safest for exporter - they receive money prior to shipment of goods Less desirable for importer - they must give up use of their cash prior to receipt of goods.
Safest from importer's perspective, goods are shipped by exporter and received by importer prior to payment. Also offer potential buyers short-term financing Undesirable from exporter's perspective
International lending activity where firms buy foreign accounts receivable as a discount from face value
commercial banks serve as agents to facilitate the payment process
Draft (Bill of Exchange)
payment is demanded from the buyer at a specific time
Bill of Lading
Plays 2 Roles in Documentary collection:
serves as a contract for transportation between the exporter and teh carrier
serves as title to the goods in question
Letters of Credit
document that is issued by a bank and contains its promise to pay the exporter on receiving proof that the exporter has fulfilled all requirements specified in the document
Requires payment upon the transfer of the title of the goods from the exporter to the importer
financial benefits and costs of an international transaction can be affected by exchange rate movements that occur after the firm is legally obligated to complete the transaction
Transaction Exposure: Go Naked
Ignore transaction exposure and assume foreign exchange risk. Benefit is no capital outlay until the product is delivered. Potential for loss or gain depending if home currency rises or falls.
Transaction Exposure: Buy Currency Option
buyer has opportunity but no the obligation to buy a certain currency at a given price in the future, depending on whether their home currency has risen or dropped in price. More expensive because firm can let it expire without due date and not lose money.
Transaction Exposure: Buying forward currency
buying the exchange currency forward in the FX market locks in the price to be paid. Firm is guaranteed a set price to pay but risks missing a potentially lower cost in the future
Transaction Exposure: Acquire an Offsetting Asset
Acquiring an offsetting asset of equivalent size denominated in purchase currency. Firm buys a security at the same time as they decide on a future price for goods. The maturity price of the security should match the cost of the goods, offsetting its exposure.
The impact on the firm's consolidated financial statements of fluctuations in exchange rates that change the value of foreign subsidiaries as measured in the parent's currency. If exchange rates were fixed, translation exposure would not be an issue.
Translation Exposure: balance sheet hedge
way of reducing translation exposure; created when an international firm matches its assets denominated in a given currency with its liabilities denominated in that same currency
Impact on the value of a firm's operations of unanticipated exchange rate changes. Affects virtually every area of operation
Minimize Working Capital Balances: Centralized Cash Management
A system controlled by a parent corporation that coordinates worldwide cash flows of its subsidiaries and pools their cash reserves