公司理财精要版原书第12版英文版课件Ross-12e--Ch21.pptx

1、CHAPTER 21 INTERNATIONAL CORPORATE FINANCECopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Define how exchange rates are quoted,what they mean,and the difference between spot and forward exchange rates

2、Explain purchasing power parity,interest rate parity,unbiased forward rates,uncovered interest rate parity,and the international Fisher effect and their implications for exchange rate changesIllustrate the different types of exchange rate risk and ways firms manage exchange rate riskShow the impact

3、of political risk on international business investingKey Concepts and SkillsCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Terminology Foreign Exchange Markets and Exchange Rates Purchasing Power Par

4、ity Interest Rate Parity,Unbiased Forward Rates,and the International Fisher Effect International Capital Budgeting Exchange Rate Risk Political RiskChapter OutlineCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hil

5、l Education.Considerations in International Financial Management Need to consider the effect of exchange rates 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 cap

6、ital markets,which may reduce the firms cost of capitalDomestic vs.International Financial ManagementCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.American Depositary Receipt(ADR)Cross-rate Eurobond

7、 Eurocurrency(Eurodollars)Foreign bonds Gilts London Interbank Offered Rate(LIBOR)SwapsInternational Finance TerminologyCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.The number of exchanges in forei

8、gn countries continues to increase,as does the liquidity on those exchanges.Exchanges that allow for the flow of 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

9、are often willing to try more innovative ways to do business.Global Capital MarketsCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.The price of one countrys currency in terms of another countrys curre

10、ncy Most currency is quoted in terms of dollars.Consider the following quote:Euro1.18360.8449 The first number(1.1836)is how many U.S.dollars it takes to buy 1 Euro.The second number(0.8449)is how many Euros it takes to buy$1.The two numbers are reciprocals of each other(1/1.1836=0.7210).Exchange Ra

11、tesCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Suppose you have$10,000.Based on the rates in Figure 21.1,how many Japanese Yen can you buy?Exchange rate=102.32 Yen per dollar Buy$10,000(102.32)=1,

12、023,200 Yen Suppose you are visiting Mumbai and you want to buy a souvenir that costs 1,000 Indian Rupees.How much does it cost in U.S.dollars?Exchange rate=60.150 rupees per dollar Cost=1,000/60.150=$16.63Example:Exchange RatesCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction

13、 or distribution without the prior written consent of McGraw-Hill Education.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?Go to the XE website to find out.Work the Web ExampleCopyright 2019 McGraw-Hill Educat

14、ion.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.We observe the following quotes:1 Euro per$1 2 Swiss Franc per$1 0.4 Euro per 1 Swiss Franc What is the cross rate for Euros per Swiss Franc?(1 Euro/$1)/(2 SF/$1)=0.5 Euro/SF This is no

15、t the same as the quote above(0.4 Euro per Swiss Franc).Triangle Arbitrage is the act of exchanging through three currencies to exploit a mispriced trio of currency quotes.Example:Triangle ArbitrageCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the p

16、rior written consent of McGraw-Hill Education.To execute triangle arbitrage in this example:buy low(0.4 Euro/SF),and sell high(0.5 Euro/SF).For example,with$100 to start:Buy$100(1 Euro/$1)=100 Euro;Use Euro to buy SF.Buy 100 Euro/(0.4 Euro/1 SF)=250 SF;Use SF to buy dollars.Buy 250 SF/(2 SF/$1)=$125

17、 You now have$25 more than you started,and this was a risk-free transaction!Example:Triangle Arbitrage(ctd.)Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Spot trade exchange currency immediately Spo

18、t rate the exchange rate for an immediate trade Forward trade agree today to exchange currency at some future date 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 cur

19、rency is selling at a premium(when quoted as$equivalents).If the forward rate is lower than the spot rate,the foreign currency is selling at a discount.Types of TransactionsCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of M

20、cGraw-Hill Education.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 difference in the commodity between locations.For most goods,absolute P

21、PP rarely holds in practice.Absolute Purchasing Power ParityCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Provides information about what causes changes in exchange ratesThe basic result is that exc

22、hange rates depend on relative inflation between countries.E(St)=S01+(hFC hUS)t S0 is the current(Time 0)spot exchange rate(foreign currency per dollar).E(St)is the expected exchange rate in t periods.hUS is the inflation rate in the United States.hFC is the foreign country inflation rate.Because ab

23、solute PPP doesnt hold for many goods,we will focus on relative PPP from here on out.Relative Purchasing Power ParityCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Suppose the Canadian spot exchange

24、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%.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 t

25、o depreciate relative to the Canadian dollar.What is the expected exchange rate in one year?E(S1)=1.181+(.02-.03)1=1.1682Example:Relative PPPCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Examines th

26、e 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 rate.Covered Interest ArbitrageCopyright 2019 McGraw-Hi

27、ll Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Consider the following information:S0=0.8 Euro/$RUS=4%F1=0.7 Euro/$RE=2%What is the arbitrage opportunity?Borrow$100 at 4%Buy$100(0.8 Euro/$)=80 Euro and invest at 2%for 1 year

28、 In 1 year,receive 80(1.02)=81.6 Euro and convert back to dollars 81.6 Euro/(0.7 Euro/$)=$116.57 and repay loan Loan payoff=$100(1.04)=$104 Profit=$116.57$104=$12.57,risk freeExample:Covered Interest ArbitrageCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution wi

29、thout the prior written consent of McGraw-Hill Education.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:Interest Rate Parity)(1 :Approx.)1()1(:Exact0101USFCUSFCRRSFRRSFCopyright 201

30、9 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.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

31、forward rate is consistently too high:Those who want to exchange 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

32、 be willing to transact in the future spot market.The forward price would have to come up for trades to occur.Unbiased Forward RatesCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.What we know so far:

33、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)tUncovered Interest ParityCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hi

34、ll Education.Multi-period Equation Summary tDCFCttDCFCtRRSFRRSF)(1 :IRP Approx.)1()1(:IRPExact 00tDCFCttDCFCthhSFhhSF)(1 :RPPP Approx.)1()1(:RPPPExact 00Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education

35、.Combining PPP and UIP we can get the International Fisher Effect.Real rate 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 return.Internat

36、ional Fisher EffectCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Home Currency Approach Estimate cash flows in foreign currency.Estimate future exchange rates using UIP or Relative PPP.Convert futur

37、e cash flows to dollars.Discount using domestic required return.Foreign Currency Approach Estimate cash flows in foreign currency.Use the IFE to convert domestic required return to foreign required return.Discount using foreign required return.Convert NPV to dollars using current spot rate.Overseas

38、Production:Alternative ApproachesCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Your company is looking at a new project in Mexico.The project will cost 9 million pesos.The cash flows are expected to

39、 be 2.25 million 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?Home Currency ApproachCopyright 2019 McGraw-Hill Educat

40、ion.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Use the same information as the previous example to estimate the NPV using the Foreign Currency Approach.Relative inflation difference from the International Fisher Effect is Rfc Rdc=8%

41、4%=4%Required Return in foreign market=RRfc=(1+RRdc)(1+Rfc Rdc)1 RRfc=(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=-2,211,463/10.91=-202,701Foreign Currency ApproachCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or

42、distribution without the prior written consent of McGraw-Hill Education.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 servic

43、es Royalties on the use of trade names and patentsRepatriated Cash FlowsCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Risk from day-to-day fluctuations in exchange rates and the fact that companies

44、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 options to lock in exchange rates if they move against you,but benefit from rates if they move in your favor.Short-Run ExposureCopyri

45、ght 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Long-run fluctuations come from unanticipated changes in relative economic conditions.Could be due to changes in labor markets or governments More difficult t

46、o hedge Try to match long-run inflows and outflows in the currency.Borrowing in the foreign country may mitigate some of the problems.Long-Run ExposureCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.I

47、ncome from foreign operations must be translated back to U.S.dollars for accounting purposes,even if foreign currency is not actually converted back to dollars.If gains and losses from this translation flowed through directly to the income statement,there would be significant volatility in EPS.Exist

48、ing accounting regulations require that all cash flows be converted at the prevailing exchange rates with currency gains and losses accumulated in a special account within shareholders equity.Translation ExposureCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution

49、 without the prior written consent of McGraw-Hill Education.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 separately.Hedging indivi

50、dual currencies could be expensive and may actually increase exposure.Managing Exchange Rate RiskCopyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.Under the old U.S.tax law,firms had an incentive to kee