Measures of Central Tendency: Mean, Median and Mode
Vega jfin7016 8
1. NORTHCENTRAL UNIVERSITY
ASSIGNMENT COVER SHEET
Fin-7016
Financial Management for International Business
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Dr. Ana Machuca
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3. • Introduction…………………………………………….5
• International finance ………………………...……….6
• International monetary system ………………………..7
• Balance of payments …………………………………...8
• Foreign exchange market ………………………………9
• Bond yields ……………………………………………10
• Currency futures ……………………………………….11
• Credit default swaps markets ...……………………….12
• Management of foreign exchange risk ………………13
• Different types of risk …….…………………………...14
• Good financial strategy ……………………………….15
3
4. • Capital Budgeting in Multinational Organizations …...16
• Financial impact of sourcing debt ……….…………….17
• Financial impact of sourcing equity globally ………...18
• Strategy to source equity globally ……………………19
• Foreign investment theory …………………………….20
• Foreign investment strategy …………………………21
• Foreign investment assessment ……………………...22
• Foreign investment management ..……………………23
• Becoming a multinational company ……………………25
• Conclusion …….………………………………………26
• References …………………………………………….27
4
5. This presentation explains different aspects of
international finance and their relation with the
economic globalization process. It is important to
emphasize the consideration which recognizes this
process as a whole in the development of humanity in
this century. The international economic environment is
now increasingly characterized by its dynamism and
globalization.
5
6. International finance divided in
2 categories:
International Economics: Exchange
rate, balance of payments, exchange
rate regimes, interest rates.
Corporate finance: They provide
sources of obtaining financing in the
short and long term study of financial
markets and financial derivatives
(futures, options, swaps [swap cash
flow]). 6
7. International monetary
systems are sets of
internationally agreed rules,
conventions and supporting
institutions that facilitate
international trade, cross
border investment and
generally the reallocation of
capital between nation
states (wikipedia, 2012).
7
8. The balance of payments
(BOP) is an accounting of a
country's international
transactions for a particular
time period (Federal
Reserve Bank, 2009).
Retrieved 2/18/2012 from http://www.developing8.org/2009/10/26/bangladeshs-
july-balance-of-payments-surplus-reaches-694-mln/
8
9. The foreign exchange market is the market in which
currencies are traded (Go currency, 2012)
Bond Yields
Currency Futures
Credit Default Swap
Markets
Retrieved 2/18/2012 from http://www.itnnews.lk/latest/?p=28607
9
10. Currency and bond
markets are very closely
related.
The direction of both
investment assets is
widely dependent on a
country's economic
environment and Retrieved 2/18/2012 from: http://bondyields.org/
monetary policy (Lee,
2011).
10
11. According to lee (2011)
derivative instruments like
currency futures are also
great in confirming short
term trends in foreign
exchange rates.
In the equity markets, stock
brokers and traders will
look towards market
volume in confirming Retrieved 2/18/2012 from: http://www.forum4finance.com/2010/08/11/now-nbfcs-
can-trade-in-currency-futures/?replytocom=10329
momentum.
11
12. According to lee (2011) A
relatively unknown market,
credit default swaps or CDS
instruments can be great in
showing long-term
sentiment for individual
currencies.
Retrieved 2/18/2012 from : http://money.howstuffworks.com/credit-
default-swap1.htm
12
13. According to Flicker (1990):
Participation in international
markets
Pricing
Settlement
Forward contract
Control foreign exchange risk
13
14. A company must evaluate
the risks utilizing various
methods such as risk
avoidance and loss
reduction; also the
corporation must be ready
to cover any losses in case
there is no way to deal with
the loss.
Risk Management in a
Manage Risk Multinational Company
14
15. Prepare sales forecast.
Projected income
Statement.
International overhead
Expenses.
International and local tax.
Foreign currency.
Projected cash flow.
Future need for liquidity.
Assets to liabilities ratio.
Financing options
Financial Retrieved 2/18/2012 from:
http://www.ehow.com/about_7394216_personal-financial-
strategy.html
15
16. Intellectual activities.
The social process.
Organizational
resources and the
environment change.
Retrieved 2/18/2012 from: http://cs.gmu.edu/~eclab/research.html
According to Szpiro & Diminik (1997) capital budgeting is a
process that involves:
16
17. Firms seeking to exploit The joint venture
cross country differences in American Depository Receipts
production cost interact International debt markets
with suppliers operating in Capital investment
environments with varying Portfolio investment
level of institutional quality Direct investment
(Carluccio & Fally, 2008). Indirect investment
Foreign investment
Financial investment
Methods of sourcing debt
17
18. Gaining access to global
capital markets lowers a
firm's marginal cost of
capital and increase its
availability by improving its
market liquidity of its
shares and by overcoming
market segmentation
(Kottolli, 2006).
18
19. Designing a capital
sourcing strategy
An investment bank
Potential foreign
investors.
Retrieved 2/20/2012 from:
http://www.cash4impact.com/small-business-
financing/debt-or-equity/
1-
19
20. Foreign Portfolio
Investment
Foreign Direct Investment
Opportunity Cost
Retrieved from http://www.google.com.pr/imgres
20
21. The developing countries
that have the most potential
as a foreign investment
starts with deciding what
products and services the
companies provide and how
it can be brought to the
market for a profit
(Investing, 2009). Retrieved from: http://bizcovering.com/investing/foreign-investment-strategies-
picking-profitable-companies/
21
22. An investor must be
concerned with the
environmental and cultural
issues when investing in a
foreign company.
22
23. The investment
management industry is
even more globally focused
as it faces emerging capital
markets, deregulation and
tremendous advances in
technology (PWC, 2012).
23
24. Export
Foreign Production
Direct Investment
Location
Rules of Foreign Countries
Retrieved 2/20/2012 from: http://www.google.com.pr/imgres?
q=Becoming+a+Multinational+Enterprise
24
25. The main objective of international financial management is to maximize
shareholder wealth of the multinational firm by developing the best financial
policies and consequent decision of the best decisions of this nature. The
knowledge of the area of international finance has grown enormously in recent
years, it has a greater understanding of many problems that previously seemed
puzzling. The study of international finance is part of the international training of
executives and entrepreneurs, important given the increasing globalization of the
economy. The knowledge of international finance allows financial executive to
understand how international events affect their companies and must be mediated
to avoid the dangers and seize the opportunities offered by changes in the
international environment.
25
26. Antiphas, T. (1999). Environmental impact assessment of foreign investment
projects: Retrieved 2/20/2012 from
http://www.leat.or.tz/publications/foreign.investment/
Both, L. D. (1982). Capital Budgeting Frameworks for the Multinational
Corporation. Journal of International Business Studies, 13(2), 113.
Federal Reserve Bank. (2009, May). Balance of payments. Retrieved 2/18/2012
from http://www.newyorkfed.org/aboutthefed/fedpoint/fed40.html
Desai, M., Foley, F., & Hines, J. J. (2004). A multinational perspective on capital
structure. The journal of finance, LIX(6), 2-5.
Flicker, S. R. (1990). Managing foreign currency exchange risk. Journal of
Accountancy, 170(1), 2-5.
Fuentes, G. (2012). What is international investment theory? Retrieved 2/20/2012
from http://www.ehow.com/facts_5905368_international-investment-theory_.html
Ghoshal, S. (1987). Global Strategy: An Organizing Framework Strategic
Management Journal, 8 (5), 425-440
Go currency. (2012). The 9 best stock to own now. Retrieved 2/18/2012 from
http://www.gocurrency.com/articles/forex-for-beginners.htm
26
27. Investing, R. (2009). Foreign Investment Strategies Picking Profitable Companies.
Retrieved 2/20/2012 from http://bizcovering.com/investing/foreign-investment-
strategies-picking-profitable-companies
Kottolli, A. (2006). Raising equity globally. Retrieved 2/20/2012 from
http://www.geocities.ws/akottolli/raising_equity_globally.html
Lee, R. (2011). 3 Key Markets To Follow When Trading FX. Retrieved 2/18/2012
from http://www.investopedia.com/articles/forex/11/3-markets-follow-trading-
fx.asp#axzz1mmdgMEBH
PWC. (2012). Investment management. Retrieved 2/20/2012 from
http://www.pwc.com/my/en/industry/investment-management.jhtml
Stephens, D. (1999, July). The Globalization of Information Technology in
Multinational Corporations. Information Management Journal, 1(1), 1-5
Szpiro, D. A., & Dimnik, T. (1996). Capital budgeting in multinational organizations:
Exploring the strategic context. Managerial Finance, 22 (1), 58-74
http://search.proquest.com.proxy1.ncu.edu/docview/212595236?accountid=28180
wikipedia. (2012). International monetary system. Retrieved 2/17/2012 from
http://en.wikipedia.org/wiki/International_monetary_systems
27
Notes de l'éditeur
Northcentral University assignment cover sheet.
They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment (wikipedia, 2012) .
The balance of payments is an accounting of a country's international transactions over a certain time period, typically a calendar quarter or year (Federal Reserve Bank, 2009) . It shows the sum of the transactions, purely financial ones, as well as those involving goods or services, between individuals, businesses and government agencies in that country and those in the rest of the world (Federal Reserve Bank, 2009) . Every international transaction results in a credit and a debit (Federal Reserve Bank, 2009) . Transactions that cause money to flow into a country are credits, and transactions that cause money to leave a country are debits (Federal Reserve Bank, 2009) . For instance, if someone in England buys a South Korean stereo, the purchase is a debit to the British account and a credit to the South Korean account (Federal Reserve Bank, 2009) . If a Brazilian company sends an interest payment on a loan to a bank in the United States, the transaction represents a debit to the Brazilian BOP account and a credit to the U.S. BOP account (Federal Reserve Bank, 2009) .
Currency Trading is the world's largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow (Go currency, 2012) . Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets (Go currency, 2012) . In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter (Go currency, 2012) . Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices (Go currency, 2012) . Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to pass that on to their clients (Go currency, 2012) . The spot currency market is open twenty-four hours a day, five days a week, with currencies being traded around the world in all of the major financial centers (Go currency, 2012) .
If an economy is showing strength, global investors will buy bonds that are being offered by a particular country always looking for stable and high rates of return (Lee, 2011) . This will cause demand for the country's currency to increase, thus appreciating the value of the currency (Lee, 2011) . Global investors interested in investing in the country (and its infrastructure) will always have to transact in the country's currency (Lee, 2011) . This is the reason why money managers will watch short-term bond yield patterns for confirmation of a forming trend in the currency market (Lee, 2011) . A movement in one asset can foretell or confirm the move in another asset (Lee, 2011) .
In the equity markets, stock brokers and traders will look towards market volume in confirming momentum (Lee, 2011) . Currency traders, instead, will use currency future open interest in gauging the market's demand for a particular currency (Lee, 2011) . This type of information can be used to predict the future demand not only for currencies, but commodities as well (Lee, 2011) . Although some analysts or strategists look at both non-commercial and commercial transactions the key is to look at non-commercial positioning (Lee, 2011) . Non-commercial positioning is usually done by entities that are speculating in the market (Lee, 2011) . The trick here is to see pent-up demand in a particular currency in confirming or hinting at a potential direction in the market (Lee, 2011) . For instance, significant interest in a currency means that a good portion of the market is on one side of the market making the opposite outcome more probable (Lee, 2011) .
Introduced and widely used in the last 14 years, credit default swaps are contracts protecting a buyer's position against a potential credit event (Lee, 2011) . For example, a money manager can insure the creditworthiness of $100 million in Japanese government bonds by paying an insurance premium (Lee, 2011) . In the event of a default or debt crisis, the money manager would be able to recoup the value of their bonds (Lee, 2011) . So, much like currency futures, credit default swaps are a great way of telling how bullish or bearish the market is on a particular currency (Lee, 2011) .
Participation in international markets may result in a foreign exchange risk known as transaction exposure (Flicker, 1990). This risk occurs when a company has a payable (or receivable) denominated in a foreign currency (Flicker, 1990). The risk lies in the fluctuation of the FC exchange rate (Flicker, 1990). Pricing is the most fundamental of the strategies to control risk is pricing, or controlling the billing currency (Flicker, 1990). Exchange risk is eliminated if the company bills customers in the company's reporting currency (Flicker, 1990). Settlement is commonly used when a company cannot bill in the reporting currency, the settlement strategy can be used to help mitigate foreign exchange risk (Flicker, 1990). This strategy requires that management consistently negotiate or offer discounts for the early settlement of payables or receivables denominated in an FC (Flicker, 1990). Forward contracts is commonly used when the company does not wish to settle early and it cannot control the billing or payment currency, it must use other techniques to control future cash flows (Flicker, 1990).
The investment in a multinational corporation requires good managers who focus his efforts in dealing with currency exchange risk, financial risk and investment risk. One important issue with risks is that they change over time, and the strategic task is to consider these risks jointly in the context of particular strategic decisions (Ghosal, 1987). It is the risks that cannot be diversified in a global environment that should be of most concern (Ghosal).
The projected financial strategy of a new company should focus their efforts in determining the options of success for the company. This could be done by preparing a sales forecast that shows the future sales of the company. A projected income statement considering international overhead expenses and the local and international taxes that apply to the location of the company. The risk that the company could have in the currency exchange should be anticipated to avoid losses when buying products. And the liquidity of the company could be determined by a projected cash flow considering the assets to liabilities ratio to know how well the company’s assets compare to their liabilities. And, finally evaluate the financing options for the company as bonds, stocks, etc.
Capital budgeting is one of the most important of management functions. Through capital budgeting decisions management determines the structural cost drivers of the firm and enacts the strategies that define the way in which a firm competes. Capital budgeting involves the intellectual activities of perception, analysis, and choice which are often subsumed under the rubric decision making, the social process of implementing formulated policies by means of organizational structure, systems of measurement and allocation, and systems for reward or punishment, and finally the dynamic process of revising policy as changes in organizational resources and the environment change the context of the original policy problem.
Local financial markets are not the only source of finance for suppliers and there is also evidence of capital flows from multinational firms to affiliate as potential channels to overcome imperfections in local market (Desai, Foley, & Hines, 2004). Sourcing equity funds in the financial market involves adding the maximum value; enhance performance and growing in the market. Growth targets can occur through mergers, acquisitions, technology granting, designs, trademarks and patents, franchise, joint venture, outsourcing vs. downsizing, etc.
To access global capital markets, a firm must design a strategy to attract international investors, which requires identifying and choosing alternative paths to access global markets improving the quality and level of its disclosure making its accounting and reporting standards more transparent to potential foreign investors (Kottolli, 2006).
Designing a capital sourcing strategy requires that management agree upon a long-run financial objective and then choose among the various alternative paths to get there (Kottolli, 2006). An investment bank often acts as an official advisor to the firm (Kottolli, 2006). Investment bankers are in touch with potential foreign investors and know what they currently require, and can also help navigate the numerous institutional and regulatory barriers in place (Kottolli, 2006).
Foreign investment theory explains the flow of investment capital into and out of a country by investors who want to maximize the return on their investments (Fuentes, 2012). One of the major factors that influences international investment is the potential return on alternative investments in the home country or other foreign markets (Fuentes, 2012).
Investors are looking across the world to find emerging markets for a long-term asset building opportunity (Investing, 2009).Foreign and domestic acquisitions of emerging markets are where savvy investors are putting their money (Investing, 2009). Promising investments in Japanese stocks, promising growth in South Korea, economic profitability in China, and revenue generating markets in India and Israel, has traders looking at world wide business decisions (Investing, 2009). With the right long term investment strategy it will be better to weather a bear market by studying national economies for growth and industrialization (Investing, 2009).
The concept of Environmental Impact Assessment (EIA) refers to the examination, analysis and assessment of planned activities with a view to ensuring their environmental soundness and sustainable development (Antiphas, 1999). It is said to be a valuable means of promoting the integration of environmental and natural resource issues into planning and program implementation (Antiphas, 1999) .
According to Kottolli ( 2006) b y cross listing or raising new equity in foreign markets, a firm typically tries to accomplish one or more of the following objectives: Improve the liquidity of its existing shares and support a liquid secondary market for new equity issues in foreign markets. Increase its share price by overcoming mispricing in a segmented and illiquid home capital market. Increase the firm's visibility and political acceptance to its customers, suppliers, creditors and foreign governments. Establish a secondary market for shares used to acquire other firms in the foreign market. Create a secondary market for shares that can be used to compensate local management and employees in foreign affiliate
Choosing to enter new sectors and deciding the means of income. Initiate actions to improve the performance of the business combination. Further opportunities to leverage the relationships between value chain business and strategic matches on competitive advantage. Establish investment priorities direct resources to the business units more attractive. The Multinational company must familiarize with the politics and rules of the foreign country.