International Managerial Finance


Foreign currencies have a habit of changing relative to the domestic currency and therefore add risk to dealing with foreign countries as sales markets or sources of supplies.

Foreign companies also can be a source of capital to facilitate capital investment and growth Some foreign currencies are seen as more stable than domestic currencies and can be a more predictable source of long term debt.



Many developing countries do not have sufficient resources to finance their investment needs. To meet these needs, they are depending on international capital markets, either from official sources or from private capital sources. Governments in developed countries and the international financial institutions (IFIs) are examples of official capital sources for developing countries.

Examples of private sources are banks and companies. The latter, in particular, can play an important role as suppliers of capital through Foreign Direct Viz Heineken in Bralirwa

For instance, Bralirwa is part owned by Heineken and a Belgian company whilst 25% is owned by “others” who trade on the Rwandan Stock Exchange (RSE)

Foreign financial intermediaries

Banks, both domestic and international, play a part in the transfer of funds from overseas into Rwanda, as Money Market Instruments (liquid) and Bonds (less liquid); but there other financial institutions which arrange the transfer of capital from/to foreign organisations.

These could be Insurance companies, asset managers such as JP Morgan or BNY Mellon

The Financial Intermediary is important as an adviser as well as means of transferring funds. Foreign Financial Intermediaries specialise in foreign funds and are very important in the integration of financial markets.


Integrated financial markets

Financial markets all over the world have witnessed growing integration within as well as across boundaries, spurred by globalisation and advances in information technology. Central banks in various parts of the world have made concerted efforts to develop financial markets, especially after the experience of several financial crises in the 1990s. As may be expected, financial markets tend to be better integrated in developed countries. At the same time, deregulation in emerging market economies (EMEs) has led to removal of restrictions on pricing of various financial assets, which is one of the pre-requisites for market integration. Harmonisation of regulations in line with international best practices, by enabling competitive pricing of products, has also strengthened the market integration process.

Capital has become more mobile across national boundaries as nations are increasingly relying on savings of other nations to supplement their domestic savings.

Integrated financial markets assume importance because:


  • Integrated markets can transmit important price signals – necessary for an efficient market
  • Efficient and integrated financial markets constitute an important vehicle for promoting domestic savings, investment and consequently economic growth (Mohan, 2005).
  • Financial market integration fosters the necessary condition for a country’s financial sector to emerge as an international or a regional financial centre (Reddy, 2003).
  • Financial market integration, by enhancing competition and efficiency of intermediaries in their operations and allocation of resources, contributes to financial stability (Trichet, 2005).
  • Integrated markets lead to innovations and cost effective intermediation, thereby improving access to financial services for members of the public, institutions and companies alike (Giannetti et al., 2002).
  • Integrated financial markets induce market discipline and informational efficiency.                                                                                   INTERNATIONAL FRANCHISES AND LICENCES

A business wishing to expand might consider being a franchisee for an international company or a Rwandan company wanting to set up in a foreign country might consider offering a franchise to a business in that foreign country

Franchise businesses for which franchising work best have one or several of the following characteristics]:

  • A good track record of profitability
  • Ease of duplication
  • Detailed systems, processes and procedures
  • A unique or unusual concept
  • Broad geographic appeal
  • Relative ease of operation
  • Relatively inexpensive operation.

As practiced in retailing, franchising offers franchisees the advantage of starting up business quickly based on a proven brand or trademark, and immediate access to the tooling and infrastructure, as opposed to having to develop them.  Also the franchisor usually provides publicity and advertisements and can offer preferential loans to help the franchisee get started.  The agreement is usually for a defined term and penalty clauses may be added to discourage early departure from the agreement.

An alternative is for a local business to purchase a licence to make a product associated with an international company.  For instance Guinness is brewed all over the world and Bralirwa has a licence to brew Guinness. At the same time it also brews local beer.

The Bralirwa story is a little more complicated.  Heineken owns 45% of Bralirwa and Heineken would have brought in overseas currency when the shares were acquired.  So another way to raise foreign finance is to sell part of the business to a foreign and probably multi-national, however the local shareholders may lose control of their business.


 Simply a market for the lending and borrowing foreign currencies.  This, for a business, would be carried out through a financial intermediary such as Bank of Kigali or KCB.


 Again these would probably be purchased through a bank, but a member of the Rwandan Stock Exchange should be able to effect the transaction.

The foreign bond would effectively be a loan from a bank or financial institution in a foreign currency.  The advantage might be lower and more stable interest rates and bonds are of normally fixed interest rate – predictability helps with budgeting and pricing.

Variable interest rates such as might be offered with an overdraft can leave a financial controller having to estimate for a more uncertain future.

Suppose Business A knew he had to pay GBP10,000 for a foreign supply, he could borrow GBP10,000 by means of a bond


The opposite of a Foreign Bond is an International Certificate of Deposit.

This is really a deposit in a foreign bank in the local currency of that bank.

A Certificate of Deposit (CD) is a time deposit, a financial product commonly offered to businesses or other clients by banks.

CDs are similar to savings accounts; they are “money in the bank”.

They are different from savings accounts in that the CD has a specific, fixed term (often monthly, three months, six months, or one to five years) and usually at a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.

Sometimes CDs may be indexed to the stock market, the bond market, or other indices.

A few general guidelines for interest rates are:

  • A larger principal should receive a higher interest rate.
  • A longer term will usually receive a higher interest rate, except in the case of an inverted yield curve (i.e. preceding a forecast recession)
  • Smaller institutions tend to offer higher interest rates than larger ones.

Buying and selling bonds and shares on the RSE are done through a stock broker who is registered as a member of the RSE


A multi-currency is a type of bond, when interest is charged in one currency, but the payment is made in another (based on a predetermined exchange rate, taking into account a certain percentage of depreciation rates).

Dual currency bonds

  • Traditional dual currency bonds: The traditional form for a dual currency bond specifies that interest will be paid in the investor’s domestic currency, with the principal amount of the bond denominated in the issuer’s domestic currency.
  • Reverse dual currency bonds: A variant on the dual currency bond, the reverse dual currency bond pays interest in the issuer’s domestic currency, while the principal amount of the bond is denominated in the currency of the investor.                                    MULTICURRENCY COCKTAIL BONDS

Are bonds where the investor’s income is a mixture of several currencies at predetermined proportions, usually correlated with the special drawing rights (SDRs), or other international institution/unit such as the ECU.


Multicurrency Cocktail bonds Sperry Corporation issued a US$56 million dual currency bond in February, 1985

  • The interest rate, payable annually in dollars, was 6 3/4%.
  • The principal was equal to 100 million Swiss francs. The final maturity was February, 1995.
  • The spot exchange rate at the time was SF 1.7857 per US dollar, making SF100 million equivalent to $56 million.
  • The 10 year US dollar and Swiss franc interest rates at the time were 9.1% and 6.2 %.FOREIGN EXCHANGE RISK – HEDGING

    When companies conduct business across borders, they must deal in foreign currencies. Companies must exchange foreign currencies for home currencies when dealing with receivables, and vice versa for payables. This is done at the current exchange rate between the two countries. Foreign exchange risk is the risk that the exchange rate will change unfavourably before the currency is exchanged.

    Hedging and financial markets

    Hedging is defined here as risk trading carried out in financial markets. Businesses do not want market-wide risk considerations – which they cannot control – to interfere with their economic activities. They are, therefore, willing to trade the risks that arise from their daily conduct of business. Whether in industrial, commercial or financial businesses, the financial assets – loans, bonds, shares, stocks, derivatives – they trade, allow them to hedge the risks that accumulate in their balance sheets in the course of business.

    Investors’ holdings of securities – or long positions in shares, stocks, bonds or loans – expose them to the sort of risks with which the securities are associated. Part of this risk stems from the unique features of the security, but part is related to more common characteristics shared across securities. Two common macroeconomic risks are those associated with the exchange rate and the interest rate risk in a given economy.

    Pooling securities together in portfolios takes advantages of the idiosyncratic nature of the risks they bear to reduce the overall risk that investors face. For example, including the shares of exporting companies and non-tradable services in an equity portfolio helps to reduce the overall risk of the portfolio to a fall in external demand. From the economy’s point of view, portfolio pooling spreads risk across investors.

    Two cash markets typically help in the development of derivatives markets. The first is the foreign exchange market.

    A second market is the local currency bond market.

    Hedging took a gigantic step forward with the development of derivative products in global financial markets.

    Derivatives are financial contracts that commit counterparties to exchange cash payments related to the value of a commodity or financial asset (underlying asset) with no actual delivery of the underlying asset (Kohn (2004)). They allow investors to deal with individual sources of risks, or a more limited set of risks than other financial assets. There are four main financial contracts: futures, forwards, swaps and options.

    Futures are exchange-traded contracts for the sale or purchase of an asset at a future date. They are written over a large range of underlying assets such as commodities, foreign currency or interest rates. Forwards are also contracts that trade an underlying asset at a future date but differ from futures in that they are traded in OTC (over the counter) markets rather than on exchanges.

    A swap is a contract in which the parties agree to a stream of payments determined with reference to the price of an asset over time. In the case of all three contracts, payments are netted and settled in cash.

    Finally, options are contracts where one party buys/sells (for the payment of a fee) to the counterparty the right to trade in the underlying asset.

    Foreign Exchange (FX):

    Currencies are traded on international exchanges in a similar manner to stocks and shares.

    The forces of supply and demand dictate the relative prices of each currency. Exchange rates are the relative prices of different currencies.


    Fixed exchange rates:

    This is where a government intervenes in the international exchanges in such a way as to keep the price of its currency stable. For example, if the price of its currency rises, it may sell reserves of the currency.

    This, effectively, increases the supply to the international markets and therefore keeps the price down. Alternatively it may buy up currency and hold it if the price is becoming too low. The price of the currency is usually calculated by reference to another major currency (US$), a basket of currencies or a major commodity (usually gold).

    E.g. The government of Utopia decide that they wish to maintain an exchange rate of 1 Utopian Dollar to 1 Euro. If the price of the Utopian Dollar climbs against the Euro (possibly due to a growing demand for Utopian exports), the government will sell off some of their reserves of Utopian dollars on the international exchanges until the rate returns to 1=1.

    One of the advantages of fixing an exchange rate is that it promotes stability within the economy. If, in the above example, Utopian Dollars rose sharply against the Euro, this would make the cost of buying Utopian exports more expensive for Europeans. This would therefore have an adverse effect on exports from Utopia and therefore profits and employment etc. If the value of the Utopian dollar fell sharply, it would become very expensive for Utopians to import supplies or goods as their dollars would be worth much less in terms of the Euro.

    The problem with adopting a policy of fixing exchange rates is that if the value of the local currency is depreciating, the government cannot keep buying it forever to keep the exchange rate fixed. Eventually it will have to stop buying and when this happens, the value of the local currency can depreciate rapidly. In Argentina, the government had to abandon fixing exchange rates in December 2001. The value of the peso fell by over 70% in a few months.  The risk to importers is that big and sudden devaluation can be devastating.


    • Floating exchange rates:

    Floating exchange rates can be either free floating or managed floating.

    Under a free floating FX system, governments do not intervene in FX rates. Under a managed floating FX system, governments will only intervene when the currency goes above or below a certain value.


    • Adjustable peg system:

    This is similar to the fixed rate system except that, on occasion, the government will move to revalue/devalue the currency to what it believes is the real value of the currency (i.e. the price that the currency would be if the exchange rates were floating).

    E.g. Following a period of high inflation, the Utopian government may decide to revalue the currency so that 1 Utopian Dollar equalled €0.80. The idea behind this method of FX system is that currency movements take place in deliberate, once-off movements rather than constantly moving up and down. It also keeps the FX rate in line with the real relative values of the currencies.

    Understanding FX rates:


    • “Spot rate” and FX “spread”.

    The spot rate is the current rate that a bank is offering. However, banks quote two rates – a buy rate and a sell rate. Rates quoted by banks are always from the banks point of view.

    Therefore if a bank quotes the following:

    US Dollars:

    We buy $0.0017 We sell $0.0015

    This means that the bank will buy dollars from you and pay you Rwf1for every $0.0017 you sell them and will sell dollars to you and charge you Rwf1for every $0.0015 you buy.

    The foreign currency is effectively a product that the bank is buying and selling. Naturally, if they want to make a profit, they will buy low and sell high. The rates banks quote (as shown above) are not prices per se. Instead they are quantities of the product they are selling. The price on their board will always in terms of the local currency; in Rwandan banks this will obviously be Rwf.

    The spread is the difference between the buy and sell rates and is effectively the profit the bank makes on the transaction.

    International Trade:

    Companies engage in international trade through a variety of means:


    • Exporting:

    Goods are shipped abroad and sold through an agent or wholesaler. This is the simplest and most common method of carrying out international trade.



    • Little or no set-up costs – only the cost of shipping – therefore low risk;
    • Takes advantage of the local knowledge of the agent or wholesaler;



    • Import duties may be expensive;
    • Transport costs may be high depending on the nature of the product;
    • Customers may prefer locally produced goods.


    • Foreign Direct Investment (FDI)

     This is where a company establishes a branch, manufacturing facility or other direct presence in the foreign country.


    • Eliminates or reduces shipping costs and import duties;
    • Shorter lead-time in getting goods to market;
    • May be advantages to the business environment in the foreign country (fewer regulations, lower taxes, cheaper raw materials);
    • Eliminates the commission/cut taken by an agent or wholesaler;


    • Expensive set-up costs – therefore high risk;
    • Involves book-keeping as well as dealing in foreign currencies;
    • Lack of knowledge of regulations, culture and local ethics etc. which are local to the foreign country;


    A licence is given to a foreign company to produce your patented/trademarked goods/services in their country in return for an agreed royalty payment. E.g.  Guinness is produced under licence all over the world.  In Rwanda the Bralirwa brew and sell Guinness.


    • Low set-up costs – therefore low risk;
    • Shipping costs are avoided;
    • Takes advantage of the local knowledge of the foreign company.



    • The foreign company takes a high proportion of the profits;
    • Quality control – If the foreign company produces sub-standard versions of the products, the product brand names could be weakened;
    • It involves handing over expertise to the foreign company.

    FX Risk:

    Any company that has any dealings in a foreign currency is exposed to the risk that the exchange rate between the foreign currency and the company’s local currency could move in such a way as to affect adversely the company’s profitability.

    E.g.  A Rwandan company which imports from the USA is invoiced in US$ as per agreement with the supplier. (Generally goods are paid for in the currency of the supplier).

    The supplier issues an invoice for goods shipped totalling $100,000 and allows 30 days credit. The spot rate on the date the invoice is received is $1=Rwf1,000. When the Rwandan company arranges to make payment (30 days later) the spot rate has changed to $0.50 = Rwf1,000. It now costs the company Rwf200,000,000 instead of Rwf100,000,000.


    The risk of FX exposure to a company can be classified into three types:


    • Transaction exposure – As illustrated in the above example, this is the exposure resulting from the time lag between the time the goods are ordered (at an agreed price) and the time that the goods are paid for.


    • Translation exposure – This is the exposure that exists where a company has assets/liabilities denominated in foreign currencies. E.g. A Rwandan company could have taken out a loan in the USA to fund a marketing campaign. The liability (in Francs) could increase or decrease over time simply as a result of FX movements. This obviously affects the value of the company.


    • Economic exposure – This is the exposure of future cash flows to movements in FX rates.

    E.g.  A Rwandan company exports coffee to the USA. If the value of the Franc moves up against the US Dollar, it will be more expensive for Americans to import coffee. Therefore the expected future sales and profits of the company will decline and, in turn, the value of the company will decline.

    Methods of minimising FX risk:

    Forward Exchange Contract

    A forward contract is where a company agrees to buy or sell a given amount of foreign currency at an agreed rate at an agreed date in the future. This is a very common method of managing FX risk.


    • By estimating its FX requirements for a given period, a company can completely cover itself against any FX rate movements for that period;
    • The company can budget in advance without fear of the budget becoming inaccurate due to FX movements;


    • The contract is legally binding and must be carried out – even if the FX rates turn out to be more favourable than the rate contracted for or if the company incorrectly estimates its foreign currency requirements;
    • Banks usually charge a premium on what they expect the rate to be at the date in the future (E.g. Assume an economic environment where FX rates rarely move and that Rwf1,000=$1. The bank may expect the same rate to rule in 3 months’ time but may contract with a company to sell it dollars at the rate of Rwf1,100=$1 in 3 months). The spot rate may turn out to be more or less favourable than the forward contract rate at the date of maturity. Companies know this but still tend to enter into FX forward contracts. The reason is that by entering into FX forward contracts, the companies know what rate they can get in the future.

    This eliminates risk. If a company with foreign currency exposure does not hedge against the risk of FX rate movements, capital markets will perceive the company as having a higher risk profile than might otherwise be the case and the company’s cost of capital will increase. Special types of forward contracts called “Option dated forward contracts” are available. These are similar to forward contracts except that the contracts can be completed at any point during a range of dates. However, they are still legally binding and must be completed at some point during the agreed range.

    If it happens that a company cannot complete a contract, the following options are available:

    • Close out the contract:

    Assume a company has contracted with a US supplier to buy a shipment of chairs for $100,000 at the end of 2011. In order to protect itself against currency fluctuations, at the end of 2010 it contracts with the bank to buy $100,000 for Rwf66,000,000. If the contract falls through for any reason (US supplier goes bankrupt), the company has the option simply to buy the $100,000 from the bank as contracted for and sell it back to the bank at the same rate. However, depending on what the spot rate is at the end of 2010, the company could make a profit or loss on the transaction.

    • Extend the contract:

    Take the example given above except that, instead of going bankrupt, the US supplier cannot supply the chairs until 3 months later than expected for some reason. The company can extend the contract for three months. The drawback with this method is that the bank will charge a premium on the original price.

    Foreign Currency Option

    This is similar to a forward contract except that the holder has the option either to exercise the option to buy/sell the foreign currency or allow it to lapse.


    This method involves trying to ensure that the value of a company’s foreign currency assets and liabilities are matched. E.g. If a company was investing in property in the UK, it may choose to borrow the funds in Sterling. If the Rwf value of the property was to rise/fall as a result of a move in FX rates, the Rwf value of the loan would rise/fall by an equivalent amount.

    Leading and Lagging

    Under this method a company tries to predict movements in the FX rates and time its cash inflows and outflows accordingly.


    Lead Payment:

    If a Rwandan company expects, say, dollars to strengthen against the Franc over the coming month, it may decide to pay its US supplier immediately before dollars get too expensive. This may be done even if payment isn’t due until the end of the month.


    Lagged Payment:

    A lagged payment is made where a company is expecting the foreign currency to weaken against the domestic currency. Therefore by waiting a while before making payment, the company can buy the required amount of foreign currency cheaper.

    The above technique is usually only used in relation to payments. It is not usually possible to time receipts.



    • Cheap method of hedging – banks and other 3rd parties not involved;
    • Enables a company to profit from FX movements;



    • Can be a risky business trying to predict FX movements;
    • Can result in dis-satisfied suppliers;
    • Limited in terms of timeframe – a company can only alter the timing of its payments by a few weeks, any more than that could result in being sued by a supplier.
    • Market integration promotes the adoption of modern technology and payment systems and vice versa.



    Project finance is finance for a particular project, such as a mine, railway, pipeline, power station, hospital or prison, which is repaid from the cash-flow of that project.

    Project financing techniques have been used on many high-profile corporate projects, including Euro Disneyland.  Increasingly, project financing is evolving as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects internationally.

    Project Financing includes understanding:-

    • The basis for project financing
    • How to prepare the financial plan
    • Assess the Risks
    • Design the financing mix
    • Raise the funds

    Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan.  A most important point to remember in project financing is the identification, analysis, allocation and management of every risk associated with the project.  Financiers and their advisers will go to substantial measures to ensure that the risks associated with the project are reduced or eliminated as far as possible.

    The cost of project finance is generally higher and it is more time consuming for such finance to be provided.

    Possible risks associated with project finance would include:- • Project not being finished on time, on budget, or at all

    • Project not functioning at its full capacity
    • Project failing to generate sufficient revenue to service the debt
    • Project hastily comes to an end

    Each project gives rise to its own unique risks and hence poses its own unique challenges, therefore in every case all parties and those advising them need to act creatively to meet those challenges and to effectively and efficiently minimise the risks embodied in the project in order to ensure that the project financing will be a success.


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