'fei. Sixth Edition. Cheol S. Eun Georgia Institute of Technology. Bruce G. Resnick Wake Forest University S'/'/ o\ [ [Co. I McGraw-Hill I Irwin

Transcription

1 I o\ [ [Co 'fei Sixth Edition S'/'/ Cheol S. Eun Georgia Institute of Technology Bruce G. Resnick Wake Forest University I McGraw-Hill I Irwin

2 Contents PART ONE CHAPTER "fl Globalization and the Multinational Firm, 4 Foundations of What's Special about Finance?, 5 Foreign Exchange and Political Risks, 5 Market Imperfections, 6 Expanded Opportunity Set, 7 Coals for Financial Management, 8 Globalization of the World Economy: Major Trends and Developments, 10 Emergence of Globalized Financial Markets, 10 Emergence of the Euro as a Global Currency, 11 INTERNATIONAL FINANCE IN PRACTICE: Why We Believe in the Euro, 12 Financial Manaqement Europe's Sovereign Debt Crisis of 2010, 12 Trade Liberalization and Economic llllttyfulluii, 1 H Privatization, 16 Global Financial Crisis of , 18 Multinational Corporations, 20 INTERNATIONAL FINANCE IN PRACTICE: Multinationals More Efficient, 21 Summary, 23 MINI CASE: Nike and Sweatshop Labor, 25 APPENDIX 1A: Gain from Trade: The Theory of Comparative Advantage, 27 Monetary System, 29 Evolution of the Monetary System, 29 Bimetallism: Before 1875, 30 Classical Gold Standard: , 30 Interwar Period: , 32 Bretton Woods System: , 33 The Flexible Exchange Rate Regime: 1973-Present, 36 The Current Exchange Rate Arrangements, 38 European Monetary System, 42 The Euro and the European Monetary Union, 45 A Brief History of the Euro, 45 What Are the Benefits of Monetary Union?, 46 Costs of Monetary Union, 48 Prospects of the Euro: Some Critical Questions, 49 INTERNATIONAL FINANCE IN PRACTICE: Mundell Wins Nobel Prize in Economics, 50 The Mexican Peso Crisis, 50 The Asian Currency Crisis, 53 Origins of the Asian Currency Crisis, 54 Lessons from the Asian Currency Crisis, 55 The Argentine Peso Crisis, 57 Fixed versus Flexible Exchange Rate Regimes, 58 Summary, 60 MINI CASE: Will the United Kingdom Join the Euro Club?, 62 CMAfFTER 3 Balance of Payments, 64 Balance-of-Payments Accounting, 64 Balance-of-Payments Accounts, 66 The Current Account, 66 The Capital Account, 68 Statistical Discrepancy, 70 Official Reserve Account, 71 The Balance-of-Payments Identity, 73 Balance-of-Payments Trends in Major Countries. 73 INTERNATIONAL FINANCE IN PRACTICE: The Dollar and the Deficit, 76

3 CONTENTS xix Summary, 78 MINI CASE: Mexico's Balance-of-Payments Problem, 81 APPENDIX 3A: The Relationship Between Balance of Payments and National Income Accounting, 82 Corporate Governance Around the World, 83 Governance of the Public Corporation: Key Issues, 84 The Agency Problem, 85 Remedies for the Agency Problem, 87 Board of Directors, 87 Incentive Contracts, 88 Concentrated Ownership, 88 INTERNATIONAL FINANCE IN PRACTICE: When Boards Are All in the Family, 89 Accounting Transparency, 90 Debt, 91 Overseas Stock Listings, 9 7 Market for Corporate Control, 92 Law and Corporate Governance, 93 Consequences of Law, 96 Ownership and Control Pattern, 96 Private Benefits of Control, 100 Capital Markets and Valuation, 100 Corporate Governance Reform, 101 Objectives of Reform, 101 Political Dynamics, 102 The Sarbanes-Oxley Act, 102 The Cadbury Code of Best Practice, 103 The Dodd-Frank Act, 104 Summary, 105 MINI CASE: Parmalat: Europe's Enron, 107 PART TWO The Foreign Exchange Market, Exchange Rate Determination, and Currency Derivatives s The Market for Foreign Exchange, 112 Function and Structure of the FX Market, 11 3 INTERNATIONAL.FINANCE IN PRACTICE: The Mouse Takes Over the Floor, 114 FX Market Participants, 114 Correspondent Banking Relationships, 116 The Spot Market, 117 Spot Rate Quotations, 117 INTERNATIONAL FINANCE IN PRACTICE: Where Money Talks Very Loudly, 118 Cross-Exchange Rate Quotations, 122 Alternative Expressions for the Cross-Exchange Rate, 123 The Bid-Ask Spread, 123 Spot FX Trading, 7 24 The Cross-Rate Trading Desk, 125 Triangular Arbitrage, 127 Spot Foreign Exchange Market Microstructure, 127 The Forward Market, 129 Forward Rate Quotations, 129 Long and Short Forward Positions, 130 Forward Cross-Exchange Rates, 130 Forward Premium, 131 Swap Transactions, 132 Exchange-Traded Currency Funds, 134 Summary, 1 35 MINI CASE: Shrewsbury Herbal Products, Ltd., 138 CHIPTEH Parity Relationships and Forecasting Foreign Exchange Rates, 139 Interest Rate Parity, 139 Covered Interest Arbitrage, 14 7 Interest Rate Parity and Exchange Rate Determination, 144 Currency Carry Trade, 7 45 Reasons for Deviations from Interest Rate Parity, 146 Purchasing Power Parity, 148 INTERNATIONAL FINANCE IN PRACTICE: McCurrencies, 150 PPP Deviations and the Real Exchange Rate, 150 Evidence on Purchasing Power Parity, 152 Fisher Effects, 155 Forecasting Exchange Rates, 157 Efficient Market Approach, 158 Fundamental Approach, 159 Technical Approach, 7 60 Performance of the Forecasters, 161 Summary, 165 MINI CASE: Turkish Lira and Purchasing Power Parity, 169 APPENDIX 6A: Purchasing Power Parity and Exchange Rate Determination, 171

4 XX CONTENTS Futures and Options on Foreign Exchange, 172 Futures Contracts: Some Preliminaries, 173 Currency Futures Markets, 175 INTERNATIONAL FINANCE IN PRACTICE: FX Market Volumes Surge, 176 Basic Currency Futures Relationships, 177 Options Contracts: Some Preliminaries, 180 Currency Options Markets, 180 Currency Futures Options, 181 Basic Option-Pricing Relationships at Expiration, 181 American Option-Pricing Relationships, 184 European Option-Pricing Relationships, 186 Binomial Option-Pricing Model, 188 European Option-Pricing Formula, 190 Empirical Tests of Currency Options, 192 Summary, 192 MINI CASE: The Options Speculator, 194 PART THREE Foreign Exchange Exposure and Manaqement Management of Transaction Exposure, 198 Three Types of Exposure, 198 Forward Market Hedge, 200 Money Market Hedge, 202 Options Market Hedge, 203 Hedging Foreign Currency Payables, 205 Forward Contract, 206 Money Market Instruments, 206 Currency Options Contracts, 207 Cross-Hedging Minor Currency Exposure, 208 Hedging Contingent Exposure, 208 Hedging Recurrent Exposure with Swap Contracts, 209 Hedging through Invoice Currency, 210 Hedging via Lead and Lag, 210 Exposure Netting, 211 Should the Firm Hedge?, 211 INTERNATIONAL FINANCE IN PRACTICE: To Hedge or Not to Hedge, 212 What Risk Management Products Do Firms Use?, 215 Summary, 216 MINI CASE: Airbus'Dollar Exposure, 219 CASE APPLICATION: Diva Shoes, Inc., 220 Management of Economic Exposure, 227 INTERNATIONAL FINANCE IN PRACTICE: U.S. Firms Feel the Pain of Peso's Plunge, 229 How to Measure Economic Exposure, 229 Operating Exposure: Definition, 233 Illustration of Operating Exposure, 234 Determinants of Operating Exposure, 236 Managing Operating Exposure, 238 Selecting Low-Cost Production Sites, 239 Flexible Sourcing Policy, 239 INTERNATIONAL FINANCE IN PRACTICE: Porsche Powers Profit with Currency Plays, 240 Diversification of the Market, 240 R&D Efforts and Product Differentiation, 240 Financial Hedging, 241 CASE APPLICATION: Exchange Risk Management at Merck, 242 Summary, 244 M I N I CASE: Economic Exposure of Albion Computers PLC, Management of Translation Exposure, 248 Translation Methods, 248 Current/Noncurrent Method, 248 Monetary/Nonmonetary Method, 249 Temporal Method, 249 Current Rate Method, 249 Financial Accounting Standards Board Statements, 250 Financial Accounting Standards Board Statement 52, 250 The Mechanics of the FASB 52 Translation Process, 253 Highly Inflationary Economies, 254 Accounting Standards, 254 CASE APPLICATION: Consolidation of Accounts according to FASB 52: The Centralia Corporation, 254 Management of Translation Exposure, 258 Translation Exposure versus Transaction Exposure, 258 Hedging Translation Exposure, 259 Balance Sheet Hedge, 259 Derivatives Hedge, 260 Translation Exposure versus Operating Exposure, 261

5 CONTENTS XXI Empirical Analysis of the Change from FASB 8 to FASB 52, 261 MINI CASE: Sundance Sporting Goods, Inc., 263 Summary, 262 PART FOUR World Financial Markets and Institutions CHAPTER 1 1 Banking and Money Market, 268 Banking Services, 268 The World's Largest Banks, 269 Reasons for Banking, 270 Types of Banking Offices, 270 Correspondent Bank, 271 Representative Offices, 271 Foreign Branches, 271 Subsidiary and Affiliate Banks, 2 72 Edge Act Banks, 272 Offshore Banking Centers, 272 Banking Facilities, 2 73 Capital Adequacy Standards, 273 Money Market, 276 Eurocurrency Market, 2 76 Eurocredits, 278 Forward Rate Agreements, 2 79 Euronotes, 281 Eurocommercial Paper, 28 7 Eurodollar Interest Rate Futures Contracts, 281 Debt Crisis, 283 History, 284 Debt-for-Equity Swaps, 285 The Solution: Brady Bonds, 286 The Asian Crisis, 286 Global Financial Crisis, 287 The Credit Crunch, 287 Impact of the Financial Crisis, 291 Economic Stimulus, 292 The Aftermath, 293 Summary, 295 MINI CASE: Detroit Motors'Latin American Expansion, 299 APPENDIX 11A: Eurocurrency Creation, 301 APPENDIX 1 1 B: MBS, SIV, CDO, CDS, 304 CHAPTER 1 2 Bond Market, 306 The World's Bond Markets: A Statistical Perspective, 306 Foreign Bonds and Eurobonds, 306 Bearer Bonds and Registered Bonds, 307 National Security Regulations, 307 Withholding Taxes, 308 Security Regulations that Ease Bond Issuance, 308 Global Bonds, 309 Types of Instruments, 309 Straight Fixed-Rate Issues, 309 INTERNATIONAL FINANCE IN PRACTICE: SOX and Bonds, 310 Euro-Medium-Term Notes, 310 Floating-Rate Notes, Equity-Related Bonds, Dual-Currency Bonds, 311 Currency Distribution, Nationality, and Type of Issuer, 312 Bond Market Credit Ratings, 313 INTERNATIONAL FINANCE IN PRACTICE: Heineken Refreshes Euromarket with Spectacular Unrated Bonds, 314 Eurobond Market Structure and Practices, 315 Primary Market, 315 Secondary Market, 320 Clearing Procedures, 320 Bond Market Indexes, 321 Summary, 323 MINI CASE: Sara Lee Corporation's Eurobonds, 325 CHAPTER 13 Equity Markets, 326 A Statistical Perspective, 326 Market Capitalization of Developed Countries, 326 Market Capitalization of Developing Countries, 327 Measures of Liquidity, 328 Measures of Market Concentration, 329 ' Market Structure, Trading Practices, and Costs, 331 Market Consolidations and Mergers, 333 Trading in Equities, 334 Cross-Listing of Shares, 334 Yankee Stock Offerings, 336 American Depository Receipts, 336 Global Registered Shares, 340 Empirical Findings on Cross-Listing and ADRs, 340 Equity Market Benchmarks, 342 isharesmsci, 343

6 XXII CONTENTS INTERNATIONAL FINANCE IN PRACTICE: Foreign Interest In South Africa Takes Off, 344 Factors Affecting Equity Returns, 344 Macroeconomic Factors, 345 Exchange Rates, 345 Industrial Structure, 345 Summary, 346 MINI CASE: San Pico's New Stock Exchange, 348 CHAIPYEK 1 4 Interest Rate and Currency Swaps, 350 Types of Swaps, 350 INTERNATIONAL FINANCE IN PRACTICE: The World Bank's First Currency Swap, 351 Size of the Swap Market, 351 The Swap Bank, 351 Swap Market Quotations, 351 Interest Rate Swaps, 352 Basic Interest Rate Swap, 352 Pricing the Basic Interest Rate Swap, 355 Currency Swaps, 355 Basic Currency Swap, 355 Equivalency of Currency Swap Debt Service Obligations, 357 Pricing the Basic Currency Swap, 358 A Basic Currency Swap Reconsidered, 359 Variations of Basic Interest Rate and Currency Swaps, 360 Risks of Interest Rate and Currency Swaps, 360 INTERNATIONAL FINANCE IN PRACTICE: FallOUt from Greece's Swap, 361 Is the Swap Market Efficient?, 362 Summary, 363 MINI CASE: The Centralia Corporation's Currency Swap, S Portfolio Investment, 368 Correlation Structure and Risk Diversification, 369 Optimal Portfolio Selection, 371 Effects of Changes in the Exchange Rate, 378 Bond Investment, 380 Mutual Funds: A Performance Evaluation, 381 Diversification through Country Funds, 383 Diversification with ADRs, 386 Diversification with Exchange- Traded Funds (ETFs), 387 INTERNATIONAL FINANCE IN PRACTICE: Stay-at-Home Shareholders, 388 Diversification with Hedge Funds, 388 Why Home Bias in Portfolio Holdings?, 390 Diversification with Small-Cap Stocks, 392 Summary, 394 MINI CASE: Solving for the Optimal Portfolio, 399 APPENDIX 15A: Investment with Exchange Risk Hedging, 402 APPENDIX 15B: Solving for the Optimal Portfolio, 404 PART FIVE Financial Management of the Multinational Firm 1 6 Foreign Direct Investment and Cross-Border Acquisitions, 408 Global Trends in FDI, 409 Why Do Firms Invest Overseas?, 413 Trade Barriers, 413 Imperfect Labor Market, Intangible Assets, 414 Vertical Integration, 415 INTERNATIONAL FINANCE IN PRACTICE: Linear Sequence in Manufacturing: Singer & Company, 416 Product Life Cycle, 416 Shareholder Diversification Services, 417 Cross-Border Mergers and Acquisitions, 417 Political Risk and FDI, 422 Summary, 429 MINI CASE: Enron versus Bombay Politicians, 431 Capital Structure and the Cost of Capital, 435 Cost of Capital, 435 Cost of Capital in Segmented versus Integrated Markets, 436 Does the Cost of Capital Differ among Countries?, 438 CASE APPLICATION: Novo Industri, 440 Cross-Border Listings of Stocks, 442 Capital Asset Pricing under Cross-Listings, 447 The Effect of Foreign Equity Ownership Restrictions, 449

7 CONTENTS XXIII Pricing-to-Market Phenomenon, 450 CASE APPLICATION: Nestle, 450 Asset Pricing under Foreign Ownership Restrictions, 451 The Financial Structure of Subsidiaries, 453 Summary, 456 APPENDIX 17A: Pricing of Nontradable Assets: Numerical Simulations, 460 CHAPTER Capital Budgeting, 461 Review of Domestic Capital Budgeting, 462 The Adjusted Present Value Model, 463 Capital Budgeting from the Parent Firm's Perspective, 465 Generality of the APV Model, 467 Estimating the Future Expected Exchange Rate, 468 CASE APPLICATION: The Centralia Corporation, 468 Risk Adjustment in the Capital Budgeting Analysis, 472 Sensitivity Analysis, 473 Purchasing Power Parity Assumption, 473 Real Options, 473 Summary, 475 MINI CASE 1: Dorchester, Ltd., 477 MINI CASE 2: Strik-it-Rich Gold Mining Company, 478 CHAPTER H Multinational Cash Management, 480 The Management of Cash Balances, 480 CASE APPLICATION: Teltrex's Cash Management System, 480 Bilateral Netting of Internal and External Net Cash Flows, 485 Cash Management Systems in Practice, 488 Summary, 489 M I N I CASE 1: Efficient Funds Flow at Eastern Trading Company, 489 MINI CASE 2: Eastern Trading Company's Reduction in Precautionary Cash Balances, 486 New MBA, 490 CHAPTER 20 Trade Finance, 491 CHAPTER 21 Tax Environment and Transfer Pricing, 502 A Typical Foreign Trade Transaction, 491 Forfaiting, 494 Government Assistance in Exporting, 494 INTERNATIONAL FINANCE IN PRACTICE: First Islamic Forfaiting Fund Set Up, 495 The Export-Import Bank and Affiliated Organizations, 495 Countertrade, 496 The Objectives of Taxation, 502 Tax Neutrality, 502 Tax Equity, 503 Types of Taxation, 503 Income Tax, 503 Withholding Tax, 505 Value-Added Tax, 505 National Tax Environments, 507 Worldwide Taxation, 507 Territorial Taxation, 507 INTERNATIONAL FINANCE IN PRACTICE: The TAXING Devil You Know, 508 Foreign Tax Credits, 508 Organizational Structures, 509 Branch and Subsidiary Income, 509 Tax Havens, 510 Glossary, 525 Index, 533 Forms of Countertrade, 496 INTERNATIONAL FINANCE IN PRACTICE: Armed Forces Tops in Countertrade List, 498 Some Generalizations about Countertrade, 498 Summary, 499 MINI CASE: American Machine Tools, Inc., 501 Controlled Foreign Corporation, 511 Transfer Pricing and Related Issues, 511 INTERNATIONAL FINANCE IN PRACTICE: On Or Off? It's a Matter of Degree, 512 CASE APPLICATION: Mintel Products Transfer Pricing Strategy, 512 INTERNATIONAL FINANCE IN PRACTICE: Transfer Pricing Is the Most Important Tax Issue, 516 Miscellaneous Factors, 519 Advance Pricing Agreement, 519 Blocked Funds, 520 Summary, 521 MINI CASE 1: Sigma Corp.'s Location Decision, 523 MINI CASE 2: Eastern Trading Company's Optimal Transfer Pricing Strategy, 523