全美顶级全美顶级MBA教材教材跨国公司财务管理跨国公司财务管理（权威工商管理教（权威工商管理教材）（第十一到第十材）（第十一到第十五章）五章）PART I. FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREI.FOREIGN EXCHANGE RISKA. Economic exposurefocuses on the impact of currencyfluctuations on firms value.1 .The most important aspect of foreign exchange risk management:Incorporate expectations about the Incorporate expectations about the risk into all basic decisions of the risk into all basic decisions of the firm.firm.FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE2. Definition:Economic exposure =Transaction exposure +Operating exposure:arises because currency fluctuations alter a companys future revenues and expenses.FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURETo measure operating exposure requires a longer-term perspective.i.e. Cost and price competitiveness could be affected by exchange rate changesFOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREOperating Exposure begins:the moment a firm starts to invest in a market subject to foreign competition or in sourcing goods or inputs abroadFOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREThe new investment includes:New product developmentA distribution networkBrand name developmentMarketingForeign supply contractsProduction facilitiesFOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREB. Real Exchange Rates Changes and RiskNominal v. real exchange rates:real rate has been adjusted forprice changes.FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREC. Implications1. If nominal rates change with an equal price change, no alteration to cash flows. 2. If real rates change, it causes relative price changes and changes in purchasing power.FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREA decline in the real value of a currency:makes exports and import-competing goods more competitiveAn appreciating appreciating currency makes:imports and export-competing goods more competitiveFOREIGN EXCHANGE RISK AND ECONOMIC EXPOSUREDuring an appreciation of home currencies:Exporters face two choices:#1 keep prices constant (but lose sales)or #2 adjust prices to foreign currency to maintain market share (lose profits)FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE3. SUMMARYa. the economic impact of a currency change depends on the offset by the difference in inflation rates or the change in real exchange rates.b. It is the relative price changes that ultimately determine a firms long-run exposure. PART II. THE ECONOMIC CONSEQUENCES OF EXCHANGE RATE CHANGESI.ECONOMIC CONSEQUENCESThe impact on Operating Exposure of a real rate change depends upon:Pricing flexibility and1. Price elasticity of demand2. Degree of product differentiation3. The Ability to shift production and the substitution of inputsIf HC Appreciates Pricing Flexibility is keyIf HC AppreciatesCan the firm maintain its profit margins both at home and abroad? If price elasticity of demand is low, the more price flexibility a firm has.i.e. Availability of good substitutesIf HC AppreciatesProduct Differentiationprice elasticity depends on degree of differentiationThe greater the differentiation, the more the firm can control its prices.e.g. Mercedes Benz carsIf HC AppreciatesThe Ability to Shift Production and to source The Ability to Shift Production and to source inputs from other countriesinputs from other countriese.g. Japanese car makers in the late 1980sPART II.MANAGING OPERATING EXPOSUREI.INTRODUCTIONOperating exposure management requires long-term operating adjustments and the involvement of all departments.MANAGING OPERATING EXPOSUREII.Marketing StrategyA. Market Selection: use competitive advantage to carve out market share when currency values changeMANAGING OPERATING EXPOSUREB. Pricing strategy: Expectations critical1.If HC depreciates, exporter gainscompetitive advantage by increasing unit profitability or market share.2.The higher price elasticity of demand, the more currency riskthe firm faces by other product substitution.MANAGING OPERATING EXPOSUREC. Product Strategyexchange rate changes may alter1.The timing of new product introductions,2.Product deletion 3.Product innovations MANAGING OPERATING EXPOSUREIII.Product Management AdjustmentsA.Input mix “shop the world”B.Shift production among plantsC.Plant relocationD.Raising productivityMANAGING OPERATING EXPOSUREIV.Planning For Exchange-Rate ChangesA.Develop contingency planswith plausible scenariosbefore the impact of a currency change makes itself felt.e.g. flexible mfg systemsMANAGING OPERATING EXPOSUREV. Financial Management of Exchange Rate Risk: Financial managers RoleFinancial managers RoleStructure the firms liabilities in such a way that the reduction in asset earnings is matched by corresponding decrease in cost of servicing liabilities.MANAGING OPERATING EXPOSUREA.Provide local manager with forecasts of inflation and exchange-rate changes.B.Identify and focus on competitive exposure.MANAGING OPERATING EXPOSUREC. Design the evaluation criteria so that operating managers neitherrewarded or penalized for unexpected exchange-rate changes.CHAPTER 12National Capital Markets and International Financing I. CORPORATE SOURCES AND USES OF FUNDSI.CORPORATE SOURCES AND USES OF FUNDSA. 3 General Sources of Funds:1.Internally-generated cash2.Short-term external funds3.Long-term external fundsB. Forms of Securities1.Equity2.Debt: the most preferred formCORPORATE SOURCES AND USES OF FUNDSC.Debt Instruments Used1.Commercial Bank Loans2.Bondsa.Publicly issuedb.Privately issuedCORPORATE SOURCES AND USES OF FUNDSD. Financial Markets v. Financial Intermediaries1.Securitizationa. Definition:replacing bank loans withsecurities issued in public markets.b.Reflects reduction in access costs due to1.)Technological improvements2.)GlobalizationCORPORATE SOURCES AND USES OF FUNDSE.Corporate Governancedifferences exist and fall into two general categories:1.Anglo-Saxon (AS) Model2.Continental European and Japanese (CEJ) Model- example: keiretsusThe Sony Keiretsu:A System of Interlocking DirectorsSONYSUPPLIER NO.1BANKNO. 1TRANSPORTCOBANKNO. 2SUPPLIERNO.2CORPORATE SOURCES AND USES OF FUNDSF. Globalization of Financial Markets-has led to1.Global center competition:London v. NY v. Tokyo2.Regulatory arbitrageII.NATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERSA. Principal Functions of Financial Centers1.To transfer purchasing power2.To allocate fundsbetween savers and borrowersNATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERSB.International Financial Market1.Most important:a.Londonb.New Yorkc.Tokyo2.Other Centers for Intermediariesa.Singaporeb.Hong Kongc.the BahamasNATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS3. Prerequisites to be a global financial centera.political stabilityb.minimal government interventionsc.legal infrastructured.financial infrastructureNATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERSC.Foreign Access to Domestic Markets1. The Foreign Bond Marketa. Extension of domestic marketb. Issues floated by foreign cos. or governmentsExamples:Yankee bonds, samurai bondsNATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERSc. Three Major Types of Foreign Bonds1.)Fixed rate2.)Floating rate3.)Equity relatedNATIONAL CAPITAL MARKET AS INTERNATIONAL CENTERS2. The Foreign Bank Marketa.Extension of domestic marketsb.Important funding source:Japanese banks for U.S. firms3. The Foreign Equity Marketa.Cross listing internationally can1.) diversify risk2.) increase potential demand3.) build base of global owners. III.DEVELOPMENT BANKSA. General Purposefounded by governments to help financevery large infrastructure projects. DEVELOPMENT BANKSB.Types of Development Banks1.World Bank Group includesa. International Bank for Reconstruction and Developmentb. International Development Associationc. International Finance CorporationDEVELOPMENT BANKSB.Types of Development Banks (cont)2.Regional Development Banksfinance industry, agricultural, and infrastructure projects3.National Development Banksconcentrate on a particular industry or region.CHAPTER 13Functions of Euromarkets I.THE EUROCURRENCY MARKETSTHE EUROMARKETS-the most obvious example of the globalization of financial marketsA. The Eurocurrency Market1. Composed of eurobanks who accept/maintain deposits of foreign currency2. Dominant currency: US$THE EUROCURRENCY MARKETSB.Growth of Eurodollar Marketcaused by restrictive US government policies, especially1. Reserve requirements on deposits2. Special charges and taxes3. Required concessionary loan rates4. Interest rate ceilings5. Rules which restrict bank competition.THE EUROCURRENCY MARKETSC.Eurodollar Creation involves1.A chain of deposits2.Changing control/usage of depositTHE EUROCURRENCY MARKETS3.Eurocurrency loansa. Use London Interbank Offer Rate: LIBOR as basic rateb. Six month rolloversc. Risk indicator: size of margin between cost and rate charged.THE EUROCURRENCY MARKETS4. Multicurrency Clausesa. Clause gives borrower option to switch currency of loan at rollover.b. Reduces exchange rate risk THE EUROCURRENCY MARKETS5.Domestic vs. Eurocurrency Marketsa. Closely linked rates by arbitrageb. Euro rates: tend to lower lending, higher depositII. EUROBONDSA. DEFINITION OF EUROBONDSbonds sold outside the country of currency denomination.1. Recent Substantial Market Growth due to use of swaps.a financial instrument which gives 2 parties the right to exchange streams of income over time. EUROBONDS2. Links to Domestic Bond Marketsarbitrage has eliminated interestrate differential.3. Placementunderwritten by syndicates of banksEUROBONDS4. Currency Denominationa. Most often US$b. “Cocktails” allow a basket of currencies5. Eurobond Secondary Market -result of rising investor demand6. Retirementa. sinking fund usuallyb. some carry call provisions.EUROBONDS7. Ratingsa. According to relative riskb. Rating Agencies Moodys, Standard & Poor8. Rationale For Market Existencea. Eurobonds avoid governmentregulationb. May fade as market deregulateEUROBONDSB. Eurobond vs. Eurocurrency Loans1. Five Differencesa. Eurocurrency loans use variable ratesb. Loans have shorter maturitiesc. Bonds have greater volumed. Loans have greater flexibilitye. Loans obtained fasterIII.NOTE ISSUANCE FACILITIES AND EURONOTESA.Note Issuance Facility (NIF)1. Low-cost substitute for loan2. Allows borrowers to issue own notes3. Placed/distributed by banksNOTE ISSUANCE FACILITIES AND EURONOTESB. NIFs vs. Eurobonds1. Differences:a. Notes draw down credit as neededb. Notes let owners determine timingc. Notes must be held to maturityIV.EURO-COMMERCIAL PAPERI. SHORT-TERM FINANCINGA. Euronotes and Euro-Commercial Paper1. Euronotesunsecured short-term debt securities denominated in US$ and issued by corporations and governments.2. Euro-commercial paper(CP)euronotes not bank underwrittenEURO-COMMERCIAL PAPERB.U.S. vs. Euro-CPs1.Average maturity longer (2x)for Euro-CPs2.Secondary market for Euro;not U.S. CPs.3.Smaller fraction of Euro usecredit rating services to rate.CHAPTER 14Foreign Investments: The Cost of Capital THE COST OF CAPITAL FOR FOREIGN INVESTMENTSI.THE COST OF EQUITY CAPITALA. Definition1. the minimum (required) rate of return necessary to induce investors to buy or hold the firms stock.2. used to value future equity cash flows3. determines common stock priceCOST OF EQUITY CAPITALB.Capital Asset Pricing Model (CAPM) Formulari = rf + i ( rm - rf )where ri = the equity required rate rf = the risk free return rate i= Cov(rm, ri)/ 2 rm where Cov(rm, ri) is the covariancebetween asset and marketreturns and 2 rm , the variance of market returns.WEIGHTED AVERAGE COST OF CAPITAL (WACC)II. WACC For Foreign ProjectsA. Weighted Average Cost of Capital (WACC = k0) Formula k0 = (1-L) ke + L id (1 - t)where L = the parents debt ratio id (1 - t) = the after-tax debt costke = the equity cost of capitalk0 is used as the discount rate in the calculation of Net Present Value.WEIGHTED AVERAGE COST OF CAPITAL 1. Two Caveatsa. Weights must be a proportion using market, not book, value.b. Calculating WACC, weights must be marginal reflecting future debt structure.DISCOUNT RATES FOR FOREIGNPROJECTSIII. DISCOUNT RATES FOR FOREIGN PROJECTSA.Systematic Risk1. Not diversifiable2. Foreign projects in non-synchronous economies should be less correlated with domestic markets.3. Paradox: LDCs have greater political risk but offer higher probability of diversification benefits.DISCOUNT RATES FOR FOREIGNPROJECTSB.Key Issues in Estimating Foreign Project Betas-find firms publicly traded that share similar risk characteristics-use the average beta as a proxyDISCOUNT RATES FOR FOREIGNPROJECTSwhereim= the correlation between returns on the project i m= standard deviation of returns on project im= the standard deviation of returns on the market portfolioDISCOUNT RATES FOR FOREIGNPROJECTS1. Three Issues:a.Should proxies be U.S. or localcompanies?b.Which is the relevant base portfolio to use?c.Should the market risk premium be based on U.S. or local market?DISCOUNT RATES FOR FOREIGNPROJECTS2.Proxy Companiesa. Most desirable to use local firmsb. Alternative: find a proxy industry in the local marketDISCOUNT RATES FOR FOREIGNPROJECTS3.Relevant Base (Market) Portfolioa. If capital markets are globally integrated, choose world mkt.b. If not, domestic portfolio is best4. Relevant Market Risk Premiuma. Use the U.S. portfoliob. Foreign project: should have no higher than domestic risk and cost of capital.DISCOUNT RATES FOR FOREIGNPROJECTSIV.ESTABLISHING A WORLDWIDE CAPITAL STRUCTUREA. MNC Advantageuses more debt due to diversificationB. What is proper capital structure?1.Borrowing in local currency helps to reduce exchange rate risk2.Allow subsidiary to exceed parentcapitalization norm if local mkt. has lower costs.CHAPTER 15Examining International Portfolio Investing Why Invest Internationally?What are the advantages of international investment?THE BENEFITS OF INTERNATIONALEQUITY INVESTINGI. THE BENEFITS OF INTERNATIONALEQUITY INVESTINGA. Advantages1.Offers more opportunities thana purely domestic portfolio2.Attractive investments overseas3.Impact on efficient portfolio with diversification benefitsII. Basic Portfolio TheoryII. Basic Portfolio TheoryA. What is the efficient frontier? It represents the most efficient combinations of all possible risky assets.The Efficient FrontierE(r)ABBasic Portfolio TheoryThe broader the diversification, the more stable the returns and the more diffuse the risk.Basic Portfolio TheoryB.International Diversification1. Risk-return tradeoff:may be greater Basic Portfolio TheoryC.Total Risk 1. A Securitys Returns may be segmented intoSystematic Riskcan not be eliminatedNon-systematic Riskcan be eliminated by diversificationThe Benefits of Intl DiversificationINTERNATIONAL DIVERSIFICATION2. International diversification and systematic riska.Diversify across nations withdifferent economic cyclesb.While there is systematic riskwithin a nation, outside the country it may be nonsystematic and diversifiableINTERNATIONAL PORTFOLIO INVESTMENT3. Recent Historya.National stock markets have widedifferences in returns and risk.b.Emerging markets have higherrisk and return than developed markets.c.Cross-market correlations havebeen relatively low.INTERNATIONAL PORTFOLIO INVESTMENT4. Theoretical ConclusionInternational diversification pushes out the efficient frontier.The New Efficient FrontierE(r)ABCCROSS-MARKET CORRELATIONS5. Cross-market correlationsa. Recent markets seem to be most correlated when volatility is greatestb. Result: Efficient frontier retreatsThe Frontier During Global CrisesE(r)ABCInvesting in Emerging MarketsD. Investing in Emerging Marketsa.Offers highest risk and returnsb.Low correlations with returnselsewherec.As impediments to capital market mobility fall, correlations are likely to increase in the future.Barriers to International DiversificationE. Barriers to International Diversification1.Segmented markets2.Lack of liquidity3.Exchange rate controls4.Underdeveloped capital markets5.Exchange rate risk6.Lack of informationa. not readily accessibleb. data is not comparableOther Methods to DiversifyF. Diversify by a 1.Trade in American DepositoryReceipts (ADRs)2.Trade in American shares3.Trade internationally diversifiedmutual funds:a.Global (all types)b.International (no home country securities)c.Single-countryINTERNATIONAL PORTFOLIO INVESTMENT4.Calculation of Expected Portfolio Return:rp = a rUS + ( 1 - a) rrw where rp = portfolio expected return rUS = expected U.S. market return rrw = expected global returnExpected Portfolio ReturnSample ProblemWhat is the expected return of a portfolio with 35% invested in Japan returning 10% and 65% in the U.S. returning 5%? rp = a rUS + ( 1 - a) rrw= .65(.05) + .35(.10) =.0325 + .0350=6.75%Expected Portfolio ReturnCalculation of Expected Portfolio Risk where =the cross-market correlation US2 =U.S. returns variance r w2 =World returns variancePortfolio Risk ExampleWhat is the risk of a portfolio with 35% invested in Japan with a standard deviation of 6% and a standard deviation of 8% in the U.S. and a correlation coefficient of .7? = (.65)2 (.08) 2 + (.35) 2(.06) 2 +2(.65)(.35)(.08)(.06)(.7) 1/2 =6.8%INTERNATIONAL PORTFOLIO INVESTMENTIV.MEASURING TOTAL RETURNSFROM FOREIGN PORTFOLIOSA.To compute dollar return of a foreign security: orINTERNATIONAL PORTFOLIO INVESTMENTBond (calculating return) formula: whereR$ = dollar return B(1) = foreign currency bond price at time 1 (present)C = coupon income during periodg = currency depreciation or appreciation INTERNATIONAL PORTFOLIO INVESTMENTB. (Calculating U.S. $ Return) Stocks Formula: whereR$ = dollar returnP(1) = foreign currency stock price at time 1D= foreign currency annual dividend U.S. $ Stock Returns:Sample ProblemSuppose the beginning stock price if FF50 and the ending price is FF48. Dividend income was FF1. The franc depreciates from FF 20 /$ to FF21.05 /$ during the year against the dollar. What is the stocks US$ return for the year? U.S. $ Stock Returns:Sample Solution