financial management in hospitality market
Kisame
Chap9.ppt
Financial Management
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- It [the Mexican peso crisis in 1994 and 1995] came so suddenly, there was nothing we could do about it.
Francisco Javier Gallegos
A restaurant waiter in Mexico City
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- When an international hospitality company expands into a foreign country, the investment capital the company brings from its home country needs to be converted into the local currency.
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- The exchange of any two currencies is determined by the exchange rate, which fluctuates in accordance with market forces of supply and demand in the foreign exchange market.
- Notice how stable the Saudi currency has been and the drastic devaluation of the currencies in Asian countries.
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- Two kinds of exchange rate quotations are shown in Exhibit 9.1: direct quote and indirect quote.
- Direct quotes show the number of U.S. dollars per unit of a foreign currency, such as $0.000118 equaled one Indonesian rupiah. Indirect quotes list the number of units of a foreign currency per unit of a U.S. dollar, such as 8450.00 rupiah were worth one U.S. dollar.
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Ask rate – Bid rate
Bid/ask spread = Ask rate
Using your Japan travel experience:
Bid rate Ask rate
Japanese yen $.0070 $.0074
$.0074 – $.0070
Bid/ask spread = $.0074 = .054 or 5.4%
Thus, the spread between bid rate and ask rate is 5.4 percent.
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- A forward contract refers to buying and selling a certain amount of foreign currency at a specified rate for delivery at a specified date in the future, normally in 1,2,3,6, or 12 months.
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- Convertibility of a currency refers to whether this currency can be publicly traded in the international exchange market. Many currencies can be publicly traded in foreign exchange markets around the world, and the heavily traded currencies include U.S. dollars, British pounds, German marks, Japanese yen, Swiss francs, and French francs.
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- These six major currencies are also called hard currencies because their value tends to be stable, and they are the most widely held assets in the world.
- On the other hand, many other currencies cannot be circulated outside their own countries, such as the Russian ruble and the Hungarian forint.
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- Governments in many developing countries do not allow free trading of foreign currencies, and impose many restrictions on foreign currency transactions.
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- Government licensing simply requires all domestic business enterprises to apply for purchase of foreign currencies through the central bank.
- The central bank will approve or reduce the requested amount of foreign currency, or simply deny the application based on the nature of the business transaction.
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- Prohibiting or limiting the repatriation of earnings by foreign firms is a way of controlling foreign exchange leakage.
- For instance, when McDonald’s opened its first restaurant in Moscow, it was not allowed by the former Soviet government to remit all of its earnings back to the United States.
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- Global hospitality development that requires substantial investment capital includes new development and acquisition. Investment capital for new development and acquisition derives from both equity and debt, and public and private sources, including C-Corp, real estate investment trusts (REITs), pension funds, insurance companies, commercial banks, government agencies, venture capitalists, and individual investors.
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- International hospitality firms can also obtain long-term debt by issuing bonds in the international bond markets.
- For example, when Accor issues bonds in Canadian dollars and sells them in Canada, it is issuing foreign bonds.
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- As discussed earlier, foreign exchange rates are not fixed and currency values frequently according to market supply and demand.
- Global hospitality managers must recognize that “a dollar earned may not appear to be a dollar” if it is earned in a foreign currency, especially if these earnings are not repatriated.
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- The best way to reduce economic exposure is to diversify a corporation’s overseas development geographically as discussed in Chapter 1.
- By geographic diversification, the hospitality corporation’s long-term financial well-being is not severely affected by adverse changes in exchange rates in one or two countries.
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- Capital budgeting is essential to assessing a hospitality firm’s cash needs on a long-term basis.
- But capital budgeting for international investment is very complicated because considerably more variables need to be analyzed than for domestic operations.
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- Capital budgeting for international investment in hotels and restaurants needs to forecast and analyze the following economic and financial aspects:
1. Initial investment
2. Consumer demand
3. Price
4. Variable cost
5. Fixed cost
6. Project lifetime
7. Salvage (liquidation) value
8. Fund transfer restrictions
9. Tax laws
10. Exchange rates
11. Required rate of return
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