International Financial Management

Cover
Title Page
Copyright
Contents
Preface
Selected Currencies and Symbols
Part 1 The Global Financial Management Environment
	Chapter 1 Introduction to International Financial Management
		1.1 The Rise of the International Company
			Evolution of the Multinational Corporation
			The Process of Overseas Expansion by Multinationals
			A Behavioral Definition of the Multinational Corporation
			The Global Manager
		1.2 The Internationalization of Business and Finance
			Political and Labor Union Concerns about Global Competition
			Consequences of Global Competition
		1.3 International Financial Management: Theory and Practice
			Criticisms of the International Corporation
			Functions of Financial Management
			Theme of This Text
			Relationship to Domestic Financial Management
			The Importance of Total Risk
			The Global Financial Marketplace
			The Role of the Financial Executive in an Efficient Market
		1.4 Outline of the Text
			The Global Financial Management Environment
			Currency and Derivatives Markets
			Managing Currency Risks
			Financing International Operations
			International Capital Budgeting
			International Management of Working Capital
		APPENDIX 1A The Origins and Consequences of International Trade
			The Gains from Trade
			Specialized Factors of Production
			Monetary Prices and Exchange Rates
			Tariffs
	Chapter 2 Exchange Rate Determination
		2.1 Setting the Equilibrium Spot Exchange Rate
			Demand for a Currency
			Supply of a Currency
			Factors that Affect the Equilibrium Exchange Rate
			Calculating Exchange Rate Changes
		2.2 Expectations and the Asset Market Model of Exchange Rates
			The Nature of Money and Currency Values
			Central Bank Reputations and Currency Values
		2.3 The Fundamentals of Central Bank Intervention
			How Real Exchange Rates Affect Relative Competitiveness
			Foreign Exchange Market Intervention
			The Effects of Foreign Exchange Market Intervention
		2.4 The Equilibrium Approach to Exchange Rates
			Disequilibrium Theory and Exchange Rate Overshooting
			The Equilibrium Theory of Exchange Rates and Its Implications
		2.5 Summary and Conclusions
	Chapter 3 The International Monetary System
		3.1 Alternative Exchange Rate Systems
			The Trilemma and Exchange Rate Regime Choice
			Free Float
			Managed Float
			Target-Zone Arrangement
			Fixed-Rate System
		3.2 A Brief History of the International Monetary System
			The Classical Gold Standard
			How the Classical Gold Standard Worked in Practice: 1821-1914
			The Gold Exchange Standard and Its Aftermath: 1925-1944
			The Bretton Woods System: 1946-1971
			The Post-Bretton Woods System: 1971 to the Present
			Assessment of the Floating-Rate System
		3.3 The European Monetary System and Monetary Union
			The Exchange-Rate Mechanism
			Lessons from the European Monetary System
			The Currency Crisis of September 1992
			The Exchange Rate Mechanism is Abandoned in August 1993
			European Monetary Union
			Optimum Currency Area
			Lessons from EMU and the Euro
			Exchange Rate Regimes Today
		3.4 Emerging Market Currency Crises
			Transmission Mechanisms
			Origins of Emerging Market Crises
			Policy Proposals for Dealing with Emerging Market Crises
		3.5 Summary and Conclusions
	Chapter 4 Currencies: Expectations, Parities, and Forecasting
		4.1 Arbitrage and the Law of One Price
		4.2 Purchasing Power Parity
			The Lesson of Purchasing Power Parity
			Expected Inflation and Exchange Rate Changes
			The Monetary Approach
			Empirical Evidence
		4.3 The Fisher Effect
			Empirical Evidence
		4.4 The International Fisher Effect
			Empirical Evidence
		4.5 Interest Rate Parity Theory
			Empirical Evidence
		4.6 The Relationship Between the Forward Rate and the Future Spot Rate
			Empirical Evidence
		4.7 Currency Forecasting
			Requirements for Successful Currency Forecasting
			Market-Based Forecasts
			Model-Based Forecasts
			Model Evaluation
			Forecasting Controlled Exchange Rates
		4.8 Summary and Conclusions
	Chapter 5 The International Monetary System and the Balance of Payments
		5.1 Balance-of-Payments Categories
			Current Account
			Capital Account
			Financial Account
			Balance-of-Payments Measures
			The Missing Numbers
		5.2 The International Flow of Goods, Services, and Capital
			Domestic Saving and Investment and the Financial Account
			The Link between the Current and Financial Accounts
			Government Budget Deficits and Current-Account Deficits
			The Current Situation
		5.3 Coping with the Current-Account Deficit
			Currency Depreciation
			Protectionism
			Ending Foreign Ownership of Domestic Assets
			Boosting the Saving Rate
			Adjusting Global Economic Policies
			Current-Account Deficits and Unemployment
			The Bottom Line on Current-Account Deficits and Surpluses
		5.4 Summary and Conclusions
	Chapter 6 Country Risk
		6.1 Measuring Political Risk
			Political Stability
			Economic Factors
			Subjective Factors
		6.2 Economic and Political Factors Underlying Country Risk
			Fiscal Irresponsibility
			Monetary Instability
			Controlled Exchange Rate System
			Wasteful Government Spending
			Resource Base
			Country Risk and Adjustment to External Shocks
			Market-Oriented Versus Statist Policies
			Key Indicators of Country Risk and Economic Health
		6.3 Country Risk Analysis in International Lending
			The Mathematics of Sovereign Debt Analysis
			Country Risk and the Terms of Trade
			The Government's Cost/Benefit Calculus
			Lessons from the International Debt Crisis
		6.4 Summary and Conclusions
Part 2 Currency and Derivatives Markets
	Chapter 7 Currency Markets
		7.1 Organization of the Foreign Exchange Market
			The Participants
			Size
		7.2 The Spot Market
			Spot Quotations
			The Mechanics of Spot Transactions
		7.3 The Forward Market
			Forward Quotations
			Forward Contract Maturities
		7.4 Summary and Conclusions
	Chapter 8 Currency Derivatives
		8.1 Futures Contracts
			Forward Contract versus Futures Contract
		8.2 Currency Options
			Market Structure
			Using Currency Options
			Option Pricing and Valuation
			Using Forward or Futures Contracts Versus Options Contracts
			Futures Options
		8.3 Reading Currency Futures and Options Prices
		8.4 Summary and Conclusions
		APPENDIX 8A Option Pricing Using Black-Scholes
			Implied Volatilities
			Shortcomings of the Black-Scholes Option Pricing Model
		APPENDIX 8B Put-Call Option Interest Rate Parity
	Chapter 9 Interest Rate Derivatives
		9.1 Interest Rate and Currency Swaps
			Interest Rate Swaps
			Currency Swaps
			Economic Advantages of Swaps
		9.2 Interest Rate Forwards and Futures
			Forward Forwards
			Forward Rate Agreement
			Short-Term Interest Rate Futures
		9.3 Structured Notes
			Inverse Floaters
			Callable Step-Up Note
			Step-Down Coupon Note
		9.4 Credit Default Swaps
		9.5 Summary and Conclusions
Part 3 Managing Currency Risks
	10.1 Alternative Measures of Foreign Exchange Exposure
		Translation Exposure
		Transaction Exposure
		Operating Exposure
	10.2 Alternative Currency Translation Methods
		Current/Noncurrent Method
		Monetary/Nonmonetary Method
		Temporal Method
		Current Rate Method
	10.3 Transaction Exposure
	10.4 Designing a Hedging Strategy
		Objectives
		Costs and Benefits of Standard Hedging Techniques
		Centralization versus Decentralization
		Managing Risk Management
		Accounting for Hedging under IFRS
		Empirical Evidence on Hedging
	10.5 Managing Translation Exposure
		Funds Adjustment
		Evaluating Alternative Hedging Mechanisms
	10.6 Managing Transaction Exposure
		Forward Market Hedge
		Money Market Hedge
		Risk Shifting
		Pricing Decisions
		Exposure Netting
		Currency Risk Sharing
		Currency Collars
		Cross-Hedging
		Foreign Currency Options
	10.7 Summary and Conclusions
	APPENDIX 10A Currency Translation in Practice
	Chapter 11 Economic Exposure
		11.1 Foreign Exchange Risk and Economic Exposure
			Real Exchange Rate Changes and Exchange Risk
			Importance of the Real Exchange Rate
			Inflation and Exchange Risk
			Competitive Effects of Real Exchange Rate Changes
		11.2  The Economic Consequences of Exchange Rate Changes
			Transaction Exposure
			Operating Exposure
		11.3 Identifying Economic Exposure
			Pla Seau Beach Resort
			Petróleos Mexicanos
			Toyota Motor Company
		11.4 Calculating Economic Exposure
			Spectrum's Accounting Exposure
			Spectrum's Economic Exposure
		11.5 An Operational Measure of Exchange Risk
			Limitations
		11.6 Managing Operating Exposure
			Marketing Management of Exchange Risk
			Production Management of Exchange Risk
			Planning for Exchange Rate Changes
			Financial Management of Exchange Risk
		11.7 Summary and Conclusions
Part 4 Financing International Operations
	12.1 Corporate Sources and Uses of Funds
		Financial Markets versus Financial Intermediaries
		Financial Systems and Corporate Governance
		Globalization of Financial Markets
	12.2 Domestic Capital Markets as International Financial Centers
		International Financial Markets
		Foreign Access to Domestic Markets
		Globalization of Financial Markets Has Its Downside
	12.3 Development Banks
		The World Bank Group
		Regional and National Development Banks
		Regional Development Banks
		Private Sector Alternatives
	12.4 Project Finance
	12.5 Summary and Conclusions
	Chapter 13 International Financial Markets
		13.1 The Eurocurrency Market
			Modern Origins
			Eurodollar Creation
			Eurocurrency Loans
			Relationship Between Domestic and Eurocurrency Money Markets
			Euromarket Trends
		13.2 Eurobonds
			To be confirmed Swaps
			Links Between the Domestic and Eurobond Markets
			Rationale for Existence of Eurobond Market
			Eurobonds versus Eurocurrency Loans
		13.3 Note Issuance Facilities and Euronotes
			Note Issuance Facilities versus Eurobonds
			Euro-Medium-Term Notes
		13.4 Euro-Commercial Paper
		13.5 The Asiacurrency Market
		13.6 Summary and Conclusions
	Chapter 14 The International Cost of Capital
		14.1 The Cost of Equity Capital
		14.2 The Weighted Average Cost of Capital for Foreign Projects
		14.3 Discount Rates for Foreign Investments
			Evidence From the Stock Market
			Key Issues in Estimating Foreign Project Discount Rates
			Proxy Companies
			The Relevant Base Portfolio
			The Relevant Market Risk Premium
			Recommendations
		14.4 The Cost of Debt Capital
			Annual Exchange Rate Change
			Using Sovereign Risk Spreads
		14.5 Establishing a Worldwide Capital Structure
			Foreign Subsidiary Capital Structure
			Joint Ventures
		14.6 Valuing Low-Cost Financing Opportunities
			Taxes
			Government Credit and Capital Controls
			Government Subsidies and Incentives
		14.7 Summary and Conclusions
Part 5 International Capital Budgeting
	Chapter 15 International Portfolio Investment
		15.1 The Risks and Benefits of International Equity Investing
			International Diversification
			Investing in Emerging Markets
			Barriers to International Diversification
		15.2 International Bond Investing
		15.3 Optimal International Asset Allocation
		15.4 Measuring the Total Return from Foreign Portfolio Investing
			Bonds
			Stocks
		15.5 Measuring Exchange Risk on Foreign Securities
			Hedging Currency Risk
		15.6 Summary and Conclusions
	Chapter 16 Strategies for Foreign Direct Investment
		16.1 Theory of the Multinational Corporation
			Product and Factor Market Imperfections
			Financial Market Imperfections
		16.2 The Strategy of Multinational Enterprise
			Innovation-Based Multinationals
			The Mature Multinationals
			The Senescent Multinationals
			Foreign Direct Investment and Survival
		16.3 Designing a Global Expansion Strategy
			Awareness of Profitable Investments
			Selecting a Mode of Entry
			Auditing the Effectiveness of Entry Modes
			Using Appropriate Evaluation Criteria
			Estimating the Longevity of a Competitive Advantage
		16.4 Summary and Conclusions
	Chapter 17 International Capital Budgeting
		17.1 Basics of Capital Budgeting
			Net Present Value
			Incremental Cash Flows
			Alternative Capital-Budgeting Frameworks
		17.2 Issues in Foreign Investment Analysis
			Parent versus Project Cash Flows
			Political and Economic Risk Analysis
			Exchange Rate Changes and Inflation
		17.3 Foreign Project Appraisal: The Case of International Machine Tools
			Estimation of Project Cash Flows
			Estimation of Parent Cash Flows
		17.4 Political Risk Analysis
			Expropriation
			Blocked Funds
		17.5 Growth Options and Project Evaluation
		17.6 Summary and Conclusions
		APPENDIX 17A Managing Political Risk
			Pre-investment Planning
			Operating Policies
Part 6 International Management of Working Capital
	Chapter 18 International Trade Management
		18.1 Payment Terms in International Trade
			Cash in Advance
			Documentary Credit
			Draft
			Consignment
			Open Account
			Banks and Trade Financing
			Collecting Overdue Accounts
		18.2 Documents in International Trade
			Bill of Lading
			Commercial Invoice
			Insurance Certificate
			Consular Invoice
		18.3 Financing Techniques in International Trade
			Bankers' Acceptances
			Discounting
			Factoring
			Forfaiting
		18.4 Government Sources of Export Financing and Credit Insurance
			Export Financing
			Export-Credit Insurance
			Taking Advantage of Government-Subsidized Export Financing
		18.5 Countertrade
		18.6 Summary and Conclusions
	Chapter 19 Managing Working Capital
		19.1 International Cash Management
			Organization
			Collection and Disbursement of Funds
			Payments Netting in International Cash Management
			Management of the Short-Term Investment Portfolio
			Optimal Worldwide Cash Levels
			Cash Planning and Budgeting
			Bank Relations
		19.2 Accounts Receivable Management
			Credit Extension
		19.3 Inventory Management
			Production Location and Inventory Control
			Advance Inventory Purchases
			Inventory Stockpiling
		19.4 Short-Term Financing
			Key Factors in Short-Term Financing Strategy
			Short-Term Financing Objectives
			Short-Term Financing Options
			Calculating the Costs of Alternative Financing Options
		19.5 Summary and Conclusions
	Chapter 20 Financial Management for the Global Enterprise
		20.1 The Value of the Multinational Financial System
			Mode of Transfer
			Timing Flexibility
			Value
		20.2 Intercompany Fund-Flow Mechanisms: Costs and Benefits
			Tax Factors
			Transfer Pricing
			Reinvoicing Centers
			Fees and Royalties
			Leading and Lagging
			Intercompany Loans
			Dividends
			Equity versus Debt
		20.3 Designing a Global Remittance Policy
			Prerequisites
			Information Requirements
			Behavioral Consequences
		20.4 Summary and Conclusions
Glossary
Index
EULA