1.2. WHAT IS ON THE INTERNATIONAL CFO’S DESK? 11
can substantially affect the tax burden.
1.2 What is on the InternationalCFO’s desk?
This book is a text on international finance. Thus, it does not address issues of multi-
national corporate strategy, and the discussion of international macroeconomics is
kept to a minimum. Within the finance discipline, it addresses only the problems
caused by the existence of many countries, as described in the preceding section.
One way to further describe the material is to think about the tasks assigned to an
international financial manager. These tasks include asset valuation, international
funding, the hedging of exchange risk, and management of other risks. We hasten
to add that these functions cannot be viewed in isolation, as will become clear as
we proceed.
1.2.1 Valuation
One task of an international finance officer is the valuation of projects with cash
flows that are risk free in terms of the foreign currency. For example, the manager
may need to evaluate a large export order with a price fixed in foreign currency
and payable at a (known) future date. The future cash flow is risky in terms of
the domestic currency because the future exchange rate is uncertain. Just like one
would do with a domestic project with cash flows that are risky in terms of the
domestic currency, this export project should be subject to a Net Present Value
(NPV) analysis. Thus, the manager needs to know how to compute present values
when the source of risk is the uncertainty about the future exchange rate. Valuation
becomes even more complicated in the case of foreign direct investment (FDI), where
the cash flows are random even in terms of the foreign currency. The issues to be
dealt with now are how to discount cash flows subject to both business risk and
exchange risk, how to deal with tax complications and political risks inherent in
FDI, and how to determine the cost of capital depending on whether or not the
home and foreign capital markets are segmented.
1.2.2 Funding
A second task is, of course, funding the project. A standard financing problem is
whether the firm should issue equity, debt, or equity-linked debt (like convertible
bonds). If bonds are issued or a loan is taken out, the standard questions are what
the optimal maturity is, and whether the terms offered by a bank or a group of
banks are attractive or not. In an international setting, the additional issue to be
considered is whether the bond or loan should be denominated in home currency
or in another one, whether or when there are any tax issues in this choice, how the
risk can be quantified when it is correlated with other risks, and so on.