global financial management - financial management strategy

Question 1

what falls under global fiancial management

Answer 1

HIDE M = hide monkey

Hedging
Intrest rate
Derivatives
Exchange rate

Methods of international payment

Question 2

What is hedging?

Answer 2

Hedging is the process of removing unknown future risks in global finance

eg exchange rate fluctuations

Hedging can be natural - where transactions remain in one currency examples:

• establishing offshore subsidiaries (a business opens a branch overseas using that country’s currency)
• Denote the contract to be in AUD

**Hedging can also be applied through derivatives **

Question 3

What are derivatives?

Answer 3

A contract between two parties agreeing on a set rate of exchange (set currency

Done through a forward exchange contract:

• The bank guarantees the exporter with a fixed rate for a set period of time

Question 4

What are interest rates in GFM

Answer 4

Where interest rates are lower overseas than in Australia so businesses are tempted to borrow finance from overseas sources with lower interest rates

• currency fluctuations eliminate the advantages of cheaper interest rates an in the long term may increase debt repayments and reduce profits

Question 5

Types of intrest rates and advantages/disadvantages

Answer 5

FIXED INTEREST RATE:

Advantages:
- protection from unexpected interest rate increases

• predictable payments which make it easier to budget

Disadvantages:
- you cannot take advantage of a fall in interest rates

• an early payout penalty if you want to clear the loan before th fixed term has expired

* VARIABLE INTREST RATES:*

Advantages:
- if interest rates fall repayments reduce

• you can shorten the term of the loan if you maintain higher repayment

Disadvantages:
- if interest rates increase repayments will rise

• you may be forced to increase your repayments if the loan cannot be paid back within the agreed term

Question 6

What are exchange rates?

Answer 6

Refer to the value of one country’s currency against another

Appreciation - the upward movement of the AUD against another currency increasing its value

• exports become more expensive and imports become cheaper

Depreciation - the downward movement of the AUD against another currency decreasing its value

• once unit of AUD is worth less than one unit of a foreign currency
• changes in exchange rates can impact sales and expenses
• imports are expensive

Question 7

what are the methods of international payment

Answer 7

PLC B

Payment in advance
Letter of credit
Clean payment

Bill of exchange

Question 8

payment in advance - method of international payment

Answer 8

the exporter recieves payment first and then the goods are sent

• very few importers agree of this (risk)

Question 9

Letter of credit - method of international payment

Answer 9

where the exporters request a leter from the importers bank to guarantee the payment of goods

• buyer cannot withdraw after committing to a letter of credit
• if the buyer fails to make payment the bank has to cover

Question 10

clean payment - method of international payment

Answer 10

• goods are shipped with an invoice requesting payment at a certain time

Question 11

Bill of exchange - method of international payment

Answer 11

• document drawn up by the exporter demanding a payment from the importer at a specific time period
• Most common used payment as exporter maintains control over the goods until payment has been made