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Essential of Multinational Business Finance Practical Approach Professor M. Vaziri.

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1 Essential of Multinational Business Finance Practical Approach Professor M. Vaziri

2 ContentContent Chapter 1 Chapter 1 Chapter 1 Chapter 1 Chapter 2 Chapter 2 Chapter 2 Chapter 2 Chapter 3 Chapter 3 Chapter 3 Chapter 3 Chapter 4 Chapter 4 Chapter 4 Chapter 4 Chapter 5 Chapter 5 Chapter 5 Chapter 5 Chapter 6 Chapter 6 Chapter 6 Chapter 6 Chapter 23 Chapter 23 Chapter 23 Chapter 23 Chapter 14 Chapter 14 Chapter 14 Chapter 14 Chapter 18 Chapter 18 Chapter 18 Chapter 18 Chapter 15 Chapter 15 Chapter 15 Chapter 15 Chapter 20 Chapter 20 Chapter 20 Chapter 20 Chapter 11 Chapter 11 Chapter 11 Chapter 11 Chapter 22 Chapter 22 Chapter 22 Chapter 22 International Banking International Banking International Banking International Banking International Financial Market International Financial Market International Financial Market International Financial Market

3 Content Chapter 1 Financial Goals and Corporate Governance n n Multinational business enterprise and finance n n A business having operating subsidiaries, branches, or affiliates located in foreign countries. n n Can be engaged in virtually every type of business activity, including banking, accounting, consulting, etc. n n Business activities, primarily financing, which reach beyond the domestic markets. n n Major risks include interest rate, exchange rate, and credit risks of foreign markets.

4 Content Chapter 1 Financial Goals and Corporate Governance n n Goal of management : Shareholder Wealth Maximization versus Corporate Wealth Maximization n n Shareholder Wealth Maximization (SWM Model) n n Is the predominant theory of domestic U.S. firms n n Assumes that the stock market is efficient and all news (public or private) is reflected in the stock price. n n Risk = added risk that the firms share bring to an established investment portfolio. n n Systematic Risk = the non-diversifiable risk inherent in the market, therefore it cannot be eliminated. n n Unsystematic Risk = the diversifiable risk of an individual.

5 Content Chapter 1 Financial Goals and Corporate Governance n n Weaknesses of Shareholder Wealth Maximization (SWM) n n Short-term gains vs. long-term gains – Some managers attempt to maximize short-term shareholder wealth at the expense of the long-term profitability of the company. n n Agency Theory -- Managers and owners may not share the same goals and objectives. Problem arises as shareholders seek effective motivational tools to promote managers conformity to will of shareholders.

6 Content Chapter 1 Financial Goals and Corporate Governance n n Corporate Wealth Maximization n n The firm treats shareholders as equals to other groups with interest in the firm (management, labor, local community, supplies, creditors, etc). n n Risk = total risk = Operational + Financial Risk. n n Concerned with growing the firm for the benefit of all, not exclusively shareholders. n n Is the predominant theory of many foreign firms. n n A few foreign firms are adopting the SWM model.

7 Content Chapter 1 Financial Goals and Corporate Governance n n Weaknesses of Corporate Wealth Maximization (CWM) n n Attempts to satisfy too many parties simultaneously. It may be to provide adequate satisfaction to any single party. n n Corporate Governance n n Relationship among firms stakeholders to control the objectives and strategic direction of the firm. n n U.S. and similar markets use the one share = one vote voting system. While many foreign firms issues separate classes of voting, limited voting, and non-voting shares. n n Due to abuses and failures of internal corporate self-governance, government and outside agencies must enact legislation regulating activities. One such law is the Sarbanes-Oxley Act of 2002.

8 Content Chapter 1 Financial Goals and Corporate Governance n n Three major characteristics of Sarbanes-Oxley n n CEOs of publicly traded firms must personally certify companys public financial statements. n n Corporate boards must have independent auditors. n n Companies cannot make loans to company directors.

9 Content Chapter 1 Financial Goals and Corporate Governance n n Basics of Corporate Governance n n The way a corporation directs itself is called corporate governance. Primarily, corporate governance states the techniques that govern the formation of a corporations structure and the laws and customs that affect these techniques. n n A corporations structure is composed of three groups: n n Board of Directors n n Managers n n Shareholders

10 Content Chapter 2 International Monetary System (IMS) n n Structure of IMS: Framework within which the foreign Exchange rates are determined, capital flows & international trade are accommodated & Balance of Payments Adjustments are made n n History of IMS: The Gold Standard ( ): Gold as a medium of exchange- Pharaohs (3000 PC) The Greeks, Romans & Persians Used gold coins & passed through the mercantile era to the 19th century No multinational agreement, but each country declared a par value for its currency in terms of gold based on rule of games or "Gold Standard"

11 Content Chapter 2 International Monetary System (IMS) n n Mercantilism of 19th Century - Need for IMS: Europe adapted the IMS in 1870 & the U.S.. in 1879 $20.67/Ounce of Gold, £4.274/Ounce: $20.67/£4.2474=£4.8665/$ Limitation of gold reserve & supply of money Limit the flow of goods and gold & suspension of GS n n Inter War Years: : Free Fluctuating of Exchange Rates with consideration of the gold and par value of other currencies. Short sell of week currencies, re-evaluation of £, the collapse of the Austrian banking system-total abandonment of GS

12 Content Chapter 2 International Monetary System (IMS) n n The Bretton Wood Agreement: (1944): Dollar based Monetary System (par value based on $) Fixed value in term of $, but not required to convert Only $ remained convertible to gold: $35/Ounce Only 1% of par allowed for fluctuation Devaluation was not allowed for purpose of high export 10% devaluation for week currency or approval of IMF IMF & World Bank were created Former Soviet Union did participate at Bretton Wood but chose not to join IMF or World Bank

13 Content Chapter 2 International Monetary System (IMS) n n International Monetary Fund IMF n Mission: Rendering temporary assistance to currencies with cyclical, seasonal or random fluctuation. n Help countries with a structural trade problem n IMF is funded based on quota of expected post WWII trade n The Original quota were 25% in gold or $ (Gold tranche), & 75% local currency. n A member country can borrow up to its original 25% in gold or convertible currencies in any 12 month plus 100% of its total quota. A member country can also borrow up to 120% of its quota in convertible currency or gold, even through it only paid 25% in convertible currency or gold. n n At the present time, each of the 151 member can borrow up to 150% annually of its quota or up to 450% during a three years period n n Cumulative access could be up to 600% of members quota

14 Content Chapter 2 International Monetary System (IMS) n n International Monetary Fund IMF (Cont) n Distribution of the quota is prelude to distribution of vote n U.S. Vote:19.1%, UK:6.6%, Germany:5.8%, France:4.8%, Japan:4.5%, Canada:3.2% n General Agreement to Borrow: IMF ability to borrow from member countries, currently more than $180 billion. n Special Drawing Rights (SDR): created according to Rio de Janeiro agreement (1967) to help increase the global trade between nations n SDR is distributed based on members quota and valued based on 16 then 5 currency n First $/SDR determined then value of other currencies are measured

15 Content Chapter 2 International Monetary System (IMS) n n Monetary Development: ( ) n EFTA (1957) & EEC (1959), rapid increase in world trade n U.S.. deficit of 1959 & International Monetary Reserve dilemma: BOP deficit to create more reserve for LDCs n Doubt of convertibility of major reserve currencies n "Interest Equalization Tax on foreign borrowing & creation of Euro- bond n Mandatory control of direct foreign investment,control of foreign lending by U.S banks,& high U.S deficit n Official Currency Swaps: Group of Ten Industrialized Nations as a interest credit between central banks

16 Content Chapter 2 International Monetary System (IMS) n n Monetary Development: ( ) n U.S. BOT had reached to all-time high in 1971 n U.S lost one-third of her official gold & president Nixon suspended convertibility of $ to gold n U.S. imposed 10%surcharge on imports & freezes P&W n Most European currencies gained against $ n n Smithsonian agreement: December of 1971: n Group ten Industrialized Nations signed on Dec, n $ devaluated to $38/Ounce, Yen evaluated against $ :16.9%, Canada 7.4% n Floatation of 2.25% (Max 4.5%) is allowed n $ lost its value sharply: $42.22 in free market, $70 in official London market

17 Content Chapter 2 International Monetary System (IMS) n n Jamaican Agreement: January 1976: n Floating Rate has been established ( has continued today) n Gold was demonetarized as a reserved asset n IMF agreed to sell $25 million ounces of gold to its members and used the proceeds to help the poor nations n IMF quota increased to $41 and then to $180 billion n 10% of the voting power given to OPEC members n Non-oil producing countries have more access to IMF n Floating Exchange Rate System has officially adopted & continued until present time

18 Content Chapter 2 International Monetary System (IMS) n n Plaza Agreement Plaza Agreement n n Louvre Agreement Louvre Agreement n n 355/choi/cur.htm 355/choi/cur.htm

19 Content Chapter 3 Balance of Payment (BOP) n n Definition of BOP: Record of transactions between residents of one country & rest of the world n n Functions of BOP: n n Helps forecast market potential of a country n n Helps to understand the currency fluctuation of a country n n It is a poor description of National Economy n n Useful in measuring economic performance if there is FER n n $ was indexed at 100 at 1970: If index is greater than 100,$ gain VS other countries currencies.

20 Content Chapter 3 Balance of Payment (BOP) n n Accounts of BOP: n n Trade Balance : Net balance in merchandise traded n n Current Account: Trade account + earning & expense on services n n Performed service: travel, shipping, banking, insurance, etc n n Debt service: interest, dividend received or paid abroad. n n Basic Balance: Current account +long term capital (such as direct investment) n n Overall Balance: basic Balance + short term capital +Error & Omission n n Unilateral Transfer: no corresponding flow of G&S-non military goods, grants, foreign aids, donation, inheritance n n Capital account: record of investment & payments

21 Content Chapter 3 Balance of Payment (BOP) n n Macro Modeling of BOP: n n Aggregates Income: Y=C+S, Where, n n C = Agg. Consumption & S = Agg. Saving n n Aggregate Expenditure: E= C+Id, where Id=Domestic investment n n Y-E=S-Id n n If Y is greater than E, S is greater than Id n n Sector of Economy n n Consumer Sector (C) n n Business Sector (Investment): - Id and If n n Government Sector (G) n n Foreign Sector = Export (X) – Import (M)

22 Content Chapter 3 Balance of Payment (BOP) n n Balance Economy n n Y-E=0 n n S (Saving) – Id = 0 : Saving Balance n n G – T (Tax) = 0: Budget Balance n n Export (X) – Import (M) = 0: Trade Balance. n n In a balance Economy: Y=E, then S= Id, then G=T, then X=M * If Y>E, then S> Id (Saving Surplus), then T>G (Budget Surplus), then X>M (Trade Surplus). So If > 0 (Capital Outflow) * If Y

23 Content Chapter 3 Balance of Payment (BOP) n n Coping with Current Account Deficit (CAD): n n Relationship between CAD & currency depreciation n n According to General Equilibrium View : not a simple one n n : $ depreciate, CAD decreased n n : $ appreciate, CAD increased n n Impose high tariffs & quotas: n n Since S-Id=X-M, (unless S & Id changes), if M decline, X must decline : less import means less demand for foreign currency, less supply of domestic currency, and an increase in value of domestic goods, which mean less export.

24 Content Chapter 3 Balance of Payment (BOP) n n End Foreign ownership of domestic assets n n No capital account surplus means interest rate will increase & investment & income will decline n n Stimulate savings: If S is greater than Id, we will have capital outflow, causing deficit to decrease in both Government budget & Current Account.

25 Content Foreign Exchange Market Euro £ Can$ SFranc ¥

26 Content Chapter 4 Foreign Exchange Market (FEM) Function of FEM: Function of FEM: Transfer of Purchasing Power. Transfer of Purchasing Power. International Credit such as L.C. International Credit such as L.C. Minimize Exposure to Foreign Exchange Risk Minimize Exposure to Foreign Exchange Risk Market for Hedging & Arbitrageur Market for Hedging & Arbitrageur Market for currency Swaps, futures & forward/Spot Transactions Market for currency Swaps, futures & forward/Spot Transactions

27 Content Participants in FEM: Participants in FEM: Banks & Non-banks Banks & Non-banks FEM Dealers- benefited from bid-ask spread FEM Dealers- benefited from bid-ask spread Market Makers-Position on certain Currencies Market Makers-Position on certain Currencies FEM Brokers (56%) FEM Brokers (56%) Exporter, Importer, Tourists MNCs, Portfolio Managers Exporter, Importer, Tourists MNCs, Portfolio Managers Speculators & Arbitrageur Speculators & Arbitrageur Central Banks Central Banks Chapter 4 Foreign Exchange Market (FEM)

28 Content Types of FEM Transactions: Types of FEM Transactions: Spot Transactions: one day settlement (63% of market) Spot Transactions: one day settlement (63% of market) Forward Transactions: one, two, six & 12 month (6%) Forward Transactions: one, two, six & 12 month (6%) Swaps Transactions: Simultaneous purchase or sale of FE, with two value dates: spot-forward, forward-forward Swaps Transactions: Simultaneous purchase or sale of FE, with two value dates: spot-forward, forward-forward Spot Transactions Forward Transactions Swaps Transactions Example: sell £20 mil forward for $ deliver in two months at $1.4870/£ & simultaneously buy back £20 mil forward for delivery in three month at $1.4820/£. Chapter 4 Foreign Exchange Market (FEM)

29 Content Types of Quotations: Types of Quotations: Direct Quotation : Direct Quotation : Home currency in terms of foreign currency. Home currency in terms of foreign currency. $/ =$1.18/: American Way $/ =$1.18/: American Way Indirect Quotation: Indirect Quotation: Foreign currency in terms of home currency Foreign currency in terms of home currency /$= /$. /$= /$. Bid & ask spread: Bid & ask spread: Buy (bid) at /$. & ask (offer) at /$. Buy (bid) at /$. & ask (offer) at /$. Difference between bid-ask is dealer Difference between bid-ask is dealer Premium=transaction cost Premium=transaction cost Chapter 4 Foreign Exchange Market (FEM)

30 Content Types of Quotations: Types of Quotations: Cross Rates: Cross Rates: Swiss Franc (CHB)/$ over Danish Krone (DKK), Swiss Franc (CHB)/$ over Danish Krone (DKK), So,CHB1.32/DKK6.30 = CHB0.2095/DKK So,CHB1.32/DKK6.30 = CHB0.2095/DKK Point Quotation: Point Quotation: Difference between forward rate & spot rate (swap rate). Difference between forward rate & spot rate (swap rate). Chapter 4 Foreign Exchange Market (FEM)

31 Content Triangular Arbitrageur Buying & selling of one currency for another & returning to the original one. U.S$ UK £ U.S$ UK £ U.S$ 1 S($/£)=1.70 S($/)=1.18 £ S(£/$)= £ S(£/$)= If S( /$)*S(£/ )*S($/£) is greater than one, successful arbitrageur. (0.8474*0.6943*1.7)=$ , is successful arbitrageur Chapter 4

32 Content The Interest Rate Parity Theory Chapter 4 DEF: Except for transaction costs, the differences in national interest rate, for security of similar risk & maturity should be equal but opposite in sign, to forward exchange rate discount or premium for foreign currency. It links National Monetary Market Rate to Foreign Exchange Rate. Forward Exchange Rate Discount & Premium: (Forward Rate-Spot Rate)/(Spot Rate)*12/n*100 (Spot Rate-Forward Rate)/(Forward Rate)*12/n*100 Can$ /1.313*12/3*100= per year: It means CAN $ is in %, 3-month forward premium or the U.S. $ is in %, 3-month forward discount.

33 Content The operation of Covered Interest Arbitrageur Chapter 4 Test for Parity UK 3-Month Interest Rate=12% per year U.S. 3-month Interest Rate=7% per year Transaction Cost=.15% should be calculated at the beginning of transaction Size of Transaction=$2,800, Covered Interest Arbitrageur actions: Step 1. Borrow $2.8mil at 7%/year for 3-month Step 2. Exchange $2.8 mil for £ at spot rate of $1.4000/£ & receive £2mil. Step 3. Invest £2mil for 3-month in UK at 12%/year or 3%/Quarter. Step 4. Sell £2.06mil forward at 3-month forward rate of $1.3860/£: which include £2mil principal & £60,000 interest for the 3-month (3%*2mil=$60mil

34 Content The operation of Covered Interest Arbitrageur Chapter 4 Covered Interest Arbitrageur actions-con..: Step 5. Pay transaction cost of $4,200 ($2.8*.15) Step 6. Three month after, redeem UK investment of £2,06mil Step 7. Fulfill forward contract by selling £2060mil at $1.3860/£ forward rate & receive $ Step 8. Repay loan of $2.8mil plus 3-month interest at 1.75%/Quarter ($2.8*1.75%=$49000). Profit Calculation: Proceed from investment in UK=$2,855,160. Principal + interest from borrowing=$2,849,000 Transaction cost=$4200 Net profit=$2, , =$1,950.00

35 Content Speculation in FEM Chapter 4 Spot Market Speculation: Spot rate:DG2.9000/$,Forward Rate=DG2.8000/$ 6-month expected spot rate=DG2.700/$ With $40,000, buy:$40,000*DG2.9=DG Sell at DG2.7/$ for $42965 (116000/2.7) Make profit of 2965 or14.82%/Year Forward Market Speculation Buy $40,000*DG2.8=DG Buy back $ at DG2.7=$41,481 Profit=$1,481

36 Content Factors to be considered in forecasting the ER Chapter 4 1.Expected changes in spot rate, 2.Inflation rate differential, 3.Interest rate differential, 4.BOP problems, 5.Growth of Money supply 6.Business Cycle, 7.Change in International Monetary Reserve, 8.Increase in official-nonofficial rate spread 9.FE policies such as, FE. control, ceilings on interest rate, high import duties, export subsidies, excess G-Spending, 10.Elasticity of demand for exchange rate, Forward rate discount or premium

37 Content Interest Rate Parity Theory Chapter 4 For given transaction cost, percentage of the forward premium or discount of foreign currency to home currency is equal but opposite in sign to interest rate differential between foreign country and home country.For given transaction cost, percentage of the forward premium or discount of foreign currency to home currency is equal but opposite in sign to interest rate differential between foreign country and home country. Forward Premium or Discount of Foreign Currency to Home Currency Interest Rate Differential between foreign country and home country IRP Line

38 Content Purchasing power Parity (PPP) Theory Chapter 4 Def: If the spot rate between two countries starts in equilibrium, any change in the difference of rate of inflation between them tends to be offset over the long run by equal, but opposite change in spot exchange rate.Def: If the spot rate between two countries starts in equilibrium, any change in the difference of rate of inflation between them tends to be offset over the long run by equal, but opposite change in spot exchange rate. Current Account Balances are very sensitive to change in inflation RateCurrent Account Balances are very sensitive to change in inflation Rate

39 Content Purchasing power Parity (PPP) Chapter 4 For example: if the inflation rate of US is 2% lower than that of UK, then the expected rate in US is 2 % higher than that of UK. Balance in current account is very sensitive to change in inflation rate.For example: if the inflation rate of US is 2% lower than that of UK, then the expected rate in US is 2 % higher than that of UK. Balance in current account is very sensitive to change in inflation rate. Inflation differential of Foreign Currency to Home Currency Expected spot rate differential of Foreign Currency to Home Currency PPP line

40 Content International Fisher Effect (Fisher Open) Theory Chapter 4 Def: Difference in interest rate between two countries is equal, but opposite in sign to the spot exchange rate of foreign currency to home currencyDef: Difference in interest rate between two countries is equal, but opposite in sign to the spot exchange rate of foreign currency to home currency

41 Content International Fisher Effect (IFE) Chapter 4 For example: If the interest rate in U.K. has 3% higher than interest rate in the U.S., U.K. should be depreciated by 3% against the $U.S., and at the same time the U.S. should be appreciated by 3%. (If it is on the IFE line)For example: If the interest rate in U.K. has 3% higher than interest rate in the U.S., U.K. should be depreciated by 3% against the $U.S., and at the same time the U.S. should be appreciated by 3%. (If it is on the IFE line) If the interest rate in U.K. is 4% lower than interest rate in the U.S., U.K. should be appreciated by 4% against the $U.S., and at the same time the U.S. should be depreciated by 4%. (If it is on the IFE line)If the interest rate in U.K. is 4% lower than interest rate in the U.S., U.K. should be appreciated by 4% against the $U.S., and at the same time the U.S. should be depreciated by 4%. (If it is on the IFE line) Expected Spot Rate difference of foreign currency to home currency Interest Rate differences of Foreign Currency to Home Currency IFE line

42 Content Fisher Effect (Irving Fisher) Chapter 4 Def: Difference in inflation rate between two countries is equal to the interest rate differential between them. Nominal interest rate is equal to the required real rate of return plus compensation for expected inflation. (i= r + π, i : the nominal interest rate, r: the real interest rate, π: expected inflation)Def: Difference in inflation rate between two countries is equal to the interest rate differential between them. Nominal interest rate is equal to the required real rate of return plus compensation for expected inflation. (i= r + π, i : the nominal interest rate, r: the real interest rate, π: expected inflation) Expected Inflation Interest Rate Differential Fisher Parity Line

43 Content Foreign Currency Option (FCO) Chapter 4 Def: FCO is a contract that gives buyers the right to buy or sell a given amount of foreign exchange at a fixed price (exercise price or strike price) per unit for a specific period of time..Def: FCO is a contract that gives buyers the right to buy or sell a given amount of foreign exchange at a fixed price (exercise price or strike price) per unit for a specific period of time.. Types of FCO: American Option: Right to exercise on any day before the expiration date, European Option: only on the expiration date.Types of FCO: American Option: Right to exercise on any day before the expiration date, European Option: only on the expiration date. In-the-money: When you make profit, At-the-money: when profit is zero, and Out-of-money: when you have a lossIn-the-money: When you make profit, At-the-money: when profit is zero, and Out-of-money: when you have a loss

44 Content Foreign Currency Option (FCO) Chapter 4 Maturity dates & size of FCO: Saturday proceeding the third Wednesday of expiration Month March, June, September, and December.Saturday proceeding the third Wednesday of expiration Month March, June, September, and December. Contract size: Cited as fixed contract per unit, such as DM62,500/per unit of option: with one mil$ one can buy:$ one mil/¨DM62,500=16 FCP contractContract size: Cited as fixed contract per unit, such as DM62,500/per unit of option: with one mil$ one can buy:$ one mil/¨DM62,500=16 FCP contract Price of FCP: No of cents per unit: £12,500*.02=$250.Price of FCP: No of cents per unit: £12,500*.02=$250.

45 Content Foreign Currency Premium (FCP) Chapter 4 FCP is a flexible transaction of over 1 mil in major trading currencies for any time period up to one year, tailored to the customer's need.FCP is a flexible transaction of over 1 mil in major trading currencies for any time period up to one year, tailored to the customer's need. This is a good alternative to the forward market.This is a good alternative to the forward market. A Percentage of Transaction, Paid advance & according to following factors:A Percentage of Transaction, Paid advance & according to following factors: 1.Strike price relative to spot rate 2.Supply & demand for option 3.Relative interest rate between countries 4.Relative currency risk, and 5.Maturity of the option.

46 Content Foreign Currency Premium (FCP) Chapter 4 An Exercise on FCP : March $1.45 call option payees $.02 per £ ( purchase £12,500 at $1.45 option with expiration date of March.March $1.45 call option payees $.02 per £ ( purchase £12,500 at $1.45 option with expiration date of March. If price of £ increase to $1.5100, buy £ at £ & sell £ & make $ =.06 per £ or 12500*.06=$750.If price of £ increase to $1.5100, buy £ at £ & sell £ & make $ =.06 per £ or 12500*.06=$750. Subtract transaction cost of 250, & make a net profit of $ =$500.Subtract transaction cost of 250, & make a net profit of $ =$500.

47 Content Currency Future Market (CFM) Chapter 4 Def of CFM: CF are contract between the future dealers & client.Def of CFM: CF are contract between the future dealers & client. It does not involve commercial banks & tradersIt does not involve commercial banks & traders Difference between CFM & Forward Exchange Market, as inflation, contract is drawn up between banks & client;Difference between CFM & Forward Exchange Market, as inflation, contract is drawn up between banks & client; Major Participants in CFM are: Importer & Exporter, Speculators & Arbitrageur, and those who invest abroad.Major Participants in CFM are: Importer & Exporter, Speculators & Arbitrageur, and those who invest abroad.

48 Content Future Contracts Chapter 5 Currency futures contracts, patterned after grain and commodity contracts, are traded at the International Monetary Market (IMM) and the Chicago Mercantile Exchange (CME) 1. 1.Futures contracts are written for a specific quantity of a given currency. The exchange rate is fixed at the time the contract is entered into, and delivery date is set by the IMM or CME Contract sizes are standardized for a currency Transactions in futures market require payment of a commission to trader rather than the bid/ask spreads of the forward market Futures contracts are marked to market daily. In other words, at the end of each day, the contracts are settled and the resulting profits and losses are paid Market participants are required to maintain a margin or security deposit with a broker.

49 Content Forward Contracts Chapter 5 Forward contracts can be written for any quantity mutually agreed upon by the two parties. Contract sizes are not standardized. Transactions in forwards are usually conducted on a bank-to-client basis Since forward contracts are custom tailored for each agreement, there is no daily marking to market because there is no centralized market No requirement for margin or security deposit.

50 Content Currency Options Chapter 5 Currency options give the holder the right, but not the obligation to buy or sell a given amount of a particular currency at a fixed price per unit for a specific time period. Call Option A call option is the right to BUY foreign currency A call option is the right to BUY foreign currency Put Option A put option is the right to SELL foreign currency A put option is the right to SELL foreign currency American Option A holder has the right to exercise the option at any time up to the expiration date A holder has the right to exercise the option at any time up to the expiration date European Option A holder has the right to exercise the option ONLY on the expiration date A holder has the right to exercise the option ONLY on the expiration date Exercise / Strike Price The price at which the option holder can buy or sell the contracted currency The price at which the option holder can buy or sell the contracted currency

51 Content Currency Options Chapter 5 In-the-money An option that would be profitable to exercise. Put: The spot exchange rate is less than the strike price Call: The spot exchange rate is greater than the strike price Out-of-the-money An option that would not be profitable to exercise Call: The spot exchange rate is less than the strike price Put: The spot exchange rate is greater than the strike price

52 Content Currency Options Chapter 5 Currency options can be used by hedgers and speculators: With a call option, the owner can profit (hedge) from (against) increases in the spot exchange rate. With a call option, the owner can profit (hedge) from (against) increases in the spot exchange rate. With a put option, the owner can profit (hedge) from (against) decreases in the spot exchange rate. With a put option, the owner can profit (hedge) from (against) decreases in the spot exchange rate. Currency options are most appropriate when hedging currency transactions that are possible but not certain to occur. Currency options are most appropriate when hedging currency transactions that are possible but not certain to occur.

53 Content Currency Options Chapter 5 Currency Option Valuation Theoretical value = Intrinsic Value + Time Value Intrinsic Value = The amount by which the option In-the-money Intrinsic Value = The amount by which the option In-the-money Time Value = The amount by which the option exceeds the Intrinsic Value Time Value = The amount by which the option exceeds the Intrinsic Value Value of an option increases with longer time expiration and greater variability in exchange rates

54 Content Currency Options Chapter 5 Comparison between a put option and call option: Put option is an option with the holder of a security to sell the security to the issuer or to the person who wrote the put option. Call Option which is a contract whereby the purchaser, owner or holder is given the right but is not obligated to purchase the underlying security or commodity at a fixed strike price within a limited time frame.

55 Content INTERNATIONAL PARITY CONDITIONS Chapter 6 Five key international parity relationships result from these arbitrage activities Purchasing power parity Purchasing power parity Fisher effect Fisher effect International Fisher effect International Fisher effect Interest Rate Parity Interest Rate Parity Unbiased Forward Rates Unbiased Forward Rates These parity conditions are linked by the following: The adjustment of various rates and prices to inflation The adjustment of various rates and prices to inflation The notion that money should have no effect on real variables The notion that money should have no effect on real variables

56 Content Purchasing Power Parity (PPP) Chapter 6 Absolute – By examining the cost of goods in various countries using the spot exchange rate, we are able to determine the real or (PPP) exchange that should exist (assuming markets are completely efficient). In other words, price levels adjusted for exchange rates should be equal across countries. Relative – This theory states that the spot exchange rate is not a good determinant of (PPP), but that the change of the exchange rate is a more accurate measure. In other words, the exchange rate of one currency to another will adjust to reflect changes in price levels.

57 Content Fisher Effect Chapter 6 A theory by Irving Fisher which states the following: Interest Rates = Required Rate of Return + Compensation for possible Inflation Interest Rates = Required Rate of Return + Compensation for possible Inflation Inflation and home currency depreciation are jointly determined by the growth of domestic money supply relative to the growth of domestic money demand. Inflation and home currency depreciation are jointly determined by the growth of domestic money supply relative to the growth of domestic money demand.

58 Content International Fisher Effect Chapter 6 The spot exchange rate should change in equal amount but in opposite direction to the difference in interest rates between two countries. The spot exchange rate should change in equal amount but in opposite direction to the difference in interest rates between two countries. Investors holding foreign securities must be rewarded with higher interest rates to be willing to hold securities denominated in currencies expected to depreciate against the investors home currency. Investors holding foreign securities must be rewarded with higher interest rates to be willing to hold securities denominated in currencies expected to depreciate against the investors home currency.

59 Content Interest Rate Parity (IRP) Chapter 6 This parity theorem states that spot exchange rate and future exchange rate already take into account the different in interest rates, therefore no real profit can be made.

60 Content Covered Interest Arbitrage Chapter 6 A portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for dollars. Unlike the previous example, there are times when the market IS NOT in a state of equilibrium. When the market is in this state, the potential for arbitrage exists. The requirement for profit is that Interest Rate Parity is not holding.

61 Content Covered Interest Arbitrage Chapter 6

62 Content Uncovered Interest Arbitrage Chapter 6 Uncovered Interest Arbitrage is similar to Covered Interest Arbitrage, however, in this example, we do not have a forward contract exchange rate at the end of our investment period. Instead, we rely upon the spot rate today and the spot rate at DAY 360 to determine our exchange rates.

63 Content Uncovered Interest Arbitrage Chapter 6

64 Content Law of One Price Chapter 6 The basis for PPP is the "law of one price". In the absence of transportation and other transaction costs, competitive markets will equalize the price of an identical good in two countries when the prices are expressed in the same currency. There are three caveats with this law of one price. (1) As mentioned above, transportation costs, barriers to trade, and other transaction costs, can be significant. (2)There must be competitive markets for the goods and services in both countries. (3)The law of one price only applies to tradable goods; immobile goods such as houses, and many services that are local, are of course not traded between countries.

65 Content The Fisher effect & The International Fisher effect Chapter 6 The Fisher effect is a theory describing the long-run relationship between inflation and interest rates. This equation tells us that, all things being equal, a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate (and vice versa). Nominal rate of interest = real rate of interest + inflation (Econ terms) The International Fisher effect states that the Interest rate differential between two countries should be an unbiased predictor of the Future change in the spot rate.

66 Content International Trade Finance Chapter 23 The Trade Relationship Nature of relationship between exporter and importer is important to understand for import/export financing. Unaffiliated Unknown – A foreign importer which an exporter has not previously conducted business. In this case, the two parties would need to create a detailed sales contract. Unaffiliated Known - A foreign importer which an exporter has previously conducted business. Specific terms may still require negotiation; however, the requirements may be less strict Affiliated Known - A foreign importer that is a subsidiary part of the exporter, also known as intra-firm trade.

67 Content International Trade Finance Chapter 23 The Trade Dilemma International trade must work around a fundamental dilemma. TRUST! Each party wants a guarantee: The Seller wants payment before shipment of goods The Buyer wants shipment of goods before payment What do you do? Hire a 3rd party to verify each stage of the transaction. Just like an escrow service, a bank can serve to verify and guarantee payment, exchange rate, receipt of goods, and provide protection against the following risks: Risk of Non-completion of the transaction Protection against foreign exchange risk

68 Content Elements of the Import/Export Transaction Chapter 23 Pricing Documentation Bill of lading (B/L) Straight = Provides that the carrier deliver the merchandise to the designated consignee only. Order = directs the carrier to deliver goods to the shipper. Commercial Invoice – description of items, unit price, financial terms, amount due, and shipping conditions. Insurance Documents Consular Invoices – Issue in exporting country by consulate of importing country to provide customs stats and information. Packing lists and Export Declaration

69 Content Elements of the Import/Export Transaction Chapter 23 Shipping Deadline – Time horizon for shipment of goods. Payment Instructions - determines whether exporter or importer will pay freight, insurance, and other transaction related charges. Letter of Credit - A banks conditional promise to pay. Issued by a bank at the request of an importer, in which the bank promises to pay the exporter upon documents specified in the Letter of Credit (L/C). A Letter of Credit reduces the risk of transaction non-completion. A disadvantage is the fees charged for the guarantee of payment.

70 Content Elements of the Import/Export Transaction Chapter 23 Draft – Also known as a bill of exchange, A draft is a written order by and exporter (seller) instructing a buyer to pay a specified amount of money at a predetermine time. A sight draft is a payable upon presentation. A time draft promises to pay at a certain time. Bankers Acceptance Notes - When a bank accepts a draft it becomes a bankers acceptance note. It is a unconditional promise of that bank to make payment on the draft when it matures. Trade Financing Alternatives - In order to trade international trade receivables, firms use the same financing instruments as for domestic trade receivables.

71 Content Elements of the Import/Export Transaction Chapter 23 Bill of Lading The document issued on behalf of the carrier describing the kind and quantity of goods being shipped, the shipper, the consignee, the ports of loading and discharge and the carrying vessel. A memorandum or acknowledgment in writing, signed by the captain or master of a ship or other vessel, that he has received in good order, on board of his ship or vessel, therein named, at the place therein mentioned, certain goods therein specified, which he promises to deliver in like good order, (the dangers of the seas excepted,) at the place therein appointed for the delivery of the same, to the consignee therein named or to his assigns, he or they paying freight for the same.

72 Content Elements of the Import/Export Transaction Chapter 23 Bill of Lading (Cont.) Ought to contain the name of the consignor; the name of the consignee the name of the master of the vessel; the name of the vessel; the place of departure and destination; the price of the freight; and in the margin, the marks and numbers of the things shipped. It is usually made in three originals, or parts. One of them is commonly sent to the consignee on board with the goods; another is sent to him by mail or some other conveyance; and the merchant or shipper retains the third. The master should also take care to have another part for his own use. The bill of lading is assignable, and the assignee is entitled to the goods, subject, however, to the shipper's right, in some cases, of stoppage in transition

73 Content Elements of the Import/Export Transaction Chapter 23 Straight The most common form, which is widely used in the U.S., is the multi-part, non-negotiable UNIFORM DOMESTIC STRAIGHT BILL OF LADING. Because it has been in use for many years, shippers have a stock of preprinted forms, which often contain not only a description of their commodities, and applicable classes but, in addition, reference to the carrier's filed tariff. These forms were mandated by the National Motor Freight Classification (NMFC), a filed tariff in which virtually all motor carriers participated, which contained not only the classification of commodities and rules regarding the details of their transportation, but in addition, the contract terms and conditions for the uniform domestic straight bill of lading.

74 Content Elements of the Import/Export Transaction Chapter 23 Straight (Cont.) And the law, commonly called the filed rate doctrine, required strict adherence to the carriers tariff. On August 26, 1994, the filed rate requirement in the federal law governing interstate transportation was repealed. Effective January 1, 1996, it was abolished for intrastate shipments when federal preemption prohibited the states from regulating the rates, routes and services provided by motor carriers for intrastate transportation. Shippers and carriers have since had the opportunity to negotiate the terms and conditions of the bill of lading contracts since this deregulation took place. Individual shippers and carriers as well as shipper and carrier trade organizations are now debating the issue.

75 Content Elements of the Import/Export Transaction Chapter 23 Insurance Export shipments are usually insured against loss, damage, and delay in transit by cargo insurance. For international shipments, the carrier's liability is frequently limited by international agreements and the coverage is substantially different from domestic coverage. Either the buyer or the seller, depending on the terms of sale, may make arrangements for cargo insurance. Exporters are advised to consult with international insurance carriers or freight forwarders for more information.

76 Content Elements of the Import/Export Transaction Chapter 23 Packing lists and export declaration Export packing list. Considerably more detailed and informative than a standard domestic packing list, an export packing list itemizes the material in each individual package and indicates the type of package: box, crate, drum, carton, and so on. It shows the individual net, legal, tare, and gross weights and measurements for each package (in both U.S. and metric systems). Package markings should be shown along with the shipper's and buyer's references.

77 Content Elements of the Import/Export Transaction Chapter 23 Packing lists and export declaration (Cont.) The packing list should be attached to the outside of a package in a waterproof envelope marked "packing list enclosed." The list is used by the shipper or forwarding agent to determine (1) (1)The total shipment weight and volume and (2) (2)Whether the correct cargo is being shipped. In addition, customs officials (both U.S. and foreign) may use the list to check the cargo.

78 Content Interest Rate & Currency Swap Chapter 14 The following areas are where firms can experience interest rate risk 1. 1.Debt Service – MNE will have differing debt, interest rates, and different currency denominations. Each country has its own interest rate yield curve and credit spreads Marketable Securities – This represents potential earnings or cash inflows to the firm. These also are subject to interest rate risk for the MNE Reference Rate – The interest rate used as a baseline for debt service payment and marketable securities. LIBOR (London Inter-bank Rate) and Prime Rate are two examples of baseline lending standards upon which lending agreements are built.

79 Content Interest Rate & Currency Swap Chapter 14 Credit Risk Also known as roll-over risk, this is the possibility that a borrowers credit worthiness has been reduced from the 1st credit request to the 2nd credit request. A change in credit worthiness can result in changing fees, interest rates, and possibly rejection. Re-pricing Risk A negative change in interest rates at the time of reapplication of credit by a borrower.

80 Content Interest Rate & Currency Swap Chapter 14

81 Content Interest Rate & Currency Swap Chapter 14 Strategy #1 The firm will enjoy the safety and comfort of a known, fixed interest rate throughout the 3-year period. However, should the interest rates fall during the 3- year period; the firm will not be able to take advantage of the new rates. On the other hand, the firm will be protected from any future interest rate increases.

82 Content Interest Rate & Currency Swap Chapter 14 Strategy #2 This protects the firm from both re-pricing risk and credit or roll-ever risk. The firm may enjoy reductions in interest rates but also experience increased interest rates. Strategy #3 The firm is able to enjoy freedom from re-pricing risk, however, due to annual reapplication, the firm now experiences credit or roll-over risk

83 Content Interest Rate & Currency Swap Chapter 14 Managing a Floating Rate Loan There are several instruments, which that can be used to manage any interest rate risk the firm may experience through floating interest rates. Forward Rate Agreement – The buyer obtains the right to lock in an interest rate for a desired term, which begins in a future date. If interest rates rise during the contract, the seller will pay the buyer the difference. Should interest rates fall; the buyer will pay the seller the difference. Typically come in 1,3,6,9, and 12-month increments. These are very similar to forward currency contracts.

84 Content Interest Rate & Currency Swap Chapter 14 Managing a Floating Rate Loan (Cont) Interest Rate Futures – Traded on the Chicago Mercantile Exchange and the Chicago Board of Trade. Allows firm to hedge a floating-rate interest payment. Interest Rate Swaps – Swaps are contractual agreements to exchange or swap a series of cash flows. In the case of interest rate swaps, one party trades a series of fixed interest rate payments for the floating interest rate payments of another.

85 Content Interest Rate & Currency Swap Chapter 14 Debt service: Cash required over a given period for the repayment of interest and principal on a debt. Your monthly mortgage payments are a good example of debt service. As the debt services industry encompasses a wide range of companies, you'll need to learn about company types in order to determine the best possible debt services company for you. One thing that universal is the general agreement of the fact that your ability to become debt free is as good as the determination you have in you to accomplish this.

86 Content Interest Rate & Currency Swap Chapter 14 Reference Rate A reference rate is any publicly available quoted number or value that is used by the parties to a financial contract It is often some form of LIBOR index, but can be anything, such as a consumer price index, house prices, unemployment rate A reference rate must be independent and outside the control of either of the parties who reference it, otherwise there will be a conflict of interest. (If either party has the ability to alter the rate, it is safe to assume that they will do so in their favor)

87 Content Interest Rate & Currency Swap Chapter 14 Interest rate future An interest bearing instrument as the underlying assets. Examples include Treasury-bill futures, Treasury-bond futures, and Eurodollar futures. They are essentially over-the-counter contracts traded on a one to one basis among the parties involved, for settlement on a future date. The parties decide the terms of these contracts mutually at the time of their initiation. If a forward contract is entered into through an exchange, traded on an exchange and settled through the Clearing Corporation/ House of the exchange, it becomes a futures contract.

88 Content Users and Uses of Interest Rate Swaps Chapter 14 Interest rate swaps are used for one or more of the following reasons: To obtain lower cost funding To hedge interest rate exposure To obtain higher yielding investment assets To create types of investment asset not otherwise obtainable To implement overall asset or liability management strategies To take speculative positions in relation to future movements in interest rates.

89 Content Users and Uses of Interest Rate Swaps Chapter 14 The advantages of interest rate swaps include the following: A floating-to-fixed swap increases the certainty of an issuer's future obligations. Swapping from fixed-to-floating rate may save the issuer money if interest rates decline. Swapping allows issuers to revise their debt profile to take advantage of current or expected future market conditions. Interest rate swaps are a financial tool that potentially can help issuers lower the amount of debt service.

90 Content Multinational Capital Budgeting Chapter 18 Capital Budgeting Essentially uses the same approach as domestic capital budgeting by identifying the following Identifying the initial capital invested or put at risk Estimating cash flows stemming from the project Identifying the appropriate discount rate to calculate the present value The use of NPV and IRR to determine the acceptability of potential prospects

91 Content Multinational Capital Budgeting Chapter 18 Special Considerations The primary difference is the firm must work to distinguish between parent cash flow and subsidiary cash flow. Must take into account inflationary differences Must also take into account political and taxation difference

92 Content Multinational Capital Budgeting Chapter 18 Capital Budgeting The process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return. Payback, Discounted Payback, NPV, Profitability Index, IRR and MIRR are all capital budgeting decision methods.

93 Content Payback Chapter 18 YearCash flow Running Total 0-15, ,000-8,000 So after the 1st year, the project has not yet broken even 2+6,000-2,000 So after the 2nd year, the project has not yet broken even 3+3,000+1,000 So the project breaks even sometime in the 3rd year Negative Balance / Cash flow from the Break Even Year= When in the final year we break even -2,000 / 3,000=0.666 When: At the beginning of the year we had still had a -2,000 balance. So do this. So we broke even 2/3 of the way through the 3rd year. So the total time required to payback the money we borrowed was 2.66 years.

94 Content Discounted Payback Chapter 18 Negative Balance / Cash flow from the Break Even Year= When in the final year we break even -58 / 621=0.093 So we break even sometime in the 5th year. When? So using the Discounted Payback Method we break even after years. YearCash flowDiscounted Cash flowRunning Total 0-15, , , ,000 6,363 -8, ,000 4,959 -3, ,000 2,254 -1, ,000 1, ,

95 Content Net Present Value (NPV) Chapter 18 Once you understand discounted payback, NPV is so easy! NPV is the final running total number. That's it. In the example above the NPV is 563. That's all. Basically NPV and Discounted Payback are the same idea, with slightly different answers. Discounted Payback is a period of time, and NPV is the final dollar amount you get by adding all the discounted cash flows together. If the NPV is positive, then approve the project. It shows that you are making more money on the investment than you are spending on your cost of capital. If NPV is negative, then do not approve the project because you are paying more in interest on the borrowed money than you are making from the project.

96 Content Profitability Index (PI) So in example, the PI = For every dollar borrowed and invested we get back $1.0375, or one dollar and 3 and one-third cents. This profit is above and beyond our cost of capital Profitability IndexEqualsNPVDivided byTotal InvestmentPlus1 PI=563/15,000+1 Chapter 18 YearCash flow 0-15, , , , , ,000

97 Content Internal Rate of Return (IRR) Chapter 18 IRR is the amount of profit you get by investing in a certain project. It is a percentage. An IRR of 10% means you make 10% profits per year on the money invested in the project. To determine the IRR, you need the financial calculator GCFo 7000GCFj 6000GCFj 3000GCFj 2000GCFj 1000GCFj FIRR After you enter these numbers the calculator will entertain you by blinking for a few seconds as it determines the IRR, in this case 12.02%

98 Content Internal Rate of Return (IRR) Chapter 18 But there are problems!!! Sometimes it gets confusing putting all the numbers in, especially if you have alternate between a lot of negative and positive numbers. IRR assumes that the all cash flows from the project are invested back into the project. Sometimes, that simply isn't possible. Let's say you have a sailboat that you give rides on, and you charge people money for it. Well you have a large initial expense (the cost of the boat) but after that, you have almost no expenses, so there is no way to re-invest the money back into the project. Fortunately for you, there is the MIRR.

99 Content Modified Internal Rate of Return (MIRR) Chapter 18 Basically the same as the IRR, except it assumes that the revenue (cash flows) from the project are reinvested back into the company, and are compounded by the company's cost of capital, but are not directly invested back into the project from which they came. MIRR assumes that the revenue is not invested back into the same project, but is put back into the general "money fund" for the company, where it earns interest. We don't know exactly how much interest it will earn, so we use the company's cost of capital as a good guess.

100 Content Modified Internal Rate of Return (MIRR) Terminal value: Assume, again, that the company's cost of capital is 10% Chapter 18 Cash FlowTimes= Future Value of that years cash flow. Note 7000X(1+.1) ^ 4=10249Compounded for 4 years 6000X(1+.1) ^ 3=7986Compounded for 3 years 3000X(1+.1) ^ 2=3630Compounded for 2 years 2000X(1+.1) ^ 1=2200Compounded for 1 years 1000X(1+.1) ^ 0=1000 Not compounded at all because this is the final cash flow TOTAL=25065This is the Terminal Value

101 Content Modified Internal Rate of Return (MIRR) Now Calculating Chapter GCFo 0GCFj 0G 0G 0G 25065GCFj FIRR Why All Those Zeros? Because the calculator needs to know how many years go by. But you don't enter the money from the sum of the cash flows until the end, until the last year. You have to understand that the cash flows are received from the project, and then get used by the company, and increase because the company makes profit on them, and then, in the end, all that money gets 'credited' back to the project. Anyhow, the final MIRR is 10.81%

102 Content Multinational Capital Budgeting Now Decision Time!! Chapter 18 Decision Method ResultApprove?Why? Payback2.66 yearsYesWell, cause we get our money back Discounted Payback years Yes Because we get our money back, even after discounting our cost of capital. NPV$500Yes Because NPV is positive (reject the project if NPV is negative) Profitability Index1.003YesCause we make money IRR12.02%Yes because the IRR is more than the cost of capital MIRR10.81%Yes because the MIRR is more than the cost of capital

103 Content Multinational Capital Budgeting Difference between Parent Cash Flow and Subsidiary Cash Flow Parent cash flow must be distinguished from project cash flow. It is the parent cash flow that matters. The parent cash flow is the cash flow that can be reinvested into other projects and can be used to pay dividends and can be used to reduce debt. So parent cash flow then is the important cash flow and the parent cash flow must have the positive net present value to be a viable project. Chapter 18

104 Content Multinational Capital Budgeting 2. 2.Parent cash flow can be different from project cash flow for the following reasons: 1. 1.Parent can arrange special financing that differs from project to project New projects may cause existing projects in other parts of the world to reduce their cash flow. This is a concept known as cannibalism Parent cash flow may be affected by political reasons established by the host country. These are usually known as "repatriation" restrictions Tax consequences may be different in different countries Royalty may affect parent cash flow and management fees charged by the parent or license fees charged by the parent and finally the parent cash flow may be affected by a concept known as "transfer pricing" Inflation rates may be different in different countries Exchange rates will change and will affect annual cash flows. Chapter 18

105 Content Multinational Capital Budgeting Similarities between financial options and real options Chapter 18 Financial OptionsReal Options SStock PricePV of Expected Cash Flows XExercise PricePV of Fixed Costs s Stock Price Movement Uncertainty Uncertainty of Expected Cash Flows T- t Time to Expiry dDividendsValue lost over Duration of Option rRisk-Free Interest Rate

106 Content International Financial Market Sources of Capital International Market: business operation International Market: business operation External Market: External Market: A. Domestic Market: domestic funds for domestic use. B. International Market: domestic funds for foreign use. C. International Market: foreign funds for domestic use. D. Offshore Market: foreign funds for foreign use ie. London, N.Y., Tokyo, Zurich, Singapore, Bahrain, Bahamas.

107 Content U.S. Dollar time deposits in a bank outside the U.S.A. U.S. Dollar time deposits in a bank outside the U.S.A. Bank may be foreign bank or overseas branch of a U.S. bank. Bank may be foreign bank or overseas branch of a U.S. bank. Deposits could be in: Call Money, Overnight Draft, 3-month CD. Deposits could be in: Call Money, Overnight Draft, 3-month CD. Eurodollar deposits are not demand deposit and cant be transferred by a check drawn on the bank having the deposit. It can be transferred by a wire or cable from a balance-hold in a corresponding bank located in the U.S. Eurodollar deposits are not demand deposit and cant be transferred by a check drawn on the bank having the deposit. It can be transferred by a wire or cable from a balance-hold in a corresponding bank located in the U.S. Banks in which Eurodollar or Eurocurrencies are deposited are generally called Euro-banks. Banks in which Eurodollar or Eurocurrencies are deposited are generally called Euro-banks. Eurodollar vs Eurocurrencies Market Eurodollar vs Eurocurrencies Market

108 Content 1.Convenient money market 2.Major source of short-term bank loans 3.Arbitrage purpose 4.U.S. long-time trade deficit 5.Money regulation in the U.S. 6.Military expenses of the 1960 s and 1970 s 7.Freezing of foreign assets in the U.S. in the 1970 s and 1980 s Reasons for Existence of Eurodollar Market

109 Content Size of the Market According to the report by Bank for International Settlement, the size of the market has increased 4 times since the 1970s to $2,056 billion. According to the report by Bank for International Settlement, the size of the market has increased 4 times since the 1970s to $2,056 billion.Bank for International SettlementBank for International Settlement A Majority of the dollar deposits are in Europe (60%), and the rest are in Asia -- mainly in Japan and Singapore. A Majority of the dollar deposits are in Europe (60%), and the rest are in Asia -- mainly in Japan and Singapore. The Expansion of the market is very similar to the money creation principle of a commercial bank. The Expansion of the market is very similar to the money creation principle of a commercial bank.

110 Content Money Market (Euro-Line of Credit, Revolving Credit, Syndicated Short-term and Medium-term loans) Money Market (Euro-Line of Credit, Revolving Credit, Syndicated Short-term and Medium-term loans) Euro-CD, such as Spot Rate CD, Roll-over Credit where the interest is paid in floating rate and TAPS, CD s for less than a year with min $25,000 denomination which could be in a series of identical CD s (Tranche) or single issue, and Five-currency CD (denominated in a basket of five different currencies). Euro-CD, such as Spot Rate CD, Roll-over Credit where the interest is paid in floating rate and TAPS, CD s for less than a year with min $25,000 denomination which could be in a series of identical CD s (Tranche) or single issue, and Five-currency CD (denominated in a basket of five different currencies). Euro-Capital Market

111 Content Eurobonds 1.The Euro-note Market: short to medium-term debt instruments (negotiable promissory notes) sold in the Eurocurrency market. They are underwritten by different facilities, such as Revolving Underwriting Facilities (RUF), Note Insurance Facilities (NIF) and Standby Note Issuance Facilities (SNIF). They are underwritten by different facilities, such as Revolving Underwriting Facilities (RUF), Note Insurance Facilities (NIF) and Standby Note Issuance Facilities (SNIF). 2.Euro-commercial Papers (ECP) - one, three and six-month maturities.

112 Content Eurobonds 3.Euro Medium-term Notes (EMTN): bridges maturity gap between ECP and Eurobond. 4.Euro-bond Market Straight Fixed Rate Issue -fixed CR, specified maturity date and full principal repayment upon final maturity. Straight Fixed Rate Issue -fixed CR, specified maturity date and full principal repayment upon final maturity. Floating Rate Notes (FRN) - semiannual coupon, variable rate, fixed maturity or perpetuities. Floating Rate Notes (FRN) - semiannual coupon, variable rate, fixed maturity or perpetuities. Euro-Equity Convertibles - similar to straight bond with added feature to convert to a certain number of stocks prior to maturity. Euro-Equity Convertibles - similar to straight bond with added feature to convert to a certain number of stocks prior to maturity.

113 Content Eurobonds 4.Euro-bond Market (Cont ) Dual currency Bonds - purchase price and coupon denominated in one currency and the principal redemption value fixed in a second currency. Currency Cocktail Bond - denominated in one of several currency baskets such as SDR or ECU; stable interest and principal payments. Stripped Bond - deep discounted bond issued in bearer form in order to sell them to non-residents; Certificate of Accrual on Treasury Securities (CATS).

114 Content Eurobonds 5.Yankee Bond - issued by non-residents in U.S. Dollars sold in the U.S. 6.Foreign Bond - issued by non-residents in non-Dollars sold in the U.S. 7.Treasury Bond - long-term obligation of federal government (U.S.) 8.Corporate Bond (General, Debenture, Jr, Subordinate) - long-term obligation of corporation. 9.Municipal Bond - long-term obligation of state and local government. 10.Interest and Currency Swaps

115 Content Foreign Direct Investment Chapter 15 The Theory of Comparative Advantage provides a basis for understanding world trade. PRODUCTIONWaffle Irons Tennis Rackets Country A: 126 Country B: 102 Country A has a comparative advantage of production over Country B. Country A has an absolute advantage over Country B in both columns; however, the relative advantage is greater in Tennis Rackets. For ever 2 units made by Country B, Country A can make 6. Therefore, Country A should specialize in Tennis Rackets and Country B should specialize in Waffle Irons. If each country specializes, then total production should increase because of specialization.

116 Content Foreign Direct Investment Chapter 15 Limitations of Comparative Advantage Because of the givens of the theory, the reality is that governments do interfere and pure free trade does not exist in all areas. There are more factors of production than listed within the theory. Geographical restrictions, labor disputes, management practices, taxes, raw material availability, etc … all serve to influence production. Comparative advantage shifts over time. Less developed countries have increased their production capacity and technological advantages.

117 Content Foreign Direct Investment Chapter 15 The OLI Paradigm and Internalization For a MNE to receive foreign direct investment (FDI), it must enjoy one or more of the following: Owner-Specific Advantages = These must be firm specific, not easily copied, and in a form that can be transferred to foreign subsidiaries. Location-Specific Advantages = Includes factors like low-cost productive labor force, sources of raw materials, large domestic market, or technological superiority Internalization = A proprietary technology or human capital that is capable of continuing to create new expertise.

118 Content Strategy and Management (one approach to execute acquisition process) Chapter 15 Identification The key document in an international shipment under an L/C is the bill of lading (B/L). The usual provisions contained in a B/L include the following: A description of the merchandise Identification marks on the merchandise Evidence of loading (receiving) ports Name of the exporter (shipper) Name of the importer Status of freight charges (prepaid or collect) Date of shipment

119 Content Strategy and Management (one approach to execute acquisition process) Chapter 15 Completion of ownership change Bankers Acceptance (BA) This is a time draft that is drawn on and accepted by a bank (the importers bank). The accepting bank is obliged to pay the holder of the draft at maturity. If the exporter does not want to wait for payment, it can request that the BA be sold in the money market. Trade financing is provided by the holder of the BA.

120 Content Strategy and Management (one approach to execute acquisition process) Chapter 15 Completion of ownership change Letters of Credit (L/C) These are issued by a bank on behalf of the importer promising to pay the exporter upon presentation of the shipping documents. The importer pays the issuing bank the amount of the L/C plus associated fees. Commercial or import/export L/Cs are usually irrevocable. Accounts Receivable Financing An exporter that needs funds immediately may obtain a bank loan that is secured by an assignment of the account receivable. Factoring (Cross-Border Factoring) The accounts receivable are sold to a third party (the factor), that then assumes all the responsibilities and exposure associated with collecting from the buyer.

121 Content Strategy and Management (one approach to execute acquisition process) Chapter 15 Management of acquired target and integration of business and culture Traditionally most small and medium-size Emerging Market projects are unable to penetrate the international debt and/or equity market for cost-efficient financing for reasons related to: lack of resources to pursue opportunities abroad, concern over political risks, high exchange rate volatility, language barriers, inadequate loan guarantees and a lack of quality representation services.

122 Content Financial Analysis and Strategy (another approach to execute acquisition process) Chapter 15 Valuation (DCF, NPV, IRR) and negotiation Discounted Cash Flow: method of ranking investment proposals that employ time value of money concepts. (1) (1)Find the present value of each cash flow, including both inflows and outflows, discounted at the projects cost of capital. (2) (2)Sum these discounted cash flows; this sum is defined as the projects NPV. (3) (3)If the NPV is positive, the project should be accepted, while if the NPV is negative, it should be rejected. If two projects with positive NPVs are mutually exclusive, the one with the higher NPV should be chosen.

123 Content Financial Analysis and Strategy (another approach to execute acquisition process) Chapter 15 Financial settlement and compensation Internal Rate of Return (IRR) method: Accounts Receivable Financing Factoring Letters of Credit Bankers Acceptances Working Capital Financing Medium-Term Capital Goods Financing (Forfeiting) Counter-trade

124 Content Financial Analysis and Strategy (another approach to execute acquisition process) Chapter 15 Rationalization of operations, integration of financial goals and synergies Synergy: The condition wherein the whole is greater than the sum of its parts; in a synergistic merger, the post merger value exceeds the sum of the separate companies pre-merger values.

125 Content International Portfolio Theory and Diversification Chapter 20 As an MNE examines international portfolio risk, a firm must evaluate the following factors: Portfolio Risk - The ratio of the variance of the portfolios return relative to the markets return. Also known as the portfolio beta. Total Risk = Systematic Risk (Market or Diversifiable) + Unsystematic (Individual or non-diversifiable) Risk Foreign Exchange Risk - As stated in earlier chapters, this is the risk that foreign exchange rates may cause a loss of investment value.

126 Content Portfolio Measurements: Sharpe Measure = Ri – Rf σi Treynor Measure = Ri – Rf β i Capital Asset Pricing Model = Ke = krf + βi (km - krf) International Portfolio Theory and Diversification Chapter 20

127 Content International Portfolio Theory and Diversification Chapter 20 Portfolio risk Portfolio risk takes into consideration the time period or length of time required to return ones original investment. Portfolio diversification means not placing all your eggs into one carton. If the carton breaks, you do not loose all your eggs. Having your investments in different cartons minimizes total loss of the investment. MNCs diversify their portfolios by spreading their exposure to loss globally, across many countries, thereby helping to hedge against events such as exchange rate fluctuations, political upheaval or war in one country, which help to lower total risk. Forecasting portfolio risk has become an art in managing investment risk and the amount of return necessary to compensate for the risks taken.

128 Content International Portfolio Theory and Diversification Chapter 20 Total risk It involves all of an investment portfolios potential for loss. Total risk encompasses diversifiable risk (unsystematic risk) as well as market risk (systematic risk). Investors seek to be risk adverse, and try to minimize their exposure to total risk of their investment and potential loss of their investment. Systematic risk even with diversification cannot totally be removed. Some element of risk will always remain. MNCs raise capital in foreign markets, because interest rates are more favorable than in their home country. This will lower their cost of capital and maximize their shareholders wealth position. They will take the borrowed funds by paying the operating costs of their foreign subsidiary, without ever converting it back to their home currency.

129 Content International Portfolio Theory and Diversification Chapter 20 Total risk (Cont.) Foreign exchange rates are based upon many different factors within the economy of each country, causing fluctuations in this market. When the exchange rate appreciates or depreciates beyond the current rate paid by the investor, the investor will either lose or win accordingly. Most large corporations hedge their risk in foreign exchange by purchasing spots and forwards. The total dollar return on an investment can be divided into three separate elements: Capital gain or loss, currency gain or loss, and dividend interest income.

130 Content International Portfolio Theory and Diversification Chapter 20 Optimal international portfolios It benefits both investors and MNCs because it allows for a maximum return on ones investment or lower capital costs depending on the forecasted perceptions of a particular foreign currency market. By calculating the effective cost of capital and applying weighted average cost of capital models, standard deviations and betas along with ratios, an optimum portfolio can be achieved. The optimal international portfolio allows the investor to maximize return per unit of risk more so than would be received with just a domestic portfolio.

131 Content International Portfolio Theory and Diversification Chapter 20 Optimal international portfolios (Cont.) Portfolio theory was developed by Harry Markowitz (Nobel Prize 1990). It can be used to determine optimal international. portfolio, taking into account risk-return trade off. World Beta is given for each country, measures the co-movement between the returns in a country's stock market with the returns for the world stock market returns. Beta = % Change in a Country's Stock Market % Change in World Stock Market

132 Content International Portfolio Theory and Diversification Chapter 20 Sharp Ratio This ratio measures the return earned in excess of the risk free rate (normally Treasury instruments) on a portfolio to the portfolio's total risk as measured by the standard deviation in its returns over the measurement period. Or how much better did you do for the risk assumed. S = Return portfolio- Return of Risk free investment

133 Content International Portfolio Theory and Diversification Chapter 20 Treynor Ratio This ratio is similar to the above except it uses beta instead of standard deviation. It's also known as the Reward to Volatility Ratio, it is the ratio of a fund's average excess return to the fund's beta. It measures the returns earned in excess of those that could have been earned on the risks investment per unit of market risk assumed. T = Return of Portfolio - Return of Risk Free Investment

134 Content Global Cost and Availability of Capital Chapter 11

135 Content Global Cost and Availability of Capital Chapter 11 Our cost of equity can be calculated as follows: Ke = Krf + β (Km – Krf) Krf = Risk Free rate of interest estimated by the U.S. Treasury bond rate Km = The expected rate of return for the market β = The systematic risk using the correlation of the firms returns with that of the market Our cost of debt is as follows: Kd = The pre tax yield of a firms combined debt payments t = The firms corporate tax rate Our weighted average cost of capital is calculated as follows: KWACC = Ke (E / V) + Kd (1 – t) (D / V)

136 Content Global Cost and Availability of Capital Chapter 11 Interrelation between the opportunity cost of capital, capital rationing, and capital investment options are, and the constraints they can place on a firm: Opportunity Cost of Capital The return that is sacrificed by investing finance in one way rather than investing in an alternative of the same risk class, e.g. financial security. Cost of capital The opportunity cost of an investment, i.e. the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected.

137 Content Reasons for Capital Rationing Chapter 11 External Reasons: These arise when a firm is unable to borrow from the outside. For example if the firm is under financial distress, tight credit conditions, firm has a new unproven product. Borrowing limits are imposed by banks particularly in relation to smaller firms and individuals. Internal Reasons: Private owned company: Owners might decide that expansion is a trouble not worth taking. For example, there may that management fear to lose their control in the company. Divisional Constraints: Upper management allocates a fixed amount for each division as part of the overall corporate strategy. This arises from a point of view of a department, cost center or wholly owned subsidiary, the budgetary constraints determined by senior management or head office.

138 Content Reasons for Capital Rationing Chapter 11 Internal Reasons: Human Resource Limitations: Company does not have enough middle management to manage the new expansions Dilution: For example, there may be a reluctance to issue further equity by management fearful of losing control of the company. Debt Constraints: Earlier debt issues might prohibit the increase in the firms debt beyond a certain level, as stipulated in previous debt contracts. For example bondholders requiring in the bond contract, that they would accept a maximum Debt-to- Asset ratio = 40%.

139 Content Working Capital Management in the MNE Chapter 22 The operating cycle of any business creates funding needs, cash inflows, and cash outflows. Working Capital – The funding needed by the operating cycle of the firm Cash conversion cycle – The time period between the purchase of input goods (cash outflow) and payment for the sale of the finished goods (cash inflow). Net Working Capital (NWC) = (Accts Receivable + Inventory) – (Accts Payable) The MNE will have to decide whether to use short-term debt or take advantage of discounts offered by suppliers. Many times, the effective annualized cost of not taking discounts from suppliers is significantly higher than the annualized cost of short term borrowing from lending institutions.

140 Content Working Capital Management in the MNE Chapter 22 Days Working Capital A common method of benchmarking financial management is to calculate the Net Working Capital based upon the Days Sales Method. (Accts Receivable + Inventory) – (Accts Payable) 365 days

141 Content Working Capital Management in the MNE Chapter 22 Managing Receivables Independent Customers - What currency should out transactions be in? What should be the terms of payment? Self-Liquidating Bills – Using the Code Napoleon No good company should wait for cash when selling to a good customer. Banks will lend money based upon sales receipts (accounts receivable) of MNEs.

142 Content Working Capital Management in the MNE Chapter 22 Inventory Management Anticipating Devaluation – If local currency is expected to significantly devalue, management may decide to build up significant levels of inventory, while the currency still has purchasing power. Anticipating Price Freezes – A firm may properly anticipate a price freeze and take corrective measures against it. Management can create a local currency high price and then discount actual sales from it. Free Trade and Industrial Zones - A free trade zone provides an area, which eliminates customers or duties. Income taxes may also be reduced. A free industrial zone allows for the manufacture of goods tax and duty-free.

143 Content Working Capital Management in the MNE Chapter 22 The Working Capital Working Capital is a valuation metric that is calculated as current assets minus current liabilities. If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors that want their money quickly. Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength.

144 Content Working Capital Management in the MNE Chapter 22 The Working Capital (Cont.) Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative; depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Working capital is also called net current assets or current capital.

145 Content Working Capital Management in the MNE Chapter 22 Cash Conversion Cycle The cash conversion cycle is the duration between the purchase of a firm's inventory and the collection of accounts receivable for the sale of that inventory. Also known as cash cycle. Cash is therefore not involved until the company pays the accounts payable and collects accounts receivable. So the cash conversion cycle measures the time between outlay of cash and the cash recovery. This cycle is extremely important for companies whose focus is the retail sector. This measure illustrates how quickly a company can convert its products into cash through sales.

146 Content Working Capital Management in the MNE Chapter 22 Cash Conversion Cycle (Cont.) The cash conversion cycle, or net operating cycle, simply indicates the duration of time it takes the firm to convert its activities requiring cash into cash returns. As highlighted earlier, this ratio is vital since it represents the number of days a firm's cash is occupied with its operations. Naturally, a firm wants this cycle to be as short as possible. Therefore, a downward trend in this cycle is a positive signal while an upward trend is a negative signal. When the cash conversion cycle shortens, cash becomes free for other uses such as investing in new capital, spending on equipment and infrastructure, as well as preparing for possible share buy-backs down the road.

147 Content Working Capital Management in the MNE Chapter 22 The Net Working Capital Working capital is sometimes used to refer only to current assets, while net working capital is defined to be the difference between current assets and current liabilities. To understand net working capital better, it helps to look at each word individually. Net: This means we look at cash tied up in short term operating assets such as accounts receivable and inventory, offset by non-interest bearing current liabilities such as accounts payable.

148 Content Working Capital Management in the MNE Chapter 22 The Net Working Capital (Cont.) Working: This means that we want to focus on cash tied up in short term operating assets. Thus, working capital excludes long-term capital required for, say, investment in Plant, Property and Equipment (PP&E). Capital: This means that we want to calculate the amount of cash that a company has to tie up in working capital in order to run its business. More specifically, for industrial companies, "net working capital" equals cash tied up by a company's short term operating assets, netted against short term operating liabilities.

149 Content International Banking International Banking Motivations: Access to dollar and Eurocurrency deposits and international saving markets. uTasks of International Banking: Financing exports and importsFinancing exports and imports Trading foreign exchangeTrading foreign exchange Underwriting both Euro-bonds and foreign bondsUnderwriting both Euro-bonds and foreign bonds Borrowing and lending in Euro-currency marketBorrowing and lending in Euro-currency market Participate and organize foreign exchange marketParticipate and organize foreign exchange market Project financingProject financing International cash flow management & fund transferInternational cash flow management & fund transfer Solicitation for local currency deposits to operate as full-service banksSolicitation for local currency deposits to operate as full-service banks Serve as consultant for MNCServe as consultant for MNC

150 Content Risks in International Banking 1. Commercial Risk Facing difficulties in receiving the repayments of principal and interest on due date. Lack of financial and economic information about the clients and host countries and differences in accounting disclosure practices and legal procedures. 2. Country Risk Sovereign Risk: political, jurisdictional and cultural differences. Exchange Rate Risk: shortage of foreign exchange reserves; change in repayment schedules.

151 Content Advantages and Disadvantages of International Banking Advantages High rate of return for investment and relatively low loss ratioHigh rate of return for investment and relatively low loss ratio Ability to diversify loan portfolio.Ability to diversify loan portfolio. Excess demand for international loans, especially for development programs.Excess demand for international loans, especially for development programs. Usually international loans are safeguarded by official and non-official insurance agencies, such as export credit insurance.Usually international loans are safeguarded by official and non-official insurance agencies, such as export credit insurance. MENU

152 Content Advantages and Disadvantages of International Banking Disadvantages Unfamiliar political and social environments and rapidly changing macroeconomic and financial variables.Unfamiliar political and social environments and rapidly changing macroeconomic and financial variables. Unexpected events and regulators.Unexpected events and regulators. Weak demand for domestic loans has relaxed standards for international loans.Weak demand for domestic loans has relaxed standards for international loans. Only a few credit-worthy countries are available.Only a few credit-worthy countries are available. External debt problems of many foreign international countries, especially Latin American countries and major international loan loss by many international banks.External debt problems of many foreign international countries, especially Latin American countries and major international loan loss by many international banks.

153 Content Types of International Bank Offices n Correspondent Banking Two way link between banks (home and foreign bank); services offered include, but not limited to: accepting drafts, honoring L/C, and furnishing credit information. Two way link between banks (home and foreign bank); services offered include, but not limited to: accepting drafts, honoring L/C, and furnishing credit information. Representative Offices Representative Offices Cannot accept deposits, make loans, accept L/C or cash checks; just help and advise parent bank clients when they are doing business in host country.Cannot accept deposits, make loans, accept L/C or cash checks; just help and advise parent bank clients when they are doing business in host country. Agencies Relationship Agencies Relationship Like branch banking without having authority to accept deposit from the public; may accept deposits from other banks; can arrange loans, L/C and trade foreign exchange.Like branch banking without having authority to accept deposit from the public; may accept deposits from other banks; can arrange loans, L/C and trade foreign exchange.

154 Content Types of International Bank Offices Bank Subsidiaries and Affiliates Bank Subsidiaries and Affiliates Can be a separately incorporated bank or owned and control by bank (partially- owned or entirely-owned subsidiaries).Can be a separately incorporated bank or owned and control by bank (partially- owned or entirely-owned subsidiaries). n Branch Banking Extension of parent bank; can be full-service bank. Extension of parent bank; can be full-service bank. International Banking Facilities (IBF) International Banking Facilities (IBF) An accounting entity as well as a legal entity of a bank to capture a segment of the Euro Market.An accounting entity as well as a legal entity of a bank to capture a segment of the Euro Market. They are not subject to FDIC rules or Feds Required Rate Ratio.They are not subject to FDIC rules or Feds Required Rate Ratio. Deposits limited to non-residents only and size limitation.Deposits limited to non-residents only and size limitation. They are exempt from state and local tax.They are exempt from state and local tax. They could be U.S.-owned IBF (exempt from federal tax) or foreign- owned IBF, such as Japanese IBF and Italian IBF.They could be U.S.-owned IBF (exempt from federal tax) or foreign- owned IBF, such as Japanese IBF and Italian IBF.

155 Content Types of International Bank Offices (Cont.) Bank Subsidiaries and Affiliates Bank Subsidiaries and Affiliates Can be a separately incorporated bank or owned and control by bank (partially- owned or entirely-owned subsidiaries).Can be a separately incorporated bank or owned and control by bank (partially- owned or entirely-owned subsidiaries). n Branch Banking Extension of parent bank; can be full-service bank. Extension of parent bank; can be full-service bank. International Banking Facilities (IBF) International Banking Facilities (IBF) An accounting entity as well as a legal entity of a bank to capture a segment of the Euro Market.An accounting entity as well as a legal entity of a bank to capture a segment of the Euro Market. They are not subject to FDIC rules or Feds Required Rate Ratio.They are not subject to FDIC rules or Feds Required Rate Ratio. Deposits limited to non-residents only and size limitation.Deposits limited to non-residents only and size limitation. They are exempt from state and local tax.They are exempt from state and local tax. They could be U.S.-owned IBF (exempt from federal tax) or foreign- owned IBF, such as Japanese IBF and Italian IBF.They could be U.S.-owned IBF (exempt from federal tax) or foreign- owned IBF, such as Japanese IBF and Italian IBF.

156 Content Types of International Bank Offices (cont...) n Edged Act Banks Subsidiary of U.S. bank incorporated in U.S. under section 25 of federal banking law to engage in international banking functions and finance all types of the loans in the world.Subsidiary of U.S. bank incorporated in U.S. under section 25 of federal banking law to engage in international banking functions and finance all types of the loans in the world. They are physically located in states other than their own within the U.S. (inter-state banking).They are physically located in states other than their own within the U.S. (inter-state banking). If they are state chartered - called Agreement Corporation, if nationally chartered - called Edged Act Bank.If they are state chartered - called Agreement Corporation, if nationally chartered - called Edged Act Bank.

157 Content Good Luck!!


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