公司理財21章

1、.Chapter 21Chapter 21International International Corporate FinanceCorporate FinanceMcGraw-Hill/Irwin.Key Concepts and Skills Understand how exchange rates are quoted and what they mean Know the difference between spot and forward rates Understand purchasing power parity and interest rate parity and

2、the implications for changes in exchange rates Understand the basics of international capital budgeting Understand the impact of political risk on international business investing21-2.Chapter Outline Terminology Foreign Exchange Markets and Exchange Rates Purchasing Power Parity Interest Rate Parity

3、, Unbiased Forward Rates, and the International Fisher Effect International Capital Budgeting Exchange Rate Risk Political Risk21-3.Domestic Financial Management and International Financial Management Considerations in International Financial Management Need to consider the effect of exchange rates

4、when operating in more than one currency Must consider the political risk associated with actions of foreign governments More financing opportunities when you consider the international capital markets, which may reduce the firms cost of capital21-4.International Finance Terminology American Deposit

5、ary Receipt (ADR) Cross-rate Eurobond Eurocurrency (Eurodollars) Foreign bonds Gilts London Interbank Offer Rate (LIBOR) Swaps21-5.Global Capital Markets The number of exchanges in foreign countries continues to increase, as does the liquidity on those exchanges Exchanges that allow for the flow of

6、capital are extremely important to developing countries The United States has one of the most developed capital markets in the world, but foreign markets are becoming more competitive and are often willing to try more innovative ways to do business21-6.Exchange Rates The price of one countrys curren

7、cy in terms of another Most currency is quoted in terms of dollars Consider the following quote: Euro1.2695.7877 The first number (1.2695) is how many U.S. dollars it takes to buy 1 Euro The second number (.7877) is how many Euros it takes to buy $1 The two numbers are reciprocals of each other (1/

8、1.2695 = . 7877)21-7.Example: Exchange Rates Suppose you have $10,000. Based on the rates in Figure 21.1, how many Japanese Yen can you buy? Exchange rate = 108.21 Yen per dollar Buy 10,000(108.21) = 1,082,100 Yen Suppose you are visiting Mumbai and you want to buy a souvenir that costs 1,000 Indian

9、 Rupees. How much does it cost in U.S. dollars? Exchange rate = 42.882 rupees per dollar Cost = 1,000 / 42.882 = $23.3221-8.Work the Web Example Thinking about going to Mexico for spring break or Japan for your summer vacation? How many pesos or yen can you get in exchange for $1,000? Click on the w

10、eb surfer to find out21-9.Example: Triangle ArbitrageWe observe the following quotes 1 Euro per $1 2 Swiss Franc per $1 .4 Euro per 1 Swiss FrancWhat is the cross rate? (1 Euro / $1) / (2 SF / $1) = .5 Euro / SFWe have $100 to invest: buy low, sell high Buy $100(1 Euro/$1) = 100 Euro; use Euro to bu

11、y SF Buy 100 Euro / (.4 Euro / 1 SF) = 250 SF; use SF to buy dollars Buy 250 SF / (2 SF/$1) = $125 Make $25 risk-free21-10.Types of Transactions Spot trade exchange currency immediately Spot rate the exchange rate for an immediate trade Forward trade agree today to exchange currency at some future d

12、ate and some specified price (also called a forward contract) Forward rate the exchange rate specified in the forward contract If the forward rate is higher than the spot rate, the foreign currency is selling at a premium (when quoted as $ equivalents) If the forward rate is lower than the spot rate

13、, the foreign currency is selling at a discount21-11.Absolute Purchasing Power Parity Price of an item should be the same in real terms, regardless of the currency used to purchase it Requirements for absolute PPP to hold Transaction costs are zero No barriers to trade (no taxes, tariffs, etc.) No d

14、ifference in the commodity between locations For most goods, absolute PPP rarely holds in practice21-12.Relative Purchasing Power Parity Provides information about what causes changes in exchange rates The basic result is that exchange rates depend on relative inflation between countries E(St ) = S0

15、1 + (hFC hUS)t Because absolute PPP doesnt hold for many goods, we will focus on relative PPP from here on out21-13.Example: PPP Suppose the Canadian spot exchange rate is 1.18 Canadian dollars per U.S. dollar. U.S. inflation is expected to be 3% per year, and Canadian inflation is expected to be 2%

16、. Do you expect the U.S. dollar to appreciate or depreciate relative to the Canadian dollar? Since expected inflation is higher in the U.S., we would expect the U.S. dollar to depreciate relative to the Canadian dollar. What is the expected exchange rate in one year? E(S1) = 1.181 + (.02 - .03)1 = 1

17、.168221-14.Covered Interest Arbitrage Examines the relationship between spot rates, forward rates, and nominal rates between countries Again, the formulas will assume that the exchange rates are quoted in terms of foreign currency per U.S. dollar The U.S. risk-free rate is assumed to be the T-bill r

18、ate21-15.Example: Covered Interest Arbitrage Consider the following information S0 = .8 Euro / $RUS = 4% F1 = .7 Euro / $RE = 2% What is the arbitrage opportunity? Borrow $100 at 4% Buy $100(.8 Euro/$) = 80 Euro and invest at 2% for 1 year In 1 year, receive 80(1.02) = 81.6 Euro and convert back to

19、dollars 81.6 Euro / (.7 Euro / $) = $116.57 and repay loan Profit = 116.57 100(1.04) = $12.57 risk free21-16.Interest Rate Parity Based on the previous example, there must be a forward rate that would prevent the arbitrage opportunity. Interest rate parity defines what that forward rate should be)(1

20、 :Approx.)1()1( :Exact0101USFCUSFCRRSFRRSF21-17.Unbiased Forward Rates The current forward rate is an unbiased estimate of the future spot exchange rate This means that, on average, the forward rate will equal the future spot rate If the forward rate is consistently too high Those who want to exchan

21、ge yen for dollars would only be willing to transact in the future spot market The forward price would have to come down for trades to occur If the forward rate is consistently too low Those who want to exchange dollars for yen would only be willing to transact in the future spot market The forward

22、price would have to come up for trades to occur21-18.Uncovered Interest Parity What we know so far: PPP: E(S1) = S01 + (hFC hUS) IRP: F1 = S01 + (RFC RUS) UFR: F1 = E(S1) Combining the formulas we get: E(S1) = S01 + (RFC RUS) for one period E(St) = S01 + (RFC RUS)t21-19.International Fisher Effect C

23、ombining PPP and UIP we can get the International Fisher Effect RUS hUS = RFC hFC The International Fisher Effect tells us that the real rate of return must be constant across countries If it is not, investors will move their money to the country with the higher real rate of return21-20.Overseas Pro

24、duction: Alternative Approaches Home Currency Approach Estimate cash flows in foreign currency Estimate future exchange rates using UIP Convert future cash flows to dollars Discount using domestic required return Foreign Currency Approach Estimate cash flows in foreign currency Use the IFE to conver

25、t domestic required return to foreign required return Discount using foreign required return Convert NPV to dollars using current spot rate21-21.Home Currency Approach Your company is looking at a new project in Mexico. The project will cost 9 million pesos. The cash flows are expected to be 2.25 mi

26、llion pesos per year for 5 years. The current spot exchange rate is 10.91 pesos per dollar. The risk-free rate in the US is 4%, and the risk-free rate in Mexico 8%. The dollar required return is 15%. Should the company make the investment?21-22.Foreign Currency Approach Use the same information as t

27、he previous example to estimate the NPV using the Foreign Currency Approach Relative inflation difference from the International Fisher Effect is 8% - 4% = 4% Required Return = (1.15*1.04 1) = 19.6% PV of future cash flows = 6,788,537 pesos NPV = 6,788,537 9,000,000 = -2,211,463 pesos NPV = -2,211,4

28、63 / 10.91 = -202,70121-23.Repatriated Cash Flows Often, some of the cash generated from a foreign project must remain in the foreign country due to restrictions on repatriation Repatriation can occur in several ways Dividends to parent company Management fees for central services Royalties on the u

29、se of trade names and patents21-24.Short-Run Exposure Risk from day-to-day fluctuations in exchange rates and the fact that companies have contracts to buy and sell goods in the short-run at fixed prices Managing risk Enter into a forward agreement to guarantee the exchange rate Use foreign currency

30、 options to lock in exchange rates if they move against you, but benefit from rates if they move in your favor21-25.Long-Run Exposure Long-run fluctuations come from unanticipated changes in relative economic conditions Could be due to changes in labor markets or governments More difficult to hedge

31、Try to match long-run inflows and outflows in the currency Borrowing in the foreign country may mitigate some of the problems21-26.Translation Exposure Income from foreign operations must be translated back to U.S. dollars for accounting purposes, even if foreign currency is not actually converted b

32、ack to dollars If gains and losses from this translation flowed through directly to the income statement, there would be significant volatility in EPS Existing accounting regulations require that all cash flows be converted at the prevailing exchange rates with currency gains and losses accumulated

33、in a special account within shareholders equity21-27.Managing Exchange Rate Risk Large multinational firms may need to manage the exchange rate risk associated with several different currencies The firm needs to consider its net exposure to currency risk instead of just looking at each currency sepa

34、rately Hedging individual currencies could be expensive and may actually increase exposure21-28.Political Risk Changes in value due to political actions in the foreign country Investment in countries that have unstable governments should require higher returns The extent of political risk depends on the nature of the business The more dependent the business is on other operations within the firm, the less valuable it is to others Natural resource development can be ver