Contents
List of Figures xii
List of Tables xv
Preface and Acknowledgments xviii
About the Authors xxvii
Part I: The Global Financial Environment 1
Chapter 1: Introduction 3
Opening Case 1: TIAA-CREF Goes Global with Corporate Governance 3
1.1 Reasons to Study International Finance 5
1.2 Company Goals and Functions of Financial Management 8
1.3 Multinational Companies and their Performance 10
1.4 Principles of Global Finance 14
1.5 Agency Theory and Corporate Governance 18
1.6 Environmental Differences 21
1.7 The Structure of this Book 23
Summary 23
Questions 24
References 24
Case Problem 1: What Is a National Company? 25
Chapter 2: Motives for World Trade and Foreign Investment 28
Opening Case 2: The Effect of Foreign Investment on Exports 28
2.1 Motives for Foreign Trade 29
2.2 Economic Integration 38
2.3 Motives for Foreign Investment 43
2.4 A Synthesis of Foreign Trade and Investment Theories 46
Summary 47
Questions 47
Problems 48
References 49
Case Problem 2: The Fruits of Free Trade Under the World Trade Organization 49
Chapter 3: The Balance of Payments 54
Opening Case 3: Opportunity Cost and Comparative Advantage 54
3.1 An Overview of the Balance of Payments 55
3.2 Balance-of-Payments Accounts 57
3.3 The Actual Balance of Payments 63
3.4 How to Reduce a Trade Deficit 70
Summary 72
Questions 72
Problems 73
References 73
Case Problem 3: USA-China Trade Relations 74
Chapter 4: The International Monetary System 78
Opening Case 4: The Euro — A Story of Change 78
4.1 A Successful Foreign-Exchange System 81
4.2 A Brief History of the International Monetary System 87
4.3 The International Monetary Fund 94
4.4 The European Monetary Union 98
4.5 Proposals for Further International Monetary Reform 102
Summary 104
Questions 105
References 105
Case Problem 4: The Mexican Peso Crisis of December 1994 106
Part II: Corporate Foreign-Exchange Risk Management 111
Chapter 5: The Foreign-Exchange Market and Parity Conditions 113
Opening Case 5: The Volume of Foreign-Exchange Trading 113
5.1 Major Participants in the Exchange Market 115
5.2 Spot Exchange Quotation: The Spot Exchange Rate 120
5.3 Forward Exchange Quotation: The Forward Exchange Rate 125
5.4 International Parity Conditions 128
5.5 Arbitrages 136
Summary 142
Questions 142
Problems 143
References 145
Case Problem 5: The Big Mac Hamburger Standard: February 2003 146
Chapter 6: Currency Futures and Options 148
Opening Case 6: Derivatives Risks 148
6.1 The Currency Futures Market 150
6.2 The Currency Options Market 157
6.3 Futures Options 169
Summary 170
Questions 171
Problems 171
References 173
Case Problem 6: Merck's Use of Currency Options 174
Chapter 7: Financial Swaps 177
Opening Case 7: Why have Gillette and GE Chosen a Higher Cost of Funding? 177
7.1 The Emergence of the Swap Market 179
7.2 Plain Vanilla Swaps 183
7.3 Motivations for Swaps 187
Summary 191
Questions 192
Problems 192
References 193
Case Problem 7: Regulations of Derivatives Markets 193
Chapter 8: Exchange Rate Forecasting 196
Opening Case 8: Mundell Wins Nobel Prize in Economics 196
8.1 Measuring Exchange Rate Changes 197
8.2 The Forecasting Needs of the Multinational Company 199
8.3 Forecasting Floating Exchange Rates 201
8.4 Forecasting Fixed Exchange Rates 210
Summary 216
Questions 216
Problems 217
References 218
Case Problem 8: General Motors Operations in Mexico, and the Peso Crisis 218
Chapter 9: Managing Transaction Exposure and Economic Exposure 221
Opening Case 9 Avon's Actions to Protect Against Volatile Currencies 221
9.1 The Basic Nature of Foreign-Exchange Exposures 222
9.2 Transaction Exposure Management 226
9.3 Economic Exposure Management 233
9.4 Currency Exposure Management Practices 235
Summary 238
Questions 238
Problems 239
References 241
Case Problem 9 Western Mining's Economic Exposure Management 241
Chapter 10:Translation Exposure Management 243
Opening Case 10. Main Features of Accounting Exposure 243
10.1 Translation Rules 244
10.2 FASBs 8 and 52 247
10.3 Hedging Translation Exposure 251
Summary 252
Questions 253
Problems 254
References 256
Case Problem 10. Dell Mercosur 256
Part III: The Global Financing Strategy 261
Chapter 11: International Financial Markets 263
Opening Case 11: Foreign Investors Load Up with Asia's Shares 263
11.1 Eurocurrency Markets 264
11.2 The Eurocurrency Interbank Market 269
11.3 The Asian Currency Market 274
11.4 The International Bond Market 276
11.5 The International Equity Market 281
11.6 Long-Term Capital Flows to Developing Countries 285
Summary 286
Questions 287
Problems 288
References 289
Case Problem 11: The Rise and Fall of the US Stock Market 290
Chapter 12: International Banking Issues and Country Risk Analysis 293
Opening Case 12: Argentina's Currency Crisis 293
12.1 International Banking Operations 295
12.2 International Loans 298
12.3 Country Risk Analysis 309
Summary 314
Questions 314
Problems 314
References 315
Case Problem 12: The World Bank 316
Chapter 13: Financing Foreign Trade 319
Opening Case 13: US Export-Import Bank Seeks Private Investors 319
13.1 Basic Documents in Foreign Trade 320
13.2 The Payment Terms of Export Transactions 326
13.3 Sources of Financing Foreign Trade 333
Summary 339
Questions 340
Problems 341
References 342
Case Problem 13: Arms Dealers Get Creative with Offsets 342
Chapter 14: Financing Foreign Investment 345
Opening Case 14: Failed US-Vietnamese Joint Ventures 345
14.1 Internal Sources of Funds 346
14.2 External Sources of Funds 349
14.3 Development Banks 357
Summary 362
Questions 363
Problems 363
References 364
Case Problem 14: IBM's Strategic Alliances 364
Part IV: Global Investment Strategy 367
Chapter 15: International Working Capital Management 369
Opening Case 15: An Efficient Global Treasury Structure 369
15.1 The Basic Concepts of Working Capital Management 370
15.2 Cash Management 382
15.3 Accounts Receivable Management 388
15.4 Inventory Management 389
Summary 392
Questions 393
Problems 393
References 395
Case Problem 15: Navistar International's Netting System 395
Chapter 16: International Portfolio Investment 398
Opening Case 16: LE Group Shows how Korea Inc. Might Restructure 398
16.1 Key Terminology 400
16.2 The Benefits of International Diversification 407
16.3 Methods of International Diversification 413
Summary 419
Questions 419
Problems 420
References 421
Case Problem 16: Investing in DaimlerChrysler in the USA 421
Chapter 17: Corporate Strategy and Foreign Direct Investment 425
Opening Case 17: How Can Companies Get the Most Out of Their Foreign
Investment? 425
17.1 An Overview of Foreign Direct Investment 426
17.2 Foreign Direct Investment in Developing Countries 429
17.3 Cross-Border Mergers and Acquisitions 433
Summary 441
Questions 441
Problems 442
References 443
Case Problem 17: BP's Acquisition of Amoco 443
Chapter 18: International Capital Budgeting Decisions 447
Opening Case 18: External Factors Affecting Foreign Project Analysis 447
18.1 The Foreign Investment Decision-Making Process 448
18.2 Portfolio Theory 458
18.3 Capital Budgeting Theory and Practice 460
18.4 Political Risk Management 462
Summary 468
Questions 468
Problems 469
References 471
Case Problem 18: Multinational Capital Budgeting Practices 472
Chapter 19: The Cost of Capital for Foreign Projects 474
Opening Case 19 GM's Target Debt Ratio in its Overseas Expansion 474
19.1 The Weighted Average Cost of Capital 476
19.2 The Optimum Capital Structure 480
19.3 The Marginal Cost of Capital and Investment Decisions 482
19.4 Cultural Values and Capital Structure 484
Summary 486
Questions 486
Problems 487
References 488 Case Problem 19: Do Multinational Firms Have Lower Debt Ratios than
Domestic Firms? 488
Chapter 20: Corporate Performance of Foreign Operations 490
Opening Case 20: Offshore Workers Increase IBM's Profits 490
20.1 The Global Control System and Performance Evaluation 491
20.2 International Taxation 499
20.3 Transfer Pricing and Tax Planning 506
Summary 509
Questions 510
Problems 510
References 513
Case Problem 20: Advanced Technology's Ethical Dilemma 514
Web Resources and Internet Exercises 518
Answers to Selected End-of-Chapter Problems 538
Glossary 545
Index 564