What is a multinational corporation?

• 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 the corporation
does business in.
 Why do firms expand into other
countries?
1. To seek new markets.
2. To seek raw materials.
3. To seek new technology.
4. To seek production efficiency.
5. To avoid political and regulatory hurdles.

6. To diversify.
 What factors distinguish multinational
financial management from domestic
financial management?
1. Different currency denominations.
2. Economic and legal ramifications.
3. Language differences.
4. Cultural differences.
5. Role of governments.
6. Political risk.
 What is a cross rate?

• The exchange rate between any two

currencies. Cross rates are actually calculated
on the basis of various currencies relative to the
U.S. dollar.
• Cross rate between Australian dollar and the
Japanese yen.
– Cross rate = (Yen / US Dollar) x (US Dollar / A. Dollar)
= 111.11 x 0.650
= 72.22 Yen / A. Dollar
– The inverse of this cross rate yields:
0.0138 A. Dollars / Yen
 What is exchange rate risk?
• 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.
• The current international monetary
system is a floating rate system.
What is difference between spot
rates and forward rates?
• 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.
 When is the forward rate at a
premium to the spot rate?
• 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.
• The primary determinant of the spot/forward
rate relationship is relative interest rates.
 What is interest rate parity?
• Interest rate parity holds that investors should
expect to earn the same return in all countries
after adjusting for risk.

ft 1 + kh
=
e0 1 + kf

ft = t - periodforwardexchangerate
e0 = today's spotexchangerate
kh = periodicinterestratein homecountry
kf = periodicinterestratein foreigncountry
What impact does relative inflation have on
interest rates and exchange rates?
• 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.
 TT BUYING AND SELLING
• Cash Buying - Rate at which Foreign Currency Cash
deposited by the customer is converted into rupees.
• Cash Selling - Rate applicable when a customer buys
Foreign Currency Cash from the bank.
• T. T. Buying - Rate at which a Foreign Inward
Remittance received by Telegraphic Transfer is
converted into rupees.
• T. T. Selling - Rate applicable when a customer sends
an outward remittance through Telegraphic Transfer.
(Money is transferred by coded interbank telex and as long as the exporter
makes it clear to the overseas buyer exactly to which bank and account)
Currency (In Rs.)
Cash Buying and Cash Selling
• USD - 49.16 and 51.53
• EUR 62.04 65.13

T.T. Buying and T.T. Selling

• USD - 49.51and 5 1.12
• EUR - 62.48 and 6 4.59
 ROLE OF BANKS
• Financing
• Collection services
• Issuance of Letter Of Credit
• Issue of Custom Bonds and Guarantees
• Issue of Trade Bonds (Exporter)
 BID ASK RATES
• Currency prices are expressed in terms of
“bid” and “ask”.
• Bid is the price at which buyers offer to
buy currencies from sellers.
• Ask is the price at which sellers offer
currencies to buyers. Ask prices are
usually slightly higher than bid prices,
reflecting the profit margins of sellers.