International Financial Management (Second Edition)

Cover......Page 1
Copyright Page......Page 4
Title Page......Page 5
Dedication Page......Page 7
BRIEF CONTENTS......Page 9
Contents......Page 11
Preface......Page 25
About the Authors......Page 31
1.1 Introduction......Page 33
1.2 Globalization and the Growth of International Trade and Capital Flows......Page 34
1.3 Multinational Corporations......Page 41
1.4 Other Important International Players......Page 50
1.5 Globalization and the Multinational Firm: Benefactor or Menace?......Page 55
1.6 Overview of the Book......Page 60
1.7 Summary......Page 64
Problems......Page 65
Bibliography......Page 66
2.1 The Organization of the Foreign Exchange Market......Page 68
2.2 Currency Quotes and Prices......Page 75
2.3 Inside the Interbank Market I: Bid–Ask Spreads and Bank Profits......Page 84
2.4 Inside the Interbank Market II: Communications and Fund Transfers......Page 89
2.5 Describing Changes in Exchange Rates......Page 93
2.6 Summary......Page 97
Problems......Page 98
Appendix: Logarithms......Page 99
CHAPTER 3 Forward Markets and Transaction Exchange Risk......Page 101
3.1 Transaction Exchange Risk......Page 102
3.2 Describing Uncertain Future Exchange Rates......Page 103
3.3 Hedging Transaction Exchange Risk......Page 108
3.4 The Forward Foreign Exchange Market......Page 115
3.5 Forward Premiums and Discounts......Page 123
3.6 Changes in Exchange Rate Volatility (Advanced)......Page 125
Problems......Page 128
Bibliography......Page 129
Appendix: A Statistics Refresher......Page 130
4.1 The Balance of Payments: Concepts and Terminology......Page 133
4.2 Surpluses and Deficits in the Balance of Payments Accounts......Page 140
4.3 The Dynamics of the BOP......Page 147
4.4 Savings, Investment, Income, and the BOP......Page 151
4.5 Summary......Page 158
Problems......Page 160
Appendix: A Primer on National Income and Product Accounts......Page 162
5.1 Alternative Exchange Rate Arrangements and Currency Risk......Page 165
5.2 Central Banks......Page 172
5.3 Flexible Exchange Rate Systems......Page 180
5.4 Fixed Exchange Rate Systems......Page 183
5.5 Limited-Flexibility Systems: Target Zones and Crawling Pegs......Page 191
5.6 How to See an Emu Fly: The Road to Monetary Integration in Europe......Page 196
5.7 Summary......Page 202
Problems......Page 203
Bibliography......Page 204
6.1 The Theory of Covered Interest Rate Parity......Page 205
6.2 Covered Interest Rate Parity in Practice......Page 214
6.3 Whey Deviations from Interest Rate Parity May Seem to Exist......Page 219
6.4 Hedging Transaction Risk in the Money Market......Page 225
6.5 The Term Structure of Forward Premiums and Discounts......Page 227
6.6 Summary......Page 233
Problems......Page 234
Bibliography......Page 236
7.1 Speculating in the Foreign Exchange Market......Page 237
7.2 Uncovered Interest Rate Parity and the Unbiasedness Hypothesis......Page 243
7.3 Risk Premiums in the Foreign Exchange Market......Page 246
7.4 Uncovered Interest Rate Parity and the Unbiasedness Hypothesis in Practice......Page 250
7.5 Empirical Evidence on the Unbiasedness Hypothesis......Page 253
7.6 Alternative Interpretations of the Test Results......Page 259
7.7 Summary......Page 268
Questions......Page 269
Problems......Page 270
Bibliography......Page 271
Appendix 7.1: The Siegel Paradox......Page 272
Appendix 7.2: The Portfolio Diversification Argument and the CAPM......Page 273
Appendix 7.3: A Regression Refresher......Page 275
CHAPTER 8 Purchasing Power Parity and Real Exchange Rates......Page 278
8.1 Price Levels, Price Indexes, and the Purchasing Power of a Currency......Page 279
8.2 Absolute Purchasing Power Parity......Page 282
8.3 The Law of One Price......Page 283
8.4 Describing Deviations from PPP......Page 289
8.5 Exchange Rates and Absolute PPPs Using CPI Data......Page 293
8.6 Explaining the Failure of Absolute PPP......Page 298
8.7 Comparing Incomes Across Countries......Page 300
8.8 Relative Purchasing Power Parity......Page 303
8.9 The Real Exchange Rate......Page 306
Questions......Page 310
Problems......Page 311
Bibliography......Page 312
9.1 How Real Exchange Rates Affect Real Profitability......Page 313
9.2 Real Exchange Risk at Exporters, Importers, and Domestic Firms......Page 315
9.3 Sharing the Real Exchange Risk: An Example......Page 322
9.4 Pricing-to-Market Strategies......Page 328
9.5 Evaluating the Performance of a Foreign Subsidiary......Page 334
9.6 Strategies for Managing Real Exchange Risk......Page 341
Problems......Page 345
Bibliography......Page 346
10.1 Parity Conditions and Exchange Rate Forecasts......Page 347
10.2 Currency Forecasting Techniques......Page 353
10.3 Fundamental Exchange Rate Forecasting......Page 357
10.4 Technical Analysis......Page 366
10.5 Predicting Devaluations......Page 373
10.6 Summary......Page 380
Problems......Page 381
Bibliography......Page 384
11.1 The Global Sources of Funds for International Firms......Page 386
11.2 The Characteristics of Debt Instruments......Page 388
11.3 A Tour of the World’s Bond Markets......Page 394
11.4 International Banking......Page 403
11.5 International Bank Loans......Page 411
11.6 Comparing the Costs of Debt......Page 416
11.7 Summary......Page 426
Questions......Page 427
Problems......Page 428
Bibliography......Page 429
12.1 A Tour of International Stock Markets......Page 430
12.2 International Cross-Listing and Depositary Receipts......Page 443
12.3 The Advantages and Disadvantages of Cross-Listing......Page 451
12.4 Strategic Alliances......Page 456
Questions......Page 457
Bibliography......Page 458
CHAPTER 13 International Capital Market Equilibrium......Page 460
13.1 Risk and Return of International Investments......Page 461
13.2 The Benefits of International Diversification......Page 465
13.3 Optimal Portfolio Allocation......Page 471
13.4 The Capital Asset Pricing Model......Page 478
13.5 The CAPM in Practice......Page 483
13.6 Integrated Versus Segmented Markets......Page 489
13.7 Alternative Cost-of-Capital Models......Page 498
13.8 Summary......Page 501
Questions......Page 502
Problems......Page 503
Bibliography......Page 504
Appendix: The Mathematics of International Diversification......Page 506
14.1 Country Risk Versus Political Risk......Page 507
14.2 Incorporating Political Risk in Capital Budgeting......Page 516
14.3 Country and Political Risk Analysis......Page 521
14.4 Managing Political Risk......Page 541
14.5 Summary......Page 549
Problems......Page 550
Bibliography......Page 551
15.1 An Overview of Adjusted Net Present Value......Page 553
15.2 Deriving the NPV of Free Cash Flow......Page 555
15.3 Financial Side Effects......Page 560
15.4 Real Options......Page 563
15.5 Parent Versus Subsidiary Cash Flows......Page 566
15.6 The Case of International Wood Products......Page 567
15.7 Summary......Page 581
Problems......Page 582
Appendix: Deriving the Value of a Perpetuity......Page 584
CHAPTER 16 Additional Topics in International Capital Budgeting......Page 585
16.1 Alternative Approaches to Capital Budgeting......Page 586
16.2 Forecasting Cash Flows of Foreign Projects......Page 593
16.3 Case Study: CMTC’s Australian Project......Page 595
16.4 Terminal Value When Return on Investment Equals rWACC......Page 604
16.5 Tax Shields on Foreign Currency Borrowing......Page 609
16.6 Conflicts Between Bondholders and Stockholders......Page 614
16.7 International Differences in Accounting Standards......Page 617
16.8 Summary......Page 618
Problems......Page 619
Bibliography......Page 620
CHAPTER 17 Risk Management and the Foreign Currency Hedging Decision......Page 621
17.1 To Hedge or Not to Hedge......Page 622
17.2 Arguments Against Hedging......Page 624
17.3 Arguments for Hedging......Page 630
17.4 The Hedging Rationale of Real Firms......Page 637
17.5 Hedging Trends......Page 642
17.6 Summary......Page 644
Problems......Page 645
Bibliography......Page 646
18.1 The Fundamental Problem with International Trade......Page 648
18.2 International Trade Documents......Page 650
18.3 Methods of Payment......Page 653
18.4 Financing Exports......Page 661
18.5 Countertrade......Page 669
18.6 Summary......Page 671
Questions......Page 672
Bibliography......Page 673
19.1 The Purpose of Net Working Capital......Page 674
19.2 International Cash Management......Page 676
19.3 Cash Transfers from Affiliates to Parents......Page 682
19.4 Managing Accounts Receivable......Page 692
19.5 Inventory Management......Page 697
19.6 Summary......Page 700
Problems......Page 701
Bibliography......Page 702
20.1 The Basics of Futures Contracts......Page 703
20.2 Hedging Transaction Risk with Futures......Page 710
20.3 Basics of Foreign Currency Option Contracts......Page 715
20.4 The Use of Options in Risk Management......Page 721
20.5 Combinations of Options and Exotic Options......Page 738
Questions......Page 743
Problems......Page 744
Bibliography......Page 745
Appendix: Foreign Currency Option Pricing (Advanced)......Page 746
21.1 Introduction to Swaps......Page 755
21.2 Interest Rate Swaps......Page 760
21.3 Foreign Currency Swaps......Page 764
Questions......Page 781
Problems......Page 782
Bibliography......Page 783
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