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  3. Lecture International finance: An analytical approach (3/e): Chapter 14 - Imad A. Moosa

Lecture International finance: An analytical approach (3/e): Chapter 14 - Imad A. Moosa

Chapter 14 - International short-term financing and investment. To explain why short-term foreign currency financing and investment are considered, to consider the choice between domestic and foreign currency financing and investment, to identify the costs and benefits of financing/investment with a portfolio. Chapter 14 International Short-Term Financing and Investment Objectives • To explain why short-term foreign currency financing and investment are considered • To consider the choice betwee

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  1. Chapter 14 International Short-Term Financing and Investment
  2. Objectives • To explain why short-term foreign currency financing and investment are considered • To consider the choice between domestic and foreign currency financing and investment • To identify the costs and benefits of financing/investment with a portfolio Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-2
  3. Internal financing • A multinational firm can utilise internal financing by:  requesting a transfer of funds from a subsidiary  increasing mark-ups on supplies sent to subsidiaries Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-3
  4. Sources of external financing • Standby Eurocredits: Eurocurrency lines and revolving commitments • Euronotes: note issuance facilities and Euro- commercial papers Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-4
  5. Why foreign currency financing? • Foreign currency financing introduces FX risk only if there is no exposure already • It may be cheaper Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-5
  6. Three-month interest rates (Australia) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-6
  7. Three-month interest rates (U.S.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-7
  8. Three-month interest rates (Japan) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-8
  9. Three-month interest rates (U.K.) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-9
  10. Effective financing rate from an Australian perspective (USD) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-10
  11. Effective financing rate from an Australian perspective (JPY) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-11
  12. Effective financing rate from an Australian perspective (GBP) Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-12
  13. International short-term investment • International short-term investment is the placement of excess funds in short-term investments denominated in various currencies Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-13
  14. Short-term investment • Time deposits • Certificates of deposit:  Tap CDs  Tranche CDs  Rollover CDs Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-14
  15. The effective financing rate e (1 i )(1 S ) 1 e i S Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-15
  16. The effective rate of return r (1 i )(1 S ) 1 r i S Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-16
  17. The effect of changes in the exchange rate • Foreign currency appreciation e i • Foreign currency depreciation e i • No change e i Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-17
  18. The effective financing rate with bid-offer spread Sa1 e (1 ia ) 1 Sb 0 Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-18
  19. The effective rate of return with bid-offer spread Sb1 r (1 ib ) 1 Sa 0 Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-19
  20. Implications of CIP • If covered interest parity (CIP) holds, the effective financing rate and the rate of return will be equal to the domestic interest rate Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t/a International Finance: An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 14-20
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