- •Chapter 3: The international financial marketplace key chapter concepts
- •Glossary of new terms
- •Financial challenge
- •Introduction
- •The global economy and multinational enterprises
- •Table 3—1
- •Table 3—1
- •Foreign currency markets and exchange rates
- •Direct and Indirect Quotes
- •Table 3 — 2 Spot Foreign Exchange Rates
- •Spot Rates
- •Forward Rates
- •Table 3 — 3. Forward Foreign Exchange Rates
- •Foreign Currency Futures
- •Table 3-4. Futures Contract Quotations
- •Foreign Currency Options
- •The Eurocurrency Market
- •Factors that affect exchange rates
- •Covered Interest Arbitrage and Interest Rate Parity
- •Purchasing Power Parity
- •Expectations Theory and Forward Exchange Rates
- •The International Fisher Effect
- •An Integrative Look at International Parity Relationships
- •Figure 3—1. International Parity Conditions: An Integrative Look
- •Forecasting future exchange rates
- •Using Forward Rates
- •Using Interest Rates
- •Foreign exchange risk
- •Transaction Exposure
- •Table 3-5. Example of Transaction Exchange Rate Risk
- •Economic Exposure
- •Translation Exposure
- •Table 3 – 6. Effect of a Decrease in the Exchange Rate on American Products' Balance Sheet
- •International finance and the practice of financial management
- •Ethical issues: payment of bribes abroad
- •Summary
- •Questions and topics for discussion
- •Self test problems
- •Problems
- •Solutions to self test problems
International finance and the practice of financial management
Financial managers can make use of the concepts, principles, international financial market instruments, and financing and risk-management strategies discussed in this chapter to make decisions that will support the goal of maximizing shareholder wealth. Throughout the book, "International Issues" sections discuss the special problems of applying financial management principles in an international context. Among the more important international topics that are covered in this manner are:
Financial analysis and performance appraisal of multinational firms (Chapter 4)
Risk and shareholder wealth maximization for multinational firms (Chapter 6)
Long-term international financing alternatives (Chapters 7 and 8)
International capital budgeting (Chapters 10 and 11)
Cost of capital for multinational firms (Chapter 12)
Capital structure policy for multinational firms (Chapters 13 and 14)
Dividend policy for multinational firms (Chapter 15)
Cash management for multinational firms (Chapter 17)
Foreign receivables financing (Chapter 18)
Use of options to hedge transaction exposure (Chapter 19)
Ethical issues: payment of bribes abroad
Managers of multinational firms often must deal with the problem of making bribes or "grease" payments abroad in order to facilitate a transaction. Customs with respect to the acceptability and need for such payments vary greatly in different countries. The issue of questionable payments is especially important to managers of U.S. firms because of the Foreign Corrupt Practices Act (FCPA) as amended in the Omnibus Trade and Competitiveness Act of 1988. The provisions of this act declare payments in the form of phony discounts, fake invoices, and inflated expense accounts illegal.
A study of 400 firms by the Securities and Exchange Commission (SEC) in the mid-1970s revealed that these firms had made over $300 million in questionable payments to officials of foreign governments, politicians, agents, and others to secure business abroad. Exxon, for example, disclosed that it had made nearly $60 million in such payments. These payments have been most common in capital-intensive industries such as aerospace, construction, and energy, which deal with large projects or contracts.
In spite of the FCPA, U.S.-based firms have continued to make grease payments abroad. Many times these payments have been cleverly disguised. For example, in April 1980, Ashland Oil paid about $29 million to acquire a mining operation in Zimbabwe that had been controlled by an official of the Omani government. The mining operation proved to be unprofitable and was written off its books by Ashland two years later. In September 1980, the Omani government awarded Ashland a 20,000 barrel per day crude oil contract at a price $3 below the regular selling price for crude oil. In 1980 the SEC brought an action against Ashland and its former chairman, charging violations of the FCPA. Ashland agreed to an SEC consent injunction barring these types of corrupt practices.
Both ethical standards and U.S. law prohibit the payment of bribes to obtain business abroad. However, in many countries the receipt of bribes is not only permitted, it is expected. How can managers reconcile this conflict between domestic ethical standards and traditional foreign business practice?