CourseSmart - 0077271874 - International Financial Management, 5th Edition

International Financial Management, 5th Edition

by Eun, Cheol; Resnick, Bruce

Publisher: McGraw-Hill Higher Education

Publishing Date: 2008/10/07

eText ISBN-10

0-07-727187-4

eText ISBN-13

978-0-07-727187-9

Print ISBN-10

0-07-338234-5

Print ISBN-13

978-0-07-338234-0

Saleable Print ISBN-10

0-07-338234-5

Saleable Print ISBN-13

978-0-07-338234-0

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International Financial Management, 5th Edition

by Eun, Cheol; Resnick, Bruce

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Part ONE. Foundations of ...

Part TWO. The Foreign Exc...

Part THREE. Foreign Excha...

Part FOUR. World Financia...

Part FIVE. Financial Mana...

Glossary, 507

Index, 515

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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