Contents. Part I: The Global Financial Environment 1

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Roderick Anderson
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1 Contents List of Figures List of Tables Preface and Acknowledgments About the Authors xii xv xviii xxvii Part I: The Global Financial Environment 1 Chapter 1: Introduction 3 Opening Case 1: TIAA-CREF Goes Global with Corporate Governance Reasons to Study International Finance Company Goals and Functions of Financial Management Multinational Companies and their Performance Principles of Global Finance Agency Theory and Corporate Governance Environmental Differences The Structure of this Book 23 Summary 23 Questions 24 References 24 Case Problem 1: What Is a National Company? 25 Chapter 2: Motives for World Trade and Foreign Investment 28 Opening Case 2: The Effect of Foreign Investment on Exports Motives for Foreign Trade Economic Integration 38

4 Principles of Global Finance 14 1.5 Agency Theory and Corporate Governance 18 1.6 Environmental Differences 21 1.

2 vi CONTENTS 2.3 Motives for Foreign Investment A Synthesis of Foreign Trade and Investment Theories 46 Summary 47 Questions 47 Problems 48 References 49 Case Problem 2: The Fruits of Free Trade Under the World Trade Organization 49 Chapter 3: The Balance of Payments 54 Opening Case 3: Opportunity Cost and Comparative Advantage An Overview of the Balance of Payments Balance-of-Payments Accounts The Actual Balance of Payments How to Reduce a Trade Deficit 70 Summary 72 Questions 72 Problems 73 References 73 Case Problem 3: USA China Trade Relations 74 Chapter 4: The International Monetary System 78 Opening Case 4: The Euro A Story of Change A Successful Foreign-Exchange System A Brief History of the International Monetary System The International Monetary Fund The European Monetary Union Proposals for Further International Monetary Reform 102 Summary 104 Questions 105 References 105 Case Problem 4: The Mexican Peso Crisis of December Part II: Corporate Foreign-Exchange Risk Management 111 Chapter 5: The Foreign-Exchange Market and Parity Conditions 113 Opening Case 5: The Volume of Foreign-Exchange Trading Major Participants in the Exchange Market Spot Exchange Quotation: The Spot Exchange Rate Forward Exchange Quotation: The Forward Exchange Rate International Parity Conditions Arbitrages 136

The Balance of Payments 54 Opening Case 3: Opportunity Cost and Comparative Advantage 54 3.1 An Overview of the Balance of Payments 55 3.2 Balance-of-Payments Accounts 57 3.

3 CONTENTS vii Summary 142 Questions 142 Problems 143 References 145 Case Problem 5: The Big Mac Hamburger Standard: February Chapter 6: Currency Futures and Options 148 Opening Case 6: Derivatives Risks The Currency Futures Market The Currency Options Market Futures Options 169 Summary 170 Questions 171 Problems 171 References 173 Case Problem 6: Merck s Use of Currency Options 174 Chapter 7: Financial Swaps 177 Opening Case 7: Why have Gillette and GE Chosen a Higher Cost of Funding? The Emergence of the Swap Market Plain Vanilla Swaps Motivations for Swaps 187 Summary 191 Questions 192 Problems 192 References 193 Case Problem 7: Regulations of Derivatives Markets 193 Chapter 8: Exchange Rate Forecasting 196 Opening Case 8: Mundell Wins Nobel Prize in Economics Measuring Exchange Rate Changes The Forecasting Needs of the Multinational Company Forecasting Floating Exchange Rates Forecasting Fixed Exchange Rates 210 Summary 216 Questions 216 Problems 217 References 218 Case Problem 8: General Motors Operations in Mexico, and the Peso Crisis 218 Chapter 9: Managing Transaction Exposure and Economic Exposure 221 Opening Case 9: Avon s Actions to Protect Against Volatile Currencies The Basic Nature of Foreign-Exchange Exposures 222

3 Futures Options 169 Summary 170 Questions 171 Problems 171 References 173 Case Problem 6: Merck s Use of Currency Options 174 Chapter 7: Financial Swaps 177 Opening Case 7: Why have Gillette and GE

4 viii CONTENTS 9.2 Transaction Exposure Management Economic Exposure Management Currency Exposure Management Practices 235 Summary 238 Questions 238 Problems 239 References 241 Case Problem 9: Western Mining s Economic Exposure Management 241 Chapter 10: Translation Exposure Management 243 Opening Case 10: Main Features of Accounting Exposure Translation Rules FASBs 8 and Hedging Translation Exposure 251 Summary 252 Questions 253 Problems 254 References 256 Case Problem 10: Dell Mercosur 256 Part III: The Global Financing Strategy 261 Chapter 11: International Financial Markets 263 Opening Case 11: Foreign Investors Load Up with Asia s Shares Eurocurrency Markets The Eurocurrency Interbank Market The Asian Currency Market The International Bond Market The International Equity Market Long-Term Capital Flows to Developing Countries 285 Summary 286 Questions 287 Problems 288 References 289 Case Problem 11: The Rise and Fall of the US Stock Market 290 Chapter 12: International Banking Issues and Country Risk Analysis 293 Opening Case 12: Argentina s Currency Crisis International Banking Operations International Loans Country Risk Analysis 309

Management 243 Opening Case 10: Main Features of Accounting Exposure 243 10.1 Translation Rules 244 10.2 FASBs 8 and 52 247 10.

5 CONTENTS ix Summary 314 Questions 314 Problems 314 References 315 Case Problem 12: The World Bank 316 Chapter 13: Financing Foreign Trade 319 Opening Case 13: US Export Import Bank Seeks Private Investors Basic Documents in Foreign Trade The Payment Terms of Export Transactions Sources of Financing Foreign Trade 333 Summary 339 Questions 340 Problems 341 References 342 Case Problem 13: Arms Dealers Get Creative with Offsets 342 Chapter 14: Financing Foreign Investment 345 Opening Case 14: Failed US Vietnamese Joint Ventures Internal Sources of Funds External Sources of Funds Development Banks 357 Summary 362 Questions 363 Problems 363 References 364 Case Problem 14: IBM s Strategic Alliances 364 Part IV: Global Investment Strategy 367 Chapter 15: International Working Capital Management 369 Opening Case 15: An Efficient Global Treasury Structure The Basic Concepts of Working Capital Management Cash Management Accounts Receivable Management Inventory Management 389 Summary 392 Questions 393 Problems 393 References 395 Case Problem 15: Navistar International s Netting System 395 Chapter 16: International Portfolio Investment 398 Opening Case 16: LE Group Shows how Korea Inc. Might Restructure Key Terminology 400

3 Sources of Financing Foreign Trade 333 Summary 339 Questions 340 Problems 341 References 342 Case Problem 13: Arms Dealers Get Creative with Offsets 342 Chapter 14: Financing Foreign Investment 345

6 x CONTENTS 16.2 The Benefits of International Diversification Methods of International Diversification 413 Summary 419 Questions 419 Problems 420 References 421 Case Problem 16: Investing in DaimlerChrysler in the USA 421 Chapter 17: Corporate Strategy and Foreign Direct Investment 425 Opening Case 17: How Can Companies Get the Most Out of Their Foreign Investment? An Overview of Foreign Direct Investment Foreign Direct Investment in Developing Countries Cross-Border Mergers and Acquisitions 433 Summary 441 Questions 441 Problems 442 References 443 Case Problem 17: BP s Acquisition of Amoco 443 Chapter 18: International Capital Budgeting Decisions 447 Opening Case 18: External Factors Affecting Foreign Project Analysis The Foreign Investment Decision-Making Process Portfolio Theory Capital Budgeting Theory and Practice Political Risk Management 462 Summary 468 Questions 468 Problems 469 References 471 Case Problem 18: Multinational Capital Budgeting Practices 472 Chapter 19: The Cost of Capital for Foreign Projects 474 Opening Case 19: GM s Target Debt Ratio in its Overseas Expansion The Weighted Average Cost of Capital The Optimum Capital Structure The Marginal Cost of Capital and Investment Decisions Cultural Values and Capital Structure 484 Summary 486 Questions 486 Problems 487 References 488 Case Problem 19: Do Multinational Firms Have Lower Debt Ratios than Domestic Firms? 488

Foreign Direct Investment 425 Opening Case 17: How Can Companies Get the Most Out of Their Foreign Investment? 425 17.1 An Overview of Foreign Direct Investment 426 17.

7 CONTENTS xi Chapter 20: Corporate Performance of Foreign Operations 490 Opening Case 20: Offshore Workers Increase IBM s Profits The Global Control System and Performance Evaluation International Taxation Transfer Pricing and Tax Planning 506 Summary 509 Questions 510 Problems 510 References 513 Case Problem 20 : Advanced Technology s Ethical Dilemma 514 Web Resources and Internet Exercises 518 Answers to Selected End-of-Chapter Problems 538 Glossary 545 Index 564

3 Transfer Pricing and Tax Planning 506 Summary 509 Questions 510 Problems 510 References 513 Case Problem 20 : Advanced

Part One Foundations of International Financial Management 1. Part Two World Financial Markets and Institutions 124

Part One Foundations of International Financial Management 1. Part Two World Financial Markets and Institutions 124 contents in brief p r e f a c e v Preface xii Part One Foundations of Financial Management 1 1 Globalization and the Multinational Firm, 2 2 Monetary System, 26 3 Balance of Payments, 52 4 The Market for