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Principles of Finance > Chapter 19 > Flashcards

Chapter 19 Flashcards

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1
Q

What is a Multinational Corporation?

A
  • A corporation that operates in two or more countries
  • Decision making within the corporation may be centralized in the home country, or may be decentralized across the countries in which the corporation does business
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2
Q

Why do firms expand into other countries?

A
  1. To seek production efficiency
  2. To avoid political and regulatory hurdles
  3. To seek new markets
  4. To seek raw materials and new technology
  5. To protect processes and products
  6. To diversify
  7. To retain customers
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3
Q

Multinational Financial Management vs. Domestic Financial Management

A
  1. Different currency denominations
  2. Political risk
  3. Economic and legal ramifications
  4. Role of governments
  5. Language and cultural differences
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4
Q

Direct Quotations

A

Expressed in US dollars

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5
Q

Indirect Quotations

A

Represents the number of units of a foreign currency needed to purchase one U.S. dollar

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6
Q

What is a cross rate?

A

The exchange rate between any two currencies. Cross rates are actually calculated on the basis of various currencies relative to the U.S. dollar

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7
Q

What is exchange rate risk?

A

The risk that the value of a cash flow in one currency translated to another currency will decline due to a change in exchange rates

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8
Q

International Money System

A
  • The framework within which exchange rates are determined
  • The blueprint for international trade and capital flows
  • Exchange rate terminology
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9
Q

Exchange rate terminology

A
  • Spot vs. forward exchange rate
  • Fixed vs. floating exchange rate
  • Devaluation and revaluation
  • Depreciation and appreciation
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10
Q

Spot Exchange Rate

A

The quoted price for a unit of foreign currency to be delivered “on the spot” or within a very short period of time

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11
Q

Forward Exchange Rate

A

The quoted price for a unit of foreign currency to be delivered at a specified date in the future

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12
Q

Fixed Exchange Rate

A

Set by the government and is allowed to fluctuate only slightly (if at all) around the desired rate, which is called the par value

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13
Q

Floating or Flexible Exchange Rate

A

Not regulated by the government, so the supply and demand in the market determine the currency’s value

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14
Q

Devaluation and Revaluation of a Currency

A
  • Refers to a decrease or increase in the stated par value of a currency whose value is fixed
  • This decision is usually made by the government without warning
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15
Q

Depreciation and Appreciation of a Currency

A
  • Refers to a decrease or increase, respectively, in the foreign exchange value of a floating currency
  • This change is caused by market forces rather than by a government
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16
Q

Freely Floating

A
  • Exchange rate determined by the market’s supply and demand for the currency
  • Governments may occasionally intervene and buy or sell their currency to stabilize fluctuations
17
Q

Managed Floating

A
  • Significant government intervention manages the exchange rate by manipulating the currency’s supply and demand
  • The target exchange rates are kept secret to limit speculation
18
Q

No Local Currency

A

The country uses either another country’s currency as its legal tender (like the U.S. dollar in Ecuador) or else belongs to a group of countries that share a currency (like the euro)

19
Q

Currency board arrangement

A

The country technically has its own currency but commits to exchange it for a specified foreign currency at a fixed exchange rate

20
Q

Fixed-Peg Arrangement

A

Occurs when a country locks its currency to a specific currency or basket of currencies at a fixed exchange rate

21
Q

What is difference between spot rates and forward rates?

A
  • Spot rates are the rates to buy currency for immediate delivery
  • Forward rates are the rates to buy currency at some agreed-upon date in the future
22
Q

When is the forward rate at a premium to the spot rate?

A
  • If the U.S. dollar buys fewer units of a foreign currency in the forward than in the spot market, the foreign currency is selling at a premium
  • In the opposite situation, the foreign currency is selling at a discount
23
Q

Interest Rate Parity

A

Holds that investors should expect to earn the same return in all countries after adjusting for risk

24
Q

Purchasing Power Parity

A

Implies that the level of exchange rates adjusts so that identical goods cost the same amount in different countries

25
Q

What impact does relative inflation have on interest rates and exchange rates?

A
  • Lower inflation leads to lower interest rates, so borrowing in low-interest countries may appear attractive to multinational firms
  • However, currencies in low-inflation countries tend to appreciate against those in high-inflation rate countries, so the effective interest cost increases over the life of the loan
26
Q

Eurocredits

A

Fixed term, floating-rate bank loans with no early repayment

27
Q

Eurobonds

A
  • Medium- to long-term international market for fixed- and floating-rate debt
  • Underwritten by an international bank syndicate and sold to investors in countries other than the one in whose currency the bond is denominated
28
Q

Foreign Bonds

A

Issued in a capital market other than the issuer’s

-The only thing foreign about it is the borrower’s nationality

29
Q

American Depository Receipts (ADRs)

A
  • Certificates representing ownership of foreign stock held in trust
  • About 1,700 ADRs are now available in the United States, with most of them traded on the over-the-counter (OTC) market
30
Q

Impact of Multinational Operations on Capital Budgeting Decisions

A
  • Foreign operations are taxed locally, then repatriated funds may be taxed in the U.S.
  • Foreign projects are subject to political risk
  • Repatriated funds must be converted to U.S. dollars (subject to exchange rate risk)

Principles of Finance (11 decks)

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