International Business
Oded Shenkar and Yadong Luo
Chapter 14
Financial Management for Global
Operations
Chapter 14: Financial Management for Global Operations
Do You Know?
• The ways that sound financial
management contributes to
Multinational Enterprise global success?
• The major financial issues that are
especially important to global
operations?
• How payment methods differ between
domestic and international
transactions?
Chapter 14: Financial Management for Global Operations
Do You Know?
• How global payments are commonly
conducted?
• The major sources of financing in global
business and export?
• The major steps involved in listing
stocks on the international exchanges?
Chapter 14: Financial Management for Global Operations
Do You Know
• How to reduce risk from foreign
exchange fluctuation?
• The differences between foreign
exchange risk and foreign exchange
exposure?
Chapter 14: Financial Management for Global Operations
Minimizing Exposure in RTZ
• How does a company manage
international risk? It isn’t easy. When
RTZ realized that foreign exchange
fluctuation, risk, and exposure
influenced net profits and could reduce
shareholder wealth, they reorganized
F(x) into the executive suite.
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Chapter 14: Financial Management for Global Operations
Minimizing Exposure in RTZ
• The strategy they created had RTZ
borrowing and conducting revenue
operations with dollars, yen, and
pounds.
• In operational locations presenting
foreign exchange risk, they hold large
reserves in domestic currency to
preserve purchasing power and
maintain ability to meet obligations in
the foreign location.
Chapter 14: Financial Management for Global Operations
Why Learn Financial Management?
• Financial Management should be
required knowledge for all international
business managers.
• Financial management is, however,
much more complex than the domestic
equivalent because management must
deal with differing financial markets,
environments, institutions, and systems.
Chapter 14: Financial Management for Global Operations
Why Learn Financial Management?
• Many times, financial management in
an Multinational Enterprise global
operations occurs in an environment
characterized by volatile foreign
exchange rates, restrictions on capital
flows, varying country and political risk,
differing tax systems, and a wide
spectrum of institutional settings.
Chapter 14: Financial Management for Global Operations
Why Learn Financial Management?
Knowledge of financial management
helps the firm in two ways:
• It helps the financial manager decide
what steps should be taken to exploit
opportunities and protect the firm from
financial threats
• It helps the manager anticipate events
and make profitable decisions before
events occur
Chapter 14: Financial Management for Global Operations
Why Learn Financial Management?
Financial management for global
operations deals with the following
major issues:
• International Trade Finance
• Financing Global Operations
• Managing Foreign Exchange Risk and
Exposure
• Working Capital Management
Chapter 14: Financial Management for Global Operations
International Trade Finance
Options for International Trade Payment
are:
• Cash in Advance
• Letter of Credit
• Documentary Collection
• The Open Account
Chapter 14: Financial Management for Global Operations
International Trade Finance
• Cash In Advance affords the exporter
the greatest protections because
payment is received before shipment, or
when goods arrive.
• This is mainly used in countries where
there is political instability, or where the
buyer’s credit is shaky.
• Political crises and/or foreign exchange
controls often necessitate the Cash in
Advance Deal.
Chapter 14: Financial Management for Global Operations
International Trade Finance
• Letters of Credit (l/c) are the means by
which the majority of international
transactions occur.
• This is a letter written to the seller,
signed by the buyer’s bank.
• It promises to honor drafts drawn on the
bank, if the seller follows the rules set in
the letter, which are usually the same as
in the purchasing contract. If they are
different, both conditions apply.
Chapter 14: Financial Management for Global Operations
Advantages of L/Cs
• They eliminate Credit Risk, if the bank
is in good standing
• They reduce uncertainty for payment,
because the seller knows all the rules
for obtaining payment
• They stabilize production by assuring
payment before a production run begins
• They facilitate financing because they
assure a ready foreign buyer
Chapter 14: Financial Management for Global Operations
International Trade Finance
L/C Terminology
• Documentary Requirement – L/C is required
for most import/export transactions
• Clean L/C – presented without other
documents, it is useful for overseas bank
guarantees, escrow arrangements, and security
purchases
• Irrevocable L/C – cannot be revoked without
the specific permission of all parties involved,
including the exporter
• Confirmed L/C – is issued by on bank and
confirmed by another, obligating both banks to
honor drafts drawn in compliance
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Chapter 14: Financial Management for Global Operations
International Trade Finance
• Unconfirmed L/C – is the obligation of only the
issuing bank. Most would prefer the “confirmed,
irrevocable L/C.”
• The Transferable L/C – is where a beneficiary has
the right to instruct the paying bank to make credit
available to one or more secondary beneficiaries
• The Back to Bank L/C – exists where the exporter,
as beneficiary, offers its credit as security in order to
finance the opening of a second credit
• The Revolving L/C – exists where the tenor or
amount of the L/C is automatically renewed pursuant
to terms and conditions. These can be cumulative or
non-cumulative
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Chapter 14: Financial Management for Global Operations
International Trade Finance
Exhibit 14-1: Process of using letter of credit (L/C)
Chapter 14: Financial Management for Global Operations
International Trade Finance
• The Documentary Collection is a payment
mechanism that allows exporters to retain ownership
of goods until they receive payment or are
reasonable certain they will receive it. These
documents are generally titles to the goods.
• The Open Account involves shipping goods, and
then billing the importer later. The credit terms are
arranged between the importer and the exporter.
These are usually afforded to longstanding partners,
or to foreign affiliates where payment is reasonably
assumed.
Chapter 14: Financial Management for Global Operations
International Trade Finance
Exhibit 14-2: Documents against payment (D/P) flow
Chapter 14: Financial Management for Global Operations
International Trade Finance
Exhibit 14-3: Documents against acceptance (D/A) flow
Chapter 14: Financial Management for Global Operations
International Trade Finance
• Means of Payment are traditionally
done through the Airmail Payment, the
Telex, the Society for Worldwide
Information and Funds Transfer
(SWIFT), the bank draft, the money
order, and the inter-bank email system.
Chapter 14: Financial Management for Global Operations
Export Financing
• Export Financing is important because
many export projects require a large
amount of startup cost. Sources of
funds come from the Private Source,
and the Governmental Source.
Chapter 14: Financial Management for Global Operations
Financing: Private Sources
•
•
•
•
•
•
•
Commercial Banks
Export Finance Companies
Factoring Houses
Forfeit Houses
International Leasing Companies
In-House Finance Companies
Private Insurance Companies
Chapter 14: Financial Management for Global Operations
Financing: Government Sources
• Export-Import Bank Financing (Ex-Im
Bank)
• Foreign Credit Insurance
Chapter 14: Financial Management for Global Operations
Financing Global Business
Compared to financing international trade,
the financing of global production is
much more complex. These options
include:
• Intercompany Financing - where
parent and sister subsidiaries
competitiveness-finance one another
• Equity Financing – Where financing is
conducted through issuing stock in
home or host country, or cross listing
shares on multiple exchanges
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Chapter 14: Financial Management for Global Operations
Financing Global Business
Exhibit 14-4: Sources of financing global operations
Chapter 14: Financial Management for Global Operations
Financing Global Business
• Debt Financing – through using
Eurocurrency Markets, Eurocredits, or
Euronotes. There are also Eurobonds,
foreign bonds, Yankee Bonds, Samurai
Bonds, and Bulldogs (issued in the
United Kingdom)
• Local Currency Financing – through
bank loans, non-bank sources,
discounting, and parallel loans
Chapter 14: Financial Management for Global Operations
Financing Global Business
Exhibit 14-5: Tapping Wall Street: three stages for non-U.S.
MNEs to be traded in the United States
Chapter 14: Financial Management for Global Operations
Managing Foreign Exchange Risk and
Exposure
• Foreign Exchange Risk – concerns the
variance of the domestic currency value of an
asset, liability, or operating income that is
attributable to unanticipated variances in the
exchange rates.
• Foreign Exchange Exposure – refers to the
sensitivity of changes in the real domesticcurrency value of assets, liabilities, or
operating incomes to unanticipated changes
in exchange rates.
Chapter 14: Financial Management for Global Operations
Transaction and Economic Exposure
• Transaction Exposure – is concerned wit
how changes in exchange rates affect the
value of anticipated cash flows in foreign
currency and their settlements.
• Economic Exposure – also known as
operating exposure, measures the change in
the present value of the firm resulting from
any change in the future operating cash flows
caused by an unexpected change in
exchange rates and macroeconomic factors.
Chapter 14: Financial Management for Global Operations
Translation Exposure
• Translation Exposure,refers to the
potential for accounting derived
changes in owner’s equity to occur
because of the need to consolidate
foreign currency financial statements.
Chapter 14: Financial Management for Global Operations
Translation Exposure
Exhibit 14-6: Framework of managing foreign
exchange exposure
Chapter 14: Financial Management for Global Operations
Managing Transaction Exposure
To manage transaction exposure, financial
managers hedge with financial instruments.
They use the:
• Forward Markets, hedging for anticipated
exchanges in the future
• Futures Markets, hedging via the futures
markets
• Options Markets, Using calls (buying a
number of currency units in the future at
some specific price), or puts (selling a
number of currency units in the future at a
specific price)
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Chapter 14: Financial Management for Global Operations
Managing Transaction Exposure
Exhibit 14-7: Forward hedging example
Chapter 14: Financial Management for Global Operations
Managing Transaction Exposure
• Spot Markets, buying and selling
currency in current time when there is
unpredictable fluctuation
• Bartering, buying and selling goods in
exchange for other goods
Chapter 14: Financial Management for Global Operations
Cash Management
• Firms need to create a global
management system for working
capital, cash flow.
• HQ must clearly define what aspects of
cash management are centralized (like
in RTZ) and what should be
decentralized.
• They should formalize policies that help
them manage international accounts
receivable.
Chapter 14: Financial Management for Global Operations