国际金融案例Case

Case Bank for International Financial Management(0) Objective of International Financial ManagementQuestion: Stakeholder objectives using UK as a case(a) 'The objective of financial management is to maximise the value of the firm.'You are required to discuss how the achievement of this objective might be compromised by the conflicts which may arise between the various stakeholders in an organisation. (10 marks)Answer: Stakeholder objectives(a) If it is agreed to maximise the value of the firm, it is necessary to ask two fundamental questions:•who is the firm?•what do we mean by value?In the United Kingdom the traditional view has been for the interests of a firm to equate with those of the current equity shareholders. But it is now recognised that this is much too narrow. The employees and lenders to a business certainly have a legitimate interest, probably also the government. Japanese influences on UK thinking would add a company's suppliers and customers as part of the stakeholders. Perhaps the general public also belong to the list.Each of the members of the above list has different key objectives. For example employees might want their labour remuneration to be larger, while the shareholders want labour costs to be low so that higher profits can lead to higher dividends. Shareholders might be uninterested whether the company invests in 'unethical' areas of business such as armaments or cigarettes, as long as their investment is profitable, while certain sections of the public will discourage unethical products.The value of an investment in terms of financial management theory is the present value of the cash returns available from the investment. However this varies from investor to investor depending on personal discount rate, tax position, period of investment, etc. For example the value of a share bought today and expected to be sold in five years time will be the present value of the five years dividends plus the present value of the expected netrealisable value at the end of the holding period. So the value of the same share will be different to different shareholders, and the job of the managers to maximise the total value becomes impossible.A further problem arises in the conflict between short-term results and long-term viability. Managers might be on annual service contracts and therefore are motivated to report the highest possible short-term profits. This might involve cutting down on revenueinvestment such as maintaining fixed assets, advertising, research costs, etc. Such apolicy is in the best interests of management, since they will be paid a bonus for reportinggood results, but is not in the long-term interests of the company.Financial managers often deal with the above conflicts by adopting a satisficing approach rather than an optimising approach. They hope to please everyone by followingmoderate policies which are not exclusively in the interests of one of the sectional stakeholders of the business.Question: Five wealthy individualsFive wealthy individuals have each put £200,000 at your disposal to invest for the next twoyears. The funds can be invested in one or more of four specified projects and in the money market. The projects are not divisible and cannot be postponed. The investors require a minimum return of 24% over the two years.Details of the possible investments are:Return over Expected standard deviationInitial cost two years of returns over two years(£’000)(%) (%)Project 1 600 22 7Project 2 400 26 9Project 3 600 28 15Project 4 600 34 13Money market minimum 100 18 5Correlation coefficients of returns (over two years)Between projects and Between projects and Between projects the market portfolio the money market1 and2 0.70 1 and market 0.68 1 and money market 0.401 and 3 0.62 2 and market 0.65 2 and money market 0.451 and 4 0.56 3 and market 0.75 3 and money market 0.552 and3 0.654 and market 0.88 4 and money market 0.602 and 4 0.573 and4 0.76Between the money marketand the market portfolio 0.40The risk-free rate is estimated to be 16%, the market return 27% and the variance of returns on the market 100% (all for the two year period).You are required:(a) to evaluate how the £1m should be invested using: (b) (i) portfolio theory,(ii) the capital asset pricing model (CAPM). (iii)Portfolio risk may be estimated using the formula:σσσρσσp x x)x (1-x)2a 2b ab a b =+-+2212(() (15 marks)(c) to explain why portfolio theory and CAPM might give different solutions as to how the £1mshould be invested.(5 marks)(c) to discuss the main problems of using CAPM in investment appraisal. (10 marks)(Total: 30 marks)Answer: Five wealthy individuals Possible portfoliosReturnProjects 1 and 2 0.6 ⨯ 22 + 0.4 ⨯ 26 = 23.6 XProjects 2 and 3 0.4 ⨯ 26 + 0.6 ⨯ 28 = 27.2Projects 2 and 40.4 ⨯ 26 + 0.6 ⨯ 34 = 30.8 Project 2andmoneymarket (mm) 0.4 ⨯ 26 + 0.6 ⨯ 18 =21.2X Project 1 and mm 0.6 ⨯ 22 + 0.4 ⨯ 18 = 20.4 X Project 3 and mm 0.6 ⨯ 28 + 0.4 ⨯ 18 = 24Project 4 and mm0.6 ⨯ 34 + 0.4 ⨯ 18 = 27.6Of the above the three marked X yield returns less than 24% and will therefore not be considered further. (a)(i)Evaluation of investment using portfolio theoryProjects 2 and 3σ =0490615204060659152222.....⨯+⨯+⨯⨯⨯⨯⨯ = 1296814212..++ =11.7%Projects 2 and 4σ =0490613204060579132222.....⨯+⨯+⨯⨯⨯⨯⨯ = 129660843201...++ =10.3%Project 3 and mmσ =0615045206040551552222.....⨯+⨯+⨯⨯⨯⨯⨯ = 814198++. = 10.2%Project 4 and mmσ =061304520604061352222.....⨯+⨯+⨯⨯⨯⨯⨯ = 608441872..++ =9.1%SummaryPortfolio Return Standard deviation2 and3 27.2% 11.7% 2 and4 30.8% 10.3% 3 and mm 24% 10.2% 4 and mm27.6%9.1%Conclusions (1) Projects 2 and 4 are better (more ‘efficient’) than 2 and 3 as they offer a higher return and a lower risk (as measured by standard deviation).(2)Project 4 and the money market is better than Projects 2 and 3 and Project 3 and the money market since returns are higher and risk is lower.(3) Projects 2 and 4 appears better than Project 3 and the money market - much higherreturn with virtually the same risk.(4)It is not possible to choose between:(1) Projects 2 and 3 and Project 3 and money market or(2) Projects 2 and 4 and Project 4 and the money market.(3)This is because Projects 2 and 3 offer a higher return and a higher risk than Project 3 and the money market. Similarly, Projects 2 and 4 offer a higher return and higher risk than Project 4 and the money market.To make a final choice using portfolio theory, it would be necessary to consider the effect of the investment on the risk and return of the investors’ total portfolio of investments, not just the 2 asset portfolios considered above. Even then it may be necessary to consider the utility preferences of the five individuals in order to ascertain which investments would maximise their utility.(ii)Evaluation of investment using the capital asset pricing model (CAPM)(Tutorial note: to use CAPM it is necessary to do two things:(1) Find the beta (β) value - the measure of systematic risk - for each project.(2) Find the βfor each portfolio ie, each combination of projects. This will simply be aweighted average of the βfor each project within the portfolio. This is because βisa measure of systematic or non diversifiable risk and will therefore not be reducedwhen projects are combined into a portfolio. This contrasts with the portfolio theoryapproach where it is necessary to identify the standard deviation (total risk) of eachportfolio, which will usually be less than the weighted average of the standarddeviations of the individual projects - because of the risk reduction effect ofdiversifying.(3)Using capital asset pricing model (CAPM), β= p s m,σσsmProject β1 0687100.⨯= 0.4762 065910.⨯= 0.5853 0751510.⨯= 1.1254 0881310.⨯= 1.144mm 04510.⨯= 0.2Portfolioβ2 and3 04 ⨯0.585 +0.6 ⨯1.125 = 0.912 and 4 0. 4 ⨯0.585 + 0.6 ⨯1.144 = 0.923 and mm 0.6 ⨯1.125 + 0.4 ⨯0.2 = 0.754 and mm 0.6 ⨯1.144 + 0.4 ⨯0.2 = 0.77SummaryPortfolio Required return Expected return Excess returnr f + (r m-r f) β(Expected return- required return)2 and3 16 + (27 -16) ⨯0.91 = 26% 27.2% 1.2%2 and 4 16 + (27 -16) ⨯0.92 = 26.1% 30.8% 4.7%3 and mm 16 + (27 -16) ⨯0.75 = 24.2% 24% -0.2%4 and mm 16 + (27 -16) ⨯0.77 = 24.5% 27.6% 3.1% Conclusions(1) Project 3 and money market is not acceptable. The expected return of 24% is lessthan the return required of 24.2% given the level of systematic risk.(2) Projects 2 and 3, Projects 2 and 4 and Project 4 and the money market are allacceptable ie, the expected return is greater than the return required for the level ofsystematic risk taken on.Projects 2 and 4 appear best as they offer the greatestexcess return over the return required.(b) Portfolio theory identifies the return and total risk (as measured by standard deviation) of each possible portfolio of 2 investments. This risk should be reduced further when the 2 investments are combined with the existing investments of the 5 individuals. Hence the risk measure for the 2 asset portfolios includes systematic and unsystematic risk.The capital asset pricing model (CAPM) makes it possible to identify the systematic risk of each of the 2 asset portfolios ie, the total risk reduction effect of using a portfolio is taken into account. βmeasures the risk that cannot be avoided (other than by investing in risk-free securities) ie, CAPM assumes that investors hold the two assets as part of a well-diversified portfolio, in which case only systematic risk is considered when calculating the required return.In this example, portfolio theory indicates that Projects 2 and 3 are not acceptable relative to Projects 2 and 4 as Projects 2 and 4 offer a higher return and lower risk, whereas CAPM indicates that Projects 2 and 3 are acceptable in that the expected return is greater than the required return.(c) The main problems of using CAPM in investment appraisal are the underlying assumptions:•CAPM is a one period model. Most investment appraisal concerns projects lasting several years.•CAPM assumes the company’s shareholders hold a well-diversified portfolio of investments andtherefore only need to consider systematic risk. This may not be the case particularly if it is a smallercompany where shareholders may have a substantial proportion of their assets invested in the company.•Estimation of β. Most approaches involve calculating βon the basis of historic data whereas βfor future periods is required. This is particularly problematic if a projectinvolves moving into a new area of operation (when an ‘industry’ beta, adjusted for gearing, would have to be used). Also, βvalues have been found to change over time.•CAPM is based on a perfect market - information about risk and return on investments freely available, no transaction costs, and investors can borrow and lend freely at therisk-free rate. These assumptions are unrealistic.•Risk is measured purely by standard deviation - assuming this can be accurately estimated for future returns.•It is necessary to accurately estimate the risk-free return and the return on the market;over what period should these returns be estimated and what securities and stock markets should be used?•Smaller companies tend to yield higher returns than predicted by CAPM, suggesting systematic risk, as measured by β, is not necessarily an accurate measure or the only factor which determines the required return.(2) Hedge. Question: Forun(a) Forun plc, a UK registered company, operates in four foreign countries, with totalforeign subsidiary turnover of the equivalent of £60 million. The managing director is conducting a strategic review of the company’s operations, with a view to increasing operations in some markets, and to reducing the scale of operations in others. He has assembled economic and other data on the four countries where subsidiaries are located which he considers to be of particular interest. His major concern is foreign exchange risk of overseas operations.CountryUK 1 2 3 4Inflation rate (%) 4 8 15 9 6Real GDP growth (%) 1 -2 3 2 2Balance of payments ($b) -12 3 -14 5 -2Base rate (%) 6 10 14 10 8Unemployment rate (%) 12 8 17 4 9Population (million) 56 48 120 29 9Currency reserves ($b) 35 20 18 26 3IMF loans ($b) - 4 20 5 5On the basis of this information the managing director proposes that activity is concentrated in countries 1 and 4, and operations are reduced in countries 2 and 3.A non-executive director believes that the meeting should not be focusing on suchlong-term strategic dimensions, as he has just read the report of the finance director who has forecast a foreign exchange loss on net exposed assets on consolidation of £15 million for the current financial year. The non-executive director is concerned with the detrimental impact he expects th is loss to have on the company’s share price. He further suggests a number of possible hedging strategies to be undertaken by Forun’s foreign subsidiaries in order to reduce the exposure and the consolidated loss. These include: (i) early collection of foreign currency receivables;(ii) early repayment of foreign currency loans;(iii) reducing stock levels in foreign countries.Required(i) Discuss whether or not you agree with the managing director’s proposed strategywith respect to countries 1 to 4. (8 marks)(ii) Give reasoned advice as to the benefit to Forun plc of the non-executive director’ssuggested hedging strategies. (10 marks)(b) Forun has a number of intra-group transactions with its four foreign subsidiaries in sixmonths time, and several large international trade deals with third parties. These aresummarised below. Intra-group transactions are denominated in US dollars. All third party international trade is denominated in the currency shown. It is now 1 June.Intra-group transactionsPaying companyReceiving UK Sub 1 Sub 2 Sub 3 Sub 4company$US’000UK -300 450 210 2701 700 -420 -1802 140 340 -410 7003 300 140 230 -3504 560 300 110 510 -Exports to third partiesReceipts due in six months:£2,000,000 from AustraliaA$3,000,000 from Australia$12 million from the USA£1,800,000 from GermanyReceipts due in some time between three and six months:32 billion lire from ItalyImports from third partiesPayments due in six months:£3,000,000 to the USAA$3,000,000 to Australia13 million Deutschemarks (DM) to Germany£2,000,000 to FranceForeign exchange ratesSpot 3 mths forward 6 mths forward US$/£ 1.4960 -1.4990 1.4720 -1.47701.4550 -1.4600Australian$/£ 2.1460 -2.1500 2.1780 -2.18402.2020 -2.2090French Francs/£7.7050 -7.7090 7.9250 -7.94908.0750 -8.0990DM/£ 2.4560 -2.4590 2.4140 -2.41802.3830 -2.3870Lire/£2,203 -2,208 2,217 -2,224 2,225 -2,232Futures market ratesSterling £62,500 contracts$/£DM/£September 1.4820 2.4510December 1.4800 2.4480Minimum price movements are: $/£ 0.01 cents, DM/£ 0.01 pfennigsForeign currency option ratesSterling £31,250 contracts (cents per £)Calls PutsExercise price September December September December $1.450/£ 3.50 5.75 4.80 7.90$1.475/£ 1.86 3.42 6.95 9.08$1.500/£0.82 1.95 9.80 11.53$1.525/£0.38 0.90 12.16 14.70Required(i) Explain and demonstrate how multilateral netting might be of benefit to Forun plc.(5 marks)(ii) Recommend, with supporting calculations, alternative hedging strategies that the company might adopt to protect itself against short-term foreign exchangeexposure. The company is risk averse with respect to short-term foreign exchange risk. (17 marks)(Total 40 marks) Answer: Forun(a)(i) Candidates are expected to display knowledge of the value of given data to the strategic decision of where to engage in foreign direct investment, drawing attention to the limitations of such data, and other influences on economic exposure.The economic data presented by the managing director gives some indication of the likely future economic strength of the four countries, and could form part of a strategic evaluation.According to the purchasing power parity theory all of the foreign currencies are expected to depreciate in value relative to the pound sterling with the smallest depreciation in countries 1 and 4. Although PPP may hold quite well in the long run, there may be significant deviations from PPP in the short run. The impact of the other variables may be summarised in many ways. The table below is a simple assessment with a + for the two best countries, and a for the two worst.1 2 3 4CommentInflation + --+GDP growth -+ + +Balance of payments + -+ -(related to population)Base rate + -+ +Unemployment + -+ -Population + + --(+ for larger markets)Currency reserves + -+ -(related to population)IMF loans + + --(related to population)Although country 1 scores highly, except for inflation, economic growth and interest rates country 4 scores poorly, and is heavily indebted to the IMF relative to its small population size. Other data such as per capita GNP and international indebtedness other than to the IMF would be useful to the analysis. The managing director’s major con cern is economic exposure, the impact of foreign exchange rate changes on the sterling expected NPV of overseas operations.Strategic decisions should not be made on the basis of the above information alone.The information provides a macro-economic analysis. Even with a relatively weak economy at the micro level a subsidiary within a particular industry may perform well. Examining macro-economic data fails to give a complete picture.Additionally it is possible that a depreciation in the value of a foreign currency might have a beneficial effect rather than a detrimental effect on economic exposure of Forun. If the price elasticity of demand is such that export sales from the foreign subsidiary increase substantially because of the relatively cheaper prices in a depreciated currency, the overall effect in sterling NPV terms might be an increase, not a decrease. If the managing director is concerned about economic exposure one way to reduce such exposure is by diversifying international operations, and financing, among many different countries. Concentrating activities in two foreign countries might lead to greater economic exposure risk, not less. The manager’s strategy to concentrate on countries 1 and 4 is based upon incomplete information and is not recommended.(ii) This question requires evaluation of suggested hedges against translation exposure, and whether or not such exposure should be hedged.The non-executive director is concerned about the effects of translation exposure, specifically on expected foreign exchange loss of £15 million.If a foreign currency is expected to depreciate relative to sterling, translation exposure may be reduced by reducing net exposed assets.Early collection by foreign subsidiaries of foreign currency receivables will not reduce net exposure (unless the foreign currency is expected to depreciate by more than the currency of the foreign subsidiary). A better tactic would be to delay collection of foreign currency receivables until after significant depreciation of the su bsidiary’s currency had occurred, the receivables will then yield a higher amount of the subsidiary’s currency. From a group viewpoint early collection could increase translation exposure rather than reduce it.Early repayment of foreign currency loans could be beneficial, if the loans are in relatively hard currencies, and if the subsidiary has the funds available to make such a repayment without detrimental effects on its operations.Reducing stock levels in foreign countries will reduce net asset exposure. However, before this, or any other balance sheet hedging techniques are used, the effect on the efficient operation of the company must be considered. There is little point in reducing stock levels if this causes production bottlenecks or failure to satisfy customer demand, and potentially a loss of orders.The non-executive director is concerned about a loss on translation of £15 million. Translation losses are not realised economic losses. Part of such a loss may be from translating the historic cost of overseas fixed assets; in reality the sterling economic value of such assets may be little changed if inflation in the foreign country increases the market value of such assets. Hedging against translation losses might result in reducing rather than increasing sterling NPV as such hedges may be opposite in direction to hedges that would be undertaken to protect against transaction exposure.Will the reported £15 million loss have an adverse effect on Forun’s share price? If the stock exchange is efficient the company’s share price will react to relevant changes in the company’s expected cash flows, not reported translation losses. The reported loss could have little or no effect on share price. Hedging is normally undertaken to protect against the risk of transaction exposure, not translation exposure.(b)(i) Candidates are required to show knowledge of the advantages of multilateral netting within a multinational company, and how to estimate the benefits of such netting.Multilateral netting is an effective means of reducing the transactions costs associated with foreign exchange transactions that are payable to banks. The netting of Forun’s intra-company US dollar exposures gives the following net payments and receipts.$’000UK 1 2 3 4 Total Netrec. receipts(payments)UK -300 450 210 270 1,230 (470)1 700 -420 -180 1,300 2202 140 340 -410 700 1,590 3803 300 140 230 -350 1,020 (110)4 560 300 110 510 -1,480 (20)_____ _____ _____ _____ _____ _____ ___Totalpayments 1,700 1,080 1,210 1,130 1,500 6,620 -_____ _____ _____ _____ _____ _____ ___Some dollar payments will still need to be made from the UK, country 3 and country 4 to countries 1 and 2. However, such payments will total a maximum of $600,000 against the total trade value of $6,620,000, saving transactions and other costs on more than$6,000,000.(ii) Candidates are required to assess what short-term foreign exchange exposures require hedging using given data and to demonstrate how such exposures might be hedged using forward markets, currency futures and currency options.As Forun is risk averse with respect to short-term foreign exchange risk, the company is recommended to hedge against any transaction exposure hedging. In order to reduce foreign exchange transaction hedging should take place after establishing the net exposure position in all currencies. The net group dollar exposure on the intra-company trade is of course zero, as dollar receipts equal dollar payments. Hedging will be undertaken on the net transaction exposure of third party trade.Exposure(Note:Sterling transactions are not exposed!)Receipts Payments NetAustralia $3 million $3 million -USA $12 million -$12 millionGermany -DM13 million (DM13million)Italy L32 billion -L32 billion These net figures are the only ones that require hedging.Hedging may be undertaken on the forward foreign exchange market, currency futures market, or currency option markets.Forward marketThe relevant outright rates are:3 months 6 monthsUS$/£ 1.4720 -1.4770 1.4550 -1.4600 DM/£ 2.4140 -2.4180 2.3830 -2.3870 Lire/£2,217 -2,224 2,225 -2,232$US receipts $12.m146= £8,219,178DM payments DM m132383.= £5,455,308Lire receipts. As the date of the receipt is uncertain, an option forward contract will be used. This will be available at the least favourable exchange rate to Forun between three months and six months forward in this case the six month offer rate.L32 billion2,232= £14,336,918(3) Case for Group Study and PresentationFidden(a) Discuss briefly 4 techniques a company may use to hedge against the foreignexchange risk involved in foreign trade (9 m)(b)Fidden is a medium sized UK company with export and import with USA. Thefollowing transactions are due within the next six months. Transactions are in the currency specified.Purchase of components, cash payment due in three months: £116,000, Sale offinished goods, cash receipt due in three months: $197,000Purchase of finished goods for resale, cash payment due in six months: $447,000 Sale of finished goods, cash receipt due in six months:$154,000Exchange rate (London market) $/£Spot 1.7106-1.7140Three month forward 0.82-0.77 cents premiumSix months forward 1.39-1.34 cents premiumInterest ratesThree months or six months Borrowing LendingSterling 2.5% 9.5%Dollars 9% 6%Foreign currency option prices (New York market)Prices are cents per £,contract size £12,500Call PutExercise price ($) March June Sep March June Sep1.6 15.202.751.7 5.65 7.75 3.45 6.401.8 1.7 3.6 7.9 9.32 15.35Assume that it is now Dec with three months to expiry of the march contract and that the option is not payable until the end of the option period, or when the option isexercised.You are required to :1) calculate the net sterling receipts/payments that Fidden might expect for both itsthree and six month transactions if the company hedges foreign risk on(1) the forward exchange market(2) the money market(8m)2 ) if the actual spot rate in six months time was with hindsight exactly the present sixmonths forward rate, calculate whether Fidden would have been better to hedgethrough foreign currency options rather than the forward market or moneymarket(8m)3) explain briefly what you consider to be the main advantage of foreign currency options. (5m)(4) Interest Rate Hedge - Case for Group Study and PresentationPanonPanon plc has a commitment to borrow 6m in 5 months for a period of 4 months. A general election is due in 4 months time and the managers of Panon are concerned that interest rates could significantly increase just after election.Panon can currently borrow at LIBOR+1%. Three month LIBOR is 7.5%. Current LIFFE 500,000 sterling three month futures price are:Sept 92.60Dec.92.10Assume it is now the end of June and futures contracts mature at the end of the relevant month.Required:(a) illustrate how Panon plc could use a futures hedge to protect against its potential interest raet risk. The type and number of contract must be included in your illustration(10)(b) Estimate the basis risk for this hedge both now and at the time the contract is likely to be closed out. Comment upon the significance of your estimates for Panon. Illustrate your answer with reference to the impact of a 2% increase in LIBOR.(10)PZP plc wishes to raise 15million of floating rate finance. The company’s bankers have suggested using a five year swap. PZP has an AAB rating and can issue fixed rate finance at 11.35% or floating rate at LIBOR plus 60 basis points. Foreten plc has only a BBC credit rating and can raise fixed rate finance at 12.8% or floating rate at LIBOR + 13.5% A five year interest rate swap on a 15million loan could be arranged with Gibbank acting as an intermediary for a fee of 10.25% per annum. PZP will only agree to the swap if it can make annual savings of at least 40basis points. LIBOR is currently 10.5%.Required:(a) Evaluate whether or not the swap is likely to be agreed. (3)(b) Estimating the present value of the differences in cask flow that would exit for PZP from using a floating rate swap rather than borrowing fixed rate directly in the market if(1) LIBOR moves to 11.8% after one year and then remains constant(2) LIBOR moves to 8.8% after three years and then remains constant.The market may be assumed to be efficient and the discount rate to be the prevailing effective floating rate swap rate for PZP. Interest may be assumed to be paid annually at the end of the year concerned.(10)C omment upon your findings and discuss whether they would be likely to influence PZP’s decision to undertake a swap. (7)(5) Option pricing。