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International financial strategy - Essay Example

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International Financial Strategy Table of Contents Table of Contents 2 Answer1 3 Reasons for which a company cross lists itself 3 Benefits associated with cross listing 5 Costs associated with cross listing 6 Answer 2 7 Identification and explanation of sources of long term finance 7 Identification of the possible rationale for the particular capital structure 9 Calculation of the cost of capital 10 Answer 3 11 Demonstration of the impact of exchange rate volatility 11 Explanation of the mechanism of the money market hedge and forward market hedge 12 Hedging using money market hedge and forward contract 13 Reference List 15 Appendix 17 Answer1 Any company that has operational base in various …
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International financial strategy

Download file to see previous pages... Thus it is absolutely important that the companies take precautionary measures to minimize the risks (Bonaccorsi and Daraio, 2009). The present research study elucidates the benefits and costs and advantages that a company can enjoy if it is listed in more than one exchange. British Petroleum is used as an example to show how it finances its long term capital needs. Apart from that effort is also made to present the transaction risk faced by the company. Reasons for which a company cross lists itself A multinational company is spread all across the globe. Due to this reason such a company is involved in multiple numbers of trading relationships across multiple time zones and more importantly in multiple currencies. The company must be listed on the domestic exchange apart from the other foreign exchanges (Chiefele, 2012). The domestic exchange most of the time performs the job for currency exchange. If the operational base of the company is spread in more than 5 to 6 different international countries, then using the domestic exchange as the basis for all transactional requirements becomes complex and cumbersome (Garrick, 2011). The transactions which are settled in different foreign currencies may have different consequences on the company if they are settled through a foreign exchange rather than a domestic exchange. For example the exchange rate between two different currencies can be slightly different between a foreign exchange and a domestic exchange. Multinational companies can use this price difference for their own advantages. The difference in price is due to the information asymmetry. The financial system is connected by very complex network where any new information generated at one corner gets dispersed to other corners easily (Gulbrandsen and Smeby, 2008). The stock exchanges around the world are connected by vast system of networks. The networks carry large amount of information in a matter of seconds. Thus any lag in information between two time zones is almost negligible. Still the negligible difference when multiplied by transactions worth billions of dollars the resultant is completely different (Hakim, 2010). This entails the arbitraging concept. This kind of arbitraging has been reduced significantly due to superfast information dissemination and sharing. Despite that there are many deficiencies in the systems which are sometimes misused by multinational companies. One of the most important reasons for cross-listing is reducing the cost of equity. Finding sources of finance is a matter of perennial concern for any company. The difficulty becomes multiplied if it is a multinational company. If the multinational company is listed in a more than one exchanges then the probability of raising the capital increases. The company can use various modes of financing both debt and equity. Thus the dependency on one economy or the modes of finance decreases considerably. This in turn eases the rate of return that a company has to offer to the investors to raise the capital (Harvey, Smith and Wilkinson, 2007). This is ...Download file to see next pagesRead More
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