International Corporate

Finance
 Multinational
Corporations
 Corporations that engage in some form of
international business are called
multinational corporations or
international corporations.
 Multinational
Corporations
 The main goal of these corporations is to
maximize shareholder wealth.
 Managers are expected to make decisions
that will maximize the stock price.
Multinational
Corporations
 Why Firms Pursue
International Business
 International business is justified by three
key theories.
 Theory of competitive advantage.
 Imperfect markets theory.
 Product cycle theory.
 Theory of
Competitive Advantage
 Theory of
Competitive Advantage
 Each country that specializes in the
production of goods can produce with
relative efficiency and rely on other
countries to meet other needs.
Imperfect Markets Theory
 Imperfect Markets Theory
 Factors of production are somewhat
immobile.
 Firms can capitalize on imperfect markets
by exploiting foreign opportunities.
Product Cycle Theory
 Product Cycle Theory
 After firms are established in their home
countries, they commonly expand their
product specialization in foreign countries.
 Why Firms Pursue
International Business
 How Firms Engage
in International Business

1. International trade
2. Licensing
3. Franchising
4. Joint Ventures
5. Acquisitions of existing operations
6. Establishing new foreign subsidiaries
 International Trade
 International trade is a relatively
conservative approach that can be used
by firms to penetrate markets (by
exporting) or to obtain supplies at a low
cost (by importing).
International Trade
 International Trade
 This is minimal risk in international trade
as there is no capital at risk.
 The internet facilitates international trade
by allowing firms to advertise their
products and accept orders on their
websites.
 Licensing
 Licensing obligates a firm to provide its
technology in exchange for fees or some
other specified benefits.
Licensing
 Licensing
 It allows firms to use their technology in
foreign markets without a major
investment and without transportation
costs that result from exporting.
 A major disadvantage, however, is that it is
difficult to ensure quality control in foreign
production process.
 Franchising
 Franchising obligates a firm to provide a
specialized sales or service strategy,
support assistance, and possibly an initial
investment in the franchise in exchange
for periodic fees.
Franchising
 Franchising
 It allows penetration into foreign markets
without a major investment in foreign
countries.
 Joint Ventures
 A joint venture is a venture that is jointly
owned and operated by two or more firms.
Joint Ventures
 Joint Ventures
 A firm may enter the foreign market by
engaging in a joint venture with firms that
reside in those markets.
 It allows two firms to apply their respective
cooperative advantages in a given project.
 Acquisitions of
Existing Operations
 Acquisitions of firms in foreign countries
allow firms to have full control over their
foreign businesses and to quickly obtain a
large portion of foreign market share.
 Acquisitions of
Existing Operations
 Acquisitions of
Existing Operations
 It is subject to the risk of large losses
because of larger investment.
 Likewise, liquidation may be difficult if the
foreign subsidiary performs poorly.
 Establishing New
Foreign Subsidiaries
 Firms can penetrate markets by
establishing new operations in foreign
countries.
 Establishing New
Foreign Subsidiaries
 Summary of Methods
 Any method of increasing international
business that requires a direct investment
in foreign operations normally is referred
to as a foreign direct investment.
 It includes franchising, joint ventures,
acquisitions, and foreign subsidiaries.
 Foreign
Exchange Market
 Foreign exchange market allows for the
exchange of one currency for another.
 An exchange rate specifies the rate at
which one currency can be exchanged for
another.
 Foreign
Exchange Market
 If a US dollar can be exchanged for 50.74
Philippine pesos, it can be written as
USD1 = PHP50.74 or $1.00 = P50.74 or
PHP50.74 per USD or ₱50.74/$.
 Foreign
Exchange Market
 Some of the most traded currencies in the
world:
 US dollar (USD or $)
 Euro (EUR or €)
 Japanese yen (JPY or ¥)
 Pound sterling (GBP or £)
 Australian dollar (AUD or A$)
 Foreign
Exchange Market
 Canadian dollar (CAD or CAD$)
 Swiss franc (CHF or SFr)
 Chinese renminbi (CNY or RMB or ¥)
 Swedish krona (SEK or kr)
 New Zealand dollar (NZD or NZ$)
 Foreign
Exchange Market
 A direct exchange rate (or direct
quotation) quotes the price of one unit of
foreign currency in terms of the home
currency.
 For example, an exchange rate of 50.74
between the US dollar and Philippine peso
would be interpreted as USD1.00 is worth
PHP50.74.
 Foreign
Exchange Market
 In contrast to the direct quote, an indirect
exchange rate (or indirect quotation)
states the price of one unit of home
currency in terms of the foreign currency.
 Using the previous example, since
USD1.00 is equal to PHP50.74, then
PHP1.00 is equal to USD1/50.74 or
USD0.02.
 Foreign
Exchange Market
 Cross exchange rate (or cross rate) is the
amount of one foreign currency per unit of
another foreign currency.
 Foreign
Exchange Market
 For example, if USD1.00 is equal to
PHP50.74 and EUR1.00 is equal to
PHP55.88, then EUR1.00 is equal to
USD55.88/50.74 or USD1.10.
 Alternatively, USD1.00 is equal to
EUR50.74/55.88 or EUR0.91.
 Foreign
Exchange Market
 The bid price is the rate at which a
foreign-exchange dealer is willing to buy
the currency.
 The offer (or ask) price is the rate at
which a foreign-exchange dealer is willing
to sell the currency.
 Foreign
Exchange Market
 For example, suppose the bid price of one
unit of US Dollar is PHP50.70, and the ask
price is PHP50.78, a dealer buy a dollar
for PHP50.70 and sell it for PHP50.78.
 The difference between bid price and the
offer price, covering dealers’ costs and
profit, is called the spread.
 Interpreting Changes
in Exchange Rates
 Currency appreciation is the increase in
the value of one currency in terms of
another currency.
 For example, if there is a change in the
exchange rate from ₱50.74/$ to ₱50.70/$,
then the Philippine peso has appreciated
against the US dollar because it takes less
peso to exchange for a dollar.
 Interpreting Changes
in Exchange Rates
 If the value of a nation’s currency rises, its
imports and foreign goods become
cheaper while its exports and domestic
goods become more expensive.
 Interpreting Changes
in Exchange Rates
 On the other hand, currency depreciation
is a decrease in the value of one currency
relative to another.
 If one country’s currency is appreciating,
another country’s currency is depreciating.
 Types of Foreign
Currency Transactions
 There are two basic types of trades in the
foreign exchange market: spot trades and
forward trades.
 Types of Foreign
Currency Transactions
 A spot trade is an agreement to exchange
currency “on the spot,” which actually
means that the transaction will be
completed or settled within two business
days.
 The exchange rate on a spot trade is
called the spot exchange rate.
 Types of Foreign
Currency Transactions
 A forward trade is an agreement to
exchange currency at some time in the
future.
 The exchange rate that will be used is
agreed upon today and is called the
forward exchange rate.
 A forward trade will normally be settled
sometime in the next 12 months.
 Types of Foreign
Currency Transactions
 For example, the spot exchange rate for
the US dollar is PHP50.74. The one-year
forward exchange rate is PHP51.53.
 This means you can buy a US dollar today
for PHP50.74, or you can agree to take
delivery of a US dollar in one year and pay
PHP51.53 at that time.
 Types of Foreign
Currency Transactions
 Notice that the US dollar is more
expensive in the forward market than the
sport market (PHP51.53 versus
PHP50.74).
 Types of Foreign
Currency Transactions
 Because the US dollar is more expensive
in the future than it is today, it is said to be
selling at a premium relative to the
Philippine peso.
 For the same reason, the Philippine peso
is said to be selling at a discount relative
to the US dollar.
 Currency Derivative
 A currency derivative is a contract whose
price is derived from the value of an
underlying currency.
 The types of currency derivatives are:
 Forward contracts
 Futures contracts
 Currency Options Contracts
 Currency Derivative
 Forward contracts are an agreements
that specifies the currencies to be
exchanged, the exchange rate, and the
date at which the transaction will occur.
 Forward contracts do not trade on a
centralized exchange and are therefore
regarded as over-the-counter (OTC)
instruments.
 Currency Derivative
 Futures contracts are similar to forward
contracts but sold on an exchange.
 It specifies a standard volume of a
particular currency to be exchanged on a
specific settlement date.
 Currency Derivative
 Currency Options Contracts
 A currency call option grants the right
to buy a specific currency at a
designated price (known as the
exercise price or strike price) within a
specific period of time.
 Currency Derivative
 A currency put option grants the right
to sell a currency at a specified strike
price or exercise price within a specified
period of time.
 Other Instruments
in International Markets
 Eurocurrencies are domestic currencies
of one country on deposit outside the
country of issue.
 For example, US dollars deposited in the
Manila are called Eurodollars, British
pounds deposited in New York are called
Eurosterling, and Japanese yen
deposited in London are called Euroyen.
 Other Instruments
in International Markets
 Foreign bonds are issued by borrower
foreign to the country where the bond is
placed and are denominated in the
currency of that country.
 Eurobonds are bonds sold in countries
other than the country of the currency
denominating the bond.
 Other Instruments
in International Markets
 Global bonds are bonds sold inside as
well as outside the country in whose
currency they are denominated.