What Is A Multinational Corporation?

What is a multinational corporation? • A corporation that operates in two or more countries. • Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries the corporation does business in.

Why do firms expand into other countries?

5.

To seek new markets. To seek raw materials. To seek new technology. To seek production efficiency. To avoid political and regulatory hurdles.

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To diversify.

1. 2. 3. 4.

What factors distinguish multinational financial management from domestic financial management? 1. 2. 3. 4. 5. 6.

Different currency denominations. Economic and legal ramifications. Language differences. Cultural differences. Role of governments. Political risk.

What is a cross rate? • 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) = 111.11 x 0.650 = 72.22 Yen / A. Dollar – The inverse of this cross rate yields: 0.0138 A. Dollars / Yen

What is exchange rate risk? • 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. • The current international monetary system is a floating rate system.

What is difference between spot rates and forward rates? • Spot rates are the rates to buy currency for immediate delivery. • Forward rates are the rates to buy currency at some agreed-upon date in the future.

When is the forward rate at a premium to the spot rate? • 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.

What is interest rate parity? • Interest rate parity holds that investors should expect to earn the same return in all countries after adjusting for risk. ft 1 + kh = e0 1 + kf ft = t - periodforwardexchangerate e0 = today's spotexchangerate kh = periodicinterestratein homecountry kf = periodicinterestratein foreigncountry

What impact does relative inflation have on interest rates and exchange rates? • Lower inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms. • However, currencies in low-inflation countries tend to appreciate against those in highinflation rate countries, so the effective interest cost increases over the life of the loan.

TT BUYING AND SELLING • Cash Buying - Rate at which Foreign Currency Cash deposited by the customer is converted into rupees. • Cash Selling - Rate applicable when a customer buys Foreign Currency Cash from the bank. • T. T. Buying - Rate at which a Foreign Inward Remittance received by Telegraphic Transfer is converted into rupees. • T. T. Selling - Rate applicable when a customer sends an outward remittance through Telegraphic Transfer. (Money is transferred by coded interbank telex and as long as the exporter makes it clear to the overseas buyer exactly to which bank and account)

Currency (In Rs.) Cash Buying and Cash Selling • USD - 49.16 and 51.53 • EUR 62.04 65.13 T.T. Buying and T.T. Selling • USD - 49.51and 5 1.12 • EUR - 62.48 and 6 4.59

ROLE OF BANKS • • • • •

Financing Collection services Issuance of Letter Of Credit Issue of Custom Bonds and Guarantees Issue of Trade Bonds (Exporter)

BID ASK RATES • Currency prices are expressed in terms of “bid” and “ask”. • Bid is the price at which buyers offer to buy currencies from sellers. • Ask is the price at which sellers offer currencies to buyers. Ask prices are usually slightly higher than bid prices, reflecting the profit margins of sellers.