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International
Financial
Management
Tenth Edition
Cheol S. Eun
Georgia Institute of Technology
Bruce G. Resnick
Wake Forest University
Tuugi Chuluun
Loyola University Maryland
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INTERNATIONAL FINANCIAL MANAGEMENT, TENTH EDITION
Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10121. Copyright ©2024
by McGraw Hill LLC. All rights reserved. Printed in the United States of America. Previous editions
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the United States.
This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 LWI 28 27 26 25 24 23
ISBN 978-1-264-41309-6 (bound edition)
MHID 1-264-41309-2 (bound edition)
ISBN 978-1-266-82631-3 (loose-leaf edition)
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All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.
Library of Congress Cataloging-in-Publication Data
Names: Eun, Cheol S., author. | Resnick, Bruce G., author. | Chuluun, Tuugi, author.
Title: International financial management / Cheol S. Eun, Georgia Institute of Technology,
Bruce G. Resnick, Wake Forest University, Tuugi Chuluun, Loyola University Maryland.
Description: Tenth edition. | New York, NY : McGraw Hill, [2024] |
Series: The McGraw-Hill education series in finance, insurance, and real estate | Includes index.
Identifiers: LCCN 2022038359 (print) | LCCN 2022038360 (ebook) |
ISBN 9781264413096 (paperback) | ISBN 9781266824739 (ebook)
Subjects: LCSH: International finance. | International business enterprises—Finance. |
Foreign exchange. | Financial institutions, International.
Classification: LCC HG3881 .E655 2024 (print) | LCC HG3881 (ebook) |
DDC 658.15/99—dc23/eng/20220906
LC record available at https://lccn.loc.gov/2022038359
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The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a
website does not indicate an endorsement by the authors or McGraw Hill LLC, and McGraw Hill LLC
does not guarantee the accuracy of the information presented at these sites.
mheducation.com/highered
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To Elizabeth
C.S.E.
To Donna
B.G.R.
To Arig and Amur
T.C.
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About the Authors
Cheol S. Eun,
Georgia Institute of Technology
Cheol S. Eun (Ph.D., NYU) is Professor Emeritus of Finance and the Thomas R.
Williams Chair (Ret.) at the Scheller College of Business, Georgia Institute of
Technology. Before joining Georgia Tech, he taught at the University of Minnesota and
the University of Maryland. He also taught at the Wharton School of the University
of Pennsylvania, Seoul National University, Korea Advanced Institute of Science and
Technology (KAIST), Singapore Management University, and the Esslingen University
of Technology (Germany) as a visiting professor. He has published extensively
on international finance issues in such major journals as the Journal of Finance,
Journal of Financial Economics, JFQA, Journal of Banking and Finance, Journal
of International Money and Finance, Management Science, and Oxford Economic
Papers. Also, he has served on the editorial boards of the Journal of Banking and
Finance, Journal of Financial Research, Journal of International Business Studies,
and European Financial Management. His research is widely quoted and referenced in
various scholarly articles and textbooks in the United States as well as abroad.
Dr. Eun is the founding chair of the Fortis/Georgia Tech Conference on
International Finance. The key objectives of the conference were to promote research
on international finance and provide a forum for interactions among academics,
practitioners, and regulators who are interested in vital current issues of international
finance.
Dr. Eun has taught a variety of courses at the undergraduate, graduate, and executive
levels, and was the winner of the Krowe Teaching Excellence Award at the University
of Maryland. He also has served as a consultant to many national and international
organizations, including the World Bank, Apex Capital, and the Korean Development
Institute, advising on issues relating to capital market liberalization, global capital raising,
international investment, and exchange risk management. In addition, he has been a
frequent speaker at academic and professional meetings held throughout the world.
Bruce G. Resnick,
Wake Forest University
Bruce G. Resnick is Professor Emeritus of Finance at the Wake Forest University
School of Business in Winston-Salem, North Carolina. Prior to retiring, he was the
Joseph M. Bryan Jr. Professor of Banking and Finance. He received a D.B.A. in finance
from Indiana University, an M.B.A. from the University of Colorado and a B.B.A.
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viii
ABOUT THE AUTHORS
from the University of Wisconsin-Oshkosh. Prior to joining Wake Forest, he taught
at Indiana University for 10 years, the University of Minnesota for five years, and
California State University, Chico for two years. He has served as a visiting professor
at Bond University in Gold Coast, Queensland, Australia, and at the Helsinki School
of Economics and Business Administration in Finland. Additionally, he served as the
Indiana University resident director at the Center for European Studies at Maastricht
University, the Netherlands. He also served as an external examiner to the Business
Administration Department of Singapore Polytechnic and as the faculty advisor on
Wake Forest University study trips to Japan, China, and Hong Kong.
Dr. Resnick taught M.B.A. and undergraduate courses in the areas of investments,
portfolio management, and international financial management. His research interests
include market efficiency studies and empirical tests of asset pricing models. A
major interest has been the optimal design of internationally diversified portfolios
constructed to control for parameter uncertainty and exchange rate risk. Most recently,
he has focused on studying the information content contained in Eurocurrency interest
rates and yield spread comparisons of domestic and international bonds. His research
articles have been published in most of the major academic journals in finance. Other
researchers and textbook authors have widely cited his research. He served for many
years as an associate editor for the Emerging Markets Review, Journal of Multinational
Financial Management, the Journal of Economics and Business, and the Journal of
Financial Research.
Tuugi Chuluun,
Loyola University Maryland
Tuugi Chuluun is a Travelers Scholar and an Associate Professor of Finance at
Sellinger School of Business and Management at Loyola University Maryland. She
holds a Ph.D. in Finance from the Georgia Institute of Technology, a master’s in
Financial Economics, and a bachelor’s degree in Economics from Ohio University.
Her research areas include international finance, corporate finance, and behavioral
finance. She has published in journals such as Journal of Banking and Finance,
Financial Management, Journal of Corporate Finance, Journal of Economic Behavior
and Organization, and Small Business Economics. Her research has also been featured
in magazines such as The Economist and Forbes Mongolia. Dr. Chuluun has taught
undergraduate and graduate courses in international finance, corporate finance,
investments, microeconomics, and macroeconomics at Loyola University Maryland,
Georgia Institute of Technology, and West Virginia University–Parkersburg, often
incorporating innovative teaching practices. At Loyola University Maryland, she was
selected as the ELMBA Program Distinguished Professor of the Year and received
the Sellinger School STAR Award in research. She has also received the Financial
Management Association’s Superior Faculty Advisor award.
Dr. Chuluun holds the Chartered Financial Analyst (CFA) designation. She is
the former president of the CFA Society Baltimore, Maryland’s largest membership
organization for investment professionals, and has served on the society’s board
since 2013. She was also the co-chair of the “Alpha and Gender Diversity Baltimore
Conference 2018,” which fostered collaborative discussion on how gender diversity
creates a competitive advantage for investment professionals and the broader finance
industry. Dr. Chuluun was a Visiting Scholar at the Brookings Institution and has
international consulting experience.
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Preface
Our Reason for Writing this Textbook
We (Cheol and Bruce) have been teaching international financial management to
undergraduates and M.B.A. students at Georgia Institute of Technology, Wake Forest
University, and at other universities we have visited for more than three decades. During this time period, we conducted many research studies, published in major finance
and statistics journals, concerning the operation of international financial markets. As
one might imagine, in doing this we put together an extensive set of teaching materials that we used successfully in the classroom. As the years went by, we individually
relied more on our own teaching materials and notes and less on any one of the major
existing textbooks in international finance (most of which we tried at some point). In
the Ninth Edition, Tuugi Chuluun from Loyola University Maryland, joined us as a
co-author and continues the tradition we have established in offering up-to-date and
timely coverage of the subject of international financial management.
As you may be aware, the scope and content of international finance have been fast
evolving due to cycles of deregulations and regulations of financial markets, product innovations, and technological advancements. As capital markets of the world are
becoming more integrated, a solid understanding of international finance has become
essential for astute corporate decision making. Reflecting the growing importance of
international finance as a discipline, we have seen a sharp increase in the demand for
experts in the area in both the corporate and academic worlds.
In writing International Financial Management, Tenth Edition, our goal was to
provide well-organized, comprehensive, and up-to-date coverage of the topics that take
advantage of our many years of teaching and research in this area. We hope the text
is challenging to students. This does not mean that it lacks readability. The text discussion is written so that a self-contained treatment of each subject is presented in a
user-friendly fashion. The text is intended for use at both the advanced undergraduate
and M.B.A. levels.
The Underlying Philosophy
International Financial Management, Tenth Edition, like the previous nine editions,
is written based on two tenets: emphasis on the basics and emphasis on a managerial
perspective.
Emphasis on the
Basics
We believe that any subject is better learned if one is first well grounded in the
basics. Consequently, we initially devote several chapters to the fundamental concepts
of international finance. After these are learned, the remaining material flows easily
from them. We always bring the reader back, as the more advanced topics are developed, to their relationship to the fundamentals. By doing this, we believe students will
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P RE FA C E
be left with a framework for analysis that will serve them well when they need to apply
this material in their careers in the years ahead.
We believe this approach has produced a successfuI textbook: International Financial Management is used in many of the best business schools in the world. Various
editions of the text have been translated into Chinese (in both traditional and simplified forms), Spanish, Korean, and Indonesian. In addition, local co-authors have
assisted in preparing Canadian, Malaysian, and Indian adaptations.
Tenth Edition Organization
International Financial Management, Tenth Edition, has been completely updated.
Data tables and statistics are the most current available when the text went to press.
We added discussions of emerging topics and issues of global significance, such as
climate risk, coronavirus pandemic, cryptocurrencies, and transition from LIBOR to
Alternative Risk-Free Rates. Additionally, the chapters incorporate several new mini
cases and International Finance in Practice boxes that contain real-world illustrations
of chapter topics and concepts. The bullet points below highlight specific changes in
the Tenth Edition.
Chapter 1:
• Included political risk as an additional “unique” dimension of international
finance.
• Added a discussion of the origin and consequences of political risk using the
recent geopolitical events, such as Brexit, Chinese policy pivots, and the RussoUkrainian war.
• Added two extra trends and developments, climate change and COVID-19
pandemic, including the physical and financial risks climate change poses to the
world and how countries can mitigate and adapt to the effects of climate change
via international cooperation, for example, Paris Climate Agreement. Also
included the economic and financial consequences of the COVID-19 pandemic,
such as supply chain disruption, higher inflation, rapid digitization of finance
and commerce, and rising inequalities.
• Updated Exhibits 1.1, 1.4, and 1.7, and added a new Exhibit 1.6 COVID-19
Shock and Macroeconomic Responses.
• Revised Mini Case: Nike and Sweatshop Labor.
• Added more References.
Chapter 2:
• Added new discussion of the role of cryptocurrencies and El Salvador’s
experiment of Bitcoin as its legal tender.
• Added discussion of the prospect of European “fiscal integration” to
complement monetary integration. Also, a discussion of Central Bank Digital
Currency (CBDC), a hot topic among central bankers around the world.
• Updated Exhibits 2.2, 2.3, 2.4, 2.7, 2.8, and 2.13.
Chapter 3:
• Created a new International Finance in Practice box titled “Squid Game and
the Rise of Global Services Trade.” This replaces the previous International
Finance in Practice box titled “The Dollar and the Deficit.”
• Revised Exhibit 3.1 with the latest U.S. balance of payments data and updated
the corresponding discussions throughout the chapter.
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P R E F A C E • Modified and reorganized the discussion of the financial account for improved
clarity.
• Revised Exhibit 3.4 which depicts the composition of total official reserves,
and Exhibit 3.5 which presents the currency composition of the world’s foreign
exchange reserves.
• Updated Exhibits 3.6 and 3.7 which depict the current and financial account
balances of the major economies, and Exhibit 3.8 presenting the top U.S.
trading partners.
• Added two new EOC problems (Problems 1 and 2) for students to analyze the
U.S. current and financial account balances from a previous year.
• Added a new mini case to analyze the trends in China’s balance of payments to
replace the mini case on Mexico’s balance of payments problem.
• A new video explaining a balance of payments problem was added.
Chapter 4. Corporate Governance around the World
• Added a new section discussing the current issue of shareholder versus
stakeholder capitalism.
• Added a new Mini Case: The Petrobras Scandal.
• Included a discussion of how foreign activist shareholders can enhance
corporate governance using Toshiba’s recent experience.
• Created more EOC questions.
Chapter 5:
• Updated Exhibit 5.1 and Exhibits 5.3–5.13 with the latest data on the foreign
exchange market and modified the corresponding discussions throughout the
chapter.
• Updated the International Finance in Practice boxes titled “Electronification of
the FX Market” and “Chinese Yuan’s Road to Internationalization” to reflect
the recent developments.
• Revised Examples 5.2–5.4 on computing cross exchange-rates and
triangular arbitrage profits using the most recent data provided in the revised
exhibits.
• Revised Examples 5.5–5.7 describing forward premium/discount and
speculative forward positions.
• Added EOC Problem 1 for students to practice working with direct and indirect
exchange rate quotes, and Problem 14 for students to practice conducting
forward market speculation.
• Modified EOC Problem 12 on triangular arbitrage and turned it into a ­
multi-step problem that is easier to assign in Connect.
• Incorporated a discussion of empirical research on informal currency zones.
• Added a discussion about the reported decline in the correspondent banking
relationships.
• Included empirical research findings on the size of bid-ask spreads.
• Added videos on how exchange rates are quoted and cross-rates are computed
and videos showing detailed examples of triangular arbitrage problems.
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P RE FA C E
Chapter 6:
• Updated Exhibit 6.3 on carry trade, Exhibit 6.6 on real effective exchange
rates, Exhibit 6.7 on world prices, and Exhibit 6.8 on GDPs measured at PPP
exchange rate.
• Updated the International Finance in Practice box on Big Mac Index.
• Included a discussion on carry trade, including how households can effectively
become carry traders when they take out mortgages denominated in foreign
currencies.
• Modified EOC Problem 2.
• Added videos explaining interest rate parity and covered interest arbitrage using
detailed examples.
Chapter 7:
• Updated market data throughout the chapter.
• Added a discussion on empirical testing of currency options.
• Created four new EOC problems.
• Added videos describing the daily resettlement of futures contracts and the
characteristics of the different positions on call and put options.
Chapter 8:
• Extensively revised Exhibit 8.12 and discussed in detail how companies use
various financial and operational hedging methods in real world when they face
transaction exposure.
• Created more EOC problems and Mini Case.
• Added a significant number of References.
Chapter 9:
• Added a new International Finance in Practice titled, “The case study: How
BMW dealt with exchange rate risk.”
• Updated References.
Chapter 10:
• Reorganized the chapter, added a section on FASB ASC830, and revised and
consolidated the discussions of FASB 8, FASB 52, and FASB ASC830 under a
new section called “U.S. GAAP.”
• Revised the section on International Accounting Standards and incorporated a
discussion about the accounting standards in China.
• Highlighted the difference between the concept of measuring foreign
currency transactions and the concept of translating foreign currency financial
statements.
• Modified the currency symbols throughout the chapter for greater clarity and
consistency.
Chapter 11:
• Updated Exhibit 11.1 listing the world’s largest banks.
• Revised the discussion on capital adequacy standards and the Basel III accord
• Included a discussion on the termination of LIBOR as the major reference rate
for Eurocurrency deposits.
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P R E F A C E xiii
• Introduced the new series of reference rates, known collectively as
Alternative Risk-Free Rates, which went into effect for the various
Eurocurrencies.
• Introduced the Secured Overnight Financing Rate (SOFR) selected as the
replacement for USD LIBOR as the benchmark rate for Eurodollar deposits and
FRAs.
• CME Group SOFR futures contracts have been introduced as a vehicle for
hedging short-term USD interest rate risk in Eurodollar positions.
• Updated all associated Eurocurrency exhibits.
• Extensively revised and shortened the discussion on the Global Financial Crisis
to reflect the passage of time and its less significant bearing on the current
global macroeconomic environment.
• Relocated the In More Depth discussion on MBSs, SIVs, CDOs, and CDSs to
an appendix.
• Updated End-of-Chapter Internet Exercise 1 to highlight using SOFR in pricing
Eurodollar loans.
Chapter 12:
• Reorganized sections of the chapter, including a subsection on the currency
distribution, nationality, and type of issuers, to improve the content flow.
• Updated Exhibits 12.1–12.4 and 12.9–12.11 to provide a detailed overview
of the world’s bond markets using the most recent data and modified the
corresponding discussions throughout the chapter.
• Revised the reference rates used in floating-rate notes to reflect the switch from
LIBOR to other benchmark rates such as SOFR.
• Created a new mini case called “Alpha Gen Technologies: Panda or Dim Sum
Bonds?” for students to compare Chinese-yuan denominated panda and dim
sum bonds. This replaces the previous mini case called “Sara Lee Corporation’s
Eurobonds.”
• Added videos explaining the EOC problems.
Chapter 13:
• Updated Exhibits 13.1–13.4 and 13.8 to provide a detailed overview of
the world’s stock markets using the most recent data and modified the
corresponding discussions throughout the chapter.
• Added a discussion describing the trends in the cross-listings of Chinese firms
since the 1990s, including the stricter rules imposed recently on Chinese firms
listing abroad.
• Modified Exhibit 13.6 for greater clarity.
• Revised the discussion of market consolidations and mergers among stock
exchanges worldwide.
• Modified the discussion on ADRs to improve clarity.
• Revised Examples 13.1–13.3 using the latest stock prices of several cross-listed
firms.
• Expanded and revised the discussion of the factors that influence
international equity returns, such as macroeconomic factors, exchange rates,
industry factors, and market factors, by summarizing findings from extensive
empirical research.
• Added a new subsection on market factors.
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P RE FA C E
Chapter 14:
• Updated Exhibits 14.1 and 14.2 with the most recent data.
• Incorporated the transition from LIBOR to alternative risk-free rates such as
SOFR in the discussions and explanations of swaps.
• End-of-chapter problems now use the new reference rates such as SOFR.
• Added videos that are guided examples of interest rate and currency swaps.
Chapter 15:
• Updated Exhibits 15.1, 15.2, 15.4, and 15.5 to present characteristics of and
correlations among major equity markets using the most recent data and
modified corresponding discussions throughout the chapter.
• Updated Exhibits 15.6–15.8 to present the composition of optimal international
equity portfolios and gains from international diversification.
• Reorganized and updated the content on home bias.
• Added a new EOC problem.
• Added new videos illustrating how to compute the rate of return on foreign
investment with and without hedging.
Chapter 16:
• Created a new exhibit, Exhibit 16.1, depicting the trends in the FDI outflows of
developed and developing regions.
• Updated Exhibits 16.1–16.5, 16.7, 16.9, and 16.12 and discussed the most
recent data and trends in global FDI, including cross-border M&As, and
political risk.
• Added a discussion of empirical findings on expropriations.
Chapter 17:
• Updated Exhibits 17.8 and 17.9.
• Provided a more detailed explanation of the International Asset Pricing Model.
Chapter 18:
• Clarified the wording in Example 18.2.
• Added a new mini case on evaluating a capital expenditure proposal in a wholly
owned foreign subsidiary—the case addresses methods for calculating and
discounting foreign cash flows in calculating the NPV of the project.
Chapter 19:
• Clarified the wording in Mini Case 1 on multilateral netting among
interaffiliate cash flows.
Chapter 20:
• Created a new section to define and summarize the global trade finance market
at the beginning of the chapter, including a discussion of the impact of the
COVID-19 pandemic on global trade finance.
• Included a new section surveying the export credit agencies worldwide.
• Created a new exhibit, Exhibit 20.2, presenting the top 25 countries by export
credit volume.
• Updated the International Finance in Practice box titled “Export-Import Bank
in Limbo” to incorporate the most recent developments.
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P R E F A C E xv
Chapter 21:
• Updated Exhibit 21.1 displaying corporate tax rates around the world.
• Updated Exhibit 21.2 displaying U.S. treaty withholding tax rates with selected
countries.
• Updated Exhibit 21.4 showing foreign tax credit offsets for subsidiary
operations using current tax rates.
• Eliminated less current International Finance in Practice boxes.
• Added a new International Finance In Practice box providing perspective on the
use of tax havens by MNCs to divert income from higher tax jurisdictions via
transfer pricing.
• Added a new section discussing the 2021 global deal formally endorsed in
Rome by 136 of 139 participating G-20 countries in conjunction with the
OECD to establish a minimum corporate tax rate of 15 percent.
• Updated the two end-of-chapter Internet exercises.
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Exhibit 11.6 shows the relationship among the various interest rates we have discussed in this section specifically for the USD. On January 5, 2022, U.S. domestic banks
were paying .25 percent for six-month NCDs and the prime lending rate, the base rate
charged the bank’s most creditworthy corporate clients, was 3.25 percent. This appears
to represent a spread of 3.00 percent for the bank to cover operating costs and earn
a profit. Also on January 5, the six-month CME Term SOFR rate was .20 percent.
Thus, by comparison, it is reasonable to think that Eurobanks will accept six-month
Eurodollar time deposits, say, Eurodollar NCDs, at a bid rate of .43 percent, calculated
as the sum of the six-month CME Term SOFR rate of .20 percent + a six-month Bank
Credit premium of .43 percent – an interbank bid-ask spread of .20 percent. Similarly,
it is reasonable that a Eurobank would offer six-month Eurodollars in the interbank
market at .63 percent, calculated as the sum of the six-month CME Term SOFR rate of
.20 percent + the six-month Bank Credit premium of .43. By comparison, the Eurobank
would charge a corporate client a rate of .63 percent + X percent, where any lending
margin less than 2.62 [= 3.25 – .63] percent appears to make the Eurodollar loan more
attractive than the prime rate loan. Since lending margins typically fall in the range of
.25 percent to 3 percent, with the median rate being .50 percent to 1.50 percent, the
exhibit shows the narrow borrowing-lending spreads of Eurobankers in the Eurodollar
credit market. This analysis seems to suggest that borrowers can obtain funds somewhat
more cheaply in the Eurodollar market. However, international competition in recent
years has forced U.S. commercial banks to lend domestically at rates below prime.
Key Features
Examples—These are integrated
throughout the text, providing
students with immediate application of
the text concepts.
EXAMPLE 11.1: Rollover Pricing of a Eurocredit
Teltrex International can borrow $3,000,000 at a lending margin of .75 percent per
annum on a three-month rollover basis from Barclays in London. Suppose that threemonth CME Term SOFR is currently .53 percent and the three-month Bank Credit
premium is 26 basis points. Further suppose that over the second interval threemonth CME Term SOFR falls to .42 percent. How much will Teltrex pay in interest to
Barclays over the six-month period for the Eurodollar loan?
Solution: $3,000,000 × (.0053 + .0026 + .0075)/4 + $3,000,000 ×
(.0042 + .0026 + .0075)/4 = $11,550 + $10,725
= $22,275
ard Rate
ements
A major risk Eurobanks face in accepting Eurodeposits and in extending Eurocredits
is interest rate risk resulting from a mismatch in the maturities of the deposits and
credits. For example, if deposit maturities are longer than credit maturities, and interest rates fall, the credit rates will be adjusted downward while the bank is still payInternational
Finance
Practiceif deposit maturities are shorter than credit
ing
a higher rate on
deposits.in
Conversely,
Boxes—Selected chapters
contain International Finance
in Practice boxes. These realworld illustrations offer students
a practical look at the major
concepts presented in and
the chapter.
CHAPTER 7
FUTURES AND OPTIONS ON FOREIGN EXCHANGE
First Pages
First Pages
INTERNATIONAL FINANCE IN PRACTICE
Electronification of the Foreign Exchange Market
221
electronically instead of relying on traditional voice trading.
For trades in some currency pairs, the share of electronic trade
volume was even higher in October 2021 such as 72 percent and
71 percent for trading in British pound–euro and U.S. dollar–
Hong Kong dollar, respectively. Similarly, some large financial
institutions nowadays almost exclusively rely on electronic trading. Automation is a development that goes hand in hand with
electronification, and the Bank for International Settlements
reports that an estimated 70 percent of orders on Electronic
Broking Services (EBS) are now submitted by algorithms,
rather than manually. This trend of increasing electronification
is depicted in the figure below.
Technological advances ranging from greater processing power
to instantaneous data transfer
(7.9) are transforming financial markets around the world, and
the foreign exchange market is no
09/29/22 02:30 pm
exception. Currency traders dealing currencies on behalf of
EXAMPLE 7.5: European Option-Pricing Valuation
their clients by holding multiple telephone conversations and
Let’s see if Equations 7.8 and 7.9 actually hold yelling
for the 112
EURphones
Europeaniscall
intoSep
their
no longer the norm. The Bank for
and the 112 Sep EUR European put options we considered. The last day of trading
International Settlementsa suggests that more than 70 percent
for both of these options is September 20, 2019, or in 179 days from March 25,
4 is executed electronically. According
of
spot
trading
since
2013
2019, the options quotation date. On that date, the 6-month dollar interest rate was
to the North
American
Foreign
2.673 percent. Thus, (1 + i$) is [1 + .02673 (179/360)]
= 1.0133.
We will use
the Exchange Volume Survey conSeptember futures price of $1.1487/EUR on March
25, by
2019,
FT. Thus,Reserve
for the Bank of New York in October
ducted
theforFederal
112 Sep EUR call,
2021, about 57 percent of all foreign exchange transactions and
3.78 ≥ Max [(114.87 − 112)/(1.0133), 0] = Max [2.83,
0] = 2.83.of spot transactions in North America are executed
65 percent
(E − F T)
P e ≥ Max ___________, 0
[ (1 + i $) ]
318
Thus, the lower boundary relationship on the European call premium holds. For the
FX Electronic Trading Share (% of total monthly trade volume executed electronically)
112 Sep EUR put,
60
.94 ≥ Max [(112 − 114.87)/(1.0133), 0] = Max [− 2.83, 0] = 0.
Thus, the lower boundary relationship on the European put premium holds as well.
Binomial Option-Pricing Model
Percentage
55
In More Depth
50
The option pricing relationships we have discussed to this point have been lower
45the
boundaries on the call and put premiums, instead of exact equality expressions for
premiums. The binomial option-pricing model provides an exact pricing formula for
a European call or put.5 We will examine only a simple one-step case of the binomial
model to better understand the nature of option pricing. In this case, the binomial
40
model assumes that at the end of the option period, the underlying foreign exchange
has either appreciated one step upward or depreciated one step downward from its
initial value.
Year
We want to use the binomial model to value the PHLX 112 Sep EUR European
call from Exhibit 7.6. We see from the exhibit that the option premiumSource:
is quoted
Tabulated from data in Semi-Annual North American Foreign Exchange Volume Surveys, Federal
= 113.14
at 3.78 cents. The current spot price of the EUR in American terms is S0Reserve
Bank of New York, October 2004–2021.
cents. Our estimate of the option’s volatility (annualized standard deviation of the
differences in market liquidity with electronic trading sysChanging
execution
change in the spot rate) is σ = 6.18 percent, which was
obtainedtrade
from the
Investingmethods in the foreign exchange
.com website, www.investing.com. The last daymarket
of trading
in in
theturn,
call option
is in with changes in the composition
tems. Information flow has increased dramatically as prices are
are,
associated
179 days on September 20, 2019, or in T = 179/365
.4904 years.
The one-step
updated more frequently, such as every five milliseconds for
of=market
participants
andbinohow they provide liquidity and share
mial model assumes that at the end of the option period the EUR
will have appreciated
__
certain subscribers on the EBS platform.
risk among
σ.√ T them. Thomson Reuters launched the first screenand d = 1/u. The spot
to SuT = S0 · u or depreciated to SdT = S0 · d, where u = e
On the other hand, concerns are growing that the foreign
systemwhere
in 1982
rate at T
will be either 118.14 = 113.14(1.0442) orbased
108.35trading
= 113.14(.9576)
u = and followed it with an anony_____
exchange market has become more volatile and prone to marmous matching
system in 1992. Several big banks
price of E = platform
112, the option
e .0618.√.4904 = 1.0442 and d = 1/u = .9576. At the exercise
will only be exercised at time T if the EUR appreciates;
its exercise
value
would beplatform, EBS, in 1993 to comket dysfunctions such as flash crashes. When the value of
launched
a similar
matching
xvi
eun13092_ch07_205-230.indd
221
across asset classes, including foreign exchange, in 2021.
The rising electronification in the foreign exchange market
has both positive and negative consequences. On the one hand,
greater electronification
has been associated with lower trad07/22/22 05:33 pm
ing costs, increased availability of and access to data, and more
efficient pricing. Ding and Hiltrop (2010),b for instance, documented narrower bid-ask spreads and reduced geographical
21
20
20
19
20
18
20
17
20
16
20
15
20
14
20
13
AM
The 6-month dollar LIBOR rate was used as the reference rate here. Starting in 2022, LIBOR is no longer used to
price new loans in the United States, and the secured overnight financing rate (SOFR) is replacing LIBOR as the
benchmark interest rate for dollar-denominated securities. This transition is expected to be completed by 2023.
5
The binomial option-pricing model was independently derived by Sharpe (1978); Rendleman and Bartter
(1979); and Cox, Ross, and Rubinstein (1979).
4
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
20
04
In More Depth—Some topics are by
nature more complex than others. The
chapter sections that contain such
material are indicated by the section
heading “In More Depth” and are in
colored text. These sections may be
skipped without loss of continuity,
enabling the instructor to easily
tailor the reading assignments to the
British pound plummeted by more than 6 percent within mere
pete with Thomson Reuters. In recent years, different nonbank
students.
End-of-chapter
Questions
seconds around
7 . . Hong Kong time (12
electronic market makers have emerged as significant liquidity
. . London time
providers, taking market share away from the banks and the
and 7 . . New York) on October 7, 2016, algorithmic trading
and
Problems
relating
to
the
In More
traditional venues of Thomson Reuters Matching and EBS.
was seen as the culprit for potentially having triggered
a series
For example, XTX Markets, an electronic market-making firm
of stop orders at a time of already thin trading and leading to a
Depth
sections
of
the
text
are
also
founded in 2015, already ranks fourth in the Euromoney magastream of automatic selling. Hence, the increasing electronificazine ranking of top liquidity providers of foreign exchange in
tion of the foreign exchange market is bringing new challenges,
indicated
by blue type.
2021. The firm reported a daily average volume of $295 billion
services, and opportunities ranging from cloud servicing to
20
ch11_305-340.indd
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AM
PM
new trading strategies. And what’s even more remarkable is the
speed at which all these are happening.
a
Bank for International Settlements, “Monitoring of Fast-Paced Electronic
Markets,” September 2018.
b
Ding, L., and J. Hiltrop. “The Electronic Trading Systems and Bid-Ask
Spreads in the Foreign Exchange Market.” Journal of International Financial
Markets, Institutions & Money 20, no. 4 (2010), pp. 323–45.
137
eun13092_fm_i-xxviii.indd xvi
10/10/22 12:10 pm
7. In a perfect capital market where stockholders can hedge exchange exposure as
well as the firm, it is difficult to justify exposure management at the corporate
level. In reality, capital markets are far from perfect, and the firm often has advantages over the stockholders in implementing hedging strategies. There thus exists
room for corporate exposure management to contribute to the firm’s value.
8. Firms use both financial and operational methods to manage their FX risk exposures. Survey studies show that firms most often use simple hedging methods
such as forward contracts, currency swaps, pricing strategies, and foreign currency
debt.
First Pages
254
CHAPTER 8
QUESTIONS
PROBLEMS
FOREIGN EXCHANGE EXPOSURE AND MANAGE
Questions and Problems—Each a. It is considering two hedging alt
chapter contains a set of Questions forward
and or borrow euros from C
Which alternative would you rec
Problems. This material can be used
b. Other things being equal, at what
by students on their own to test their
ferent between the two hedging m
understanding of the material, 5.
or Suppose
as
that Baltimore Machinery
gave the Swiss client a choice of
homework exercises assigned by the
months.
instructor. Questions and Problems
a. In the
relating to the In More Depth sections
of example, Baltimore Mach
the text are indicated by blue type. option to buy up to $10,000 usin
a. What is the expected gain/loss from a forward hedge?
b. If you were the financial manager of Cray Research, would you recommend
hedging this euro receivable? Why or why not?
c. Suppose the foreign exchange adviser predicts that the future spot rate
08/08/22will
07:29be
pm
the same as the forward exchange rate quoted today. Would you recommend
hedging in this case? Why or why not?
d. Suppose now that the future spot exchange rate is forecast to be $1.17/€. Would
you recommend hedging? Why or why not?
2. IBM purchased computer chips from NEC, a Japanese electronics concern, and
was billed ¥250 million payable in three months. Currently, the spot exchange rate
is ¥105/$ and the three-month forward rate is ¥100/$. The three-month money
market interest rate is 8 percent per annum in the United States and 7 percent per
annum in Japan. The management of IBM decided to use a money market hedge
to deal with this yen account payable.
252
PART THREE
4. Boeing just signed a contract to s
France will be billed €20 million p
rate is $1.05/€ and the one-year forw
6 percent in the United States and 5
the volatile exchange rate between t
exchange exposure.
contingent exposure, 246
hedging through invoice
reinvoice center, 249
cross-hedging, 245
currency, 000
transaction
MANAGEMENT
OF TRANSACTION
EXPOSURE
253
economic
exposure,
233
lead/lag strategy, 248
exposure, 233
exposure netting, 249
money market hedge, 240
translation exposure, 233
forward market
options market
5.hedge,
Suppose
a put option on the euro to manage exchange
000your company has purchased
hedge, 000
exposure associated with an account receivable denominated in that currency. In
this case, your company can be said to have an “insurance” policy on its receivable. Explain in what sense this is so.
6. Recent surveys of corporate exchange risk management practices indicate that
manywould
U.S. firms
simplytransaction
do not hedge.
How would
thisfrom
result?
1. How
you define
exposure?
Howyou
is itexplain
different
economic
7. exposure?
Should a firm hedge? Why or why not?
8. Discuss
Using anand
example,
discuss
the possible
effect
of hedging
a firm’s
taxcontract
obligations.
2.
compare
hedging
transaction
exposure
usingonthe
forward
vermoney
market instruments.
dothe
alternative
hedging
approaches
9. sus
Explain
contingent
exposure andWhen
discuss
advantages
of using
currencyproduce
options
the
same result?
to manage
this type of currency exposure.
3. Discuss
and compare and
the discuss
costs ofthe
hedging
by forward contracts
and options
10.
Explain cross-hedging
factors determining
its effectiveness.
contracts.
4.
What
are
the
advantages
of
a
currency
options
contract
as
a
hedging
comThe spreadsheet TRNSEXP.xls may be used in solving parts of problems 2, 3,tool
4, and
6.
pared with the forward contract?
1. Cray Research sold a supercomputer to the Max Planck Institute in Germany on
credit and invoiced €10 million payable in six months. Currently, the six-month
forward exchange rate is $1.10/€ and the foreign exchange adviser for Cray
Research predicts that the spot rate is likely to be $1.05/€ in six months.
KEY WORDS
eun13092_ch08_231-264.indd
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254
Questions with Excel Software—An icon in
the
margin
indicates
that
the
end-of-chapter
a. Explain
the process
of a money
market hedge and
compute
the dollar
cost of
meeting the yen obligation.
question
is
linked
to
an
Excel
program
created
b. Conduct a cash flow analysis of the money market hedge.
3. You plan to visit Geneva, Switzerland, in three months to attend an international
by
the
authors.
See
the
Ancillary
Materials
business conference. You expect to incur a total cost of SF5,000 for lodging,
meals, and transportation during your stay. As of today, the spot exchange rate is
section for more information on the software.
$0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-
exchange rate?
b. If the spot exchange rate turns ou
the Swiss client will choose to u
P A R T for
T Hthe
R ESwiss
E
FOREIGN
option
client? EX
c. What is the best way for Baltimo
6. Princess Cruise Company (PCC) pu
for 500 million yen payable
in one
4. Boeing
one-year forward rate is 110/$.
The
France
8 percent in the United States. PCC
rate is
the strike price of $.0081 per yen fo
6 perc
a. Compute the future dollar
thecosts
vo
month call option on SF with an exercise price of $0.64/SF for the premium of
market and forward hedges.
exchan
$0.05 per SF. Assume that your expected future spot exchange rate is the same
b. Assuming that the forward excha
as the forward rate. The three-month interest rate is 6 percent per annum in the
United States and 4 percent per annum in Switzerland.
rate, compute the expected
a. futur
It is
a. Calculate your expected dollar cost of buying SF5,000 if you choose to hedge
the
option
hedge
is
used.
forw
by a call option on SF.
c. At what future spot rate doWh
you
b. Calculate the future dollar cost of meeting this SF obligation if you decide to
hedge using a forward contract.
Transfer Pricing and Related Issues
option and forward hedge?
c. At what future
spot exchangeinclude
rate will you be indifferent between the forward
CFA Questions—Many
chapters
b. Oth
Within a large business firm with multiple divisions, goods and services are frequently
and option market hedges?
7. Consider
tha
transferred from one division to another. The process brings into question
the transfer a U.S.-based companyfere
d. Illustrate
the future dollar
cost of meeting thestudy
SF payable against the future spot
problems from CFA
Program
Curriculum
price
that
should
be
assigned,
for
bookkeeping
purposes,
to
the
goods
or
services
as
exchange rate under both the options and forward market hedges.
pany expects to receive payment on
they are transferred between divisions. Obviously, the higher the transfer price, the
materials. These CFA problems, indicated with
5. Suppo
larger will be the gross profits of the transferring division relative to the receiving
divithe payment
will be in Swiss
franc
sion. Even within a domestic firm, it is difficult to decide on the transfer price. Within
the CFA logo, show students the relevancy
gavefrt
a MNC, the decision is further compounded by exchange restrictions on decline
the part of thein the value of the Swiss
host country where the receiving affiliate is located, a difference in income
rates is 2 percent, and the Swiss
freetaxrate
month
of what is expected of certified professional
between the two countries, and import duties and quotas imposed by the host country.
The following case application illustrates the important transfer pricing rates
issues. are expected to remain fixed o
analysts.
a. In t
is $0.5974.
eun13092_ch08_231-264.indd
253
Confirming Pages
08/08/22 07:29 pm
CASE
APPLICATION
Case Applications—Case Applications
are incorporated within selected
chapters throughout the text in order
to enhance specific topics and help
students apply theories and concepts
to real-world situations.
CHAPTER 8
First Pages
257
MANAGEMENT OF TRANSACTION EXPOSURE
Airbus’ Dollar Exposure
MINI CASE
Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 million payable in six months. Airbus is concerned about the euro proceeds from international sales
and would like to control exchange risk. The current spot exchange rate is $1.05/€ and
the six-month forward exchange rate is $1.10/€. Airbus can buy a six-month put option
on U.S. dollars with a strike price of €0.95/$ for a premium of €0.02 per U.S. dollar.
Currently, six-month interest rate is 2.5 percent in the euro zone and 3.0 percent in the
United States.
1. Compute the guaranteed euro proceeds from the American sale if Airbus decides
to hedge using a forward contract.
2. If Airbus decides to hedge using money market instruments, what action does
Airbus need to take? What would be the guaranteed euro proceeds from the
American sale in this case?
3. If Airbus decides to hedge using put options on U.S. dollars, what would
554be the
“expected” euro proceeds from the American sale? Assume that Airbus regards
the current forward exchange rate as an unbiased predictor of the future spot
exchange rate.
4. At what future spot exchange do you think Airbus will be indifferent between the
option and money market hedge?
eun13092_ch21_545-564.indd 554
Mintel Products Transfer Pricing Strategy
opt
a. Indicate whether the U.S. compa
exc
to hedge currency risk.
If th
b. Calculate the no-arbitrageb.price
forward contract that expiresthe
in t
c. It is now 30 days since the U.S.
optc
spot rate is $0.55. Interestc.rates
Wh
the U.S. company’s forward posi
Low versus High Markup Policy
Mintel Products Inc. manufactures goods for sale in the United States and overseas.
Finished goods are transferred from the parent firm to its wholly owned sales affiliate for
overseas retail sale. Mintel’s financial manager, Hilary Van Kirk, has decided that the firm’s
transfer pricing strategy should be reevaluated as part of a routine review of the operations of the sales affiliate. Van Kirk has decided to explore both a low and a high markup
policy. The analysis is to be done in U.S. dollars. She notes that both the parent firm and
the sales affiliate have a 40 percent income tax rate, that the variable production cost of
one unit is $1,500, and that the unit retail sales price charged by the sales affiliate to the
final customer is $3,000. As a first step in her analysis, Van Kirk prepares Exhibit 21.5.
The upper portion of the exhibit presents the analysis of a low markup policy, where the
transfer price is set at $2,000. The lower portion of the exhibit analyzes the effect of a
high markup policy, where the transfer price is $2,400 per unit.
Van Kirk notices from Exhibit 21.5 that the low markup policy results in larger pretax
income, income taxes, and net income per unit in the selling country. On the other hand,
the high markup policy has the opposite effect, that is, higher taxable income, income
taxes, and net profit per unit in the manufacturing country. She also notes that because
the income tax rates are the same in both countries, the consolidated results are identical
regardless of whether the MNC follows a low or high transfer pricing scheme.
Exchange Restrictions
Van Kirk wonders if Mintel should be indifferent between the low and high markup policies, since the consolidated results are the same. She reasons, however, that if the distribution country imposes exchange restrictions limiting or blocking the amount of profits
that can be repatriated to the manufacturing parent, Mintel would no longer be indifferent between the two markup policies. It obviously would prefer the high markup policy.
According to Exhibit 21.5, the higher markup allows $240 per unit to be repatriated to the
parent that otherwise may have been blocked. This amount represents the $400 higher
markup minus the $160 additional taxes paid in the parent country.
Van Kirk notes that the high markup policy is disadvantageous from the host country’s
perspective. eun13092_ch08_231-264.indd
If the transferring affiliate attempts
254to reposition funds by changing from the
low to the high markup policy, the exchange controls have been partially bypassed and
there is a loss of tax revenue in the host country. Thus, the host country may take measures to enforce a certain transfer price. She decides she needs to brush up on how this
might be accomplished and also to consider the effect of a difference in income tax rates
between the two affiliates.
Mini Cases—Almost every chapter
includes a mini case for student
analysis of multiple concepts covered
throughout the chapter. These Mini
Case problems are real world in nature
to show students how the theory and
concepts in the textbook relate to the
everyday world.
09/29/22 02:32 pm
5. Assuming that you believe the current forward exchange rate is the best predictor
of the future spot exchange rate, what hedging method would you recommend to
Airbus? Justify your recommendation.
Richard May’s Options
CASE
eun13092_fm_i-xxviii.indd
xvii
It is Tuesday afternoon, February 14, 2012. Richard May, Assistant Treasurer at American
Digital Graphics (ADG), sits in his office on the 34th floor of the building that dominates
Rockefeller Plaza’s west perimeter. It’s Valentine’s Day, and Richard and his wife have dinner reservations with another couple at Balthazar at 7:30. I must get this hedging memo
done, thinks May, and get out of here. Foreign exchange options? I had better get the
story straight before someone in the Finance Committee starts asking questions. Let’s
see, there are two ways in which I can envision us using options now. One is to hedge a
dividend due on September 15th from ADG Germany. The other is to hedge our upcoming payment to Matsumerda for their spring RAM chip statement. With the yen at 78 and
increasing I’m glad we haven’t covered the payment so far, but now I’m getting nervous
and I would like to protect my posterior. An option to buy yen on June 10 might be just
the thing.
xvii
xvii
10/10/22 12:10 pm
6. Prince
for 50
one-ye
8 perc
the str
a. Com
mar
b. Ass
rate
the
c. At
opt
7. Consid
pany e
the pa
declin
free ra
rates a
is $0.5
a. Ind
to h
b. Cal
forw
c. It is
spo
the
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xx
P RE FA C E
Ancillary Materials
To assist in course preparation, the following instructor ancillaries are within the
Instructor Library in Connect:
• Solutions Manual—Includes detailed suggested answers and solutions to the
end-of-chapter questions and problems, written by the authors.
• Test Bank—True/false and multiple-choice test questions for each chapter
prepared by Leslie Rush, University of Hawaii–West Oahu. Available as Word
documents and assignable within Connect.
• PowerPoint Presentations—PowerPoint slides for each chapter to use in
classroom lecture settings, created by the authors.
• Videos—Mini lectures and guided examples covering various quantitative
concepts, created by the authors. Assignable within Connect and linked to the
related end-of-chapter problems and questions.
The resources also include the International Finance Software that can be used with
this book. This Excel software has four main programs:
• A currency options pricing program allows students to price put and call
options on foreign exchange.
• A hedging program allows students to compare forward, money market
instruments, futures, and options for hedging exchange risk.
• A currency swap program allows students to calculate the cash flows and
notional values associated with swapping fixed-rate debt from one currency
into another.
• A portfolio optimization program based on the Markowitz model allows for
examining the benefits of international portfolio diversification.
The four programs can be used to solve certain end-of-chapter problems (marked with
an Excel icon) or assignments the instructor devises. A User’s Manual and sample
projects are included in the Instructor Resources.
Acknowledgments
We are indebted to the many colleagues who provided insight and guidance throughout the development process. Their careful work enabled us to create a text that is
current, accurate, and modern in its approach. Among all who helped in this endeavor
for the Tenth Edition:
Brian Gendreau
University of Florida
Joseph F Greco
California State University, Fullerton
Robert Jozowski
Eckerd College
Irina Khindanova
University of Denver
Hong-Jen Abraham Lin
Brooklyn College, CUNY
Micki Pitcher
Davenport University
eun13092_fm_i-xxviii.indd xx
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P R E F A C E xxi
Hilmi Songur
University of Arizona
Robert Uptegraff
Oakland University
Ricardo Vicente
Brigham Young University – Hawaii
Qun Wu
University of Nevada-Reno
Geungu Yu
Jackson State University
Many people assisted in the production of this textbook. At the risk of overlooking
some individuals, we would like to acknowledge Brian Conzachi for the outstanding
job he did proofreading the entire manuscript. Additionally, we thank Yusri Zaro for
his hard work checking the accuracy of the solutions manual. Marta Gaia Bras, Ernest
Jang, Rohan-Rao Ganduri, Kristen Seaver, Milind Shrikhande, Jin-Gil Jeong, Sanjiv
Sabherwal, Sandy Lai, Jinsoo Lee, Hyung Suk Choi, Teng Zhang, Minho Wang, and
Victor Huang provided useful inputs into the text. Professsor Martin Glaum of the
Giessen University and Professor Thomas Schuster of DHBW Mannheim University,
both from Germany, also provided many valuable comments. Our special thanks go to
Dr. Ryan Brewster who created the excellent cover image for the 10th edition despite
his hectic schedule.
We also wish to thank the many professionals at McGraw Hill Education for their time
and patience with us. Charles Synovec, portfolio director; Michele Janicek, senior production development manager, Barbara Hari, product developer; and Melissa Leick, senior
core content project manager have done a marvelous job guiding us through this edition.
Last, but not least, we would like to thank our families, Christine, James, and
Elizabeth Eun; Donna Resnick; and Puje Olkhanud, Maya Chuluun, and Dolgormaa
Tsegmed, for their tireless love and support, without which this book would not have
become a reality.
We hope that you enjoy using International Financial Management, Tenth Edition.
In addition, we welcome your comments for improvement. Please let us know either
through McGraw Hill Education, c/o Editorial, or at our e-mail addresses provided
below.
Cheol S. Eun
cheol.eun@scheller.gatech.edu
Bruce G. Resnick
resnicbg@wfu.edu
Tuugi Chuluun
tchuluun@loyola.edu
eun13092_fm_i-xxviii.indd
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Contents
in Brief
PART ONE
Foundations of International Financial Management
1
2
3
4
PART TWO
The Foreign Exchange Market, Exchange Rate
Determination, and Currency Derivatives
5
6
7
PART THREE
Management of Transaction Exposure, 233
Management of Economic Exposure, 265
Management of Translation Exposure, 285
World Financial Markets and Institutions
11
12
13
14
15
PART FIVE
The Market for Foreign Exchange, 135
International Parity Relationships and Forecasting Foreign
Exchange Rates, 169
Futures and Options on Foreign Exchange, 205
Foreign Exchange Exposure and Management
8
9
10
PART FOUR
Globalization and the Multinational Firm, 3
International Monetary System, 37
Balance of Payments, 77
Corporate Governance Around the World, 101
International Banking and Money Market, 307
International Bond Market, 341
International Equity Markets, 359
Interest Rate and Currency Swaps, 387
International Portfolio Investment, 407
Financial Management of the Multinational Firm
16
17
18
19
20
21
Foreign Direct Investment and Cross-Border Acquisitions, 443
International Capital Structure and the Cost of Capital, 471
International Capital Budgeting, 499
Multinational Cash Management, 519
International Trade Finance, 531
International Tax Environment and Transfer Pricing, 545
Glossary, 565
Index, 573
xxii
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Contents
PART ONE
Foundations of International Financial Management
CHAPTER 1
What’s Special about International Finance?, 4
Globalization and the
Multinational Firm, 3
Privatization, 16
Political Risk, 4
Global Financial Crisis of 2008–2009, 17
Market Imperfections, 6
Brexit, 19
Expanded Opportunity Set, 7
COVID-19 Pandemic, 21
Goals for International Financial Management, 8
Globalization of the World Economy: Major Trends
and Developments, 10
International
Monetary System, 37
m i n i c a s e : Nike and Sweatshop Labor, 31
a p p e n d i x 1 A : Gain from Trade: The Theory of
Comparative Advantage, 33
Evolution of the International Monetary System, 37
What Are the Benefits of Monetary Union?, 58
Bimetallism: Before 1875, 38
Costs of Monetary Union, 59
Classical Gold Standard: 1875–1914, 38
Prospects of the Euro: Some Critical Questions, 60
Interwar Period: 1915–1944, 40
The Mexican Peso Crisis, 62
Bretton Woods System: 1945–1972, 41
The Asian Currency Crisis, 63
Origins of the Asian Currency Crisis, 64
Lessons from the Asian Currency Crisis, 66
The Current Exchange Rate Arrangements, 46
The Argentine Peso Crisis, 66
Cryptocurrencies, 51
The Rise of the Chinese Renminbi, 68
European Monetary System, 53
Fixed versus Flexible Exchange Rate Regimes, 69
The Euro and the European Monetary Union, 54
Summary, 71
A Brief History of the Euro, 55
Balance of
Payments, 77
Summary, 28
Emergence of the Euro as a Global Currency, 11
The Flexible Exchange Rate Regime: 1973–
Present, 44
CHAPTER 3
Climate Change, 24
Multinational Corporations, 25
Emergence of Globalized Financial Markets, 10
Europe’s Sovereign Debt Crisis of 2010, 12
CHAPTER 2
Trade Liberalization and Economic Integration, 13
Foreign Exchange Risk, 4
Balance of Payments Accounting, 77
Balance of Payments Accounts, 79
The Current Account, 80
international finance in practice: Squid Game and the
Rise of Global Services Trade, 81
The Capital Account, 83
The Financial Account, 83
Statistical Discrepancy, 85
m i n i c a s e : Grexit or Not?, 74
Official Reserve Account, 86
The Balance of Payments Identity, 89
Balance of Payments Trends in Major Countries, 90
Summary, 94
m i n i c a s e : Trends in China’s Balance of
Payments, 97
a p p e n d i x 3 A : The Relationship between Balance of
Payments and National Income Accounting, 99
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CONTENTS
CHAPTER 4
Corporate Governance
Around the
World, 101
Governance of the Public Corporation: Key
Issues, 102
The Agency Problem, 103
Remedies for the Agency Problem, 105
Board of Directors, 106
Incentive Contracts, 106
international finance in practice: When Boards Are All in
the Family, 107
Concentrated Ownership, 107
PART TWO
CHAPTER 5
The Market for
Foreign
Exchange, 135
Capital Markets and Valuation, 120
Corporate Governance Reform, 120
Objectives of Reform, 121
Political Dynamics, 121
The Sarbanes-Oxley Act, 122
Debt, 109
The Dodd-Frank Act, 124
Shareholder Activism, 110
What Are Companies For?, 125
Overseas Stock Listings, 111
Summary, 126
Market for Corporate Control, 112
m i n i c a s e : Parmalat: Europe’s Enron, 129
Law and Corporate Governance, 112
m i n i c a s e : The Petrobras Scandal, 130
he Foreign Exchange Market, Exchange Rate
T
Determination, and Currency Derivatives
Function and Structure of the FX Market, 136
Triangular Arbitrage, 151
international finance in practice: Electronification of
the Foreign Exchange Market, 137
The Forward Market, 155
Spot Foreign Exchange Market Microstructure, 154
FX Market Participants, 140
Forward Rate Quotations, 155
Correspondent Banking Relationships, 141
Long and Short Forward Positions, 156
Spot Rate Quotations, 144
Cross-Exchange Rate Quotations, 146
The Bid-Ask Spread, 148
Spot FX Trading, 149
The Cross-Rate Trading Desk, 149
Interest Rate Parity, 169
Covered Interest Arbitrage, 172
Forward Premium, 157
Forward Cross-Exchange Rates, 158
Non-Deliverable Forward Contracts, 159
Swap Transactions, 159
Exchange-Traded Currency Funds, 162
Summary, 162
m i n i c a s e : Shrewsbury Herbal Products Ltd., 166
Fisher Effects, 187
Forecasting Exchange Rates, 189
Interest Rate Parity and Exchange Rate
Determination, 175
Efficient Market Approach, 190
Currency Carry Trade, 176
Technical Approach, 192
Reasons for Deviations from Interest Rate Parity, 177
Purchasing Power Parity, 180
PPP Deviations and the Real Exchange Rate, 181
international finance in practice: What the Big Mac
Index Says About Currencies, 182
Evidence on Purchasing Power Parity, 184
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Private Benefits of Control, 118
The Cadbury Code
of Best Practice, 123
The Spot Market, 144
International Parity
Relationships and
Forecasting Foreign
Exchange Rates, 169
Ownership and Control Pattern, 116
Accounting Transparency, 109
international finance in practice: Chinese Yuan’s Road to
Internationalization, 142
CHAPTER 6
Consequences of Law, 115
Fundamental Approach, 191
Performance of the Forecasters, 194
Summary, 196
m i n i c a s e : Turkish Lira and Purchasing Power
Parity, 201
a p p e n d i x 6 A : Purchasing Power Parity and
Exchange Rate Determination, 204
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C O N T E N T S CHAPTER 7
Futures and
Options on Foreign
Exchange, 205
PART THREE
CHAPTER 8
Management
of Transaction
Exposure, 233
Futures Contracts: Some Preliminaries, 206
American Option-Pricing Relationships, 217
Currency Futures Markets, 208
European Option-Pricing Relationships, 219
Basic Currency Futures Relationships, 209
Binomial Option-Pricing Model, 221
Options Contracts: Some Preliminaries, 213
European Option-Pricing Formula, 223
Currency Options Markets, 213
Empirical Tests of Currency Options, 225
Currency Futures Options, 214
Summary, 226
Basic Option-Pricing Relationships at Expiration, 214
m i n i c a s e : The Options Speculators, 229
Foreign Exchange Exposure and Management
Three Types of Exposure, 233
Cross-Hedging Minor Currency Exposure, 245
Should the Firm Hedge?, 234
Hedging Contingent Exposure, 246
Hedging Foreign Currency Receivables, 236
Forward Market Hedge, 236
Hedging Recurrent Exposure with Swap
Contracts, 247
Money Market Hedge, 239
Hedging through Invoice Currency, 248
Options Market Hedge, 240
Hedging via Lead and Lag, 248
Comparison of Hedging Strategies, 242
Exposure Netting, 249
Hedging Foreign Currency Payables, 243
Forward Market Hedge, 243
Money Market Hedge, 243
Options Market Hedge, 244
Comparison of Hedging Strategies, 244
CHAPTER 9
Management
of Economic
Exposure, 265
How to Measure Economic Exposure, 267
Measuring Asset Exposure, 267
Hedging Asset Exposure, 269
Operating Exposure: Definition, 270
Illustration of Operating Exposure, 271
Determinants of Operating Exposure, 273
Managing Operating Exposure, 275
Selecting Low-Cost Production Sites, 276
Flexible Sourcing Policy, 276
CHAPTER 10
Management
of Translation
Exposure, 285
Translation Methods, 285
Current/Noncurrent Method, 286
Monetary/Nonmonetary Method, 286
Temporal Method, 286
Current Rate Method, 286
U.S. Generally Accepted Accounting Principles, 287
FASB 8, 287
FASB 52, 287
FASB ASC 830, 289
The Mechanics of the FASB ASC 830 Translation
Process, 289
Highly Inflationary Economies, 291
International Accounting Standards, 291
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What Risk Management Products Do Firms
Use?, 249
Summary, 251
m i n i c a s e : Airbus’ Dollar Exposure, 257
c a s e : Richard May’s Options, 257
Diversification of the Market, 277
R&D Efforts and Product Differentiation, 277
i n t e r n at i o n a l f i n a n c e i n p r a c t i c e : Case Study:
How BMW Dealt with Exchange Rate Risk, 278
Financial Hedging, 278
c a s e a p p l i c at i o n : Exchange Risk Management at
Merck, 279
Summary, 281
m i n i c a s e : Economic Exposure of Albion Computers
PLC, 283
c a s e a p p l i c at i o n : Consolidation of Accounts
According to FASB ASC 830: The Centralia
Corporation, 292
Management of Translation Exposure, 296
Translation Exposure versus Transaction
Exposure, 296
Hedging Translation Exposure, 297
Balance Sheet Hedge, 297
Derivatives Hedge, 298
Translation Exposure versus Operating
Exposure, 299
Summary, 299
m i n i c a s e : Sundance Sporting Goods Inc., 301
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CONTENTS
PART FOUR
World Financial Markets and Institutions
CHAPTER 11
International Banking Services, 307
International
Banking and Money
Market, 307
The World’s Largest Banks, 308
Reasons for International Banking, 309
The Problem, 323
Types of International Banking Offices, 309
Debt-for-Equity Swaps, 324
Correspondent Bank, 310
The Solution, 326
Representative Offices, 310
The Asian Crisis, 326
Foreign Branches, 310
Global Financial Crisis, 326
Subsidiary and Affiliate Banks, 311
Edge Act Banks, 311
Impact of the Financial Crisis, 329
Summary, 330
International Banking Facilities, 312
Capital Adequacy Standards, 312
m i n i c a s e : Detroit Motors’ Latin American
Expansion, 333
International Money Market, 315
a p p e n d i c e s 1 1 A : Eurocurrency Creation, 335
Eurocurrency Market, 315
a p p e n d i c e s 1 1 B : MBS, SIV, CDO, and CDS, 338
Forward Rate Agreements, 318
Euronotes, 320
Eurocommercial Paper, 321
CHAPTER 12
The Credit Crunch, 327
Offshore Banking Centers, 311
Eurocredits, 317
International Bond
Market, 341
CME SOFR Futures Contracts, 321
International Debt Crisis, 323
The World’s Bond Markets: A Statistical
Perspective, 341
Foreign Bonds and Eurobonds, 341
Currency Distribution, Nationality, and Type of
Issuer, 342
international finance in practice: Saudi Arabia Debuts on
the International Bond Market, 343
Bearer Bonds and Registered Bonds, 343
National Security Regulations, 344
Security Regulations that Ease Bond Issuance, 345
Global Bonds, 345
Types of Instruments, 346
Straight Fixed-Rate Issues, 346
Mortgage-Backed Securities and Structured Investment
Vehicles, 338
Collateralized Debt Obligations, 338
Credit Defaults Swaps, 338
Floating-Rate Notes, 346
Equity-Related Bonds, 347
Dual-Currency Bonds, 347
International Bond Market Credit Ratings, 348
Eurobond Market Structure and Practices, 351
Primary Market, 351
Secondary Market, 352
Clearing Procedures, 352
International Bond Market Indexes, 353
Summary, 355
m i n i c a s e : Alpha Gen Technologies: Panda or Dim
Sum Bonds?, 357
Euro-Medium-Term Notes, 346
CHAPTER 13
International Equity
Markets, 359
The World’s Equity Markets: A Statistical
Perspective, 359
Global Registered Shares, 376
Empirical Findings on Cross-Listing and ADRs, 377
Market Capitalization, 359
International Equity Market Benchmarks, 378
Market Liquidity, 362
iShares MSCI, 379
Market Concentration, 362
Factors Affecting International Equity Returns, 379
Market Structure, Trading Practices, and Costs, 362
Market Consolidations and Mergers, 366
Trading in International Equities, 367
Cross-Listing of Shares, 367
international finance in practice: Alibaba Sets IPO
Record with NYSE Debut, 371
Yankee Stock Offerings, 371
Macroeconomic Factors, 381
Exchange Rates, 381
Industry Factors, 381
Market Factors, 382
Summary, 383
m i n i c a s e : San Pico’s New Stock Exchange, 385
American Depository Receipts, 372
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C O N T E N T S CHAPTER 14
Interest Rate and
Currency Swaps, 387
Types of Swaps, 387
international finance in practice: The World Bank’s First
Currency Swap, 388
Size of the Swap Market, 388
The Swap Bank, 389
PART FIVE
CHAPTER 16
Foreign Direct
­Investment and
­Cross-Border
Acquisitions, 443
CHAPTER 17
International Capital
Structure and the
Cost of Capital, 471
A Basic Currency Swap Reconsidered, 397
Variations of Basic Interest Rate and Currency
Swaps, 399
Interest Rate Swaps, 391
Risks of Interest Rate and Currency Swaps, 400
Basic Interest Rate Swap, 391
Is the Swap Market Efficient?, 400
Pricing the Basic Interest Rate Swap, 393
Summary, 401
Basic Currency Swap, 393
International Portfolio
Investment, 407
Pricing the Basic Currency Swap, 397
Swap Market Quotations, 389
Currency Swaps, 393
CHAPTER 15
Equivalency of Currency Swap Debt Service
Obligations, 396
m i n i c a s e : The Centralia Corporation’s Currency
Swap, 406
International Correlation Structure and Risk
Diversification, 408
International Diversification through ADRs, 423
Optimal International Portfolio Selection, 412
International Diversification with Industry, Style, and
Factor Portfolios, 425
Effects of Changes in the Exchange Rate, 416
International Diversification through Hedge Funds, 424
International Bond Investment, 419
Why Home Bias in Portfolio Holdings?, 427
International Diversification at Home, 421
Summary, 429
International Diversification through International
Mutual Funds, 421
m i n i c a s e : Solving for the Optimal International
Portfolio, 434
International Diversification through Country
Funds, 421
a p p e n d i x 1 5 A : International Investment with
Exchange Risk Hedging, 436
International Diversification through Exchange-Traded
Funds, 423
a p p e n d i x 1 5 B : Solving for the Optimal
Portfolio, 438
Financial Management of the Multinational Firm
Global Trends in FDI, 444
Vertical Integration, 451
Why Do Firms Invest Overseas?, 448
Product Life Cycle, 452
Trade Barriers, 448
Shareholder Diversification Services, 452
Imperfect Labor Market, 448
Cross-Border Mergers and Acquisitions, 453
Intangible Assets, 449
Political Risk and FDI, 458
international finance in practice: Linear Sequence in
Manufacturing: Singer & Company, 450
Cost of Capital, 471
Cost of Capital in Segmented versus Integrated
Markets, 474
Summary, 465
m i n i c a s e : Enron versus Bombay Politicians, 467
Pricing-to-Market Phenomenon, 487
c a s e a p p l i c at i o n : Nestlé, 487
Asset Pricing under Foreign Ownership
Restrictions, 488
Does the Cost of Capital Differ among
Countries?, 475
The Financial Structure of Subsidiaries, 491
c a s e a p p l i c at i o n : Novo Industri, 477
Summary, 492
Cross-Border Listings of Stocks, 479
a p p e n d i x 1 7 A : , Pricing of Nontradable Assets:
Numerical Simulations, 497
Capital Asset Pricing under Cross-Listings, 484
The Effect of Foreign Equity Ownership
Restrictions, 486
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CONTENTS
CHAPTER 18
International Capital
Budgeting, 499
Review of Domestic Capital Budgeting, 500
Sensitivity Analysis, 511
The Adjusted Present Value Model, 501
Purchasing Power Parity Assumption, 511
Capital Budgeting from the Parent Firm’s
Perspective, 503
Real Options, 511
m i n i c a s e 1 : Dorchester Ltd., 515
Estimating the Future Expected Exchange Rate, 506
m i n i c a s e 2 : Strik-it-Rich Gold Mining
Company, 516
c a s e a p p l i c at i o n : The Centralia Corporation, 506
CHAPTER 19
Multinational Cash
Management, 519
Risk Adjustment in the Capital Budgeting
Analysis, 510
m i n i c a s e 3 : Jesper Tech, 517
The Management of International Cash Balances, 519
Cash Management Systems in Practice, 527
c a s e a p p l i c at i o n : Teltrex’s Cash Management
System, 519
Summary, 528
Bilateral Netting of Internal and External Net Cash
Flows, 524
Reduction in Precautionary Cash Balances, 525
CHAPTER 20
International Trade
Finance, 531
Global Trade Finance Market, 531
A Typical Foreign Trade Transaction, 532
Forfaiting, 535
Government Assistance in Exporting, 535
The Export-Import Bank and Affiliated
Organizations, 535
international finance in practice: Export-Import Bank in
Limbo, 536
CHAPTER 21
International Tax
Environment and
Transfer Pricing, 545
Summary, 513
Generality of the APV Model, 505
The Objectives of Taxation, 545
m i n i c a s e 1 : Efficient Funds Flow at Eastern
Trading Company, 529
m i n i c a s e 2 : Eastern Trading Company’s New
MBA, 529
Export Credit Agencies Worldwide, 537
Countertrade, 537
Forms of Countertrade, 538
international finance in practice: Guns and Sugar;
The Defence Industry, 540
Some Generalizations about Countertrade, 541
Summary, 541
m i n i c a s e : American Machine Tools Inc., 543
Tax Havens, 552
Tax Neutrality, 545
Controlled Foreign Corporation, 552
Tax Equity, 546
Transfer Pricing and Related Issues, 554
Types of Taxation, 546
Income Tax, 546
Withholding Tax, 548
Value-Added Tax, 548
National Tax Environments, 550
Worldwide Taxation, 550
Territorial Taxation, 550
Foreign Tax Credits, 551
Organizational Structures, 551
Branch and Subsidiary Income, 551
c a s e a p p l i c at i o n : Mintel Products Transfer Pricing
Strategy, 554
international finance in practice: The Way Governments
Tax MNCs Is Long Past Due for a Change, 557
Miscellaneous Factors, 559
Advance Pricing Agreement, 560
Blocked Funds, 560
Summary, 561
m i n i c a s e 1 : Sigma Corp.’s Location Decision, 564
m i n i c a s e 2 : Eastern Trading Company’s Optimal
Transfer Pricing Strategy, 564
Glossary, 565
Index, 573
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