Integrative Problems There Are Few

Integrative Problems There are few differences between international and domestic expansion. The first is that international expansion creates transaction and translation risk. While the former can be effectively hedged, the hedges are often imperfect. The latter cannot be hedged, creating a form of foreign exchange exposure that can and will impact on the firm's profits. In addition, foreign expansion typically involves setting up a local subsidiary, and this means the creation of another corporation.

From a financial management standpoint, it is more difficult to manage multiple companies compared with one company. In addition, different countries utilize different accounting principles. Canada has GAAP similar to the American model, but the rest of the world uses IFRS, an international standard that at times can be significantly different from U.S. GAAP. As a result, financial managers must not only be able to produced IFRS statements, but they must be able to reconcile those statements with U.S. GAAP for domestic reporting purposes. 22-2.

There are a number of different types of businesses operating in the international environment. Among them are wholly-owned subsidiaries, joint ventures and partnerships. The techniques and strategies available to these firms differ because of the ownership structure. The degree to which foreign partners are involved in the business will dictate how much control the American firm has with respect to the operations of the foreign entity.

The types of financing the foreign entity has, and the connections and legal status within the foreign country are also factors that can result in operating constraints on a foreign firm. 22-3. There are different types of arbitrage profits. The first type is those that are derived essentially risk-free, relating to the purchase of a good in a lower-cost country and then sold in a higher-cost country. An example would be goods that move between Ireland and Northern Ireland.

In general, UK prices are lower than Irish prices but there is no border between the two nations. Thus, a retailer in Dublin can buy supplies in Belfast at UK prices, then re-sell those goods in Dublin. The profits would be higher than if the retailer procured those goods from an equivalent supplier in Dublin. The second type of arbitrage profit relates to merger and acquisition activity, but works on the same principle.

Firms can earn arbitrage profits if they purchase a company for less than the current stock price -- or for less than the current book value. In this situation, again there is the opportunity to resell the company or its assets for more than was paid for them. 22-4. An example of simple arbitrage would be any situation where an asset can be purchased low on one market and sold high on another near simultaneously. This can be found on foreign currency markets (Barrett, 2010).

For example, if a Hong Kong dollar can be purchased in Singapore for $6 USD and then sold in New York for $6.02 USD, there would be an arbitrage profit of $.02. Such opportunities are rare today, but once were relatively common when forex markets were less interconnected. A triangular arbitrage uses the same principle, but would involve three currencies. An example of such a situation would be to effect an arbitrage transaction between.