International Financial
Management
Griffin & Pustay
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International Business, 6th Edition
chapter 18
Chapter Objectives
Analyze the advantages and
disadvantages of the major forms of
payment in international trade
Identify the primary types of foreignexchange risk faced by international
businesses
Describe the techniques used by firms to
manage their working capital
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Chapter Objectives (continued)
Evaluate the various capital budgeting
techniques used for international
investments
Discuss the primary sources of
investment capital available to
international businesses
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Financial Issues in
International Trade
Which currency to use for the
transaction
When and how to check credit
Which form of payment to use
How to arrange financing
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Method of Payment
Payment in
Advance
Open Account
Documentary
Collection
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Letters of Credit
Credit Cards
Countertrade
Forms of Drafts Used with
Documentary Collection
Sight
Draft
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Time
Draft
Advantages/Disadvantages of
Documentary Collection
Advantages
Disadvantages
Reasonable fees
Refusal of
shipments
Enforceable debt
instrument
Simple collections
process
Prompt payments
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Decline draft
acceptance
Potential for
default
Figure 18.1 Using a Sight Draft
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Documentation for
Letters of Credit
Export
Licenses
Certificates of
Product Origin
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Inspection
Certificates
Types of Letters of Credit
Advised letter of credit
Confirmed letter of credit
Irrevocable letter of credit
Revocable letter of credit
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Figure 18.2 Using a
Letter of Credit
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Forms of Countertrade
Barter
Counterpurchase
Buy-back
Offset purchase
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Countertrade: Turkmenistan cotton
exchanged for Indian Wheat
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Map 18.1 Countertrade by Marc Rich
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Table 18.1 Payment Method for
International Trade
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Foreign-Exchange Exposure
Transaction
Exposure
Translation
Exposure
Economic
Exposure
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Transaction Exposure
Transaction Exposure is when the
financial benefits and costs of an
international transaction can be affected by
exchange rate movements that occur after
the firm is legally obligated to complete the
transaction.
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Transactions Leading to
Transaction Exposure
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Product Purchases
Product Sales
Credit Extensions
Money Borrowing
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Options for Responding to
Transaction Exposure
Go naked
Buy forward currency
Buy currency option
Acquire an offsetting asset
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Strategies for Managing Transaction
Exposure: Table 18.2
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Translation Exposure
Translation Exposure is the impact on
the firms consolidated financial statements
of fluctuations in exchange rates that
change the value of foreign subsidiaries as
measured in the parents currency.
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AFLACs corporate treasurer manages the companys
translation exposure to changes in the yen-dollar exchange
rate by using a balance sheet hedge.
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Economic Exposure
Economic Exposure is the
impact on the value of a firms
operations of unanticipated
exchange rate changes.
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Map 18.3 Changes in Currency Values
Relative to the U.S. $ July 2003 vs. July 2008
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Management of Working Capital
Minimize working-capital balances
Minimize currency conversion costs
Minimize foreign-exchange risk
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Figure 18.3
Payment Flows without Netting
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Minimizing Currency Conversion Costs
Bilateral
netting
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Multilateral
netting
Table 18.3 Multilateral Netting
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Evaluating Investment Projects
Net
Present Value
Internal
Rate of Return
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Payback
Period
Using the Net Present Value Approach
Risk Adjustment
Choice of Currency
Perspective
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Sources of International Investment Capital
External Sources
Internal Sources
Strategic Use of Transfer Pricing
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External Sources of Funding
Investment Bankers
Sale of Stock
Loans
Swaps
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Figure 18.4 Internal Sources of Capital
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Table 18.4 Strategic Use of NonmarketBased Transfer Prices
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