Chapter 15International Business Finance.ppt

Chapter 15International Business Finance Key sections Factors affecting exchange rates Nature of exchange risk and types How control exchange risk? Introduction Globalization –to make something worldwide in scope/application In finance, integration of countries’ financial and product markets Increases availability of funds and liquidity Made possible by computer and communications technologies Multinational Corporations Multinational corporations or MNC’s Have operations in more than one country Problems: different languages, currencies financial markets, taxes, cultures, etc. World Trade Trade growing rapidly, capital flows even faster US Balance of Trade Deficit – 2004- $600 billion, up from less than $500 billion in 2003. -We are a deficit nation and have to borrow from other countries – Japan and China - Will they continue to lend? Pressure on the dollar? Exchange Rates (X-rates) Price of a foreign currency in terms of the domestic currency Exchange risk – future rates may be different Exchange markets –method of transferring purchasing power Extremely active market -trades $1.9 trillion/day Market Evolution 1949-1970 – exchange rates fixed (more or less) Since 1973 – floating rates Determined by supply/demand; change minute by minute Most exchange controls eliminated The Euro 1999 – 11 European countries adopted common currency, the Euro (€) No more DM, FF, Lira Easier to travel and trade goods and services Eliminates price differences Broadens/deepens capital markets Exchange Terminology Devaluation – currency made cheaper Revaluation – becomes more expensive Direct quote = number of units of home currency to buy one unit of foreign currency 50 US cents to buy one Australian dollar Indirect – foreign units per home unit Two Aussies for each US$1. More Terminology Spot rate – rate agreed today for exchange in two days Forward rate – rate agreed today for future exchange Cross rates – two foreign curr