International Financial Management 1. Introduction 2022-23 PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL Main dimensions of International Financeis International financing covers a broad financial field. These are aspects that have to do with the existence of many different countries. This complicates the life of a financial manager in many ways. For example: the existence of national currencies and, therefore, the question ofexchange rates and currency risk; the existence of different judicial systems, which further complicates the issue ofcredit risk; the sovereign autonomy of countries addspolitical risksto thecommercial risks; the existence of different and sometimes incompatible tax systems, giving rise to questions ofdouble taxationand triple. PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 2 Exchange and Political Risks Exchange Rate Fluctuation: affects production and investment costs and the total value of revenues, expenditures and results. Political risks: unexpected changes in the fiscal framework, in the rules on foreign investment, in the profit repatriation regime, in access to production factors, etc. PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 3 International market opportunities Access broad product markets; Lower costs ofFunding(Financing) Possibility of economies of scale in production: reduction of average production costs and financial means. PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 4 Who is interested in International Finance? multinationals Companies that import or export Companies that finance themselves abroad Domestic companies in competition with external companies PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 5 The example of currency exposure… 1. Does a company that does not have operations abroad face any operational currency exposure? two. Do only companies with exports or companies that compete with foreign exporters face operational exposure? 3. Does a company that denominates all of its contracts in local currency or hedges all of its contracts in foreign currency face operational exposure? Almost all companies facesome operational exposure, although some are only exposed indirectly (through the country's general economic activity). As large economies have a major impact on world economic activity, companies in these countries tend to be very exposed to exchange rates. The smaller the country, the more open the economy. Therefore, the exposure is relevant to most companies in a small country with an open economy. PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 6 The Financial Function in a Globalized Economy International Finance combines elements of Corporate Finance with themes of International Economy; Markets are now more interdependent and international finance is an important element in the management of companies that have decided to go international; Companies have international assets or operations in foreign markets and obtain part of the revenues and results in these markets; In the international context, companies face difficulties arising from the economic, financial and legal complexities of each country different from the domestic context. International financial management presupposes theunderstanding of the set of international financial risks. PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 7 The functions of international financial management They include valuation of assets in foreign currency (exports, imports, investment projects, …);How to update cash flows subject to commercial, exchange, political, tax risk? How to determine the cost of capital? International funding;In an international setting, should loans be denominated in local/domestic or other currency? risk coverageexchange rate and management of other risks. One of the financial manager's tasks is to reduce risk by hedging exposure. There are many other sources of uncertainty besides exchange rates, such as interest rates or commodity prices. These functions cannot be seen in isolation: evaluation,hedgeand funding are interrelated. PORT POLYTECHNIC.SUPERIOR INSTITUTE OF ACCOUNTING AND ADMINISTRATION OF THE PORTO POLYTECHNIC OF PORTO.PORTO ACCOUNTING AND BUSINESS SCHOOL 8