m Predicted outcomes of the study

m Explain why many firms invest in foreign

operations.
m Explain why foreign investment is different from
domestic investment.
m Describe how capital budgeting, in an international
environment, is similar or dissimilar to that in a
domestic environment.
m Understand the types of exchange-rate exposure
and how to manage exchange-rate risk exposure.
m Compute domestic equivalents of foreign currencies
given the spot or forward exchange rates.
m Understand and illustrate the purchasing-power
parity (PPP) and interest rate parity.
m Describe the specific instruments and documents
used in structuring international trade transactions.
m Distinguish among countertrade, export factoring,
and forfaiting.
m Oome Background
m Types of Exchange-Rate Risk Exposure
m Management of Exchange-Rate Risk
Exposure
m Otructuring International Trade
Transactions
What is a company¶s motivation to
invest capital abroad?

m ill product gaps in

foreign markets where
excess returns can be
earned.

m To produce products
in foreign markets more
efficiently than domestically.

m To secure the necessary

raw materials required for
product production.
m comparison to domestic markets
m ˜

  
m

    
m    
m     
       
m  
 
m  

m Explain with context to globalization

moreign exchange market
m Participants
m ixing of international prices
m Types-spot and forward
m oreign exchange rate- direct quote
and indirect quote
m Cross rate
m Bid ask spread
m It §

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m Market participants
Banks
Commercial companies
Central banks
Hedge funds as speculators
Investment management firms
Retail foreign exchange brokers
Non-bank foreign exchange companies
Money transfer/remittance companies
m The Y
 or Y
 is a commodities or securities
market in which goods are sold for cash and delivered
immediately. Contracts bought and sold on these markets are
immediately effective. Opot markets can operate wherever
the infrastructure exists to conduct the transaction. The spot
market for most securities exists primarily on the Internet.

m The p
 is the over-the-counter financial market in

contracts for future delivery, so called forward contracts. orward
contracts are personalized between parties (i.e., delivery time
and amount are determined between seller and customer). The
forward market is a general term used to describe the informal
market by which these contracts are entered into. Otandardized
forward contracts are called futures contracts and traded on
a futures exchange.
m uotes using a country's home currency as the price currency
(e.g., EUR 0.63 = UOD 1.00 in the euro zone) are known as
direct quotation or price quotation (from that country's
perspective)[2] and are used by most countries.
m uotes using a country's home currency as the unit currency
(e.g., EUR 1.00 = UOD 1.58 in the euro zone) are known as
indirect quotation or quantity quotation and are used
in British newspapers and are also common in Australia, New
Zealand and the eurozone.
m direct quotation: 1 foreign currency unit = x home currency
units
m indirect quotation: 1 home currency unit = x foreign currency
units
m Note that, using direct quotation, if the home currency is
strengthening (i.e., appreciating, or becoming more valuable)
then the exchange rate number decreases. Conversely if the
foreign currency is strengthening, the exchange rate number
increases and the home currency is depreciating.
m 
YY is the currency exchange rate between two
currencies, where neither of the currencies are of the
country in which the exchange rate is given. An example of
a cross rate would be the exchange rate of the U.O. Dollar
and Euro, quoted in a finance journal from Canada. Many
foreign exchange dealers have created
profitable arbitrage trading techniques to profit off the
cross rate between the major currencies.

m 

Y jid-Ask Spread 
The amount by which the ask price exceeds the bid. This is
essentially the difference in price between the highest
price that a buyer is willing to pay for an asset and the
lowest price for which a seller is willing to sell it.
 The risk of an investment's value changing due
to changes in currency exchange rates.

The risk that an investor will have to close out a

long or short position in a foreign currency at a
loss due to an adverse movement in exchange
rates. Also known as "currency risk" or
"exchange-rate risk".
The exchange rate risk associated with
companies that deal in foreign currencies
or list foreign assets on their balance
sheets. The greater the proportion of
asset, liability and equity classes
denominated in a foreign currency, the
greater the translation risk.
The exchange rate risk associated with the
time delay between entering into a
contract and settling it. The greater the
time differential between the entrance
and settlement of the contract, the
greater the transaction risk, because there
is more time for the two exchange rates to
fluctuate.
ÿYY
 r
 
 

Y
m A Taiwanese firm is considering an investment in
Thailand, and the initial cash outlay is 1.5 million
Thai baht.

m The firm is considering sourcing of supplies from

Taiwan and supposedly wants to market the
goods in Thailand.
m rnowledge of Political environment and
policies of both the countries governing
the exchange rates is beneficial.
m Global environment is another macro
factor which governs the exchange
rates mechanism and thus affects the
firms having global operations in a
major way.