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Copyright, iv
Preface, v
About the Authors, xi
Part I. Global Financial Environment, 1
Chapter 1. Globalization and the Multinational Enterprise, 2
Globalization and Creating Value in the Multinational Enterprise, 3
The Theory of Comparative Advantage, 4
What Is Different about Global Financial Management?, 7
Market Imperfections: A Rationale for the Existence of the Multinational Firm, 8
The Globalization Process, 9
Summary Points, 13
Mini-Case: Porsche Changes Tack, 13
Questions, 19
Problems, 19
Internet Exercises, 20
Chapter 2. Financial Goals and Corporate Governance, 22
Who Owns the Business?, 22
What Is the Goal of Management?, 24
Corporate Governance, 28
Summary Points, 40
Mini-Case: Governance Failure at Enron, 41
Questions, 45
Problems, 46
Internet Exercises, 48
Chapter 3. The International Monetary System, 50
History of the International Monetary System, 50
Contemporary Currency Regimes, 56
Emerging Markets and Regime Choices, 62
The Birth of a European Currency: The Euro, 64
Exchange Rate Regimes: What Lies Ahead?, 69
Summary Points, 70
Mini-Case: The Revaluation of the Chinese Yuan, 71
Questions, 74
Problems, 75
Internet Exercises, 76
Chapter 4. The Balance of Payments, 78
Typical Balance of Payments Transactions, 79
Fundamentals of Balance of Payments Accounting, 80
The Accounts of the Balance of Payments, 81
The Capital and Financial Accounts, 83
The Balance of Payments in Total, 88
The Balance of Payments Interaction with Key Macroeconomic Variables, 91
Trade Balances and Exchange Rates, 93
Capital Mobility, 96
Summary Points, 99
Mini-Case: Turkey’s Kriz (A): Deteriorating Balance of Payments, 99
Questions, 101
Problems, 102
Internet Exercises, 105
Chapter 5. Current Multinational Financial Challenges: The Credit Crisis of 2007–2009, 106
The Seeds of Crisis: Subprime Debt, 106
The Transmission Mechanism: Securitization and Derivatives of Securitized Debt, 109
The Fallout: The Crisis of 2007 and 2008, 120
The Remedy: Prescriptions for an Infected Global Financial Organism, 129
Summary Points, 131
Mini-Case: Letting Go of Lehman Brothers, 132
Questions, 134
Problems, 134
Internet Exercises, 136
Part II. Foreign Exchange Theory and Markets, 137
Chapter 6. The Foreign Exchange Market, 138
Geographical Extent of the Foreign Exchange Market, 138
Functions of the Foreign Exchange Market, 139
Market Participants, 140
Transactions in the Interbank Market, 142
Foreign Exchange Rates and Quotations, 148
Summary Points, 156
Mini-Case: The Venezuelan Bolivar Black Market, 157
Questions, 160
Problems, 160
Internet Exercises, 163
Chapter 7. International Parity Conditions, 164
Prices and Exchange Rates, 164
Interest Rates and Exchange Rates, 172
Forward Rate as an Unbiased Predictor of the Future Spot Rate, 181
Prices, Interest Rates, and Exchange Rates in Equilibrium, 183
Summary Points, 184
Mini-Case: Currency Pass-Through at Porsche, 185
Questions, 186
Problems, 186
Internet Exercises, 191
Appendix: An Algebraic Primer to International Parity Conditions, 193
Chapter 8. Foreign Currency Derivatives, 197
Foreign Currency Futures, 198
Currency Options, 201
Foreign Currency Speculation, 203
Option Pricing and Valuation, 210
Currency Option Pricing Sensitivity, 213
Prudence in Practice, 221
Summary Points, 222
Mini-Case: Warren Buffett’s Love-Hate Relationship with Derivatives, 223
Questions, 226
Problems, 226
Internet Exercises, 229
Appendix: Currency Option Pricing Theory, 230
Chapter 9. Interest Rate and Currency Swaps, 234
Defining Interest Rate Risk, 234
Management of Interest Rate Risk, 237
Trident Corporation: Swapping to Fixed Rates, 245
Currency Swaps, 246
Trident Corporation: Swapping Floating Dollars into Fixed Rate Swiss Francs, 247
Counterparty Risk, 249
Summary Points, 250
Mini-Case: McDonald’s Corporation’s British Pound Exposure, 251
Questions, 252
Problems, 252
Internet Exercises, 254
Chapter 10. Foreign Exchange Rate Determination and Forecasting, 256
Exchange Rate Determination: The Theoretical Thread, 257
The Asset Market Approach to Forecasting, 260
Disequilibrium: Exchange Rates in Emerging Markets, 262
Illustrative Case: The Asian Crisis, 262
Illustrative Case: The Argentine Crisis of 2002, 265
Forecasting in Practice, 270
Summary Points, 274
Mini-Case: JPMorgan Chase’s Forecasting Accuracy, 274
Questions, 276
Problems, 276
Internet Exercises, 278
Part III. Foreign Exchange Exposure, 281
Chapter 11. Transaction Exposure, 282
Types of Foreign Exchange Exposure, 282
Why Hedge?, 284
Measurement of Transaction Exposure, 287
Trident’s Transaction Exposure, 289
Management of an Account Payable, 297
Risk Management in Practice, 299
Summary Points, 300
Mini-Case: Xian-Janssen Pharmaceutical (China) and the Euro, 301
Questions, 303
Problems, 304
Internet Exercises, 310
Appendix: Complex Options, 312
Chapter 12. Operating Exposure, 320
Attributes of Operating Exposure, 320
Illustrating Operating Exposure: Trident, 322
Strategic Management of Operating Exposure, 326
Proactive Management of Operating Exposure, 329
Contractual Approaches: Hedging the Unhedgeable, 336
Summary Points, 337
Mini-Case: Toyota’s European Operating Exposure, 338
Questions, 340
Problems, 341
Internet Exercises, 343
Chapter 13. Translation Exposure, 344
Overview of Translation, 344
Translation Methods, 347
Translation Example: Trident Europe, 350
Comparing Translation Exposure with Operating Exposure, 355
Managing Translation Exposure, 355
Summary Points, 359
Mini-Case: LaJolla Engineering Services, 360
Questions, 362
Problems, 363
Internet Exercises, 364
Part IV. Financing the Global Firm, 365
Chapter 14. The Global Cost and Availability of Capital, 366
Weighted Average Cost of Capital, 368
The Demand for Foreign Securities: The Role of International Portfolio Investors, 373
The Cost of Capital for MNEs Compared to Domestic Firms, 379
Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher Than for Their Domestic Counterparts?, 380
Summary Points, 382
Mini-Case: Novo Industri A/S (Novo), 383
Questions, 387
Problems, 388
Internet Exercises, 390
Chapter 15. Sourcing Equity Globally, 391
Designing a Strategy to Source Equity Globally, 392
Foreign Equity Listing and Issuance, 395
Effect of Cross-Listing and Equity Issuance on Share Price, 397
Barriers to Cross-Listing and Selling Equity Abroad, 399
Alternative Instruments to Source Equity in Global Markets, 400
Summary Points, 404
Mini-Case: Petrobrás of Brazil and the Cost of Capital, 404
Questions, 408
Problems, 408
Internet Exercises, 409
Chapter 16. Sourcing Debt Globally, 410
Optimal Financial Structure, 410
Optimal Financial Structure and the MNE, 411
Financial Structure of Foreign Subsidiaries, 414
International Debt Markets, 418
Summary Points, 424
Mini-Case: Tirstrup BioMechanics (Denmark): Raising Dollar Debt, 424
Questions, 426
Problems, 427
Internet Exercises, 429
Part V. Foreign Investment Decisions, 431
Chapter 17. International Portfolio Theory and Diversification, 432
International Diversification and Risk, 432
Internationalizing the Domestic Portfolio, 435
National Markets and Asset Performance, 441
Summary Points, 446
Mini-Case: Is Modern Portfolio Theory Outdated?, 447
Questions, 448
Problems, 449
Internet Exercises, 451
Chapter 18. Foreign Direct Investment Theory and Political Risk, 452
Sustaining and Transferring Competitive Advantage, 452
The OLI Paradigm and Internalization, 455
Deciding Where to Invest, 457
How to Invest Abroad: Modes of Foreign Involvement, 458
Foreign Direct Investment Originating in Developing Countries, 462
Foreign Direct Investment and Political Risk, 464
Assessing Political Risk, 465
Firm-Specific Risks, 466
Country-Specific Risks: Transfer Risk, 469
Country-Specific Risks: Cultural and Institutional Risks, 472
Global-Specific Risks, 476
Summary Points, 479
Mini-Case: Mattel’s Chinese Sourcing Crisis of 2007, 480
Questions, 483
Problems, 484
Internet Exercises, 485
Chapter 19. Multinational Capital Budgeting, 487
Complexities of Budgeting for a Foreign Project, 488
Project versus Parent Valuation, 489
Illustrative Case: Cemex Enters Indonesia, 490
Real Option Analysis, 502
Project Financing, 503
Summary Points, 505
Mini-Case: Trident’s Chinese Market Entry—An Application of Real Option Analysis, 505
Questions, 507
Problems, 508
Internet Exercises, 511
Part VI. Managing Multinational Operations, 513
Chapter 20. Multinational Tax Management, 514
Tax Principles, 514
Transfer Pricing, 522
Tax Management at Trident, 524
Tax Haven Subsidiaries and International Offshore Financial Centers, 525
Summary Points, 527
Mini-Case: Stanley Works and Corporate Inversion, 527
Questions, 531
Problems, 532
Internet Exercises, 533
Chapter 21. Working Capital Management, 535
Trident Brazil’s Operating Cycle, 535
Trident’s Repositioning Decisions, 537
Constraints on Repositioning Funds, 539
Conduits for Moving Funds by Unbundling Them, 539
International Dividend Remittances, 540
Net Working Capital, 542
International Cash Management, 548
Financing Working Capital, 552
Summary Points, 556
Mini-Case: Honeywell and Pakistan International Airways, 557
Questions, 559
Problems, 560
Internet Exercises, 564
Chapter 22. International Trade Finance, 565
The Trade Relationship, 565
The Trade Dilemma, 567
Benefits of the System, 568
Letter of Credit (L/C), 570
Draft, 572
Bill of Lading (B/L), 573
Example: Documentation in a Typical Trade Transaction, 574
Government Programs to Help Finance Exports, 576
Trade Financing Alternatives, 578
Forfaiting: Medium- and Long-Term Financing, 580
Summary Points, 582
Mini-Case: Crosswell International’s Precious Ultra-Thin Diapers, 583
Questions, 587
Problems, 588
Internet Exercises, 589
Answers to Selected Problems, 590
Glossary, 593
Index, 608
Credits, 628
The World of Foreign Exchange Dealing, EP-1
Currencies of the World, EP-3

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