International Finance
Multinational Companies MNCs
operations
Firms that have internationalassetsand
in foreign markets
Diversifyingoperations Haring operations in more than one manet cansmooth
at
cyclicalchanges
GeneralAgreement on
tariff and trade GATT Treaty governingworldtrade
Wald Trade Organisation WTO
International
bodythat policies wold
tradingpractices
Factors Affecting Multinational Companies
Legal Requirements MNCs will assess implications of a
cantries laws
and restrictions and determine favaribility before entering themarket
Tunes
Unfavorable tax conditions can have a
negative effecton foreign
direct investment
Financial Mallets Wheremoney
is tent or baraved
Euro Markets International financial market that provides forborrowing
and lending currencies outside country of
of
Major Participants USD
origin
is the dominant currency EUR and Yuan
are emerging
Exchange Rate Risk
As multinational companies operate in many foreign markets pations
of revenue and costs are based on foreign currency Exchange
rate between 2 or more companies will cause exchange rate risk
exposure
Forex Exposure
Translation Exposure effectthat change in exchangerate willhaveanrecorded
results of a company
Transaction Exposure Importing andexporting as well as loansstated in
foreign currency
le the effect therand exchange rate has onsuch
transactions
Economic Exposure longterm realeffects of a change in exchange
rates
Causesof change in ExchangeRates
Political
unrest stability
Social
Any factors having a positivenegativeimpactoncurrency
Economic Interest Rate Inflation unemployment
SpotRates and ForwardRates
SpotRate Price quoted
for immediate settlementon interestrate commodity
security anency Spot Price anent market value
FawadRate
Contracted
price for a transaction that will becompleted at
an agreedupon future date Forward rates areused to hedge risk or
explorepotentialpricefluctuations
T
mostimpotent driving forcesbehindexchangerate movements
C
Inflation Rates
www
Interest Rates
Interest
Rate Parity
Fundamental
equation that governs relationship between interest rates
and currency exchange rates
Hedged returns from investing in
different cantries should be the
same regardless of exchange rates
SA Interest Rates higher than US Interest rates
hand forwardrate
wouldbelaver than spot Dolla is premium
Witferenuinturestates
DiffgggynygspotandyMe
we
F
I
r
I
rf
rf
F Forward Exchange Rate
8 Spot exchange rate
rt foreign interest rate
r
domestic interest rate
Fg
I tr
I
r
f
HedgingInstruments
Forward Contracts
Money market hedges
Currencyoptions
Currency of Invoice
Leads and
lags
Futures contracts
Currency swaps