International Financial Management, 6th Edition PDF by Jeff Madura and Roland Fox

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International Financial Management, 6th Edition

By Jeff Madura and Roland Fox

International Financial Management, 6th Edition

Contents:

About the authors iv

Preface xiv

PART I The international

financial environment 1

1 Multinational

financial management:

an overview 2

Understanding the context 2

Goal of the MNC 3

Conflicts with the MNC goal 3

Agency theory 3

External influences 7

Constraints interfering with the MNC’s goal 9

International business methods 10

International trade 10

Licensing 10

Franchising 11

Joint ventures 11

Acquisitions of existing operations 11

Establishing new foreign subsidiaries 12

Special Purpose Vehicles 12

Summary of methods 13

Exposure to international risk 13

Exposure to exchange rate movements 13

Exposure to foreign economies 14

Exposure to regulatory risk 14

Overview of an MNC’s cash flows 16

Host country MNC relationships 18

MNC valuation 19

Stock market valuation 19

Valuation in the accounts 19

Financial academic models 20

Organization of the text 21

Summary 22

Critical debate 23

Self test 23

Questions and exercises 23

Endnotes 25

BLADES PLC CASE STUDY: Decision to

expand internationally 26

SMALL BUSINESS DILEMMA: Developing

a multinational sporting goods industry 27

2 International trade and investment:

measurement and theories 29

Balance of payments 30

Why the balance of payments balances 31

The IMF presentation of the balance of payments 32

Understanding the balance of payments 34

International trade and investment flows 36

Direction of trade 37

Trade and investment agreements 37

Trade disputes 39

Factors affecting international trade flows 42

Impact of inflation 42

Impact of national income 42

Impact of government restrictions 42

Impact of exchange rates on MNCs 44

The Marshall Lerner conditions* 44

Interaction of factors 48

Correcting a balance of trade deficit 48

Why a weak home currency is not a perfect

solution 49

International capital flows 50

Factors affecting foreign direct investment 52

Factors affecting international portfolio investment 53

Economic theories of international trade and

investment 54

Agencies that facilitate international flows 58

International Monetary Fund 58

World Bank 60

World Trade Organization 61

International Financial Corporation 61

International Development Association 61

Bank for International Settlements 61

Regional development agencies 62

BRICS 62

Summary 62

Critical debate 63

Self test 63

Questions and exercises 64

Endnotes 64

BLADES PLC CASE STUDY: Exposure to

international flow of funds 66

SMALL BUSINESS DILEMMA: Developing

a multinational sporting goods industry 67

3 International financial markets

and portfolio investment 68

Functions of a financial market 69

Motives for using international financial markets 69

Motives for investing in foreign markets 69

Motives for providing credit in foreign markets 70

Motives for borrowing in foreign markets 70

Foreign exchange market 71

Foreign exchange transactions 71

Understanding the exchange rate 74

Currency pairs quote – standard notation 75

Avoiding currency conversion errors 75

Direct and indirect quotations 76

Currency futures and options markets 81

International money market 82

Origins and development 83

The rise of the Eurodollar 85

Central Bank Digital Currency (CBDC) and MNC

payments 85

Standardizing global bank regulations 87

International credit market 88

Syndicated loans 89

International bond market 89

Eurobond market 89

Development of other bond markets 90

Comparing interest rates between currencies 91

International stock markets 92

Issuance of foreign shares in the US 92

Issuance of shares in foreign markets 93

International financial markets and the MNC 94

Market efficiency and the efficient markets

hypothesis 95

Summary 102

Critical debate 102

Self test 103

Questions and exercises 103

Endnotes 105

BLADES PLC CASE STUDY: Decisions to

use international financial markets 106

SMALL BUSINESS DILEMMA: Developing

a multinational sporting goods industry 107

APPENDIX 3: Portfolio investment 108

4 International ethical concerns:

the Green movement, Islamic

finance and globalization 123

What are ethics? 124

The importance of ethical issues 124

Poor regulation of markets 127

The Green movement 128

Islamic finance 131

The ethical arguments of capitalist interest

rates 132

Islamic finance principles 132

Prohibitions and encouraged practices 133

Islamic financial transactions 134

Globalization and its discontents 135

Globalization 135

Discontent 136

Corporate Social Responsibility (CSR) and Socially

Responsible Investment (SRI) 138

International corporate governance 139

Corporate governance and outside parties 139

Differing control structures 140

Why do governance structures differ? 140

Summary 141

Critical debate 141

Self test 142

Questions and exercises 142

Endnotes 143

BLADES PLC CASE STUDY: Ethical debate 144

SMALL BUSINESS DILEMMA: Obtaining

finance 145

Part I: Integrative problem 146

Part I: Essays/discussion and academic

articles 147

PART II Exchange rate

behaviour 149

5 Exchange rate changes 150

Measuring exchange rate movements 151

Exchange rate movements – an overview 152

Demand for a currency 153

Supply of a currency for sale 153

Equilibrium 154

Factors that influence exchange rates 155

Relative inflation rates 155

Relative interest rates 156

Relative income levels 158

Government controls 159

Expectations 160

Speculation 161

Order flow models 161

Interaction of factors 162

Speculating on anticipated exchange rates 164

Summary 166

Critical debate 167

Self test 167

Questions and exercises 167

Endnotes 169

BLADES PLC CASE STUDY: Assessment

of future exchange rate movements 170

SMALL BUSINESS DILEMMA: Assessment

by the Sports Exports Company of factors

that affect the British pound’s value 171

6 Exchange rate

history and the role

of governments 172

Exchange rate systems 173

Fixed exchange rate system 173

Managed float exchange rate system 175

Pegged exchange rate system 176

Currency boards 176

Dollarization 178

Freely floating exchange rate system 178

The concept of an optimal currency area* 180

Classification of exchange rate arrangements 181

Government intervention – the process 183

Reasons for government intervention 183

Direct intervention 184

Indirect intervention 187

Exchange rate target zones 188

Intervention as a policy tool 189

Influence of a weak (relatively low value) home

currency on the economy 189

Influence of a strong home currency on the

economy 189

Balassa Samuelson effect 190

The law of comparative advantage? 191

The trilemma of government policy choice 191

A brief history of exchange rates 192

Summary 207

Critical debate 207

Self test 208

Questions and exercises 208

Endnotes 209

BLADES PLC CASE STUDY: Assessment of

government influence on exchange rates 211

SMALL BUSINESS DILEMMA: Assessment

of central bank intervention by the Sports

Exports Company 212

7 Forecasting exchange rates 213

Why firms forecast exchange rates 214

Forecasting techniques 217

Market efficiency 217

Technical forecasting 220

Fundamental forecasting 221

Market-based forecasting 226

Mixed forecasting 228

Forecasting services 229

Performance of forecasting services 229

Evaluation of forecast performance 229

Forecast accuracy over time 230

Statistical test of forecasts – the de-trending

problem 231

Should MNCs make exchange rate forecasts? 232

Methods of forecasting exchange rate volatility 235

Summary 236

Critical debate 237

Self test 237

Questions and exercises 238

Endnotes 239

BLADES PLC CASE STUDY: Forecasting

exchange rates 240

SMALL BUSINESS DILEMMA: Exchange

rate forecasting by the Sports

Exports Company 241

8 International arbitrage and

covered interest rate parity 242

International arbitrage 243

Locational arbitrage 243

Triangular arbitrage 246

Covered interest arbitrage 249

Summary of arbitrage effects 250

Interest rate parity (IRP) 251

Derivation of interest rate parity 251

Determining the forward premium 251

The approximate relationship between forward

premium and interest rate differential 252

Graphic analysis of interest rate parity 253

Interpretation of interest rate parity 254

Does interest rate parity hold? 255

Considerations when assessing interest rate parity 256

Summary 258

Critical debate 258

Self test 259

Questions and exercises 259

Endnote 261

BLADES PLC CASE STUDY: Assessment

of potential arbitrage opportunities 262

SMALL BUSINESS DILEMMA: Assessment

of prevailing spot and forward rates by the

Sports Exports Company 263

9 Relationships between

inflation, interest rates and

exchange rates 264

Purchasing power parity (PPP) 265

Interpretations of purchasing power parity 265

Power parity theory – an informal approach 266

Derivation of purchasing power

parity – a more formal approach 267

Using PPP to estimate exchange rate effects 269

Graphic analysis of purchasing power parity 270

Testing the purchasing power parity theory 271

Why purchasing power parity does not occur 272

The real exchange rate 273

Purchasing power parity in the long and short run 275

Commodity currencies 277

International Fisher effect (IFE) 278

Relationship with purchasing power parity 278

Implications of the IFE for the foreign investment

market 279

Derivation of the international Fisher effect 281

Tests of the international Fisher effect 282

Comparison of the IRP, PPP and IFE theories 283

Summary 284

Critical debate 285

Self test 285

Questions and exercises 286

Endnotes 287

BLADES PLC CASE STUDY: Assessment

of purchasing power parity 288

SMALL BUSINESS DILEMMA: Assessment

of the IFE by the Sports Exports Company 289

APPENDIX 9*: Further notes on exchange rate

models 290

Part II: Integrative problem 293

Part II: Essays/discussion and academic

articles 294

PART III Exchange rate

risk management 295

10 Measuring exposure to exchange

rate fluctuations 296

Is exchange rate risk relevant? 297

Purchasing power parity argument 297

The investor/stakeholder hedge argument 297

Currency diversification argument 297

Creditor argument 298

The size argument 298

MNC response 298

Types of exposure 299

Transaction exposure 299

Estimating ‘net’ cash flows in each currency 299

Measuring the potential impact of the currency

exposure 301

Assessing transaction exposure based on

value-at-risk* 306

Economic exposure 309

Economic exposure of domestic firms 311

Measuring economic exposure 311

Translation exposure 315

Does translation exposure matter? 316

Determinants of translation exposure 316

Summary 318

Critical debate 318

Self test 318

Questions and exercises 319

BLADES PLC CASE STUDY: Assessment

of exchange rate exposure 321

SMALL BUSINESS DILEMMA: Assessment

of exchange rate exposure by the Sports

Exports Company 322

11 Market insurance: currency

derivatives 323

Overview 324

Forward market 324

How MNCs use forward contracts 324

Non-deliverable forward contracts 331

Currency futures market 332

Contract specifications 333

Trading futures 334

Pricing currency futures 338

How firms use currency futures 338

Currency swap market 339

Currency options market 342

Option exchanges 343

Over-the-counter market 343

Currency call options 344

Factors affecting currency call option premiums 345

How firms can use plain vanilla currency

call options 347

Speculating with currency call options 349

Further points 350

Currency put options 351

Factors affecting currency put option premiums 352

Hedging with currency put options 353

Speculating with currency put options 353

Contingency graphs for currency options 356

Contingency graphs for call options 356

Contingency graphs for put options 357

Lowering the cost of options: conditional

and barrier options and collars* 359

Conditional currency options 359

Barrier options 360

Collars 361

Option types 363

European and American currency options 363

Asian options 363

Options in emerging market economies 363

Cross-hedging 363

Financial management of derivatives for

non-financial companies 364

Summary 365

Critical debate 365

Self test 365

Questions and exercises 366

Endnotes 368

BLADES PLC CASE STUDY: Use of currency

derivative instruments 369

SMALL BUSINESS DILEMMA: Use of currency

futures and options by the Sports Exports

Company 370

APPENDIX 11A*: Currency option pricing 371

APPENDIX 11B: Currency option

combinations 373

12 Non-market methods of

transaction management 377

Transaction exposure 378

Identifying net transaction exposure 378

Non-market methods for reducing transaction

exposure 378

Market methods for reducing transaction

exposure 383

Futures hedge 384

Forward hedge 384

Currency option hedge 387

Comparison of hedging techniques 389

Hedging policies of MNCs 397

Limitations of hedging 398

Limitation of hedging an uncertain amount 398

Limitation of repeated short-term hedging 399

Hedging long-term transaction exposure 400

Long-term forward contract 401

Currency swap 401

Parallel loan 402

Borrowing policy 402

Cross-hedging 402

Summary 403

Critical debate 403

Self test 404

Questions and exercises 404

BLADES PLC CASE STUDY: Management of

transaction exposure 410

SMALL BUSINESS DILEMMA: Hedging

decisions by the Sports Exports Company 411

APPENDIX 12: Calculating the optimal size

of a cross-currency hedge: the hedge ratio 412

13 Economic and translation

exposure management 414

Economic exposure 415

Use of the income statement to assess economic

exposure 416

How restructuring can reduce economic exposure 418

Issues involved in the restructuring decision 420

A case study in hedging economic exposure 421

Silverton Ltd’s dilemma 422

Assessment of economic exposure 422

Assessment of each unit’s exposure 423

Identifying the source of the unit’s exposure 423

Possible strategies to hedge economic exposure 424

Silverton’s hedging solution 425

Limitations of Silverton’s optimal hedging

strategy 426

Hedging exposure to fixed assets 426

Managing translation exposure 426

Limitations of hedging translation exposure 428

Summary 429

Critical debate 429

Self test 429

Questions and exercises 430

Endnote 431

BLADES PLC CASE STUDY: Assessment of

economic exposure 432

SMALL BUSINESS DILEMMA: Hedging the

Sports Exports Company’s economic

exposure to exchange rate risk 433

Part III: Integrative problem 434

Part III: Essays/discussion and academic

articles 435

PART IV Long-term asset

and liability management 437

14 Foreign direct investment 438

The big picture 439

Investment appraisal – the modern approach 439

Net present value 440

Real options 442

Game theory and strategy 443

A combined view 444

Motives for foreign direct investment 445

Firm-specific advantages (ownership) 445

Internalization advantages 445

Country-specific advantages 446

Benefits of international diversification 448

Diversification analysis of international projects 449

Diversification among countries 451

Host government views of foreign direct

investment 452

The bargaining model 453

Investment agreements 455

The Multilateral Agreement on Investment (MAI) 455

Subsidiary versus parent perspective 459

Tax differentials 459

Restricted remittances 459

Excessive remittances 459

Exchange rate movements 459

Summary of factors 460

Empirical studies 461

Internalization 461

Exchange rates 461

Taxes 461

Institutions 462

Tariffs 462

Trade effects 462

Summary 462

Critical debate 463

Self test 463

Questions and exercises 463

Endnotes 465

BLADES PLC CASE STUDY: Consideration

of foreign direct investment 466

SMALL BUSINESS DILEMMA: Foreign direct

investment decision by the Sports Exports

Company 467

APPENDIX 14: Incorporating international

tax laws in the investment decision 468

15 Country risk analysis 475

Why country risk analysis is important 476

Political risk factors 476

Attitude of consumers in the host country 477

Actions of host government 477

Blockage of fund transfers 479

Currency inconvertibility 479

War 479

Bureaucracy 480

Corruption 480

Financial risk factors 481

Indicators of economic growth 482

Types of country risk assessment 482

Macroassessment of country risk 482

Microassessment of country risk 483

Techniques to assess country risk 484

Checklist approach 485

Delphi technique 485

Quantitative analysis 485

Inspection visits 485

Combination of techniques 485

Measuring country risk 486

Variation in methods of measuring country risk 487

Using the country risk rating for

decision-making 489

Comparing risk ratings among countries 489

Market approach to country risk rating 489

Incorporating country risk in capital

budgeting 490

Adjustment of the discount rate 490

Adjustment of the estimated cash flows 490

How country risk affects financial decisions 491

Reducing exposure to host government

takeovers 492

Use a short-term horizon 492

Rely on unique supplies or technology 493

Hire local labour 493

Borrow local funds 493

Purchase insurance 493

Summary 494

Critical debate 494

Self test 494

Questions and exercises 495

Endnotes 496

BLADES PLC CASE STUDY: Country risk

assessment 497

SMALL BUSINESS DILEMMA: Country risk

analysis at the Sports Exports Company 498

16 Long-term financing 499

Long-term financing decision 500

Sources of equity 500

Sources of debt 500

Cost of debt financing 501

Measuring the cost of financing 502

Assessing the exchange rate risk of debt

financing 503

Use of exchange rate probabilities 503

Use of simulation 504

Reducing exchange rate risk 504

Offsetting cash inflows 504

Market methods 505

Currency swaps 505

Parallel loans 507

Diversifying among currencies 508

Interest rate risk from debt financing 509

The debt maturity decision 509

The fixed versus floating rate decision 511

Hedging with interest rate swaps 511

Plain vanilla swap 512

Project finance 515

Summary 516

Critical debate 516

Self test 517

Questions and exercises 517

BLADES PLC CASE STUDY: Use of long-term

foreign financing 519

SMALL BUSINESS DILEMMA: Long-term

financing decision by the Sports

Exports Company 520

Part IV: Integrative problem 521

Part IV: Essays/discussion and academic

articles 523

PART V Short-term asset

and liability management 525

17 Financing international trade 526

Payment methods for international trade 527

Prepayment 527

Letters of credit (L/C) 528

Drafts 528

Consignment 528

Open account 528

Trade finance methods 529

Accounts receivable financing 529

Factoring 529

Letters of credit (L/C) 529

Banker’s acceptance 533

Working capital financing 536

Medium-term capital goods financing (forfaiting) 537

Countertrade 537

Government agencies for international trade 538

Summary 539

Critical debate 539

Self test 540

Questions and exercises 540

BLADES PLC CASE STUDY: Assessment

of international trade financing in Thailand 542

SMALL BUSINESS DILEMMA: Ensuring

payment for products exported by the

Sports Exports Company 543

18 Short-term financing 544

Sources of short-term financing 545

Euronotes 545

Euro-commercial paper 545

Eurobank loans 545

Trade credit 545

Internal financing by MNCs 545

Why MNCs consider foreign financing 546

Foreign financing to offset foreign currency

inflows 546

Foreign financing to reduce costs 547

Determining the effective financing rate 548

The variance of the rate divided into currency

and exchange rate movements* 552

Criteria considered for foreign financing 552

Interest rates 552

Interest rate parity (IRP) 552

Exchange rate variation 552

Term, roll over risk and regulatory risk 553

Exchange rate forecasts 553

Actual foreign financing 555

Financing with a portfolio of currencies 556

Summary 558

Critical debate 558

Self test 558

Questions and exercises 559

BLADES PLC CASE STUDY: Use of foreign

short-term financing 561

SMALL BUSINESS DILEMMA: Short-term

financing by the Sports Exports Company 562

19 International cash management 563

Cash flow analysis – subsidiary perspective 564

Subsidiary expenses 564

Subsidiary revenue 564

Subsidiary dividend payments 564

Subsidiary liquidity management 565

Centralized cash management 565

Techniques to optimize cash flows 567

Accelerating cash inflows 567

Minimizing currency conversion costs 567

Managing blocked funds 570

Managing intersubsidiary cash transfers 570

Complications in optimizing cash flow 571

Company-related characteristics 571

Government restrictions 571

Characteristics of banking systems 571

Investing excess cash 571

How to invest excess cash 572

Centralized cash management 572

Diversifying cash across currencies 574

Dynamic hedging 574

Summary 575

Critical debate 575

Self test 576

Questions and exercises 576

BLADES PLC CASE STUDY: International

cash management 578

SMALL BUSINESS DILEMMA: Cash

management at the Sports

Exports Company 579

Part V: Integrative problem 580

Part V: Essays/discussion and academic

articles 582

20 Concluding comments 583

The significance of international financial

management 584

Summary of the book 584

Advances 584

Remaining issues 585

Endnotes 586

APPENDIX A: Answers to self-test questions 587

APPENDIX B: Statistics and project support 598

Glossary 610

Index 621

Online additional reading

1 Multinational restructuring

2 Multinational cost of capital and capital structure

3 Multinational capital budgeting

See the online resources

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