BFF2140 Chap.5 International Finance and Working Capital
International Finance and Working Capital
International Finance and Working Capital links foreign-currency exposure to the firm's short-term cash cycle. Exchange-rate quotations must be interpreted before conversion, and forward contracts can lock a home-currency value without removing the underlying business risk. Inventory, receivables and payables then determine how long operating cash is committed and how much short-term finance is needed.
Currency labels act like algebraic units: writing them explicitly shows whether a quotation should be multiplied or divided. A forward hedge fixes the domestic value of a known foreign receipt or payment, reducing adverse uncertainty while surrendering favourable movement.
A foreign project can be valued consistently by converting dated cash flows at forward rates and discounting in home currency, or by discounting in foreign currency and translating the resulting NPV at spot. Mixing currencies and discount rates produces an uninterpretable answer. Working-capital analysis measures inventory days, receivable days and payable days before combining them into the cash conversion cycle.
Shortening the cycle can release funds, but overly lean inventory, harsh collection or delayed supplier payment may damage operations. Trade-credit and bank-finance comparisons also need a common annual horizon, fees and risk basis. The chapter therefore treats liquidity as a managed operating system rather than a target ratio viewed in isolation.
What this chapter covers
- 01
Spot exchange rates
- 02
Direct and indirect quotations
- 03
Forward contracts
- 04
Foreign project valuation
- 05
Operating and cash cycles
- 06
Short-term financing
- 07
Unit-consistent currency conversion and liquidity recommendations that balance funding cost against inventory, customer and supplier consequences
Worked example · free
Measure the cash conversion cycle
- 3Inventory days are 360,000/2,400,000 multiplied by 365, or 54.75 days; receivable days are 29.2 days.
- 3Payable days are 36.5 days, so the cash conversion cycle is 54.75 plus 29.2 less 36.5, or 47.45 days.
Key terms
- Spot rate
- The exchange rate for immediate currency delivery.
- Forward contract
- An agreement today to exchange currencies later at a fixed rate.
- Cash conversion cycle
- Inventory days plus receivable days less payable days.
International Finance and Working Capital FAQ
Why does quotation direction matter?
An exchange rate states units of one currency per unit of another. Reversing the quotation changes whether conversion requires multiplication or division, so label both currencies before calculating.
What does a forward hedge achieve?
A forward contract fixes the exchange rate for a known future foreign-currency amount. It reduces transaction exposure but can also remove the benefit of a favourable currency movement and does not repair weak operating cash flow.
Is a shorter cash cycle always better?
A shorter cycle usually releases cash, but extreme cuts can create stockouts, harm customer relationships or strain suppliers. The decision should balance liquidity against sales, resilience and bargaining effects.
Exam move
Put currency units beside every exchange-rate number. Read a quotation as a fraction, cancel units on paper and use a one-unit example to decide whether multiplication or division is correct. Practise reciprocal quotations until reversing a rate feels like a unit conversion rather than a memorised rule.
For a known foreign receipt or payment, compare the unhedged home-currency outcome with the amount locked by a forward contract. Explain that the hedge reduces transaction uncertainty but also removes the benefit of a favourable exchange movement.
Foreign-project valuation must remain internally consistent: either convert each dated foreign cash flow with the relevant forward rate and discount in home currency, or discount in foreign currency and translate the resulting present value at spot. Perform both routes on a small case and investigate any difference beyond rounding.
When evaluating a foreign borrowing source, compare interest cost and exchange exposure together instead of selecting the lowest printed rate. Working-capital questions begin with the operating timeline. Draw inventory acquisition, supplier payment, sale and customer collection, then distinguish the operating cycle from the cash conversion cycle.
Use cost of goods sold for inventory and payable days and sales for receivable days unless the problem specifies another basis. Check that the sign on payable days is negative within the cash cycle because supplier credit delays the firm's cash outflow. Interpret the answer as the duration of operating funding rather than a universal target.
Explore how inventory reductions, faster collection and slower supplier payment alter liquidity, then write the commercial cost of each action. For trade credit, calculate the implicit cost of giving up a discount over the exact gap between discount and net dates, annualise it effectively and compare it with an annual bank cost including fees.
Build revision sets that mix currency and working-capital questions so units, dates and funding consequences remain central. Record mistakes under inverted quotation, inconsistent currency discounting, wrong sales-or-cost denominator and incompatible annualisation. End recommendations with the operational trade-off, because the cheapest-looking source can damage supplier relationships or create a currency mismatch.
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