Chapter 1 Current Multinational Challenges and the Global Economy 2
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1 PART I Global Financial Environment 1 Chapter 1 Current Multinational Challenges and the Global Economy 2 GLOBAL FINANCE IN PRACTICE Global Capital Markets: Entering a New Era 3 The Global Financial Marketplace 4 The Theory of Comparative Advantage 9 What Is Different about Global Financial Management? 12 Market Imperfections: A Rationale for the Existence of the Multinational Firm 13 GLOBAL FINANCE IN PRACTICE Corporate Responsibility and Corporate Sustainability 13 The Globalization Process 14 Summary of Learning Objectives 18 MINI-CASE Nine Dragons Paper Questions 26 Problems 26 Internet Exercises 27 Chapter 2 Financial Goals and Corporate Governance 28 Who Owns the Business? 28 GLOBAL FINANCE IN PRACTICE Family-Controlled Firms in France Outperform the Public Sector 30 What Is the Goal of Management? 31 Corporate Governance 36 GLOBAL FINANCE IN PRACTICE Is Good Governance Good Business Globally? 46 Summary of Learning Objectives 48 MINI-CASE Luxury Wars LVMH vs. Hermes 49 Questions 54 Problems 55 Internet Exercises 57 Chapter 3 The International Monetary System 59 History of the International Monetary System 59 GLOBAL FINANCE IN PRACTICE Hammering Out an Agreement at Bretton Woods 61 Contemporary Currency Regimes 65 GLOBAL FINANCE IN PRACTICE Who Is Choosing What in the Trinity/Trilemma? 68 Emerging Markets and Regime Choices 69 The Birth of a European Currency: The Euro 72 Exchange Rate Regimes: What Lies Ahead? 75 Summary of Learning Objectives 76 MINI-CASE First Steps in the Globalization of the Yuan 77 Questions 80 Problems 81 Internet Exercises 82
2 xiv Contents Chapter 4 The Balance of Payments 83 Typical Balance of Payments Transactions 84 Fundamentals of Balance of Payments Accounting 85 The Accounts of the Balance of Payments 86 The Capital and Financial Accounts 89 GLOBAL FINANCE IN PRACTICE China's Twin Surpluses 93 GLOBAL FINANCE IN PRACTICE Official Foreign Exchange Reserves: The Rise of China 94 The Balance of Payments in Total 94 The Balance of Payments Interaction with Key Macroeconomic Variables 97 Trade Balances and Exchange Rates 99 Capital Mobility 102 Summary of Learning Objectives 104 MINI-CASE Global Remittances 105 Questions 109 Problems 110 Internet Exercises 112 Chapter 5 Current Multinational Financial Challenges: The Credit Crisis of The Seeds of Crisis: Subprime Debt 114 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt 117 The Fallout: The Crisis of GLOBAL FINANCE IN PRACTICE Financial Fraud and Financial Recovery 134 The Remedy: Prescriptions for an Infected Global Financial Organism 134 GLOBAL FINANCE IN PRACTICE Refinancing Opportunities and the Credit Crisis 135 GLOBAL FINANCE IN PRACTICE Warren Buffett on the Credit Crisis 136 The Future 138 Summary of Learning Objectives 138 MINI-CASE Letting Go of Lehman Brothers 139 Questions 141 Problems 141 Internet Exercises 143 PART 2 Foreign Exchange Theory and Markets 145 Chapter 6 The Foreign Exchange Market 146 Geographical Extent of the Foreign Exchange Market 147 Functions of the Foreign Exchange Market 148 Market Participants 148 GLOBAL FINANCE IN PRACTICE The Foreign Exchange Dealer's Day 149 GLOBAL FINANCE IN PRACTICE My First Day of Foreign Exchange Trading 150 Transactions in the Interbank Market 151 Size of the Foreign Exchange Market 154 Foreign Exchange Rates and Quotations 156 Summary of Learning Objectives 165 MINI-CASE The Saga of the Venezuelan Bolivar Fuerte 166 Questions 168 Problems 168 Internet Exercises 171
3 xv Chapter 7 International Parity Conditions 173 Prices and Exchange Rates 174 GLOBAL FINANCE IN PRACTICE The Immiseration of the North Korean People The "Revaluation" of the NorthKorean Won 176 GLOBAL FINANCE IN PRACTICE Deviations from Purchasing Power Parity in the Twentieth Century 180 Interest Rates and Exchange Rates 181 Forward Rate as an Unbiased Predictor of the Future Spot Rate 189 Prices, Interest Rates, and Exchange Rates in Equilibrium 191 Summary of Learning Objectives 165 MINI-CASE Emerging Market Carry Trades 193 Questions 194 Problems 194 Internet Exercises 198 Appendix: An Algebraic Primer to International Parity Conditions 200 The Law of One Price 200 Purchasing Power Parity 200 Forward Rates 201 Covered Interest Arbitrage (CIA) and Interest Rate Parity (IRP) 201 Fisher Effect 202 International Fisher Effect 202 Chapter 8 Foreign Currency Derivatives and Swaps 204 Foreign Currency Futures 205 Currency Options 207 GLOBAL FINANCE IN PRACTICE The New Zealand Kiwi, Key, and Krieger 214 Option Pricing and Valuation 215 Interest Rate Risk 217 GLOBAL FINANCE IN PRACTICE A Fixed-Rate or Floating-Rate World? 218 Interest Rate Derivatives 219 Prudence in Practice 223 Summary of Learning Objectives 224 MINI-CASE McDonald's Corporation's British Pound Exposure 225 Questions 226 Problems 227 Internet Exercises 231 PART 3 Foreign Exchange Exposure 233 Chapter 9 Foreign Exchange Rate Determination and Forecasting 234 Exchange Rate Determination: The Theoretical Thread 236 Currency Market Intervention 240 GLOBAL FINANCE IN PRACTICE Rules of Thumb for Effective Intervention 242 Disequilibrium: Exchange Rates in Emerging Markets 243 GLOBAL FINANCE IN PRACTICE Was George Soros to Blame for the Asian Crisis? 246 Forecasting in Practice 251 GLOBAL FINANCE IN PRACTICE JPMorgan Chase Forecast of the Dollar/Euro 253 Summary of Learning Objectives 256 MINI-CASE The Japanese Yen Intervention of Questions 259 Problems 259 Internet Exercises 262
4 xvi Contents Chapter 10 Transaction and Translation Exposure 263 Types of Foreign Exchange Exposure 263 Why Hedge? 265 Trident's Transaction Exposure 269 GLOBAL FINANCE IN PRACTICE The Credit Crisis and Option Volatilities in Translation Exposure 278 Trident Corporation's Translation Exposure 281 Managerial Implications 285 GLOBAL FINANCE IN PRACTICE When Business Dictates Hedging Results 287 Summary of Learning Objectives 287 MINI-CASE Banbury Impex (India) 289 Questions 293 Problems 293 Internet Exercises 298 Chapter 11 Operating Exposure 299 Trident Corporation: A Multinational's Operating Exposure 299 GLOBAL FINANCE IN PRACTICE Do Fixed Exchange Rates Increase Corporate Currency Risk in Emerging Markets? 303 Measuring Operating Exposure 303 Strategic Management of Operating Exposure 308 Proactive Management of Operating Exposure 310 GLOBAL FINANCE IN PRACTICE Key Challenges to Managing FX Risk 315 Summary of Learning Objectives 315 MINI-CASE Toyota's European Operating Exposure 316 Questions 318 Problems 319 Internet Exercises 321 PART 4 Financing the Global Firm 323 Chapter 12 The Global Cost and Availability of Capital 324 Financial Globalization and Strategy 324 The Demand for Foreign Securities: The Role of International Portfolio Investors 333 GLOBAL FINANCE IN PRACTICE Bang & Olufsen and Philips N.V. 337 The Cost of Capital for MNEs Compared to Domestic Firms 338 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher than for Their Domestic Counterparts? 340 Summary of Learning Objectives 342 MINI-CASE Novo Industri A/S (Novo) 342 Questions 346 Problems 347 Internet Exercises 349 Chapter 13 Sourcing Equity and Debt Globally 351 Designing a Strategy to Source Equity Globally 352 Optimal Financial Structure 353 Financial Structure of Foreign Subsidiaries 356 Foreign Equity Listing and Issuance 362 Effect of Cross-Listing and Equity Issuance on Share Price 364 Barriers to Cross-Listing and Selling Equity Abroad 366 Alternative Instruments to Source Equity in Global Markets 367 International Debt Markets 370 GLOBAL FINANCE IN PRACTICE Pricing and Structure of a Syndicated Eurocredit 371
5 xvu GLOBAL FINANCE IN PRACTICE Islamic Finance 375 Summary of Learning Objectives 375 MINI-CASE Petrobras of Brazil and the Cost of Capital 377 Questions 380 Problems 381 Internet Exercises 383 Chapter 14 Multinational Tax Management 385 Tax Principles 386 Transfer Pricing 392 Tax-Haven Subsidiaries and International Offshore Financial Centers GLOBAL FINANCE IN PRACTICE The Activities of Offshore Financial Centers 398 Summary of Learning Objectives 398 MINI-CASE The U.S. Corporate Income Tax Conundrum 399 Questions 403 Problems 404 Internet Exercises PART 5 Foreign Investment Decisions 407 Chapter 15 Foreign Direct Investment and Political Risk 408 Sustaining and Transferring Competitive Advantage 409 Deciding Where to Invest 413 How to Invest Abroad: Modes of Foreign Involvement 414 Political Risk 418 GLOBAL FINANCE IN PRACTICE Apache Takes a Hit from Egyptian Protests 420 GLOBAL FINANCE IN PRACTICE Drugs, Public Policy, and the Death Penalty in Summary of Learning Objectives 433 MINI-CASE Corporate Competition from the Emerging Markets 435 Questions 436 Internet Exercises 438 Chapter 16 Multinational Capital Budgeting and Cross-Border Acquisitions 439 Complexities of Budgeting for a Foreign Project 440 Project versus Parent Valuation 441 Illustrative Case: Cemex Enters Indonesia 442 Real Option Analysis 454 Project Financing 455 Cross-Border Mergers and Acquisitions 456 GLOBAL FINANCE IN PRACTICE Statoil of Norway's Acquisition of Esso of Sweden 461 Summary of Learning Objectives 462 MINI-CASE Yanzhou (China) Bids for Felix Resources (Australia) 463 Questions 469 Problems 470 Internet Exercises 473 PART 6 Topics in International Finance Available online at Answers to Selected End-of-Chapter Problems A-1 Glossary G-1 Index 1-1
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