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Part ONE. Foundations of International Financial Management, 2
Chapter 1. Globalization and the Multinational Firm, 4
What's Special about International Finance?, 5
Foreign Exchange and Political Risks, 5
Market Imperfections, 6
Expanded Opportunity Set, 7
Goals for International Financial Management, 8
Globalization of the World Economy: Major Trends, 10
Emergence of Globalized Financial Markets, 10
Emergence of the Euro as a Global Currency, 11
INTERNATIONAL FINANCE IN PRACTICE: Why We Believe in the Euro, 12
Trade Liberalization and Economic Integration, 12
Privatization, 15
Multinational Corporations, 16
INTERNATIONAL FINANCE IN PRACTICE: Multinationals More Efficient, 17
Summary, 19
MINI CASE: Nike and Sweatshop Labor, 21
APPENDIX 1A: Gains from Trade: The Theory of Comparative Advantage, 23
Chapter 2. International Monetary System, 25
Evolution of the International Monetary System, 25
Bimetallism: Before 1875, 26
Classical Gold Standard: 1875–1914, 26
Interwar Period: 1915–1944, 28
Bretton Woods System: 1945–1972, 29
The Flexible Exchange Rate Regime: 1973–Present, 32
The Current Exchange Rate Arrangements, 34
European Monetary System, 35
The Euro and the European Monetary Union, 39
A Brief History of the Euro, 39
What Are the Benefits of the Monetary Union?, 41
Costs of Monetary Union, 43
Prospects of the Euro: Some Critical Questions, 44
The Mexican Peso Crisis, 45
INTERNATIONAL FINANCE IN PRACTICE: Mundell Wins Nobel Prize in Economics, 46
INTERNATIONAL FINANCE IN PRACTICE: The New World Order of Finance, 48
The Asian Currency Crisis, 48
Origins of the Asian Currency Crisis, 49
Lessons from the Asian Currency Crisis, 52
The Argentine Peso Crisis, 52
Fixed versus Flexible Exchange Rate Regimes, 54
Summary, 56
MINI CASE: Will the United Kingdom Join the Euro Club?, 58
Chapter 3. Balance of Payments, 60
Balance-of-Payments Accounting, 60
Balance-of-Payments Accounts, 61
The Current Account, 62
The Capital Account, 64
Statistical Discrepancy, 66
Official Reserve Account, 67
The Balance-of-Payments Identity, 69
Balance-of-Payments Trends in Major Countries, 69
INTERNATIONAL FINANCE IN PRACTICE: How One Word Haunts Dollar, 70
INTERNATIONAL FINANCE IN PRACTICE: The Dollar and the Deficit, 72
Summary, 74
MINI CASE: Mexico's Balance-of-Payments Problem, 77
APPENDIX 3A: The Relationship Between Balance of Payments and National Income Accounting, 78
Chapter 4. Corporate Governance Around the World, 79
Governance of the Public Corporation: Key Issues, 80
The Agency Problem, 81
Remedies for the Agency Problem, 83
Board of Directors, 83
Incentive Contracts, 84
Concentrated Ownership, 84
INTERNATIONAL FINANCE IN PRACTICE: When Boards Are All in the Family, 85
Accounting Transparency, 86
Debt, 87
Overseas Stock Listings, 87
Market for Corporate Control, 88
Law and Corporate Governance, 89
Consequences of Law, 92
Ownership and Control Pattern, 92
Private Benefits of Control, 96
Capital Markets and Valuation, 96
Corporate Governance Reform, 97
Objectives of Reform, 97
Political Dynamics, 98
The Sarbanes-Oxley Act, 98
The Cadbury Code of Best Practice, 99
Summary, 100
MINI CASE: Parmalat: Europe's Enron, 102
Part TWO. The Foreign Exchange Market, Exchange Rate Determination, and Currency Derivatives, 106
Chapter 5. The Market for Foreign Exchange, 108
Function and Structure of the FX Market, 109
INTERNATIONAL FINANCE IN PRACTICE: The Mouse Takes Over the Floor, 110
FX Market Participants, 110
Correspondent Banking Relationships, 112
The Spot Market, 113
Spot Rate Quotations, 113
INTERNATIONAL FINANCE IN PRACTICE: Where Money Talks Very Loudly, 114
Cross-Exchange Rate Quotations, 118
Alternative Expressions for the Cross-Exchange Rate, 119
The Bid-Ask Spread, 119
Spot FX Trading, 120
The Cross-Rate Trading Desk, 121
Triangular Arbitrage, 123
Spot Foreign Exchange Market Microstructure, 123
The Forward Market, 125
Forward Rate Quotations, 125
Long and Short Forward Positions, 126
Forward Cross-Exchange Rates, 127
Swap Transactions, 127
Forward Premium, 128
Exchange Traded Currency Funds, 129
Summary, 129
MINI CASE: Shrewsbury Herbal Products, Ltd., 133
Chapter 6. International Parity Relationships and Forecasting Foreign Exchange Rates, 134
Interest Rate Parity, 134
Covered Interest Arbitrage, 136
Interest Rate Parity and Exchange Rate Determination, 139
Reasons for Deviations from Interest Rate Parity, 140
Purchasing Power Parity, 142
INTERNATIONAL FINANCE IN PRACTICE: McCurrencies, 144
PPP Deviations and the Real Exchange Rate, 144
Evidence on Purchasing Power Parity, 146
Fisher Effects, 149
Forecasting Exchange Rates, 151
Efficient Market Approach, 151
Fundamental Approach, 153
Technical Approach, 154
Performance of the Forecasters, 155
Summary, 158
MINI CASE: Turkish Lira and Purchasing Power Parity, 162
APPENDIX 6A: Purchasing Power Parity and Exchange Rate Determination, 164
Chapter 7. Futures and Options on Foreign Exchange, 165
Futures Contracts: Some Preliminaries, 166
Currency Futures Markets, 168
INTERNATIONAL FINANCE IN PRACTICE: CME Ramping Up FOREX Support, Targets OTC Business, 169
Basic Currency Futures Relationships, 169
Eurodollar Interest Rate Futures Contracts, 172
Options Contracts: Some Preliminaries, 174
Currency Options Markets, 175
Currency Futures Options, 175
Basic Option-Pricing Relationships at Expiration, 176
American Option-Pricing Relationships, 180
European Option-Pricing Relationships, 180
Binomial Option-Pricing Model, 182
European Option-Pricing Formula, 183
Empirical Tests of Currency Options, 185
Summary, 185
MINI CASE: The Options Speculator, 189
Part THREE. Foreign Exchange Exposure and Management, 190
Chapter 8. Management of Transaction Exposure, 192
Three Types of Exposure, 192
Forward Market Hedge, 194
Money Market Hedge, 196
Options Market Hedge, 197
Hedging Foreign Currency Payables, 199
Forward Contracts, 200
Money Market Instruments, 200
Currency Options Contracts, 201
Cross-Hedging Minor Currency Exposure, 201
Hedging Contingent Exposure, 202
Hedging Recurrent Exposure with Swap Contracts, 203
Hedging through Invoice Currency, 203
Hedging via Lead and Lag, 204
Exposure Netting, 205
Should the Firm Hedge?, 205
INTERNATIONAL FINANCE IN PRACTICE: To Hedge or Not to Hedge, 206
What Risk Management Products Do Firms Use?, 209
Summary, 210
MINI CASE: Airbus' Dollar Exposure, 213
CASE APPLICATION: Chase Options, Inc.: Hedging Foreign Currency Exposure through Currency Options, 213
Chapter 9. Management of Economic Exposure, 221
INTERNATIONAL FINANCE IN PRACTICE: U.S. Firms Feel the Pain of Peso's Plunge, 223
How to Measure Economic Exposure, 223
Operating Exposure: Definition, 227
Illustration of Operating Exposure, 228
Determinants of Operating Exposure, 230
Managing Operating Exposure, 232
INTERNATIONAL FINANCE IN PRACTICE: The Strong Yen and Toyota's Choice, 233
Selecting Low-Cost Production Sites, 233
INTERNATIONAL FINANCE IN PRACTICE: Porsche Powers Profit With Currency Plays, 234
Flexible Sourcing Policy, 234
Diversification of the Market, 234
R&D Efforts and Product Differentiation, 235
Financial Hedging, 236
CASE APPLICATION: Exchange Risk Management at Merck, 236
Summary, 238
MINI CASE: Economic Exposure of Albion Computers PLC, 241
Chapter 10. Management of Translation Exposure, 242
Translation Methods, 242
Current/Noncurrent Method, 242
Monetary/Nonmonetary Method, 243
Temporal Method, 243
Current Rate Method, 243
Financial Accounting Standards Board Statement 8, 244
Financial Accounting Standards Board Statement 52, 244
The Mechanics of the FASB 52 Translation Process, 247
Highly Inflationary Economies, 248
International Accounting Standards, 248
CASE APPLICATION: Consolidation of Accounts according to FASB 52: The Centralia Corporation, 248
Management of Translation Exposure, 252
Translation Exposure versus Transaction Exposure, 252
Hedging Translation Exposure, 253
Balance Sheet Hedge, 253
Derivatives Hedge, 254
Translation Exposure versus Operating Exposure, 255
Empirical Analysis of the Change from FASB 8 to FASB 52, 255
Summary, 255
MINI CASE: Sundance Sporting Goods, Inc., 257
Part FOUR. World Financial Markets and Institutions, 260
Chapter 11. International Banking and Money Market, 262
International Banking Services, 262
The World's Largest Banks, 263
Reasons for International Banking, 263
Types of International Banking Offices, 264
Correspondent Bank, 265
Representative Offices, 265
Foreign Branches, 265
Subsidiary and Affiliate Banks, 266
Edge Act Banks, 266
Offshore Banking Centers, 266
International Banking Facilities, 267
Capital Adequacy Standards, 267
International Money Market, 270
Eurocurrency Market, 270
Eurocredits, 271
Forward Rate Agreements, 273
Euronotes, 274
Eurocommercial Paper, 275
International Debt Crisis, 275
History, 275
Debt-for-Equity Swaps, 276
The Solution: Brady Bonds, 278
The Asian Crisis, 278
Credit Crunch 2007–2008, 279
Summary, 281
MINI CASE: Detroit Motors' Latin American Expansion, 284
APPENDIX 11A: Eurocurrency Creation, 286
Chapter 12. International Bond Market, 289
The World's Bond Markets: A Statistical Perspective, 289
Foreign Bonds and Eurobonds, 289
Bearer Bonds and Registered Bonds, 290
National Security Regulations, 290
Withholding Taxes, 291
Security Regulations that Ease Bond Issuance, 291
Global Bonds, 292
Types of Instruments, 292
Straight Fixed-Rate Issues, 292
INTERNATIONAL FINANCE IN PRACTICE: SOX and Bonds, 293
Euro-Medium-Term Notes, 293
Floating-Rate Notes, 293
Equity-Related Bonds, 294
Dual-Currency Bonds, 294
Currency Distribution, Nationality, and Type of Issuer, 295
International Bond Market Credit Ratings, 296
INTERNATIONAL FINANCE IN PRACTICE: Heineken Refreshes Euromarket with Spectacular Unrated Bonds, 297
Eurobond Market Structure and Practices, 298
Primary Market, 298
Secondary Market, 298
Clearing Procedures, 303
International Bond Market Indexes, 303
Summary, 305
MINI CASE: Sara Lee Corporation's Eurobonds, 307
Chapter 13. International Equity Markets, 309
A Statistical Perspective, 309
Market Capitalization of Developed Countries, 309
Market Capitalization of Developing Countries, 310
Measures of Liquidity, 312
Measures of Market Concentration, 313
Market Structure, Trading Practices, and Costs, 314
Market Consolidations And Mergers, 316
Trading In International Equities, 317
Cross-Listing of Shares, 317
Yankee Stock Offerings, 319
American Depository Receipts, 319
Global Registered Shares, 323
International Equity Market Benchmarks, 324
iShares MSCI, 324
Factors Affecting International Equity Returns, 325
INTERNATIONAL FINANCE IN PRACTICE: Foreign Interest In South Africa Takes Off, 326
Macroeconomic Factors, 326
Exchange Rates, 326
Industrial Structure, 327
Summary, 327
MINI CASE: San Pico's New Stock Exchange, 329
Chapter 14. Interest Rate and Currency Swaps, 331
Types of Swaps, 331
INTERNATIONAL FINANCE IN PRACTICE: The World Bank's First Currency Swap, 332
Size of the Swap Market, 332
The Swap Bank, 332
Swap Market Quotations, 332
Interest Rate Swaps, 333
Basic Interest Rate Swap, 333
Pricing the Basic Interest Rate Swap, 336
Currency Swaps, 336
Basic Currency Swap, 336
Equivalency of Currency Swap Debt Service Obligations, 338
Pricing the Basic Currency Swap, 339
A Basic Currency Swap Reconsidered, 340
Variations of Basic Interest Rate and Currency Swaps, 340
INTERNATIONAL FINANCE IN PRACTICE: AIG, Nomura, and IFC Link Up in Latin Swap Transaction, 341
Risks of Interest Rate and Currency Swaps, 342
Is the Swap Market Efficient?, 342
Summary, 343
MINI CASE: The Centralia Corporation's Currency Swap, 347
Chapter 15. International Portfolio Investment, 349
International Correlation Structure and Risk Diversification, 350
Optimal International Portfolio Selection, 352
Effects of Changes in the Exchange Rate, 359
International Bond Investment, 360
International Mutual Funds: A Performance Evaluation, 362
International Diversification through Country Funds, 364
International Diversification with ADRs, 367
International Diversification with Exchange Traded Funds (ETFs), 368
International Diversification with Hedge Funds, 368
INTERNATIONAL FINANCE IN PRACTICE: Stay-at-Home Shareholders, 370
Why Home Bias in Portfolio Holdings?, 370
Summary, 373
MINI CASE: Solving for the Optimal International Portfolio, 378
APPENDIX 15A: International Investment with Exchange Risk Hedging, 381
APPENDIX 15B: Solving for the Optimal Portfolio, 383
Part FIVE. Financial Management of the Multinational Firm, 386
Chapter 16. Foreign Direct Investment and Cross-Border Acquisitions, 388
Global Trends in FDI, 389
Why Do Firms Invest Overseas?, 391
Trade Barriers, 392
Imperfect Labor Market, 394
Intangible Assets, 394
Vertical Integration, 395
INTERNATIONAL FINANCE IN PRACTICE: Linear Sequence in Manufacturing: Singer & Company, 396
Product Life Cycle, 396
Shareholder Diversification Services, 397
Cross-Border Mergers and Acquisitions, 397
INTERNATIONAL FINANCE IN PRACTICE: Daimler Chrysler: The First Global Car Colossus, 400
INTERNATIONAL FINANCE IN PRACTICE: Stories Past and Present, 404
Political Risk and FDI, 405
Summary, 412
MINI CASE: Enron versus Bombay Politicians, 414
Chapter 17. International Capital Structure and the Cost of Capital, 417
Cost of Capital, 417
Cost of Capital in Segmented versus Integrated Markets, 418
Does the Cost of Capital Differ among Countries?, 420
CASE APPLICATION: Novo Industri, 423
Cross-Border Listings of Stocks, 424
Capital Asset Pricing under Cross-Listings, 429
The Effect of Foreign Equity Ownership Restrictions, 431
Pricing-to-Market Phenomenon, 432
CASE APPLICATION: Nestlé, 432
Asset Pricing under Foreign Ownership Restrictions, 434
The Financial Structure of Subsidiaries, 435
Summary, 438
APPENDIX 17A: Pricing of Nontradable Assets: Numerical Simulations, 442
Chapter 18. International Capital Budgeting, 443
Review of Domestic Capital Budgeting, 444
The Adjusted Present Value Model, 445
Capital Budgeting from the Parent Firm's Perspective, 447
Generality of the APV Model, 449
Estimating the Future Expected Exchange Rate, 449
CASE APPLICATION: The Centralia Corporation, 450
Risk Adjustment in the Capital Budgeting Analysis, 454
Sensitivity Analysis, 454
Purchasing Power Parity Assumption, 455
Real Options, 455
Summary, 457
MINI CASE 1: Dorchester, Ltd., 459
MINI CASE 2: Strik-It Rich Gold Mining Company, 459
Chapter 19. Multinational Cash Management, 461
The Management of International Cash Balances, 461
CASE APPLICATION: Teltrex's Cash Management System, 461
Bilateral Netting of Internal and External Net Cash Flows, 466
Reduction in Precautionary Cash Balances, 467
Cash Management Systems in Practice, 469
Summary, 469
MINI CASE 1: Efficient Funds Flow at Eastern Trading Company, 470
MINI CASE 2: Eastern Trading Company's New MBA, 471
Chapter 20. International Trade Finance, 472
A Typical Foreign Trade Transaction, 472
Forfaiting, 475
Government Assistance in Exporting, 475
INTERNATIONAL FINANCE IN PRACTICE: First Islamic Forfaiting Fund Set Up, 476
The Export-Import Bank and Affiliated Organizations, 476
Countertrade, 477
Forms of Countertrade, 477
INTERNATIONAL FINANCE IN PRACTICE: Armed Forces Tops in Countertrade List, 479
Some Generalizations about Countertrade, 479
Summary, 480
MINI CASE: American Machine Tools, Inc., 482
Chapter 21. International Tax Environment and Transfer Pricing, 483
The Objectives of Taxation, 483
Tax Neutrality, 483
Tax Equity, 484
Types of Taxation, 484
Income Tax, 484
Withholding Tax, 486
Value-Added Tax, 486
National Tax Environments, 488
Worldwide Taxation, 488
Territorial Taxation, 488
INTERNATIONAL FINANCE IN PRACTICE: The TAXING Devil You Know, 489
Foreign Tax Credits, 489
Organizational Structures for Reducing Tax Liabilities, 490
Branch and Subsidiary Income, 490
Tax Havens, 492
Controlled Foreign Corporation, 492
INTERNATIONAL FINANCE IN PRACTICE: On or Off? It's a Matter of Degree, 493
Transfer Pricing and Related Issues, 494
CASE APPLICATION: Mintel Products Transfer Pricing Strategy, 494
INTERNATIONAL FINANCE IN PRACTICE: Transfer Pricing Is the Most Important International Tax Issue, 498
Miscellaneous Factors, 499
Advance Pricing Agreement, 500
Blocked Funds, 501
Summary, 502
MINI CASE 1: Sigma Corp.'s Location Decision, 504
MINI CASE 2: Eastern Trading Company's Optimal Transfer Pricing Strategy, 505
Glossary, 507
Index, 515

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