The main goals of this chapter are: 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 15 International Short-Term Financing and Investment 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. Internal Financing A multinational can utilise internal financing by: Requesting a transfer of funds from a subsidiary Increasing mark-ups on supplies sent to subsidiaries Sources of External Financing Standby Eurocredits: Eurocurrency lines and revolving commitments Euronotes: note issuance facilities and Euro-commercial papers Why Foreign Currency Financing? Foreign currency financing introduces FX risk only if there is no exposure already. It may be cheaper. Three-Month Interest Rates Three-Month Interest Rates (cont.) Three-Month Interest Rates (cont.) Three-Month Interest Rates (cont.) Three-Month Interest Rates (cont.) International Short-Term Investment International short-term investment is the placement of excess funds in short-term investments denominated in various currencies. Short-Term Investment Time deposits Certificates of deposit: Tap CDs Tranche CDs Rollover CDs The Effective Financing Rate The Effective Rate of Return The Effect of Changes in the Exchange Rate Foreign currency appreciation Foreign currency depreciation No change The Effective Financing Rate with Bid-Offer Spread The Effective Rate of Return with Bid-Offer Spread 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. Measuring Risk: Probability Distributions Measuring Risk: Historical Data Financing with and Investment in a Portfolio of Currencies Centralised Versus Decentralised Cash Management Centralised: receipts and payments in various currencies are managed by a central body. Decentralised: receipts and payments are managed by branches and subsidiaries. . | Chapter 15 International Short-Term Financing and Investment 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. Internal Financing A multinational can utilise internal financing by: Requesting a transfer of funds from a subsidiary Increasing mark-ups on supplies sent to subsidiaries Sources of External Financing Standby Eurocredits: Eurocurrency lines and revolving commitments Euronotes: note issuance facilities and Euro-commercial papers Why Foreign Currency Financing? Foreign currency financing introduces FX risk only if there is no exposure already. It may be cheaper. Three-Month Interest Rates Three-Month Interest Rates (cont.) Three-Month Interest Rates (cont.) Three-Month Interest Rates (cont.) Three-Month Interest Rates (cont.) International Short-Term Investment .
