rate is the price of
one unit of foreign currency
expressed as a certain price in local
currency.

For example $.1.11/€ means the euro

in the U.S. is worth $1.11.
Equilibrium Exchange Rates

B. How Do you Purchase German

Goods?
1. Foreign Currency Demand:
-derived from the demand for foreign
country’s goods, services, and financial assets.

e.g. Locals demand German goods such as

Mercedes cars
 The Demand for € in the U.S.
$/€

D
$1.20/ €

$1.10/ €
$1.00/ €
Qty
At higher exchange rates, Americans demand
less euros and vice versa.
 Equilibrium Exchange Rates

2. Foreign Currency Supply:

- derived from the foreign country’s demand
for local goods.
- Foreign buyers must convert their currency in
order to purchase.
e.g. German demand for local goods
such as asphalt means Germans must convert
euros to TT$/US $ in order to buy.
 The Supply of € in the U.S.
$/ €

$1.20/€
S
$1.10/€
$1.00/€
Qty
At higher exchange rates, Germans supply
more euros and vice versa.
Equilibrium Exchange Rates

3. Equilibrium Exchange Rate

occurs where the quantity supplied
equals the quantity demanded of a
foreign currency at a specific local price.
 The $/ € Equilibrium Rate
$/ €
Equilibrium
D

S
$1.10

Qty
 Equilibrium Exchange Rates
C. How Exchange Rates Change
1. Increased demand as more foreign goods

are demanded, more of the foreign

currency is demand at each possible
exchange rate

2. The price of the foreign currency in local

currency increases.
Equilibrium Exchange Rates

3. Home Currency Depreciation

a. Foreign currency becomes more valuable

than the home currency.

b. Conversely, the foreign currency’s value

has appreciated against the home

currency.
 The US$ Depreciates When
$/ € D’
D
$1.20/ €
S

$1.10/ €

Q1 Q2 Qty
Equilibrium Exchange Rates

D. Computing a Currency
Appreciation

= (e1 - e0)/ e0

where e0 = old currency value

e1 = new currency value
Equilibrium Exchange Rates

EXAMPLE: € Appreciation
If the dollar value of the € goes from $1.10
(e0) to $1.20 (e1), then the € has appreciated
by

(1.20 - 1.10)/ 1.10 = 9.1%

Equilibrium Exchange Rates

C.4. Calculating a Depreciation:

= (e0 - e1)/ e1

where e0 = old currency value

e1 = new currency value
Equilibrium Exchange Rates

EXAMPLE: US$ Depreciation

Use the formula

(e0 - e1)/ e1
substituting
(1.10 – 1.20)/1.20 = - 8.3%
is the US$ depreciation.
Equilibrium Exchange Rates
D. FACTORS AFFECTING
EXCHANGE RATES:
1. Inflation rates
2. Interest rates
3. GNP growth rates
 Sample Problem
Suppose the U.S. dollar appreciates
against the Russian ruble by 500%.
How much did the ruble depreciate
against the dollar?
 Sample Problem
Depreciation of the ruble: