International Business take-home exam

International Finance

BUAD 841

Fall 2017

Kurt Norder, Ph.D.

International Finance and GM

Agenda

2

� Today we will… � Cover Admin:

� Quiz 10 opens tomorrow (on Int’l HR Ch 20) � Final presentations of company expansions is due Nov 30th

� Discuss and integrate topics of international finance � Accounting systems � Foreign exchange

� Team exercise on GM

International Finance and GM

What is the point of international finance?

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� Maximize profits relative to risks � Need accurate and timely information … accounting � Coordinate cash flows � Manage foreign exchange

� Meet government regulations � Stay compliant to reduce risks … accounting

International Finance and GM

Accounting systems

� FASB Æ US GAAP, IASB Æ IFRS (120 countries & EU) � Info consolidated for comparison and allocation � Translate to consolidate

� Method depends on functional currency (typically most cash flows)… parent = temporal, local = current-rate

� Functional currency impacts I/S vs. Equity translation offsets � Budget vs. Actual ... How compare when changing?

� Consistency at forecast = op variance � Forecast rate vs. actual rate = FX variance

International Finance and GM

Cultural Differences in Accounting

A Disclosure/Assessment Matrix for National Accounting Systems

International Finance and GM

How the MNE Handles its Funds

International Finance and GM

Global Cash Management

�What are the local and corporate needs for cash?

�How can cash be withdrawn from subsidiaries and centralized?

�Once the cash has been centralized, what should be done with it?

International Finance and GM

Decisions on cash management

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� What if the MNE is not able to repatriate funds?

� Where should you get the capital?

� Tax impacts … interest income vs. interest expense?

International Finance and GM

Basic concepts … FX and Accounting Systems

9

� What is foreign exchange (FX)?

� Why does FX matter?

� How do you know how well a company is performing?

� How do we define the value of assets? Projects?

� What form do we get information for MNEs (consolidated)?

International Finance and GM

Determining Exchange Rates

The Equilibrium Exchange Rate and How it Moves

International Finance and GM

Exchange Rates & Purchasing Power Parity

�Purchasing power parity (PPP)

� a change in relative inflation between two countries must cause a change in exchange rates to keep the prices of goods in the countries fairly similar

�The Big Mac Index

International Finance and GM

Exchange Rates and Interest Rates

�The Fisher Effect � links inflation and interest rates

�The International Fisher Effect (IFE) � links interest rates and exchange rates

�Other Factors in Exchange Rate Determination � confidence � information

International Finance and GM

Foreign Exchange Risk Management

�Types of Exposure �Translation exposure �Transaction exposure �Economic (or Operating) exposure

International Finance and GM

Foreign Exchange Risk Management

�Exposure-Management Strategy �Define and measure exposure �Establish a reporting system �Adopt an overall policy on exposure management �Formulate hedging strategies

International Finance and GM

MNE and Multilateral Netting

International Finance and GM

Business Implications of Exchange Rates

� Marketing Decisions � As a country’s currency rises, exporting becomes more difficult

� Production Decisions � locate production in a weak currency country because the initial

investment is cheap and it will make a good base for exports

� Financial Decisions � currency rates influence sourcing, cross-border remittance of funds,

and the reporting of financial results

International Finance and GM

GM Finance

� What are the foreign exchange risks that GM is facing?

� How should these risks be managed? Support your answers.

� Should the GM policy be changed? How?