Chapter 15 • International aspects of business finance
Many business finance texts cover international aspects. Arnold (2005) includes a readable
chapter. Two books specialising in international business finance that can be recommended for
their readability are Buckley (2005) and Madura (2006). For a case study on how one major UK
business deals with foreign exchange problems see Dhanani (2003).Further
reading15.1 Why is it claimed that a UK business can achieve its objectives more effectively by
internationalising its activities?
15.2 Broadly, there are four types of people or organisations that use the foreign exchange
market. Who are they?
15.3 What are the four theoretical rules on foreign exchange rates that derive from the law
of one price?
15.4 What causes foreign exchange markets not to be price efficient?
15.5 How are the three risks of being involved in international business usually described?
15.6 What is a ‘money market hedge’?Review questions
Suggested answers to
review questions appear
in Appendix 3.(All the problems appearing in this chapter are basic-level problems.)15.1*Planters plc manufactures agricultural implements, components for which are
acquired from a number of sources, including some overseas ones. The implements
are marketed in the UK and, increasingly, overseas.
The directors are aware that the business is exposed to exchange rate risk, but
in the past have taken the view that this leads to losses and gains at a level that it has
been prepared to accept. Recently, the scale of overseas trading has led the dir-
ectors to consider the possibility of managing their foreign exchange risk exposure.
Draft a note for the directors explaining how buying and selling in foreign currencies
exposes the business to risk. The note should then explain, in reasonable detail, how
this risk might be managed in practice.15.2*Pavlov plc has just made a sale to an Australian customer for A$500,000, the payment
to be made in three months’ time. The current exchange rate is £1 =A$2.6. Nominal
interest rates for three months are 2 per cent in Australia and 3 per cent in the UK.
Pavlov plc is going to avoid transaction risk by using a money market hedge.
Describe, with exact figures, what action the business will take, and when it will take
it, to achieve its objective. (Work to the nearest £ and/or A$.)15.3 Lee plc has just made a sale to an Australian customer for A$500,000, the payment
to be made in three months’ time. The current exchange rate is £1 =A$2.6. Nominal
interest rates for three months are 2 per cent in Australia and 3 per cent in the UK.PROBLEMS
Sample answers to
problems marked with
an asterisk appear in
Appendix 4.