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A B C D E F G H I
10/28/2015
A multinational corporation is one that operates in two or more countries.
To reduce risk by diversification.
Chapter 17. Mini Case for Multinational Financial Management
a. What is a multinational corporation? Why do firms expand into other countries?
b. What are the six major factors which distinguish multinational financial management from financial
management as practiced by a purely domestic firm?
c. Consider the following illustrative exchange rates.
With the growth in demand for exotic foods, Possum Products’ CEO Michael Munger is considering
expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison
jerky snack packs. Historically, jerky products have performed well in the southern United States, but there
are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the
expansion carries some risk–Europeans may not be as accepting of opossum jerky as initial research
suggest–so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France
and Sweden (the two countries with the highest indicated demand), and the second is to set up a production
plant in France with the ultimate goal of product distribution throughout Europe.
Possum Products’ CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about
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(4) What is a cross rate? Calculate the two cross rates between euros and kronor.
A B C D E F G H I
Swedish krona
EUR/USD =
1.2500
USD/SEK =
7.0000
USD/EUR = 0.8
Direct quote for kronor (rounded to 4 decimal places):
SEK/USD = 0.1429
(1) What is a direct quotation? What is the direct quote for euros?
7.0000
From a U.S. perspective, the quotes in the first column are called direct quotes because they are number of
units of a foreign currency that can be purchased by 1 unit of the home currency.
(3) The euro and British pound usually are quoted as direct quotes. Most other currencies are quoted as
indirect quotes. How would you calculate the indirect quote for a euro? How would you calculate the direct
quote for a krona?
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system that was in place prior to August 1971?
A B C D E F G H I
Target Price = 1.75$ x 1.5
French Price = 2.6250$ ÷1.2500 dollars per euro
French Price = 2.1000$ euros
Suppose the kronor per dollar exchange rate changes.
Old kronor per dollar = 7.0000 Old dollar per krona = 0.1429
New kronor per dollar = 9.0000 New dollar per krona = 0.1111
Percent change = 28.6% Percent change = -22.2%
(5) Assume Possum Products can produce a package of jerky and ship it to France for $1.75. If the firm
wants a 50 percent markup on the product, what should the jerky sell for in France?
(6) Now assume Possum Products begins producing the same package of jerky in France. The product costs
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=
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A B C D E F G H I
A currency is convertible when the issuing country promises to redeem the currency at current market rates.
Convertible currencies are traded in world currency markets.
In the opposite situation, the foreign currency is selling at a discount.
Actual Direct Forward Rate = 1.2700
Annual home rate = 6%
1+rh
=
It becomes very difficult for multi-national companies to conduct business because there is no easy way to
take profits out of the country.
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.
Interest rate parity implies that investors should expect to earn the same return on similar-risk securities in
all countries:
Direct Forward Rate
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A B C D E F G H I
=816.00 euros
Example:
Buy $1,000 worth of euros in the spot market:
Dollars xSpot Indirect Quote (euros/dollar)
1000 x0.8000 euro/dollar
=800.00 euros
A U.S. investor could directly invest in the U.S. security and earn an annualized rate of 6%. Alternatively, the
U.S. investor could convert dollars to euros invest in the French security, and then convert profit back into
dollars. If the return on this strategy is higher than 6%, then the French security has the higher rate.
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A B C D E F G H I
Eurodollar markets
Dollars held outside the U.S.
Mostly Europe, but also elsewhere
International bonds
Foreign bonds: Sold by foreign borrower, but denominated in the currency of the country of issue.
Eurobonds: Sold in country other than the one in whose currency it is denominated.
Intital cost in million of yen = ¥1,000 ¥
2-Year U.S. bond interest rate = 2.8%
1-Year Japan bond interest rate = 0.05%
2-Year Japan bond interest rate = 0.26%
22.8% 0.26% 0.009091 0.009557
0 1 2
-¥1,000 ¥500 ¥800
Year
l. Using the data below, evaluate a potential investment by a U.S. company in Japan.
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A B C D E F G H I
Distances are greater.
Access to more markets for loans and for temporary investments.
Cash is often denominated in different currencies.
Credit is more important, because commerce to lesser-developed countries often relies on credit.
Credit for future payment may be subject to exchange rate risk.
Many companies use export credit risk insurance when granting credit to an international customer.
Some factors to consider are shipping times, carrying costs, taxes, import duties, and exchange rates.
Inventory decisions can be more complex, especially when inventory can be stored in locations
in different countries.
(1) Cash management.
m. Briefly discuss special factors associated with the following areas of multinational working capital
management.
(2) Credit management.
(3) Inventory management.