Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

Discuss the role of financial management in an international setting with particular reference to:
(i) Currency exchange rates.
(ii) Sources of finance
(iii) Investing in overseas countries.
answer
The decision as to whether or not to move into export markets or to invest overseas is the same as any other investment decision and therefore the usual techniques should be applied.

However, there are additional considerations which may well mean that the estimates are less to make and may be less certainly fulfilled. These additional considerations are: (students to include such points)

The economy of the foreign country and the international economy
The political stability in the overseas country which may result in the sequestration of property and disruption of activities.
Any restrictions on the remission of profits back to the home country arising from exchange control regulations.
Fluctuating exchange rates which may mean that losses on exchange occur.
Cultural differences which may mean that the Head Office management behaves in an inappropriate and thus less effective way.

(a) (i)Currency exchange rates
The problem of fluctuating exchange rates can be reduced decreasing the level of exposure. Protection can be achieved requiring the invoice to be at a fixed rate of exchange (from supplier) or buying forward the necessary amount of foreign currency. Incase of longer term transactions (e.g investing in an overseas country) it may be desirable to reduce the level of exposure buy gearing up through foreign currency borrowings.

(ii) Sources of finance
As export trade often mean a longer period of credit, the company may well need to raise additional finance. The more likely sources are euro-currency borrowings, dollar- borrowings, documentary credits and loans from banks; the latte may need insurance.

(iii) Investing in overseas countries
Apart from the problems outlined above, investing in overseas countries involves one further problem – the need to translate the assets or investment into Head Office currency at the year end. The rates used will depend on the particular transaction under consideration but the most important principle is that the treatment should be consistent from year to year.

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