Financial management

WELCOME

TO OUR PRESENTATION

MEMBERS OF GROUP

NAME OF THE MEMBERS

ID

MARUF AHMED WUB 01/11/33/1785

SAIMA AMBIA TOMA WUB 01/11/33/1753

FATEMA AKTER WUB 01/11/33/1755

SHARNA YESMIN WUB 01/11/33/1760

TAHIRA JAHAN LAMIA WUB 01/11/33/1763

ALAMGIR HOSSAIN WUB 01/11/33/1771

AFRIN AHMED WUB 01/11/33/1773

ALI AHMMED EMON WUB 01/11/33/1777

NAZMUL ALAM WUB 01/11/33/1782

ONECHAPTER

PRESENTING – MARUF AHMEDWUB 01/11/33/1785

MULTINATIONAL FINANCIAL MANAGEMENT:AN OVERVIEW

• A corporation that has its facilities and other assets in at least one country other than its home country is called multinational company. Example: nestle

• The commonly accepted goal of an MNC is to maximize shareholder wealth.

MNC and MNC’s Goal

• Conflict of goals between a firm’s managers and shareholders is often referred to as the agency problem—the agency problem.

• Agency costs are normally larger for MNCs than for purely domestic firms, due to:• the difficulty in monitoring distant managers,• the different cultures of foreign managers,• the sheer size of the larger MNCs, and• the tendency to downplay short-term effects.• Subsidiary managers may be tempted to make

decisions that maximize the values of their respective subsidiaries.

Conflicts with the MNC Goal

Theories of International Business

Theory of Comparative Advantage• Specialization by countries can increase

production efficiency.

Imperfect Markets Theory• The markets for the various resources

used in production are “imperfect.”

Product Cycle Theory• As a firm matures, it may recognize

additional opportunities outside its home country.

The International Product Cycle

Firm exports product to accommodate foreign demand

Firm creates product to accommodate local demand

Firm establishes foreign subsidiary to establish presence in foreign country and possibly to reduce costs

a. Firm differentiates product from competitors and/or expands product line in foreign country

b. Firm’s foreign business declines as its competitive advantages are eliminated

or

ONECHAPTER

PRESENTING – SHARNA YESMINWUB 01/11/33/1760

MULTINATIONAL FINANCIAL MANAGEMENT:AN OVERVIEW

International Business Methods

International trade involves exporting and/or importing.

Licensing allows a firm to provide its technology in exchange for fees or some other benefits.

Franchising obligates a firm to provide a specialized sales or service strategy, support assistance, and possibly an initial investment, in exchange for periodic fees.

Firms may also penetrate foreign markets by engaging in a joint venture (joint ownership and operation) with firms that reside in those markets.

Acquisitions of existing operations in foreign countries allow firms to quickly gain control over foreign operations as well as a share of the foreign market.

Establishing new foreign subsidiaries

International Business MethodsContinued….

Exposure to International Risk

• International business usually increases an MNC’s exposure to:

exchange rate movements foreign economies political risk

TWOCHAPTER

PRESENTING – FAETMA AKTERWUB 01/11/33/1755

INTERNATIONAL FLOW OF FUNDS

The balance of payments is a summary of transactions between domestic & foreign residents for a specific country over a specified period of time.

Components of balance of payments• Current Account• Capital Account

The balance of payments

Summary of the flow of funds between one specified country & all other countries due to purchases of goods or services

• Balance of trade Which is simply the difference between exports & imports.

• Factor income which represents income received by investors on foreign investments in financial assets.

• Transfer Payments which represent aid, grants & gifts from one country to another.

Current Account

Summary of the flow of funds resulting from the sale of assets between one specified country & all other countries over a specified period of time.

• Direct foreign investment represents the investment in fixed assets in foreign countries that can be used to conduct business operations.

• Portfolio Investment represents transactions involving long term financial assets between countries that do not affect the transfer of control.

• Capital Investment which represents transactions involving short-term financial assets between countries.

Capital Account

Factors AffectingInternational Trade Flows

• Inflation• A relative increase in a country’s inflation

rate will decrease its current account, as imports increase and exports decrease.

• National Income• A relative increase in a country’s income

level will decrease its current account, as imports increase.

• Government Restrictions• A government may reduce its country’s

imports by imposing tariffs on imported goods, or by enforcing a quota.

Factors AffectingInternational Trade Flows

• Exchange Rates• If a country’s currency begins to rise in

value, its current account balance will decrease as imports increase and exports decrease.

Factors Affecting DFI

• Changes in Restrictions• New opportunities may arise from the removal

of government barriers.

• Privatization• DFI has also been stimulated by the selling of

government operations.

• Potential Economic Growth• Countries with higher potential economic

growth are more likely to attract DFI.

• Tax Rates• Countries that impose relatively low tax

rates on corporate earnings are more likely to attract DFI.

• Exchange Rates• Firms will typically prefer to invest their

funds in a country when that country’s currency is expected to strengthen.

Factors Affecting DFI

THREECHAPTER

PRESENTING – SAIMA AMBIA TOMAWUB 01/11/33/1753

INTERNATIONAL FINANCIAL MARKETS

• The markets for real or financial assets are prevented from complete integration by barriers such as tax differentials, tariffs, quotas, labor immobility, communication costs, cultural differences, and financial reporting differences.

• These barriers can also create unique opportunities for specific geographic markets that will attract foreign investors and creditors.

Motives for Using International Financial Markets

Investors invest in foreign markets following motives:

• Investors invest in foreign markets:• to take advantage of favorable economic

conditions;• when they expect foreign currencies to

appreciate against their own; and• to reap the benefits of international

diversification.

Motives for Investing in Foreign Markets

• Creditors provide credit in foreign markets:• to capitalize on higher foreign interest rates;• when they expect foreign currencies to

appreciate against their own; and• to reap the benefits of international

diversification.

Motives for Providing credit in Foreign Markets

• Borrowers borrow in foreign markets:• to capitalize on lower foreign interest rates; and• when they expect foreign currencies to

depreciate against their own.

Motives for Borrowing in Foreign Markets

• The foreign exchange market allows currencies to be exchanged in order to facilitate international trade or financial transactions.• The system for establishing exchange rates

has evolved over time.• From 1876 to 1913, each currency was

convertible into gold at a specified rate, as dictated by the gold standard.

Foreign Exchange Market

Two types of foreign exchange transactions:

• There is no specific building or location where traders exchange currencies. Trading also occurs around the clock.

• The market for immediate exchange is known as the spot market.

• The forward market enables an MNC to lock in the exchange rate at which it will buy or sell a certain quantity of currency on a specified future date.

• The bid/ask spread is normally larger for those currencies that are less frequently traded.

Foreign Exchange Transactions

Two types of foreign exchange quotations:

i. Direct quotations: Direct quotations represent value of local currency against one unit of foreign currency.

ii. Indirect quotations: Indirect quotations represent value of foreign currency against one unit of home currency.

Indirect quotation=.

Interpreting Foreign Exchange Quotations

THREECHAPTER

PRESENTING – ALI AHMMED EMONWUB 01/11/33/1777

INTERNATIONAL FINANCIAL MARKETS

• A cross exchange rate reflects the amount of one foreign currency per unit of another foreign currency.

• Value of 1 unit of currency A in units of currency B

=value of currency A in $value of currency B in $

Interpreting Foreign Exchange Quotations

Currency Futures and Options Market

• A currency futures contract specifies a standard volume of a particular currency to be exchanged on a specific settlement date.

• Currency options contracts give the right to buy or sell a specific currency at a specific price within a specific period of time. They are sold on exchanges too.

Currency Futures and Options Market

• currency option contract • Currency call option• Currency put option

• Eurodollar • Eurocurrency market• Asian money market• Eurobonds are bonds that are sold in

countries other than the currency denominating the bonds.

International Money Market

Why Corporation use in International Money Market

• Corporation may need to borrow funds to pay.• Corporation also issue money market

securities.• Corporation or Government may

consider borrowing in a currency.

Why Corporation and Investors invest in international money market

• Foreign interest rates are higher than local money market.• Foreign currency will appreciate against

home currency.

Why Corporation in Issue Stock in international stock market

• More easily digested rate when it issue in several market.• It enhance the firms image and name

recognition in a foreign country.• The location of an MNCs operations can

influence the deceision.

FOURCHAPTER

PRESENTING – NAZMUL ALAMWUB 01/11/33/1782

EXCHANGE RATE DETERMINATION

Measuring Exchange Rate Movements :

• An exchange rate measures the value of one currency in units to another currency.

• A decline in a currency value is often referred to as depreciation.

• The increase in a currency value is often referred to as appreciation.

• The percentage change (% D) in the value of a foreign currency is computed as

where St denotes the spot rate at time t.

Exchange rate Equilibrium

• At any point in time, a currency should exhibit the price at which the demand for that currency is equal to supply, & this represents the equilibrium exchange rate.

Quantity of $

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$1.50

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Demand for a Currency for Sale

Supply of a Currency for Sale

Quantity of $

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Equilibrium

Quantity of $

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FOURCHAPTER

PRESENTING – AFRIN AKTERWUB 01/11/33/1782

EXCHANGE RATE DETERMINATION

Factors that Influence Exchange Rates

Factors Influence exchange rates three types, they are:

1) Relative Inflation Rates2) Relative Interest Rates3) Relative Income Levels

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Relative Inflation Rates

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Relative Interest Rates

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Relative Income Levels

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FIVECHAPTER

PRESENTING – ALAMGIR HOSSAINWUB 01/11/33/1771

CURRENCY DERIVATIVES

To exchange a specified amount of currency At a specified exchange rate called the forward rate On a specified date in the future

Forward Contract & Currency futures contracts

Currency futures contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date,

Forward Contract

Forward Markets Futures Markets

Contract size Customized. Standardized.

Delivery date Customized. Standardized.

Participants Banks, brokers, Banks, brokers,MNCs. Public MNCs. Qualifiedspeculation not public speculationencouraged. encouraged.

Security Compensating Small securitydeposit bank balances or deposit required.

credit lines needed.

Comparison of Currency Futures & Forward Contracts

currency options market the right to purchase or sell currencies at a specified price. Types of currency option :

1) Currency Call option 2) Currency Put option

Currency Options Market


A Currency Call Option said to be:

• In the money• At the money• Out of the money

A Currency Put Option said to be:

• In the money• At the money• Out of the money


SIXTEENCHAPTER

PRESENTING – TAHIRA JAHAN LAMIAWUB 01/11/33/1763

COUNTRY RISK ANALYSIS

Country Risk Analysis is assessment of potential risks and rewards from doing business in country.

Political Risk is the potential adverse impact of a country’s environment on an MNC’s cash flows

Country Risk and Political Risk

Political Risk Factors

Attitude of Consumers in the Host Countryconsumers may be very loyal to homemade products.

Attitude of Host Governmentexchange rate movements The host government may impose special requirements or taxes, restrict fund transfers, subsidize local firms, or fail to enforce copyright laws.

Blockage of Fund TransfersFunds that are blocked may not be optimally used.

Currency InconvertibilityThe MNC parent may need to exchange earnings for goods.

WarInternal and external battles, or even the threat of war, can have devastating effects.

BureaucracyBureaucracy can complicate businesses.

CorruptionCorruption can increase the cost of conducting business or reduce revenue.

Political Risk FactorsContinued….

Financial Risk Factors

Interest RatesHigh or low

Exchange RatesAffect import vs export, and thus income

InflationAffect purchasing power and demand