INTERNATIONAL FINANCIAL MANAGEMENT AT MNCs Chapter 6

CHAPTER VI: INTERNATIONAL
FINANCIAL MANAGEMENT AT MNCs
1. Multinational Corporation
2. International Management at MNCs
12/22/2010 1
B02013 - International Financial
Management at MNCs
1. Multinational Corporation
1.1 What is MNCs?
A corporation that has its facilities and other
assets in at least one country other than its
home country. They have offices and/or factories
in different countries and usually have a
centralized head office where they co-ordinate
global management.
1.1 What is MNCs?
A corporation that has its facilities and other
assets in at least one country other than its
home country. They have offices and/or factories
in different countries and usually have a
centralized head office where they co-ordinate
global management.
12/22/2010 2
B02013 - International Financial
Management at MNCs
1. Multinational Corporation
1.2 Characteristics
• Centralize ownership
• Use a wide and vary range of resources
• Often chase after global management strategy
Risk

- Buy and sell of products
- Financial Transfer
1.2 Characteristics
• Centralize ownership
• Use a wide and vary range of resources
• Often chase after global management strategy
Risk
- Buy and sell of products
- Financial Transfer
12/22/2010 3
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.1 Concept
Manage and mitigate risks in transferring of
financial products and services between
countries, intercompany, bilateral or
multilateral.
2.2 Manage Risks
- Risks in transaction (A/R, A/P, )
- Risks in fluctuation (inflation…)
- Risks in investments
2.1 Concept
Manage and mitigate risks in transferring of
financial products and services between
countries, intercompany, bilateral or
multilateral.
2.2 Manage Risks
- Risks in transaction (A/R, A/P, )
- Risks in fluctuation (inflation…)

- Risks in investments
12/22/2010 4
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
 Choose a suitable management system
- Self-managed subsidiaries
- Central Management by Parent company
Each system has there own costs and risks
 Adjusted Present Value Approach
- Calculate present value of return on
investment to ensure the profitability
2.3 Tools and method of management
 Choose a suitable management system
- Self-managed subsidiaries
- Central Management by Parent company
Each system has there own costs and risks
 Adjusted Present Value Approach
- Calculate present value of return on
investment to ensure the profitability
12/22/2010 5
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
 Risk of foreign exchange fluctuations
– Translation Exposure – difference between
exposed assets and liabilities
– Fluctuations in foreign exchange rates

– Fluctuations in real value of firm in long-term
 Fluctuations in exchange rate will change
book value of MNC
2.3 Tools and method of management
 Risk of foreign exchange fluctuations
– Translation Exposure – difference between
exposed assets and liabilities
– Fluctuations in foreign exchange rates
– Fluctuations in real value of firm in long-term
 Fluctuations in exchange rate will change
book value of MNC
12/22/2010 6
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
 Risk of foreign exchange fluctuations
How to mitigate risk?
- Buy and sell of Forward, Future contract
- Use strong currency in contract (less fluctuate)
- Accept payment or storage of currency that is
expected to be valuated
- Other instruments
2.3 Tools and method of management
 Risk of foreign exchange fluctuations
How to mitigate risk?
- Buy and sell of Forward, Future contract
- Use strong currency in contract (less fluctuate)
- Accept payment or storage of currency that is
expected to be valuated

- Other instruments
12/22/2010 7
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
+ Forward Hedge
- Binding contract under which a commodity or
financial instrument is bought or sold at the
market price (spot price) as on today (date of
making the contract), but is to be delivered on a
stated future (forward) date in settlement of the
contract.
- Mitigate risks
- Self-insurance in contract
- IMM contract
- Currency Options
- Intra IC Hedge
2.3 Tools and method of management
+ Forward Hedge
- Binding contract under which a commodity or
financial instrument is bought or sold at the
market price (spot price) as on today (date of
making the contract), but is to be delivered on a
stated future (forward) date in settlement of the
contract.
- Mitigate risks
- Self-insurance in contract
- IMM contract
- Currency Options

- Intra IC Hedge
12/22/2010 8
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
+ Credit/ Money Market Hedge
The use of borrowing and lending transactions in
foreign currencies to lock in the home currency
value of a foreign currency transaction.
+ Choose time of payment
Incase, home currency of importer is devaluatig
compare to exporter’s one, he/she will try to pay
promptly. But if the home currency is valuating,
he/she will try to delay the payment process
2.3 Tools and method of management
+ Credit/ Money Market Hedge
The use of borrowing and lending transactions in
foreign currencies to lock in the home currency
value of a foreign currency transaction.
+ Choose time of payment
Incase, home currency of importer is devaluatig
compare to exporter’s one, he/she will try to pay
promptly. But if the home currency is valuating,
he/she will try to delay the payment process
12/22/2010 9
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management

+ Exposure Netting
Offsetting exposures in one currency with
exposures in the same or another currency,
when exchange rates are expected to move in
such a way that losses or gains on the first
exposed position should be offset by gains or
losses on the second currency exposure.
Can be used in combination group of currency
that have similar fluctuation or one weak
currency and one strong currency
2.3 Tools and method of management
+ Exposure Netting
Offsetting exposures in one currency with
exposures in the same or another currency,
when exchange rates are expected to move in
such a way that losses or gains on the first
exposed position should be offset by gains or
losses on the second currency exposure.
Can be used in combination group of currency
that have similar fluctuation or one weak
currency and one strong currency
12/22/2010 10
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
+ Price adjustment
Increase price when domestic currency is
devaluated
will help to cover any loss

2.3 Tools and method of management
+ Price adjustment
Increase price when domestic currency is
devaluated
will help to cover any loss
12/22/2010 11
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
+ Interest Rate Swaps
Exchange of periodic interest payments between
two parties (called counter parties) as means of
exchanging future cash flows.
2.3 Tools and method of management
+ Interest Rate Swaps
Exchange of periodic interest payments between
two parties (called counter parties) as means of
exchanging future cash flows.
12/22/2010 12
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
+ Currency Swaps
Simultaneous buying and selling of a currency to
convert debt principal from the lender's currency
to the debtor's currency.
2.3 Tools and method of management
+ Currency Swaps

Simultaneous buying and selling of a currency to
convert debt principal from the lender's currency
to the debtor's currency.
12/22/2010 13
B02013 - International Financial
Management at MNCs
2. International Management at MNCs
2.3 Tools and method of management
+ Swaps contract
+ Bilateral loans contract
+ Bank Swap
+ Others issues
- Floating Exchange Rate
- FASB 52
- Inflation
- Electronic Fund Management
2.3 Tools and method of management
+ Swaps contract
+ Bilateral loans contract
+ Bank Swap
+ Others issues
- Floating Exchange Rate
- FASB 52
- Inflation
- Electronic Fund Management
12/22/2010 14
B02013 - International Financial
Management at MNCs
Discussion questions
1. What is Multinational companies?

2. How to manage risks in the MNCs?
Listed few tools and techniques of the
MNCs.
1. What is Multinational companies?
2. How to manage risks in the MNCs?
Listed few tools and techniques of the
MNCs.
12/22/2010 15
B02013 - International Financial
Management at MNCs