1. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-1 Part IV The Multinational Corporation’s Financial Decisions Chapter 12Multinational Treasury Management Chapter 13The Rationale for Hedging Currency Risks Chapter 14Transaction Exposure to Currency Risk Chapter 15Operating Exposure to Currency Risk Chapter 16Translation Exposure to Currency Risk Chapter 17Multinational Capital Structure and Cost of Capital

2. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-2 Chapter 12 Multinational Treasury Management 12.1Determining the Firm’s Financial Goals and Strategies 12.2Managing the Corporation’s International Trade 12.3Financing the Corporation’s International Trade 12.4Managing the Corporation’s Cash Flows 12.5Risk Management in the Multinational Corporation 12.6Summary

3. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-3 Functions of the modern treasury division F Determine the firm’s overall financial goals F Manage the risks of domestic and international transactions F Arrange financing for domestic and international trade F Consolidate and manage the financial flows of the firm F Identify, measure, and manage the firm’s risk exposures

4. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-4 Setting financial goals and strategies F Identify the firm’s core competencies and potential growth opportunities F Evaluate the business environment within which the firm operates F Formulate a comprehensive strategic plan for turning the firm’s core competencies into sustainable competitive advantages F Develop robust processes for implementing the strategic business plan

5. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-5 Managing international trade If something can go wrong, it will.

6. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-6 Managing international trade The problems of international trade include: F Exporters must assure themselves of timely payment F Importers must assure themselves of timely delivery of quality goods F Geographic and cultural distances involved in international trade are greater than in domestic trade F Trade disputes span several legal jurisdictions

7. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-7 Managing the risks of international shipments F Cover your risks with trade documentation –Commercial invoice –Packing list –Certificate of origin –Shipper’s export declaration –Export license –Bill of lading –Dock receipt –Warehouse receipt –Inspection certificate –Insurance certificate F Use a commercial freight forwarder (or freight shipper) to coordinate the logistics of trade

8. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-8 International payments F Open account: Seller delivers goods and bills buyer under agreed-upon payment terms. F Cash in advance: Buyer pays for goods prior to shipment. F Documentary collections: Seller draws a draft (trade bill or bill of exchange) payable to itself on the buyer. »Sight drafts: payable on demand »Time drafts: payable at a specified future date –Trade acceptances: drawn on and accepted by buyer –Banker’s acceptances: accepted by a commercial bank F Documentary credits: Letter of credit issued by buyer’s bank guarantees payment upon receipt of trade documents.

9. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-9 The risks of international payment methods

10. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-10 Payment through a banker’s acceptance

11. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-11 Payment through a confirmed letter of credit

12. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-12 Export financing F Open account: Accounts receivable can be discounted or factored (sold); long-term receivables can be sold to a forfaiter. F Cash in advance: Buyer provides financing. F Documentary collections: Both trade acceptances and banker’s acceptances can be discounted F Documentary credits: In some countries, letters of credit can be discounted or used as collateral for new borrowings. Other countries do not follow this practice.

13. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-13 Managing multinational cash flows F Cash management »Multinational netting »Forecasting funds needs F Managing relations between operating divisions and external partners »Credit management »Transfer pricing »Determination of hurdle rates on new investments

14. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-14 A five-step currency risk management program F Anticipating and responding to changes in exchange rates »identify the distribution of future exchange rates »estimate the sensitivity of revenues and expenses »determine the desirability of hedging »evaluate hedging alternatives »monitor the position and reevaluate

15. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-15 Setting a risk management policy F Risk management should complement the overall business plan

16. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-16 Exchange rate forecasting F Market-based exchange rate forecasts » E[S t d/f ] = F t d/f » E[S t d/f ] = S 0 d/f [(1+i d )/(1+i f )] t » E[S t d/f ] = S 0 d/f [(1+p d )/(1+p f )] t F Model-based exchange rate forecasts » Technical analysis - uses the recent history of exchange rates to predict future exchange rates » Fundamental analysis - uses macroeconomic data to predict future exchange rates

17. Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 12-17 The G30 Global Derivatives Study Group F Determine at the highest level of policy and decision making the scope of involvement in derivatives activities. F Value derivatives at market, at least for risk management purposes. F Quantify market risk under adverse market conditions, perform stress simulations, and forecast cash investing and funding needs. F Assess credit risk arising from derivatives activities based on measures of current and potential exposure against credit limits. F Establish market and credit risk management functions with clear authority, independent of the dealing function. F Authorize only professionals to transact and manage the risks, as well as to process, report, control, and audit derivatives activities. F Establish management information systems to measure, manage, and report the risks of derivatives activities. F Voluntarily adopt accounting and disclosure practices for international harmonization and greater transparency.