Tài chính doanh nghiệp - Global financial modeling

1Global Financial ModelingTopic 16Advanced Financial ModelingL. GattisTopicsFX Quotes (Direct / Indirect)FX Appreciation and DepreciationFX ConversionsForecasting FX rates using PPP and IRPFX Forward and Options PricingTransactional Gains/Losses and Hedging FX ExposureGlobal Capital BudgetingConverting Cashflows, Repat Taxes, risk premiumsGlobal Portfolio Optimization2Direct and Indirect Prices: Latte3The price of a Latte is 3.30 U.S. dollarsDirect Price Quote: $3.30/LatteThis a called a direct quote in USD for an AmericanYou could also say that the Latte price of a USD is 0.3030 LatteIndirect Quote: 0.3030 Latte/USDThis a called a indirect quoteLattes are always quoted in direct terms$3.30Direct and Indirect Prices: Euro4The price of a Euro is 1.25 U.S. dollarsDirect Quote: $1.25/EuroThis a direct quote in USD for an AmericanYou could also say that the euro price of a USD is .80 euroIndirect Quote: €0.80/USDThis a called a indirect quoteThe euro is usually quoted in direct terms$1.25/€Direct and Indirect Prices: Danish Krone5The price of one Krone is .16 U.S. dollarsDirect Quote: $0.16/KroneThis a direct quote in USD for an AmericanYou could also say that the krone price of a USD is 6.25 kroneIndirect Quote: Kr 6.25/USDThis a called a indirect priceThe krone is usually quoted in indirect terms, others includeJap. Yen, Swiss Franc, Can. dollar, Chinese yuan, Mexican peso, Brazilian RialKr6.25/$Bloomberg.com Currency Pairs6 FormatBASE-QUOTE (EUR-USD)BASEQUOTE (EURUSD)BASE/QUOTE (EUR\USD)< US$ price of a Euro (US$/€)< US$ price of a British Pound (US$/£)< Japanese Yen price of a US$ (¥/US$)< US$ price of a Australian Dollar (US$/A$)< Canadian Dollar price of USD (C$/US$)< Yen Price of a Euro (¥/€)Currency Conversions7To convert from one currency to another simply use cross multiplicationSuppose the USD-CAD exchange rate is C$1.05/$. How many CAD (C$) can you exchange for $100 USD?How many USD can you exchange for C$100?   Cross Rates8 9Calculating Currency Appreciations and DepreciationCurrency Appreciation = (s1 - s0)/ s0 where s0 = old currency value s1 = new currency value When using this equation you are describing the appreciation or depreciation of the “denominator currency”(If you want to talk about the numerator currency use this equation to calculate appreciation = (s0 - s1)/ s1) or invert exchange rates and use the previous example.10Appreciation: Direct Quotes EXAMPLE: € Appreciation If the dollar value of the € goes from $1.50 (s0) to $1.65 (s1), What is the appreciation or depreciation of the €? What is the appreciation or depreciation of the $?   Hint: Euro appreciated, USD depreciated11Appreciation: Indirect Quotes EXAMPLE: C$ AppreciationThe USD-CAD rate goes from C$1.05 (s0) to C$1.03 (s1), What is the appreciation or depreciation of the US$? What is the appreciation or depreciation of the C$?   Hint: USD depreciated, C$ appreciatedPractice Problems12Practice Problems13Why Currency Appreciation is Important14If the euro depreciates 10% against the USD, the USD revenue of euro-denominated receivables falls 10%.If the Chinese yuan appreciates 10% against the USD, the USD costs of yuan-denominated labor cost and other payables rises 10%.If the USD appreciates 10% against major currencies, U.S. exports are 10% more expensive to the rest of the world.Inflation, Interest Rates, and Exchange Rates15Purchasing power parity (PPP) is a theory that states that exchange rates must adjust in the long-run based on inflation differentials to maintain the cost of goods and prevent arbitrage in goods (buy cheap and ship)Example: suppose the spot price of the euro is $1.30 and inflation in the U.S. is 10% and inflation in Europe is 4%. If exchange rates do not change, European goods just got 6% cheaper. The spot price of the euro would need to appreciate by 6% to prevent arbitrage. The PPP formula is:Inflation, Interest Rates, and Exchange Rates16For indirect quotes: Suppose the spot price of the Polish zloty is Zl3.00/$. Inflation in the U.S. is 3% and inflation in Poland is 7%. The Zloty would depreciate by approximately 4% (and dollar appreciate by 4%). Inflation, Interest Rates, and Spot Exchange Rates, and Forwards17If you assume that arbitrage in interest rates ensures that real rates of return are the same in each country, then interest rates only reflect differences in inflation. Therefore, you can use observable government bond interest rates instead of inflation rate forecasts. (Interest Rate Parity – IRP)Also note, the IRP and PPP provide longer term forecasts by taking the interest rate ratio to the t power This is also the no-arbitrage forward pricePractice Problems18Practice Problems19Transaction Gain/LossSuppose Ingersoll-Rand enters into a contract to buy €100,000 in equipment from a German firm when the exchange rate is $1.10/€When Ingersoll-Rand pays the invoice the exchange rate is $1.30/€how much more did IR pay? =- €100,000 * $1.1 = - $110,000 =- €100,000 * $1.3 = - $130,000 ($20,000 more)Transaction Gain/Loss = V*(S1-S0)Where V is negative for payables =- €100,000*($1.3-1.1) = - $20,000 (Loss) 20Hedging FX RiskForward: Enter into long forward contract to buy 100,000 euros at the forward priceNo upfront costsIRP can be used to price forwardsOption: Buy call option to purchase 100,000 euros at the strike priceMust pay premiumBS can be used to price option premium: Set-Foreign interest rate as dividend yield and enter spot and strike in direct terms ($)21Black-Scholes FunctionsFunction BSCall(s, k, v, r, t, d) d_1 = (Application.Ln(s / k) + (r - d + (v ^ 2) / 2) * t) / (v * t ^ 0.5) nd1 = Application.NormSDist(d_1) d_2 = d_1 - v * t ^ 0.5 nd2 = Application.NormSDist(d_2)BSCall = s * Exp(-d * t) * nd1 - k * Exp(-r * t) * nd2End FunctionFunction BSPut(s, k, v, r, t, d) d_1 = (Application.Ln(s / k) + (r - d + (v ^ 2) / 2) * t) / (v * t ^ 0.5) minus_nd1 = Application.NormSDist(-d_1) d_2 = d_1 - v * t ^ 0.5 minus_nd2 = Application.NormSDist(-d_2)BSPut = -s * Exp(-d * t) * minus_nd1 + k * Exp(-r * t) * minus_nd2End Function22FX Cashflow Hedge Simulation23FX Cashflow Hedged: Solution24Global Capital Budgeting NPVConvert foreign-denominated cashflows to USD using forwards or IRP forecasted exchange ratesAccount for repatriation taxesDiscount cashflows using a domestic project WACC plus a risk premium (sovereign risk premium often used: difference between yield on domestic and foreign sovereign bonds)25Global Capital Budgeting NPV26Global Capital Budgeting NPV27Global Investing28Global Investing29TopicsFX Quotes (Direct / Indirect)FX Appreciations and DepreciationsFX ConversionsForecasting FX rates using PPP and IRPFX Forward and Options PricingTransactional Gains/Losses and Hedging FX ExposureGlobal Capital BudgetingConverting Cashflows, Repat Taxes, risk premiumsGlobal Portfolio Optimization30