11: International Financial Management
- Page ID
- 150168
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Financial decision-making increasingly takes place in a global environment. Firms source materials internationally, sell to customers across borders, raise capital in foreign markets, and invest in operations outside their home country. As a result, exchange rates, global interest rates, and country-specific risks play a direct role in determining firm value.
This chapter extends the core principles you have already developed—time value of money, capital budgeting, and financing decisions—to settings in which cash flows, discount rates, and financing choices are affected by international conditions. The objective is not to turn financial managers into currency traders, but to help them make better value-creating decisions in a global setting.
International Finance as an Extension of Managerial Finance
At its core, international financial management uses the same analytical framework applied throughout this text:
- Forecast future cash flows
- Assess risk and uncertainty
- Select an appropriate discount rate
- Choose financing that supports long-term value creation
What changes in an international context is the environment surrounding these decisions. Cash flows may be earned in foreign currencies, operating conditions may differ across countries, and risks may arise from political, legal, or economic instability rather than from business operations alone.
As a result, managers must explicitly account for how global factors affect both the size of expected cash flows and the risk premium required by investors.
Connections to Capital Budgeting and Financing Decisions
International considerations appear most clearly in two areas you have already studied:
- Capital Budgeting (Chapter 9): When projects generate cash flows abroad, exchange rate movements can change the home-currency value of those cash flows even if the project performs exactly as expected operationally. Country risk may also require adjustments to expected cash flows or to the discount rate used in NPV analysis.
- Financing Decisions (Chapter 10): Firms may borrow in foreign markets, issue debt in foreign currencies, or match financing sources to operating cash flows. Differences in interest rates, access to capital, and risk exposure can affect the firm’s weighted average cost of capital and its optimal financing mix.
Throughout this chapter, familiar tools such as NPV, discounting, and risk–return analysis will be revisited with a global perspective.
Learning Objectives
After completing this chapter, you should be able to:
- Explain why exchange rates, global interest rates, and country risk matter for financial decision-making.
- Describe how international factors affect project cash flows, discount rates, and NPV.
- Identify major types of currency exposure faced by firms operating internationally.
- Explain how financing choices can be used to manage international risk.
- Apply a value-focused managerial framework to international financial decisions.