firms that engage in some form of international business their managers conduct international financial management and intend to maximize value of the MNC
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agency problem
conflict of goals between a firm's managers and shareholders
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comparative advantage
allows firms to penetrate foreign markets
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imperfect market
conditions where factors of production are somewhat immobile costs and other restrictions affect the transfer or labor and other resources used for production
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product cycle theory
a firm first becomes established in its home market, where information about markets and competition is readily available
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international trade
conservative approach that can be used by firms to penetrate markets (by exporting) or to obtain supplies at a low cost (by importing)
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licensing
arrangement whereby one firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or other considerations
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franchising
arrangement, one firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees, allowing local residents to own and manage the specific units
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direct foreign investment (DFI)
direct investment in foreign operations
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joint venture
business that is jointly owned and operated by two or more firms
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acquisitions of existing operations
firms frequently acquire other firms in foreign countries as a means of penetrating foreign markets acquisitions represent DFI because MNCs directly invest in a foreign country by purchasing the operations of target companies
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domestic valuation model
purely domestic firm, does not engage in any foreign transactions n = number of future periods in which cash flows are received E(CF..) = denotes expected cash flows to be received at the end of period t k = weighted average cost of capital and required rate of return by investors and creditors that provide funds to the MNC
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multinational valuation model
deals with multiple currencies CFj,t = amount of cash flow denominated in a particular foreign currency j at the end of period t Sj,t = exchange rate at which the foreign currency can be converted to dollars at the end of period t
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uncertainty surrounding MNC cash flows
exposure to international economic conditions exposure to international political risk exposure to exchange rate risk
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foreign exchange market
allows for the exchange of one currency for another
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foreign exchange dealers
serve as intermediaries in the foreign exchange market by exchanging currencies desired by MNCs or individuals
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spot market
market where foreign exchange transactions is for immediate exchange
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spot rate
exchange rate at which one currency is traded for another in the spot market
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interbank market
where trading between banks occurs
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bid price
buy quote of currency
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ask price
sell quote of currency
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bid/ask spread
difference between the bid and ask prices and meant to cover the costs associated with fulfilling requests to exchange currencies = (ask rate - bid rate) / ask rate
quotations that report the value of a foreign currency in dollars number of dollars per unit of other currency = 1/indirect quotation
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indirect quotations
quotations that report the number of units of a foreign currency per dollar = 1/direct quotation
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cross exchange rate
The amount of one foreign currency per unit of another foreign currency Found using foreign exchange quotations
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forward contract
an agreement between an MNC and a foreign exchange dealer that specifies the currencies to be exchanged, the exchange rate, and the date at which the transaction will occur
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forward rate
the exchange rate specified in the forward contract, at which the currencies will be exchanged
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forward market
market in which forward contracts are traded over-the-counter market, the main participants are the foreign exchange dealers and the MNCs that wish to obtain a forward contract
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currency futures contract
specifies a standard volume of a particular currency to be exchanged on a specific settlement date
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futures rate
the exchange rate at which an entity can purchase or sell a specified currency on the settlement date in accordance with the futures contract
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currency call option
provides the right to buy a specific currency at a specific price (strike price or exercise price) within a specific period of time
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currency put option
provides the right to sell a specific currency at a specific price within a specific period of time
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eurodollars
The dollar deposits in banks in Europe (and on other continents)
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Asian money market
accommodates dollar-denominated bank accounts
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London Interbank Offer Rate (LIBOR)
currency's money market is highly influenced interest rate most often charged for short-term loans between banks in international money markets
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international money market securities
When MNCs and government agencies issue debt securities with a short-term maturity (one year or less) in the international money market
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syndicate
join together
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foreign bond
an international bond issued by a borrower foreign to the country where the bond is placed
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parallel bonds
currency denominating each type of bond is determined by the country where it is sold
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eurobonds
bonds that are sold in countries other than the country whose currency is used to denominate the bonds
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American depository receipts (ADRs)
certificates representing bundles of the firms stock
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depreciation
decline in currency's value
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appreciation
increase in currency value
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percent change in foreign currency value
S = spot rate S t-1 = spot rate at earlier date
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real interest rate
adjusts the nominal interest rate for inflation = nominal interest rate - inflation rate
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forward contract
an agreement between a corporation and a financial institution (such as a commercial bank) to exchange a specified amount of a currency at a specified exchange rate (called the forward rate) on a specified date in the future
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non-deliverable forward contract (NDF)
often used to hedge currencies in emerging market agreement regarding a position in a specified amount of a specified currency, a specified exchange rate, and a specified future settlement date
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currency futures contracts
contracts specifying a standard volume of a particular currency to be exchanged an a specific settlement date - used to hedge foreign currency positions
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currency call option
grants the right to buy a specific currency at a designated price within a specific period of time
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exercise price/strike price
price at which the owner is allowed to buy the currency - desirable when one wishes to lock in a maximum price to be paid for a currency in the future
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factors affecting currency call option premiums
spot price relative to strike price length of time before the expiration date volatility of the currency
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currency put option
the right to sell a currency at a specified price (strike price) within a specified period of time - owner of put option is not obligated to exercise the option
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