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An introduction to multinational financial management, discussing the differences between multinational and domestic financial management, the reasons why firms expand into other countries, and the factors that distinguish multinational financial management from domestic. It also covers exchange rates, including direct and indirect quotations, cross rates, and exchange rate risk.
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The exchange rate between any two currencies. Cross rates are actually calculated on the basis of various currencies relative to the U.S. dollar. - Cross rate between Australian dollar and the Japanese yen. - Cross rate = ( Yen / US Dollar ) x ( US Dollar / A. Dollar ) =
x
=
Yen / A. Dollar
The inverse of this cross rate yields:
A. Dollars / Yen
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The product will cost 250 yen to produce and ship to Australia, where it can be sold for 6 Australian dollars. What is the U.S. dollar profit on the sale? - Cost in A. dollars = 250 yen (0.0138) = 3. A. dollars - A. dollar profit = 6 - 3. = 2. A. dollars - U.S. dollar profit = 2. / 1. = $1.
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The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates. - For example, in the last slide, a weakening Australian dollar (strengthening dollar) would lower the dollar profit. - The current international monetary system is a floating rate system.
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Austria - Belgium - Finland - France - Germany - Greece ๏ฎ Ireland ๏ฎ Italy ๏ฎ Luxembourg ๏ฎ Netherlands ๏ฎ Portugal ๏ฎ Spain ๏ฎ Notable European Unioncountries not in the EMU: ๏ฎ Britain, Sweden, andDenmark
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If the U.S. dollar buys fewer units of a foreign currency in the forward than in the spot market, the foreign currency is selling at a premium. - In the opposite situation, the foreign currency is selling at a discount. - The primary determinant of the spot/forward rate relationship is relative interest rates.
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Suppose one yen buys $0. in the 30 โ day forward exchange market and k NOM for a 30 โ day risk โ free security in Japan and in the U.S. is 4%. - ft = 0. - k h = 4% / 12 = 0.333% - k f^ = 4% / 12 = 0.333%
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1 e
1.00331. e
0 0 ๏ฝ ๏ฝ
Therefore, for interest rate parity to hold, e 0 must equal $0.0095, but we were given earlier that e 0 = $0.0090.
