I Overview and BackgroundII The International Financial EnvironmentIII Derivative Securities for Hedging Currency RiskIV Managing the Risks of Multinational OperationsV Valuation and the Structure of Multinational OperationsVI International Portfolio Investment and Asset Pricing,Multinational Finance by Kirt C. Butler,Multinational financial management is financial management conducted in more than one cultural, social, economic, or political environmentWell develop a framework for evaluating the opportunities, costs and risks of operating in the worlds markets for goods, services, and financial assets and liabilities,Chapter 1 An Introduction to Multinational Finance,Challenges facing the multinational manager,The gentle reader will never, never know what a consummate ass he can become, until he goes abroad.Mark Twain,Viv la difference,Cross-border differences can affect all areas of business, particularly through differences in - Language & culture - Human resource management - Accounting - Marketing - Distribution - Logistics - Financial markets - Corporate governance - Other business conventions(legal, accounting, taxation, regulation, etc.),where the art resides,The notes I handle no better than many pianists, but the pauses between the notes ah, that is where the art resides. Arthur Schnabel,Multinational financial management,Multinational finance is interdisciplinary within the field of financeMultinational financial managers must be familiar withForeign exchange and Eurocurrency markets Derivatives securities International financial (debt & equity) markets International markets for real assets International portfolio investment,The approach of the book,Everything should be made as simple as possible, but not simpler.Albert Einstein,Value = St ECFt / (1+it)tMultinational investment policy Higher returns from existing investments New investment opportunitiesMultinational financial policy Reduced capital costs through access to international capital markets,The MNCs opportunities,Perfect financial market assumptions,Financial opportunities often involve a violation of one of these assumptionsFrictionless markets No government intervention or taxes No transactions, agency, or bankruptcy costsRational investors Equal access to costless information Equal access to market prices,Frictionless markets ensure operational efficiencyRational investors with equal access to markets and information ensure informational efficiency That is, a market in which prices reflect all relevant informationTogether, these promote allocational efficiency,Market efficiency,Investment opportunities,Financing opportunities,The value of multinationality,The MNCs additional risks,Country risk - the risk that the business environment in a host country will unexpectedly changePolitical risk - the risk that the business environment in a host country will change unexpectedly due to political eventsFinancial risk - the risk of unexpected change in the financial or economic environment of a host country,Risk versus risk exposure,Risk exists whenever actual outcomes can differ from expectationsA company has a risk exposure when its value can change with unexpected changes in business conditions,Foreign market entry,Export or import entry Agents or distributors (foreign or domestic) Foreign sales branches or subsidiariesContract-based entry Licensing or franchisingInvestment-based entry Foreign direct investments Mergers and acquisitions Strategic alliances or joint ventures,Export through agents or distributors,Export agents and distributors should haveTechnical knowledge of the productExperience, expertise, and marketing contacts in the foreign countryExperience and expertise in shipping, documentation, and trade creditReliability and financial stability,Foreign sales branches/subsidiaries (versus agents or distributors),Advantages Higher sales potential Retains control over production, marketing, distributionDisadvantages Higher resource commitment Slower entry High country risks and costs,Contract-based entry,Advantages quick and easy low resource commitment low cultural costs and risks avoids import and investment barriersDisadvantages limited fees/royalties on license agreements loss of control over production technology potential creation of competitors,Investment-based entry,Advantages Potential for higher sales Potential for lower costs Diversifies manufacturing base and matches foreign currency costs to revenues Avoids import quotas and tariffsDisadvantages Higher resource commitment Higher exit costs Must overcome cultural differences Must overcome investment barriers,Investment-based entry,International joint ventures,Mergers and acquisitions,FDI: plant expansions,FDI: new investment,Source: Ernst & Young,Investment-based entry,Foreign direct investment Relatively slow entry Maintains control over assetsCross-border M&A Relatively rapid entry, but possibly at a high price (acquisition premium)Cross-border joint ventures May avoid investment restrictions Less exposure to country risks Potential loss of control over intellectual property,