Chap 4: ER
determination
Measuring ER = %
change in value
over a period
Determine
equilibrium:
Demand - Supply
Factors affecting
equilibrium
Inflation rate
Movements in cross ER =
considering the
movement in each
currency against the dollar
and applying intuition.
Speculation
Expect appre:
purchasing
that currency -> sell
later at higher price
Interest rate
Income level
Expect depre:
borrowing ->
exchanging for
home currency ->
buying that
currency back
just before repay
the loan
Gov control
Individuals
Expectation
Chap 9:
Forecasing ER
Techniques
Technical:
Historical data ->
future value
>< near future (1
day)
not always wwork
well
Fundamental =
relationship
between infla,
interest, income,
gov control, exp =>
Sensitivity/PPP
Error = (forecast realized)/realized
Market based =
market indicator
=> Spot
rate/Forward rate
Interval forecasts:
Forecast ER
volatility
Mixed
Benefits
Hedging
Short financing
Timing of the
impact of factor
Short investment
Value of the
factor
Capital budgeting
Factor cannot
quantified
Regression not
constant
Earning
assessment
Evaluate: by
comparing actual
and predicted
values
Bias = Consistent
+/- error
Accuaracy: Over
time/Among
currrencies
Chap 10: Exposure
to ER fluctations
Relevance: Heding
ER risk
Transaction
exposure: Future
cash transaction
Economic exposure
(bigger than transaction)
Direct/indirect cash flow
Translation exposure:
Consolidated financial
stsatements
Determine future
payable &
receivable
Appre => Cash flow
reduce
Effect:
Variability level
Depre => Cash flow
increase
Expected future
cash flow
Proportion
Evaluating stock
price
Location
Correlation of
currencies
Determinants
Accounting method
Chap 11: Managing
transaction exposure
Hedge payables
Buy
future/forward
contract on the
foreign currency
Money market
hedge strategy:
Borrow home ->
convert into
foreign
Buy call option
on the foreign
Hedge
receivables
Sell
future/forward
contract on the
foreign currency
Limitations
Money market
hedge strategy:
Borrow foreign
to be received ->
convert into
home
Buy put option
on the foreign
Uncertain
payment
Repeated short
term hedging
Hedge long term
transaction
Use long term
forward contract
that match the date
with
payables/recceivable
s
Paralel loan:
exchange ->
reexchange at a
specified ER on a
future date
Other methods
Leading &
lagging: Adjust
time
Cross hedging
(proxy hedge)
Currency
diversification
Chap 13: FDI
Why FDI
Attract new
sources of
demand
Chap 12: Economic &
Translation exposure
Benefits of
nternational
diversification
Reduce domestic
economic
exposure =>
Reduce cost of
financing
Enter market for
superior profits
Hedge economic =
balancing the sensitivity
of rev and exp to ER
fluctuation
Rev > Exp => Concern
about aprre
Hedge translation: Sell
forward the foreign =>
Offset cashloss
Key: Not highly
correlated project
Cost efficiency
(production,
marterial,
technology)
Protect foreign
market share
React to ER
movements
Exp > Rev => Concern
depre
Avoid trade
restrictions
Chap 14:
Multinational
capital budgeting
Subsidiary vs
Parent
Subsidiary: Not
consider ER & tax
Parent: Feasible
or ot
How to applied:
Calculate NPV
How to assess
risk:
Normal input:
Other difficulties:
Initial outlay
Periodic cash
flows
Salvage value
Financing
arrangement
(parent vs sub)
Blocked funds by
host gov
Host gov
incentives
Required rate of
return
Adjust discount
rate
Sensitivity
abalysis: What- if
scenarios
Simulation:
Probability
distribution for
NPV based on a
range of possible
values for input
variables.
Chap 15:
International
acquisition
How to use M&A to
restructuring
Target-specific
factors
How to valuate
foreign firm:
Country-specific
factors
Previous cash flow
Economic
Managerial talent
Political
Currency
Stock market
Screens prospective
targets based on
willingness to be
acquired and
country barriers
Estimating cash
flows of each
(target + country
characteristics ->
discounting the
expected cash
flows)
Compared to the
market value ->
whether the target
can be purchased at
lower than the
calculation
Why valuations
varies?
Other types of
restruturing
Different cash flows
International partial
acquisitions
ER movements
International
acquisitions of
privatized
businesses
Required rate of
return
International
alliances (such as
international
licensing or
joint ventures)
International
divestitures (thoái
vốn)
Chap 16: Country risk
analysis (Miccro, macro)
Policital risk
Attitue of
consumerss
toward locally
produced
goods
Financial risk
Interest rate
ER
Host gov
actions
Inflation rate
Blockage of
fund transer
Currency
inconvertibility
Techniques to
measure risk
Checklist
approach
Delphi
technique:
Collection of
independent
opinions
without group
discussion
Quantitative
analysis:
Regression
model
War
Inspection visits
Bureaucracy
Corruption
Application
Adjust discount
rate
Explicitly
account for
each factor:
Recalculate
NPV under
the condition
that the event
(such as
blocked funds,
increased
taxes, etc.)
occurs.
Prevent host
gov takeover
Use short term
horizon for
operations
Unique
technology
(Cannot be
copied)
Local labor
Local financing
Chap 20: Short term
financing
Sources
Internal:
Subsidiaries
excess fund
Why?
External
Notes
Commercial
paper
Bank loans
Offset foreign
currency
inflows
(Minimiize ER
risk)
Reduce
financing costs
How?: Estimate
the effective
financing rate
i(f): Quoted
interest rate
e(f):
Forecasted %
change in the
financing
period
Criteria
Interest rate
parity
p: premium
i(h): home
interest rate
Forward rate
as a forecast
Benefits
Increase
probability of
achieving low
financing cost
(not highly
correlated)