International Business Finance: Assessment 3 Report Analysis

This report, prepared for an International Business Finance course, delves into several key aspects of financial management and strategy. It begins by defining and explaining the use of forward exchange contracts, including their calculation and application in mitigating currency exchange risks for a Polish manufacturer. The report then explores the sources of finance available to businesses at different stages of their life cycle, from introduction to decline, and analyzes the suitability of various funding methods. Furthermore, it examines banks' lending preferences and the factors they consider when evaluating loan applications. The role of venture capital in business financing is also discussed, including the different stages of venture capital investment and the benefits it offers to entrepreneurs. Finally, the report offers advice to an entrepreneur, providing recommendations on steps to take to ensure the success of their venture, considering various financial and strategic approaches.

Assessment 3 1
International Business: Assessment 3
By Student’s Name
Name of Class and Course
Professor
Name of the University
City and State
The Date

Assessment 3 2
Question 1:
1. Definition of a forward exchange contract
A forward exchange contract refers to an agreement between two parties (buyer and bank) to
exchange two currencies at a predetermined exchange rate at a future date. A forward
exchange contract is used to mitigate foreign exchange risks. Buyers use this type of
contracts to protect themselves against transactional losses arising from the fluctuation of
foreign exchange rates. Forward exchange rates are predetermined 30 days, 90 days, to up to
twelve months into the future (Richards, 2015, p. 56). In some cases, a foreign exchange rate
can last for ten years in the future where the U.S dollar and the Euro currencies are involved.
A forward exchange rate is calculated using four key variables, namely:
a) The spot rate; (S)
b) The interest rate of the domestic currency; (r(d)).
c) Interest rate of the foreign currency; (r(f)).
d) t= Contract time in days.
Therefore, a forward exchange rate is calculated using the formula;
Forward rate (F)= S X
2. Explain why would you like to use this protection (no more than 300 words) - 10
marks
Several factors determine the exchange rates between two different currencies. Some of the
elements are; inflation rate, interest rates, political stability, country’s balance of payments,
government debts, terms of trade, recession and speculations. Any change in these factors
would positively and negatively impact a foreign exchange rate (Wystup, 2017, p. 202).

Assessment 3 3
Surprisingly, all these factors are macro, meaning businesses cannot control them. For
instance, a business trading U.S based company is likely to pay more than the contract
amount if the dollar weakens against the Euro (Hull, 2009, p. 412). On the other hand, the
same business would pay less than the contract amount if the dollar strengthens against the
Euro.
The illustration mentioned above clearly shows that the amount payable in the future date is
likely to fluctuate about the changes in the foreign exchange rate. The forward exchange
contract is a tool used by businesses to avoid losses in case a domestic currency weakens
against a foreign currency used in trade (Wystup, 2017, p. 316).
As a Polish manufacturer of leather goods, I should enter into a forward exchange contract
with my bank. The contract will ensure that the business does not suffer losses in case of an
exchange rate risk. Therefore, I would hedge against currency movements to ensure that my £
500,000 does not lose value.
3. Calculating the one-month forward exchange rate
A forward exchange rate is calculated using the formula;
Forward rate (F)= S X
The spot rate (S) is calculated by dividing the Euro’s exchange rate with the Great Britain
Pound’s exchange rate. Therefore, the spot rate is calculated, as shown below.
S= €/ £
S= 1.1128/ 1.1152
S= 0.9978

Assessment 3 4
The spot rate is now used to calculate the forward exchange rate, as shown below.
Forward rate (F)= S *
F= 0.9978 *
F= 0.9978*
F= 0.9978 * 1.013
F= 1.011
Therefore, the Forward exchange rate is 1.011
The value of £500,000 at the end of one month if the forward exchange contract is not
entered can be calculated using the spot rate, as shown below.
Note: The value is calculated in Euro (€)
= £ 500,000 * €0.9978
= €498,900
Likewise, the value of £500,000 at the end of one month, if the forward exchange contract is
entered, can be calculated using the forward rate, as shown below.
= £500,000 * €1.011
= €505,500

Assessment 3 5
As an exporter, I would gain €6,600 (€505,500- €498,900) by entering a forward exchange
contract.
Question 2:
a) Sources of finance in different growth stages of the company
Businesses go through four stages of the life cycle, namely introduction, growth, maturity and
decline. There are different methods of getting funds to finance the business. The
appropriateness of the methods of obtaining financial capital depends on the stage of the
business within the life cycle (Alhabeeb, 2012, p. 78).
Introduction stage: A new entrepreneur in a given industry lacks a reputation to support an
acquisition of a huge bank loan. Appropriate sources of financial capital are personal savings,
loans from family and friends, credit cards, and credit from suppliers. Small bank loans are
also a preferred source of financial capital and venture capital (VC) firms (The Staff of
Entrepreneur Media, 2016, p. 98).
Growth stage: Financial capital is required for business expansion and investment. The
favourable sources of funds at this stage are bank loans, venture capital firms, equity markets
by launching initial public offering (IPO) of shares. The business can also offer its ordinary
shares to investors.
Maturity stage: Financial capital is required for acquiring new models of productions or
replacing products. Internal sources of funds through retained earnings as well as issuing
equity and bonds are considered appropriate. An entrepreneur may also seek a modest bank
loan (The Staff of Entrepreneur Media, 2016, p. 102).
Decline stage: A reduction in sales characterizes this stage because of the high competition
level. An entrepreneur may choose to repurchase stock and retire debts.

Assessment 3 6
My uncle has a business idea. He also enjoys a technological advantage over his competitors
in the production of blades. However, he is yet to patented the technology. Therefore, the
idea can counterfeit easily. The information on the projected financial performance of the
business is not available. Therefore, seeking a bank loan is not appropriate because it might
take long before the business is in a position to commence loan repayment. The effective
sources of financial capital would be personal savings, loans from family and friends, credit
cards, partnership, and trade credit from suppliers (Peirson, et al., 2015, p. 75).
b) Banks’ preferences while lending to companies in general
Banks are cautious about offering loans to new businesses as compared to existing
businesses. Banks do not want to gamble with the money belonging to the account holders.
Lastly, banks only give small loans, even when a business owner successfully present their
application. Banks need to understand the loan purpose, repayment method and risks
involved. The three presences are evaluated using character, collateral, capacity, capital and
conditions (Lipman, 2016, p. 213).
Character: Banks need a surety that a borrower has the education, knowledge and experience
required to operate the business. Reputation important for a borrower to get a bank loan.
Collateral: Banks want collateral to ensure that their money would get lost when a borrower
fails to repay a loan.
The capacity of loan repayment: Banks need to be assured that a borrower can repay a loan.
Lenders rely on the debt-to-income ratio to determine a company’s free cash flow.
Need for Capital: Banks are more comfortable in giving loans when borrowers money is also
invested in the business. Why should a bank invest in a business which the owner has not

Assessment 3 7
invested? Borrowers tend to work harder to repay bank loans when their own money is in the
business.
Economic conditions: Banks also consider macro factors such as industry trend, political
direction and economy when evaluating the ability of a borrower to repay a loan. Banks is
more likely to decline a loan request when macro factors are unfavourable compared to when
they are favourable (Lipman, 2016, p. 221).
c) The role which venture capital might play in his venture and in what stage it might
become a realistic financing option
Venture capital (VC) is a form of an equity investment used to finance new businesses.
Venture capital is mostly used to finance new businesses operating om high technology
industries. When entrepreneurs cannot raise adequate funds to invest in their ideas, they turn
to investors under VC. The investors assume control of some business decisions and
ownership and offer financial capital in return. An advantage of seeking funding through VC
firms is that investors help entrepreneurs to nurture their businesses. VC firms also provide
expertise, valuable connections and time for businesses to grow (Hull, 2009, p. 522). There
are several stages of funding under VC.
Seed money stage: The entrepreneur convinces venture capitalists how they stand to
benefit from the business idea. Investors have to critically evaluate the business plan,
potential growth and economic and technical feasibility of the idea. Investors choose to
invest in a business only when the idea has the potential to succeed.
Start-up stage: An investor offers financial capital for product development and
marketing. Moreover, the investor will select his representative in the business’ board.
The investor also monitors the performance of the business over time to decide whether it
is okay to continue with the funding or not (Hull, 2009, p. 524).

Assessment 3 8
Second round stage: Investor provide more funds to finance working capital requirement
when the business is yet to break even.
Expansion stage: The Investor provides funds to expand the operations of the business if
it is profitable.
Bridge financing stage: VC exits the business by selling its shares to the company.
My uncle requires both financial support and industry expertise/ knowledge to run the
business. Seeking funding from venture capital would be appropriate for my uncle because an
investor would help him to nurture his businesses. An investor will also provide expertise,
valuable connections and time for businesses to grow. The appropriate stage of seeking a VC
would be the seed money stage. At this stage, he will have to convince the venture capitalist
about the benefits of investing in the business. I am sure an investor would be convinced to
finance the idea of considering my uncle’s competitiveness and technological expertise in the
business (Hull, 2009, p. 531).
d) Advice your uncle on steps he should take to make his venture successful.
My uncle has a business idea. He also enjoys a technological advantage over his competitors
in the production of blades. However, he is yet to patented the technology. Therefore, the
idea can counterfeit easily. The information on the projected financial performance of the
business is not available. Therefore, seeking a bank loan is not appropriate because it might
take long before the business is in a position to commence loan repayment. The effective
sources of financial capital would be a diversified financial capital plan. The plan would
comprise of venture capital, personal savings and loans from family and friends. A venture
capitalist will provide expertise, valuable connections and time for businesses to grow
besides financial capital. On the other hand, personal savings will ensure that my uncle has
his funds in business to work harder for its success. Loans from family and friends will help

Assessment 3 9
to meet additional financial obligations not covered using venture capital and personal
savings.
References List
Alhabeeb, M. J., 2012. Mathematical Finance. New York: Wiley.
Hull, J., 2009. Options, Futures and Other Derivatives. Illustrated ed. New Jersey:
Pearson/Prentice Hall.
Lipman, F. D., 2016. New Methods of Financing Your Business in the United States: A
Strategic Analysis. New York: World Scientific.
Peirson, G. et al., 2015. Business finance. Sydney: McGraw Hill.
Richards, W. L., 2015. Currency: Fundamentals and Functions. First Edition ed. New York:
Design Pub.
The Staff of Entrepreneur Media, 2016. Finance Your Business: Secure Funding to Start,
Run, and Grow Your Business. Irvine, California: Entrepreneur Press.
Wystup, U., 2017. FX Options and Structured Products. First Edition ed. New York: John
Wiley & Sons.