International Financial Management, 8th Edition PDF by Cheol S Eun and Bruce G Resnick


International Financial Management, Eighth Edition

By Cheol S. Eun and Bruce G. Resnick

International Financial Management


PART ONE Foundations of International Financial Management
Globalization and the Multinational Firm, 4
What’s Special about International Finance?, 5
Foreign Exchange and Political Risks, 5
Market Imperfections, 6
Expanded Opportunity Set, 7
Goals for International 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
Europe’s Sovereign Debt Crisis of 2010, 12
Trade Liberalization and Economic Integration, 13
Privatization, 16
Global Financial Crisis of 2008–2009, 17
Multinational Corporations, 19
Summary, 21
m i n i c a s e : Nike and Sweatshop Labor, 23
appendix 1 a : Gain from Trade: The Theory
of Comparative Advantage, 25
Monetary System, 27
Evolution of the International Monetary System, 27
Bimetallism: Before 1875, 28
Classical Gold Standard: 1875–1914, 28
Interwar Period: 1915–1944, 30
Bretton Woods System: 1945–1972, 31
The Flexible Exchange Rate
Regime: 1973–Present, 34
The Current Exchange Rate Arrangements, 36
European Monetary System, 41
The Euro and the European Monetary Union, 43
A Brief History of the Euro, 43
What Are the Benefits of Monetary Union?, 44
Costs of Monetary Union, 46
Prospects of the Euro: Some Critical Questions, 47
international finance in practice: Mundell
Wins Nobel Prize in Economics, 48
The Mexican Peso Crisis, 50
The Asian Currency Crisis, 51
Origins of the Asian Currency Crisis, 52
Lessons from the Asian Currency Crisis, 54
The Argentine Peso Crisis, 55
Fixed versus Flexible Exchange Rate Regimes, 56
Summary, 58
m i n i c a s e : Grexit or Not? 60
Balance of Payments, 62
Balance-of-Payments Accounting, 62
Balance-of-Payments Accounts, 64
The Current Account, 64
The Capital Account, 66
Statistical Discrepancy, 68
Official Reserve Account, 69
The Balance-of-Payments Identity, 72
Balance-of-Payments Trends in Major Countries, 72
international finance in practice: The Dollar and the
Deficit, 74
Summary, 77
m i n i c a s e : Mexico’s Balance-of-Payments
Problem, 80
appe n d i x 3 a : The Relationship Between
Balance of Payments and National Income Accounting, 81
Governance of the Public Corporation:
Key Issues, 83
The Agency Problem, 84
Remedies for the Agency Problem, 86
Board of Directors, 87
Incentive Contracts, 87
international finance in practice: When Boards
Are All in the Family, 88
Concentrated Ownership, 88
Accounting Transparency, 90
Debt, 90
Overseas Stock Listings, 90
Market for Corporate Control, 91
Law and Corporate Governance, 92
Consequences of Law, 95
Ownership and Control Pattern, 95
Private Benefits of Control, 99
Capital Markets and Valuation, 99
Corporate Governance Reform, 100
Objectives of Reform, 100
Political Dynamics, 101
The Sarbanes-Oxley Act, 101
The Cadbury Code of Best Practice, 102
The Dodd-Frank Act, 103
Summary, 104
m i n i c a s e : Parmalat: Europe’s Enron, 107
Function and Structure of the FX Market, 113
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, 124
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
Non-Deliverable Forward Contracts, 130
Forward Cross-Exchange Rates, 130
Forward Premium, 132
Swap Transactions, 132
Exchange-Traded Currency
Funds, 135
Summary, 135
m i n i c a s e : Shrewsbury Herbal
Products, Ltd., 139
Interest Rate Parity, 140
Covered Interest Arbitrage, 142
Interest Rate Parity and Exchange Rate
Determination, 145
Currency Carry Trade, 146
Reasons for Deviations from Interest
Rate Parity, 147
Purchasing Power Parity, 149
PPP Deviations and the Real Exchange Rate, 151
Evidence on Purchasing Power Parity, 151
international finance in practice: McCurrencies, 152
Fisher Effects, 156
Forecasting Exchange Rates, 158
Efficient Market Approach, 159
Fundamental Approach, 160
Technical Approach, 161
Performance of the Forecasters, 162
Summary, 166
m i n i c a s e : Turkish Lira and Purchasing
Power Parity, 171
appe n d i x 6 a : Purchasing Power Parity and
Exchange Rate Determination, 172
Futures Contracts: Some Preliminaries, 174
Currency Futures Markets, 176
international finance in practice: FX Market Volumes
Surge, 177
Basic Currency Futures Relationships, 178
Options Contracts: Some Preliminaries, 181
Currency Options Markets, 181
Currency Futures Options, 182
Basic Option-Pricing Relationships at
Expiration, 182
American Option-Pricing Relationships, 185
European Option-Pricing Relationships, 187
Binomial Option-Pricing Model, 189
European Option-Pricing Formula, 191
Empirical Tests of Currency Options, 192
Summary, 193
m i n i c a s e : The Options Speculator, 195
Futures and
Options on Foreign
Exchange, 173
How to Measure Economic Exposure, 226
Operating Exposure: Definition, 230
Illustration of Operating Exposure, 231
Determinants of Operating Exposure, 233
Managing Operating Exposure, 235
Selecting Low-Cost Production
Sites, 236
Flexible Sourcing Policy, 236
Diversification of the Market, 237
R&D Efforts and Product Differentiation, 237
Financial Hedging, 238
c a s e a p p l i c at i on : Exchange Risk Management
at Merck, 238
Summary, 240
m i n i c a s e : Economic Exposure of Albion Computers
PLC, 242
of Economic
Exposure, 225
Translation Methods, 244
Current/Noncurrent Method, 244
Monetary/Nonmonetary Method, 245
Temporal Method, 245
Current Rate Method, 245
Financial Accounting Standards Board
Statement 8, 246
Financial Accounting Standards Board
Statement 52, 246
The Mechanics of the FASB 52 Translation
Process, 249
Highly Inflationary Economies, 250
International Accounting Standards, 250
c a s e a p p l i c at i on : Consolidation of
Accounts according to FASB 52: The Centralia
Corporation, 250
Management of Translation Exposure, 254
Translation Exposure versus Transaction Exposure, 254
Hedging Translation Exposure, 255
Balance Sheet Hedge, 255
Derivatives Hedge, 256
Translation Exposure versus Operating Exposure, 257
Empirical Analysis of the Change from
FASB 8 to FASB 52, 257
Summary, 258
m i n i c a s e : Sundance Sporting Goods, Inc., 259
of Translation
Exposure, 244
Three Types of Exposure, 198
Forward Market Hedge, 200
Money Market Hedge, 202
Options Market Hedge, 203
Hedging Foreign Currency Payables, 205
Forward Contracts, 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
What Risk Management Products Do
Firms Use?, 213
Summary, 214
m i n i c a s e : Airbus’ Dollar Exposure, 218
c a s e a p p l i c at i on : Richard May’s Options, 218
World Financial Markets and Institutions
Banking and Money
Market, 264
International Banking Services, 264
The World’s Largest Banks, 265
Reasons for International Banking, 266
Types of International Banking Offices, 266
Correspondent Bank, 267
Representative Offices, 267
Foreign Branches, 267
Subsidiary and Affiliate Banks, 268
Edge Act Banks, 268
Offshore Banking Centers, 268
International Banking Facilities, 269
Capital Adequacy Standards, 269
International Money Market, 272
Eurocurrency Market, 272
Eurocredits, 274
international finance in practice: The Rotten Heart
of Finance, 276
Forward Rate Agreements, 276
Euronotes, 279
Eurocommercial Paper, 279
Eurodollar Interest Rate Futures Contracts, 279
International Debt Crisis, 281
History, 281
Debt-for-Equity Swaps, 282
The Solution: Brady Bonds, 284
The Asian Crisis, 284
Global Financial Crisis, 285
The Credit Crunch, 285
Impact of the Financial Crisis, 289
Economic Stimulus, 291
The Aftermath, 293
Summary, 294
m i n i c a s e : Detroit Motors’ Latin American
Expansion, 299
appendix 11a: Eurocurrency Creation, 301
International Bond
Market, 304
The World’s Bond Markets: A Statistical
Perspective, 304
Foreign Bonds and Eurobonds, 305
Bearer Bonds and Registered Bonds, 305
National Security Regulations, 306
Withholding Taxes, 306
Security Regulations that Ease Bond Issuance, 306
Global Bonds, 307
Types of Instruments, 307
international finance in practice: SOX and
Bonds, 308
Straight Fixed-Rate Issues, 308
Euro-Medium-Term Notes, 308
Floating-Rate Notes, 309
Equity-Related Bonds, 309
Dual-Currency Bonds, 309
Currency Distribution, Nationality, and
Type of Issuer, 310
International Bond Market Credit Ratings, 311
international finance in practice: Heineken Refreshes
Euromarket with Spectacular Unrated Bonds, 312
Eurobond Market Structure and Practices, 314
Primary Market, 314
Secondary Market, 314
Clearing Procedures, 316
International Bond Market Indexes, 318
Summary, 320
m i n i c a s e : Sara Lee Corporation’s Eurobonds, 321
International Equity
Markets, 323
A Statistical Perspective, 323
Market Capitalization, 323
Measure of Liquidity, 326
Market Structure, Trading Practices, and Costs, 326
Market Consolidations and Mergers, 330
Trading in International Equities, 330
Cross-Listing of Shares, 331
Yankee Stock Offerings, 333
American Depository Receipts, 334
Global Registered Shares, 337
Empirical Findings on Cross-Listing and ADRs, 338
International Equity Market Benchmarks, 339
iShares MSCI, 340
Factors Affecting International Equity
Returns, 340
Macroeconomic Factors, 340
international finance in practice: Foreign Interest in
South Africa Takes Off, 342
Exchange Rates, 342
Industrial Structure, 342
Summary, 343
m i n i c a s e : San Pico’s New Stock Exchange, 345
Types of Swaps, 347
international finance in practice: The World Bank’s First
Currency Swap, 348
Size of the Swap Market, 348
The Swap Bank, 349
Swap Market Quotations, 349
international finance in practice: Double-Crossed 350
Interest Rate Swaps, 351
Basic Interest Rate Swap, 351
Pricing the Basic Interest Rate Swap, 353
Currency Swaps, 354
Basic Currency Swap, 354
Equivalency of Currency Swap Debt Service
Obligations, 355
Pricing the Basic Currency Swap, 356
A Basic Currency Swap Reconsidered, 357
Variations of Basic Interest Rate and
Currency Swaps, 358
Risks of Interest Rate and Currency Swaps, 359
Is the Swap Market Efficient?, 359
Summary, 360
m i n i c a s e : The Centralia Corporation’s Currency
Swap, 364
International Portfolio
Investment, 365
International Correlation Structure and Risk
Diversification, 366
Optimal International Portfolio Selection, 368
Effects of Changes in the Exchange Rate, 375
International Bond Investment, 377
International Mutual Funds: A Performance
Evaluation, 378
International Diversification through Country
Funds, 380
International Diversification with ADRs, 383
International Diversification with Exchange-Traded
Funds, 384
International Diversification with
Hedge Funds, 385
Why Home Bias in Portfolio Holdings?, 386
International Diversification with Small-Cap
Stocks, 387
Summary, 389
m i n i c a s e : Solving for the Optimal International
Portfolio, 394
appe ndix 15a: International Investment with
Exchange Risk Hedging, 397
appe ndix 15b: Solving for the Optimal
Portfolio, 399
PART FIVE Financial Management of the Multinational Firm
Foreign Direct
Acquisitions, 404
Global Trends in FDI, 405
Why Do Firms Invest Overseas?, 408
Trade Barriers, 409
Imperfect Labor Market, 409
Intangible Assets, 410
Vertical Integration, 411
international finance in practice: Linear Sequence in
Manufacturing: Singer & Company, 412
Product Life Cycle, 412
Shareholder Diversification Services, 413
Cross-Border Mergers and
Acquisitions, 413
Political Risk and FDI, 418
Summary, 425
m i n i c a s e : Enron versus Bombay
Politicians, 427
International Capital
Structure and the
Cost of Capital, 431
Cost of Capital, 431
Cost of Capital in Segmented versus Integrated
Markets, 434
Does the Cost of Capital Differ among
Countries?, 435
c a s e a p p l i c at i on : Novo Industri, 437
Cross-Border Listings of Stocks, 439
Capital Asset Pricing under Cross-Listings, 444
The Effect of Foreign Equity Ownership
Restrictions, 446
Pricing-to-Market Phenomenon, 446
c a s e a p p l i c at i on : Nestlé, 447
Asset Pricing under Foreign Ownership
Restrictions, 448
The Financial Structure of Subsidiaries, 451
Summary, 452
appe ndix 17a: Pricing of Nontradable Assets:
Numerical Simulations, 457
Review of Domestic Capital Budgeting, 459
The Adjusted Present Value Model, 460
Capital Budgeting from the Parent Firm’s
Perspective, 462
Generality of the APV Model, 464
Estimating the Future Expected Exchange Rate, 465
c a s e a p p l i c at i on : The Centralia Corporation, 465
Risk Adjustment in the Capital Budgeting
Analysis, 469
Sensitivity Analysis, 470
Purchasing Power Parity Assumption, 470
Real Options, 470
Summary, 472
m i n i c a s e 1 : Dorchester, Ltd., 474
m i n i c a s e 2 : Strik-it-Rich Gold Mining
Company, 475
Multinational Cash
Management, 477
The Management of International Cash
Balances, 477
c a s e a p p l i c at i on : Teltrex’s Cash Management
System, 477
Bilateral Netting of Internal and External Net Cash
Flows, 482
Reduction in Precautionary Cash Balances, 483
Cash Management Systems in Practice, 485
Summary, 486
m i n i c a s e 1 : Efficient Funds Flow at Eastern
Trading Company, 487
m i n i c a s e 2 : Eastern Trading Company’s New
MBA, 487
A Typical Foreign Trade Transaction, 488
Forfaiting, 491
Government Assistance in Exporting, 491
international finance in practice: First Islamic Forfaiting
Fund Set Up, 492
The Export-Import Bank and Affiliated
Organizations, 492
Countertrade, 493
Forms of Countertrade, 493
international finance in practice: Armed Forces Tops in
Countertrade List, 495
Some Generalizations about Countertrade, 495
Summary, 496
m i n i c a s e : American Machine Tools, Inc., 498
The Objectives of Taxation, 499
Tax Neutrality, 499
Tax Equity, 500
Types of Taxation, 500
Income Tax, 500
Withholding Tax, 502
Value-Added Tax, 502
National Tax Environments, 504
Worldwide Taxation, 504
Territorial Taxation, 504
Foreign Tax Credits, 505
Organizational Structures, 505
Branch and Subsidiary Income, 505
Tax Havens, 506
Controlled Foreign Corporation, 507
Tax Inversion, 507
international finance in practice: On or Off?
It’s a Matter of Degree, 508
Transfer Pricing and Related Issues, 509
c a s e a p p l i c at i on : Mintel Products Transfer Pricing
Strategy, 509
international finance in practice: Transfer Pricing: An
Important International Tax Issue, 512
Miscellaneous Factors, 514
international finance in practice: Wake Up and Smell the
Coffee, 515
Advance Pricing Agreement, 516
Blocked Funds, 516
Summary, 517
m i n i c a s e 1 : Sigma Corp.’s Location
Decision, 519
m i n i c a s e 2 : Eastern Trading Company’s Optimal
Transfer Pricing Strategy, 520
Glossary, 521
Index, 528
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