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    International Financial Management Abridged 10 Edition: by Jeff Madura

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    Hiếu Nhi Trịnh
    The document discusses long-term financing options for multinational corporations including debt and equity sources as well as hedging foreign exchange and interest rate risk associated with long-term debt. It covers topics such as the costs of financing in different currencies, currency swaps, interest rate swaps, and the standardization of the swaps market.

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    International Financial Management Abridged 10 Edition: by Jeff Madura

    Uploaded by

    Hiếu Nhi Trịnh
    42 views13 pages
    The document discusses long-term financing options for multinational corporations including debt and equity sources as well as hedging foreign exchange and interest rate risk associated with long-term debt. It covers topics such as the costs of financing in different currencies, currency swaps, interest rate swaps, and the standardization of the swaps market.

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    The document discusses long-term financing options for multinational corporations including debt and equity sources as well as hedging foreign exchange and interest rate risk associated with long-term debt. It covers topics such as the costs of financing in different currencies, currency swaps, interest rate swaps, and the standardization of the swaps market.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    42 views13 pages

    International Financial Management Abridged 10 Edition: by Jeff Madura

    Uploaded by

    Hiếu Nhi Trịnh
    The document discusses long-term financing options for multinational corporations including debt and equity sources as well as hedging foreign exchange and interest rate risk associated with long-term debt. It covers topics such as the costs of financing in different currencies, currency swaps, interest rate swaps, and the standardization of the swaps market.

    Copyright:

    © All Rights Reserved
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    of 13

    International Financial Management

    Abridged 10th Edition


    by Jeff Madura

    1 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    18
    Long-Term Financing

    Chapter Objectives
    This chapter will:

    A. Explain how exchange rate movements affect the cost of long-term


    financing in foreign currencies

    B. Explain how to reduce the exchange rate risk associated with debt
    financing in foreign currencies

    C. Explain the exposure and hedging of interest rate risk due to debt
    financing

    2 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Long-Term Financing Decision

    1. Sources of Equity
    a. Domestic equity offering
    b. Global equity offering
    c. Private placement of equity in home country
    d. Private placement of equity in foreign country
    2. Sources of Debt
    a. Public placement of debt in own country
    b. Global debt offering
    c. Private placement of debt in home country
    d. Private placement of debt in foreign country
    3. Stockholder versus Creditor Conflict
    3 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Cost of Debt Financing

    To make long-term financing decision, the MNC must:


    1. Determine the amount of funds needed
    2. Forecast the price at which it can issue the bond
    3. Forecast periodic exchange rate values for the
    currency denominating the bond

    4 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Measuring the Cost of Financing

    1. Impact of a strong currency on financing costs: if


    the currency that was borrowed appreciates over time,
    an MNC will need more funds to cover the coupon or
    principal payments.

    2. Impact of a weak currency on financing costs: a


    depreciating currency will reduce the issuer’s outflow
    payments and reduce financing costs.

    5 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Uncertainty of Financing Costs

    1. Accounting for Uncertainty of Financing Costs by:


    a. Sensitivity Analysis: develop alternative forecasts for
    exchange rates each period and reestimate cost of financing.
    b. Simulation: develop a probability distribution for the
    exchange rate in each period and use a computer simulation
    program to iterate possible future scenarios.
    2. Actual Financing Costs
    a. Determine how exchange rate movements affected the costs
    of bonds denominated in a foreign currency.

    6 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Reducing Exchange Rate Risk

    1. Offsetting cash inflows


    a. Offsetting cash flows with high-yield debt
    2. Forward contracts
    3. Currency swaps
    4. Parallel loans
    a. Using parallel loans to hedge risk
    5. Diversifying among currencies

    7 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Exhibit 18.7 Illustration of a Currency Swap

    10 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Interest Rate Risk from Debt Financing

    1. The debt maturity decision: interest rates and the


    vary across maturities and across countries. Yield
    curve can be upward sloping, flat, or inverted in
    different countries.

    2. The fixed versus floating decision: floating rate


    coupons can be tied to the London Interbank Offer
    Rate (LIBOR)

    11 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Hedging with Interest Rate Swaps

    1. The plain vanilla swap: contract to exchange


    floating rate payments for fixed rate payments.

    2. Determining swap payments: based on a notional


    principal but the principal itself is not exchanged.

    3. Limitations of interest rate swaps:


    a. Time and resources associated with searching for suitable
    swap candidate and negotiating terms
    b. Risk that the counterparty could default on payments.

    12 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Exhibit 18.10 Illustration of an Interest Rate Swap

    13 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Other Types of Interest Rate Swaps

    1. Accretion swap
    2. Amortizing swap
    3. Basis (floating-for-floating) swap
    4. Callable swap
    5. Forward swap
    6. Putable swap
    7. Zero-coupon swap
    8. Swaption

    14 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
    Standardization of Swap Market

    1. International Swaps and Derivatives Association


    (ISDA): a global trade association representing
    leading participants in the privately negotiated
    derivatives industry.

    2. ISDA Master Agreement: provides a general legal


    document to standardize the derivatives market.

    15 © 2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
    as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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