Introduction to Finance

forward contract
 
that specifi es the currencies 
to be exchanged, an exchange rate, and a future date when the transaction will be completed. 
The exchange rate specifi ed in the forward contract is called the 
forward rate
. The terms 
of the forward contract are established between the multinational corporation and a bank or 
other institutional foreign exchange dealer. Other fi nancial instruments available for currency 
hedging activities include currency futures contracts and currency options contracts.
4
Large multinational corporations enjoy special opportunities for risk reduction and spec-
ulation since they can move cash balances from one country to another as monetary conditions 
warrant. For example, if a decline in the value of a particular currency is expected, cash in the 
branch in that country may be moved back to the United States, or a fi rm may borrow funds 
in a foreign market and move them immediately to the United States (or to another country) 
with the expectation of repaying the loan at a reduced exchange rate. This is speculation rather 
than a risk-reduction activity. An expected decline in a currency may lead to an attempt to 
accelerate collection of accounts receivable, with funds transferred quickly to another country. 
Payments on accounts payable may be delayed in the expectation of a decline in exchange 
rates. If, on the other hand, a foreign currency is expected to increase in relative value, the 
preceding actions would be reversed.
Career opportunities have developed with the increasing importance of multinational 
fi nancial management. Some corporations maintain special departments to study foreign 
business activities and their prospective profi tability; for example, to analyze governmental 
attitudes, tax rates, and duties, as well as to determine how foreign operations are to be fi nanced. 
In addition, to protect bank balances and other investments, almost constant attention must be 
given to day-to-day exchange rate changes.
Ethical Considerations
ETHICAL
The concept of acceptable ethical behavior diff ers across cultures and countries. 
In some primarily developing countries, it seems to be acceptable practice for government 
offi
cials and others to request “side” payments and even bribes as a means for foreign com-
panies being able to do business in these countries. This is morally wrong. In addition, the 
Foreign Corrupt Practices Act (FCPA) prohibits U.S. fi rms from bribing foreign offi
cials. 
For violators of the FCPA, the U.S. Justice Department may impose monetary penalties, and 
criminal proceedings may be brought against violators. Government actions may result in 
lost reputations and fi rm values. 
For example, Titan Corporation had its proposed 2004 sale to Lockheed Martin Corpor-
ation implode because it could not promptly resolve a bribery investigation brought by the 
Justice Department.
Another example was the 2004 indictment of two former HealthSouth 
Corporation executives for conspiracy in a bribery scheme involving a Saudi Arabian hospital.