PART O N E
PART TWO
Foundations of International Financial Management
1
Globalization and the Multinational Firm, 4
2
International Monetary System, 25
3
4
Balance of Payments, 59
Corporate Governance around the World, 78
The Foreign Exchange Market, Exchange Rate
Determination, and Currency Derivatives
5
The Market for Foreign Exchange, 106
6
International Parity Relationships and Forecasting Foreign
Exchange Rates, 132
Futures and Options on Foreign Exchange, 162
7
PART
THREE
PART
FOUR
Foreign Exchange Exposure and Manaqement
8
9
Management of Transaction Exposure, 192
Management of Economic Exposure, 222
10
Management of Translation Exposure, 244
World Financial Markets and Institutions
11
12
13
14
1 5
PART
FIVE
International Banking and Money Market, 266
International Bond Market, 293
International Equity Markets, 313
Interest Rate and Currency Swaps, 337
International Portfolio Investment, 356
Financial Management of the Multinational Firm
16
17
18
19
20
Foreign Direct Investment and Cross-Border Acquisitions, 394
International Capital Structure and the Cost of Capital, 422
International Capital Budgeting, 449
Multinational Cash Management, 467
International Trade Finance, 487
21
International Tax Environment, 498
Glossary, 513
Index, 520
PART O N E
CHAPTER
1
Globalization and
the Multinational
Firm, 4
Foundations of International Financial Management
What's Special a b o u t International Finance?, 5
Foreign Exchange
Market
and Political
Imperfections,
Expanded
Opportunity
Risks, 5
6
Set, 7
Goals for International Financial Management, 8
Globalization o f t h e W o r l d Economy: M a j o r
Trends, 10
Emergence of Globalized
Markets,
10
Financial
2
International
Monetary
System, 25
Evolution of the International M o n e t a r y
System, 2 6
Classical Gold Standard: 1 8 7 5 - 1 9 1 4 , 2 7
Interwar Period: 1 9 1 5 - 1 9 4 4 , 2 8
Bretton Woods System: 1 9 4 5 - 1 9 7 2 , 2 9
The Flexible Exchange Rate Regime:
1973-Present, 32
The Current Exchange Rate Arrangements, 3 4
European M o n e t a r y System, 3 5
The Euro and the European Monetary Union, 3 9
of the Euro, 39
What Are the Benefits
Union?, 41
Costs of Monetary
CHAPTER
3
Balance of
Payments, 59
of
Monetary
Union, 42
Balance-of-Payments Accounting, 6 0
Balance-of-Payments Accounts, 6 1
The Current Account,
61
The Capital Account,
64
Statistical
Discrepancy,
Official Reserve Account,
Trade Liberalization
Integration,
13
Privatization,
and Economic
15
Multinational Corporations, 16
INTERNATIONAL FINANCE I N PRACTICE:
Multinationals M o r e Efficient, 17
M I N I C A S E : Nike and Sweatshop Labor, 21
A P P E N D I X 1 A : Gain f r o m Trade: The Theory
of Comparative Advantage, 2 2
Prospects of the Euro: Some Critical
Questions, 43
INTERNATIONAL FINANCE I N PRACTICE: M u n d e l l
Bimetallism: Before 1 8 7 5 , 2 6
A Brief History
Believe in t h e Euro, 12
Summary, 19
Emergence of the Euro as a Global
Currency, 11
CHAPTER
INTERNATIONAL FINANCE I N PRACTICE: Why We
Wins Nobel Prize in Economics, 4 4
INTERNATIONAL FINANCE I N PRACTICE: The New
World O r d e r o f Finance, 4 6
The Mexican Peso Crisis, 4 7
The Asian Currency Crisis, 4 8
Origins of the Asian Currency
Crisis, 49
Lessons from the Asian Currency
Crisis, 51
The Argentine Peso Crisis, 5 2
Fixed versus Flexible Exchange Rate
Regimes, 5 3
Summary, 5 5
M I N I C A S E : Will the United Kingdom Join the
Euro Club?, 5 7
The Balance-of-Payments Identity, 6 8
INTERNATIONAL FINANCE I N PRACTICE: H O W O n e
Word Haunts Dollar, 6 8
Balance-of-Payments Trends in M a j o r
Countries, 7 0
65
66
INTERNATIONAL FINANCE I N PRACTICE: The Dollar
and t h e Deficit, 7 2
Summary, 7 3
MINI
C A S E : Mexico's Balance-of-Payments
Problem, 7 6
CHAPTER
4
Corporate
Governance around
the World, 78
Law and Corporate Governance, 8 8
Governance o f the Public Corporation:
Key Issues, 7 9
Consequences o f Law, 9 0
The Agency Problem, 8 0
Ownership
Remedies for the Agency Problem, 8 2
Private
Board of Directors,
Incentive
83
Contracts,
83
Concentrated
Ownership,
85
Transparency,
86
S
The Market
for Foreign
Exchange, 106
for Corporate
of Reform,
Dynamics,
96
97
Act, 97
The Cadbury Code o f Best Practice, 98
87
M I N I C A S E : Parmalat: Europe's Enron, 101
87
Function and Structure of the FX M a r k e t , 107
The Cross-Rate
Trading Desk, 119
INTERNATIONAL FINANCE I N PRACTICE: The M o u s e
Triangular
Takes Over the Floor, 1 0 8
Spot Foreign Exchange
Microstructure,
121
FX Market
Participants,
Correspondent
Banking
109
Relationships,
111
Arbitrage,
121
Market
The Forward M a r k e t , 1 2 3
The Spot M a r k e t , 111
Forward
INTERNATIONAL FINANCE I N PRACTICE: W h e r e
Long and Short Forward
Positions,
M o n e y Talks Very Loudly, 112
Forward
Rates,
Spot FX Trading,
Cross-Exchange
114
Forward
117
118
MINI
Covered Interest Arbitrage,
125
126
CASE:
Shrewsbury H e r b a l
from
Forecasting Exchange Rates, 1 4 9
135
Rate
Interest
Market
149
150
151
of the Forecasters,
152
Summary 5 5
INTERNATIONAL FINANCE I N PRACTICE: Big
MacCurrencies, 1 4 2
M I N I C A S E : Turkish Lira and Purchasing
Power Parity, 1 5 9
Exchange
Power Parity,
Approach,
Approach,
Technical Approach,
Performance
Purchasing Power Parity, 141
and the Real
Efficient
Fundamental
138
Evidence on Purchasing
Premium,
124
125
Fisher Effects, 1 4 7
Interest Rate Parity and Exchange
Determination,
138
PPP Deviations
Rate, 143
Cross-Exchange
Products, Ltd., 1 3 0
Interest Rate Parity, 1 3 2
Rate Parity,
123
Summary, 1 2 7
Rate Quotations,
Reasons for Deviations
Rate Quotations,
Swap Transactions,
116
Alternative Expressions for the
Cross-Exchange Rate, 119
International Parity
Relationships and
Forecasting
Foreign Exchange
Rates, 132
95
The Foreign Exchange Market, Exchange Rate
Determination, and Currency Derivatives
The Bid-Ask Spread,
6
95
and Valuation,
The Sarbanes-Oxley
Control,
Spot Rate Quotations,
CHAPTER
of Control,
Summary, 9 9
Overseas Stock Listings,
CHAPTER
Objectives
Political
Debt, 86
Market
Benefits
91
Corporate Governance Reform, 9 6
INTERNATIONAL FINANCE I N PRACTICE: When Boards
Accounting
and Control Pattern,
Capital Markets
Are All in the Family, 8 4
PART T W O
A P P E N D I X 3 A : The Relationship between
Balance o f Payments and National Income
Accounting, 7 7
144
A P P E N D I X 6 A : Purchasing Power Parity and
Exchange Rate D e t e r m i n a t i o n , 161
CHAPTER
7
Futures and Options
on Foreign
Exchange, 162
Futures Contracts: Some Preliminaries, 1 6 3
Currency Futures Options, 1 7 4
Currency Futures M a r k e t s , 1 6 5
Basic Option-Pricing Relationships a t
INTERNATIONAL FINANCE I N PRACTICE: C M E
Expiration, 1 7 4
Ramping Up FOREX Support, Targets OTC
American Option-Pricing Relationships, 1 7 7
Business, 1 6 6
European Option-Pricing Relationships, 1 7 9
Basic Currency Futures Relationships, 1 6 7
Binomial Option-Pricing M o d e l , 1 8 1
Eurodollar Interest Rate Futures
Contracts, 1 7 1
Options Contracts: Some Preliminaries, 1 7 2
European Option-Pricing Formula, 1 8 2
. . .
Empirical Tests o f Currency Optio
„ Summary, 1 8 4
Currency Options Markets, 1 7 3
MINI
PART
THREE
CHAPTER
S
Management of
Transaction
Exposure, 192
Three Types o f Exposure, 1 9 2
Hedging via Lead a n d Lag, 2 0 5
Forward M a r k e t Hedge, 1 9 4
Exposure N e t t i n g , 2 0 5
M o n e y M a r k e t Hedge,
196
INTERNATIONAL FINANCE I N PRACTICE: Riding
O p t i o n s M a r k e t Hedge, 1 9 8
Shifting
S
Hedging Foreign Currency Payables, 2 0 0
Contracts
200
. _ .
_
Market Instruments,
„
.
Currency Options Contracts,
o
u
l
d
t
W
a
v
e
h
e
F
i
s
o
r
f
m
Currency, 2 0 6
Hedge?, 2 0 7
o r N o t t o Hedge, 2 0 8
201
W h a t Risk M a n a g e m e n t Products Do Firms
Use?,
201
Cross-Hedging M i n o r Currency Exposure, 2 0 1
Management of
Economic
Exposure, 222
h
INTERNATIONAL FINANCE I N PRACTICE: TO Hedge
Money
9
The O p t i o n s Speculator, 1 8 7
Foreiqn Exchanqe Exposure and Management
Forward
CHAPTER
CASE:
Summary 2 1 1
H e d g i n g C o n t i n g e n t Exposure, 2 0 3
M
Hedging Recurrent Exposure with Swap
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2
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4
o p t i o n s , Inc.:
Contracts, 2 0 3
Hedging Foreign Currency Exposure through
Hedging through Invoice Currency, 2 0 4
Currency Options, 2 1 5
INTERNATIONAL FINANCE I N PRACTICE: U.S. Firms
Diversification
of the Market,
235
Feel t h e Pain of Peso's Plunge, 2 2 4
INTERNATIONAL FINANCE I N PRACTICE: Porsche
How t o Measure Economic Exposure, 2 2 5
Powers Profit W i t h Currency Plays, 2 3 6
O p e r a t i n g Exposure: Definition, 2 2 8
R&D Efforts and Product
Illustration of O p e r a t i n g Exposure, 2 2 9
Differentiation,
Determinants o f O p e r a t i n g Exposure, 2 3 2
Financial Hedging,
M a n a g i n g O p e r a t i n g Exposure, 2 3 4
Selecting
Low-Cost Production
C
Sites, 234
INTERNATIONAL FINANCE I N PRACTICE: The S t r o n g
A
S
E
237
A P P L I C A T I O N : Exchange Risk
M a n a g e m e n t a t Merck, 2 3 7
„
Summary, 2 4 0
m
M
Yen and Toyota's Choice, 2 3 5
236
„
a
,
N
I C a s e :
_
.
E c o n o m i c
_
E x
P
o s u r e
o f
A l b l o n
Computers PLC, 2 4 2
Flexible Sourcing
CHAPTER
1O
Management of
Translation
Exposure, 244
Policy,
235
Translation M e t h o d s , 2 4 5
Current/Noncurrent
Monetary/Nonmonetary
Temporal Method,
The Mechanics
Method,
245
Method,
245
245
Current Rate Method,
246
Financial Accounting Standards Board
of the FASB 52
Translation
Process, 249
Highly Inflationary
Economies, 250
C A S E A P P L I C A T I O N : Consolidation of
Accounts according t o FASB 5 2 : The Centralia
Corporation, 2 5 2
M a n a g e m e n t o f Translation Exposure, 2 5 6
Statement 8 , 2 4 8
Translation
Exposure
Financial Accounting Standards Board
Exposure,
256
Statement 5 2 , 2 4 8
Hedging
Translation
versus
Exposure,
Transaction
257
Balance Sheet Hedge,
Derivatives
Hedge,
Translation
Exposure,
PART FOUR
CHAPTER 1 1
International
Banking and Money
Market, 266
257
Empirical Analysis o f t h e Change f r o m
F
258
Exposure
versus Operating
A
S
B
8
t
0
F
A
S
B
52,
2
5
9
Summary, 2 5 9
258
M I N I CASE: Sundance S p o r t i n g
Goods, Inc., 2 6 1
World Financial Markets and Institutions
International Banking Services, 2 6 6
The World's Largest Banks,
Forward
267
Rate Agreements,
Euronotes,
Reasons for International Banking, 2 6 7
Eurocommercial
Types o f International Banking Offices, 2 6 9
Bank, 269
History, 279
Representative
Offices,
Debt-for-Equity
Subsidiary
Offshore
269
269
International
Banks,
S
270
h
Centers,
Banking
o
u
T
2 70
Banking
Swaps, 281
INTERNATIONAL FINANCE I N PRACTICE: LDC Lenders
and Affiliate
Edge Act Banks,
Paper, 279
International Debt Crisis, 2 7 9
Correspondent
Foreign Branches,
277
279
271
Facilities,
,
d
h
H
e
a
v
e
Listened t o David Hume, 2 8 2
Solution:
Brady Bonds, 283
Japanese Banking Crisis, 2 8 4
T
271
h
eA
s
i
a
n
C r i s i s
»
2
8
5
Capital Adequacy Standards, 2 7 2
Summary, 2 8 5
International Money M a r k e t , 2 7 4
M I N I C A S E : Detroit M o t o r s ' Latin American
Expansion, 2 8 9
Eurocurrency
Market,
274
APPENDIX
Eurocredits,
1 1 A : Eurocurrency Creation, 2 9 0
276
CHAPTER 1 2
The World's Bond M a r k e t s : A Statistical
International Bond
Market, 293
Perspective, 2 9 3
Currency D i s t r i b u t i o n , Nationality, a n d Type o f
Foreign Bonds a n d Eurobonds, 2 9 4
Issuer, 2 9 9
Bearer Bonds and Registered
National
Security
Withholding
Regulations,
Bonds,
Dual-Currency
295
295
Global Bonds,
Changes,
296
296
Types of Instruments, 2 9 6
Straight
Fixed-Rate
Euro-Medium-Term
Floating-Rate
International Bond M a r k e t Credit Ratings, 3 0 0
INTERNATIONAL FINANCE I N PRACTICE: Heineken
Taxes, 295
Other Recent Regulatory
Bonds, 298
Refreshes Euromarket w i t h Spectacular
Unrated Bonds, 3 0 1
_
.., .
.
Eurobond M a r k e t Structure a n d Practices, 3 0 3
,
_
Primary Market, 303
„
,
.
,
„ ^
Secondary Market, 306
„ ^
Clearing Procedures, 306
,
. *, ,
International Bond M a r k e t Indexes, 3 0 8
M
Issues, 297
Notes, 297
Notes, 297
Summary, 3 1 0
Equity-Related
Bonds,
298
m
,
a
MINI
Zero-Coupon
CHAPTER 1 3
International Equity
Markets, 313
Bonds,
298
Capitalization
Countries,
Market
International Equity M a r k e t Benchmarks, 3 2 0
of Developed
iShares MSCI, 3 2 3
314
Capitalization
Countries,
315
Measures
of Liquidity,
Measures
of Market
„
Sara Lee C o r p o r a t i o n s
Eurobonds, 3 1 2
A Statistical Perspective, 3 1 3
Market
CASE:
Trading In International Equities, 3 2 4
of Developing
INTERNATIONAL FINANCE I N PRACTICE: Foreign
Interest In South Africa Takes Off, 3 2 5
316
Concentration,
Cross-Listing
318
of Shares, 325
Yankee Stock Offerings,
M a r k e t Structure, Trading Practices,
T
h
e
and Costs, 3 1 9
American
European
327
Stock Market,
Depository
327
Receipts,
328
Global Registered
Shares,
332
Industrial
Factors A f f e c t i n g I n t e r n a t i o n a l Equity
Returns, 3 3 2
Macroeconomic
Factors,
Exchange Rates,
CHAPTER
1 4
Interest Rate and
Currency
Swaps, 337
MINI
333
CASE:
Variations o f Basic Interest Rate a n d Currency
Swaps, 3 4 8
Types o f Swaps, 3 3 7
INTERNATIONAL FINANCE I N PRACTICE: The W o r l d
Bank's First Currency Swap, 3 3 8
INTERNATIONAL FINANCE I N PRACTICE: A I C ,
Size of t h e Swap M a r k e t , 3 3 8
N o m u r a , a n d IFC Link Up In Latin Swap
Transaction, 3 4 8
The Swap Bank, 3 3 8
Risks of Interest Rate and Currency Swaps, 3 4 9
Is t h e Swap M a r k e t Efficient?, 3 4 9
Summary, 3 5 0
Basic Interest Rate Swap,
340
MINI
Currency Swaps, 3 4 3
Basic Currency
International
Portfolio
Investment, 356
San Pico's New Stock
333
Interest Rate Swaps, 3 4 0
1 5
333
Exchange, 3 3 5
Swap M a r k e t Quotations, 3 3 9
CHAPTER
Structure,
Summary, 3 3 4
CASE:
The Centralia Corporation's
Currency Swap, 3 5 5
Swap,
343
International Correlation Structure a n d Risk
INTERNATIONAL FINANCE I N PRACTICE: Live Here,
Diversification, 3 5 7
Invest A b r o a d , 3 7 6
O p t i m a l International Portfolio Selection, 3 5 9
Why Home Bias in Portfolio Holdings?, 3 7 7
Effects o f Changes in t h e Exchange Rate, 3 6 5
INTERNATIONAL FINANCE I N PRACTICE: Stay-at-Home
International Bond Investment, 3 6 7
Shareholders, 3 7 8
International M u t u a l Funds: A Performance
Summary, 3 8 1
Evaluation, 3 6 8
M I N I CASE: Solving for the Optimal International
International Diversification t h r o u g h Country
Portfolio, 3 8 6
Funds, 3 7 1
APPENDIX
w
International Diversification w i t h ADRs, 3 7 4
International Diversification w i t h WEBS, 3 7 5
i
t
h
E
x
c
h
a
n
1 5 A : International Investment
g
e
R
i
s
k
Appendix 15B
:
H
e
d
g
S o l v i n g
i
n
g
,
3
8
f o rt h e
8
OP
t i m a l
Portfolio, 3 9 0
International Diversification with
Hedge Funds, 3 7 5
PART
FIVE
CHAPTER
1 6
Foreign Direct
Investment and
Cross-Border
Acquisitions, 394
Financial Management of the Multinational Firm
Global Trends in FDI, 3 9 5
Cross-Border Mergers and Acquisitions, 4 0 4
Why D o Firms Invest Overseas?, 3 9 8
INTERNATIONAL FINANCE I N PRACTICE:
Trade Barriers,
DaimlerChrysler: The First Global
Car Colossus, 4 0 6
399
Imperfect
Labor Market,
Intangible
Assets,
Vertical Integration,
400
INTERNATIONAL FINANCE I N PRACTICE: Stories Past
401
and Present, 4 1 0
401
Political Risk a n d FDI, 4 1 0
INTERNATIONAL FINANCE I N PRACTICE: Linear
Sequence in M a n u f a c t u r i n g : Singer &
Company, 4 0 2
M I N I C A S E : Enron versus Bombay
Politicians, 4 1 9
Product Life Cycle, 403
Shareholder
CHAPTER
17
International Capital
Structure and the
Cost of Capital, 422
Diversification
Services,
403
Cost of Capital, 4 2 3
Cost o f Capital in Segmented versus Integrated
Markets, 4 2 4
Does t h e Cost of Capital Differ a m o n g
Countries?, 4 2 6
INTERNATIONAL FINANCE I N PRACTICE: The U.S.
Welcomes t h e Alien Invasion, 4 2 6
Summary, 4 1 7
C A S E A P P L I C A T I O N : NOVO I n d u s t r i ,
430
Cross-Border Listings of Stocks, 4 3 1
Capital Asset Pricing under Cross-Listings, 4 3 5
The Effect of Foreign Equity Ownership
Restrictions, 4 3 7
Pricing-to-Market
Phenomenon,
C A S E A P P L I C A T I O N : Nestle,
438
438
Asset Pricing under Foreign
Restrictions,
440
Ownership
The Financial Structure of Subsidiaries, 4 4 2
CHAPTER
1 8
International Capital
Budgeting, 449
Review of Domestic Capital Budgeting, 4 5 0
The Adjusted Present Value M o d e l , 4 5 1
Capital Budgeting f r o m the Parent Firm's
Perspective, 4 5 3
Generality
of the APV Model,
455
Estimating the Future Expected
Rate, 456
CHAPTER
1 9
Multinational Cash
Management, 467
Exchange
International Trade
Finance, 487
Purchasing Power Parity A s s u m p t i o n , 4 6 1
Real Options, 4 6 1
Summary, 4 6 3
CASE
C A S E 2 : Strik-it-Rich Gold M i n i n g
Corporation, 4 5 6
Company, 4 6 6
The M a n a g e m e n t o f International
Cash Balances, 4 6 7
INTERNATIONAL FINANCE I N PRACTICE: Transfer
C A S E A P P L I C A T I O N : Teltrex's Cash
1 : Dorchester, L t d . , 4 6 5
Pricing Is the M o s t I m p o r t a n t
International Tax Issue, 4 8 0
Miscellaneous
M a n a g e m e n t System, 4 6 8
Factors,
482
Blocked Funds, 4 8 3
Bilateral N e t t i n g of Internal and External N e t
Cash Flows, 4 7 3
Summary, 4 8 4
Reduction in Precautionary Cash
Balances, 4 7 3
M I N I C A S E 1 : Efficient Funds Flow a t Eastern
Trading Company, 4 8 5
Cash M a n a g e m e n t Systems in Practice, 4 7 5
MINI
Transfer Pricing and Related Issues, 4 7 6
O p t i m a l Transfer Pricing Strategy, 4 8 5
CASE APPLICATION:
MINI
M i n t e l Products
C A S E 2 : Eastern Trading Company's
C A S E 3 : Eastern Trading Company's
New M B A , 4 8 6
A Typical Foreign Trade Transaction, 4 8 8
Forms of Countertrade,
Forfaiting, 4 9 0
Some Generalizations
Countertrade,
494
INTERNATIONAL FINANCE I N PRACTICE: First Islamic
The Export-Import
Bank and
Organizations,
491
Affiliated
Tax Equity,
499
Tax Havens,
Tax, 501
Value-Added
Tax, 501
Taxation,
503
503
INTERNATIONAL FINANCE I N PRACTICE: The TAXING
Devil You Know, 5 0 4
Index, 520
504
Income,
505
507
507
INTERNATIONAL FINANCE I N PRACTICE: A S Dot-Corns
National Tax Environments, 5 0 3
Taxation,
Foreign Tax Credits,
Payments to and from Foreign Affiliates,
Withholding
Glossary, 513
M I N I CASE: A m e r i c a n M a c h i n e
Branch and Subsidiary
Income Tax, 499
Territorial
Forces Tops In Countertrade List, 4 9 4
Summary, 4 9 5
Organizational Structures f o r Reducing Tax
Liabilities, 5 0 5
499
Types of Taxation, 4 9 9
Worldwide
about
Tools, Inc., 4 9 7
The Objectives of Taxation, 4 9 8
Tax Neutrality,
493
INTERNATIONAL FINANCE I N PRACTICE: A r m e d
Countertrade, 4 9 2
International Tax
Environment, 498
Sensitivity Analysis, 4 6 1
MINI
Government Assistance in Exporting, 4 9 1
21
Risk A d j u s t m e n t in the Capital Budgeting
Analysis, 4 6 0
MINI
Forfaiting Fund Set Up, 4 9 1
CHAPTER
A P P E N D I X 1 7 A : Pricing of Nontradable
Assets: Numerical Simulations, 4 4 8
C A S E A P P L I C A T I O N : The Centralia
Transfer Pricing Strategy, 4 7 6
CHAPTER 2 G
Summary, 4 4 4
Go Bust In U.S., Bermuda Hosts an O d d Little
Boomlet, 5 0 8
Controlled
Foreign Corporation,
510
Summary, 511
M I N I C A S E : Sigma Corp.'s Location
Decision, 5 1 2