International Financial Management by Jeff Madura is a comprehensive textbook that provides a detailed exploration of the concepts and practices in the field of international finance. The book is widely used in academic settings and serves as a valuable resource for students, professionals, and researchers interested in understanding the complexities of managing financial operations in a global context.
Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Direct Exchange Rates over Time Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Continued on Inside Back Cover Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Want to turn your C into an A? Obviously, right? But the right way to go about it isn’t always so obvious Go digital to get the grades MindTap’s customizable study tools and eTextbook give you everything you need all in one place Engage with your course content, enjoy the flexibility of studying anytime and anywhere, stay connected to assignment due dates and instructor notifications with the MindTap Mobile app and most of all…EARN BETTER GRADES TO GET STARTED VISIT WWW.CENGAGE.COM/STUDENTS/MINDTAP Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 International Financial Management Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 International Financial Management 13th Edition Jeff Madura Florida Atlantic University Australia • Brazil • Mexico • Singapore • United Kingdom • United States Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 International Financial Management, 13th Edition Jeff Madura SVP, General Manager for Social Sciences, Humanities & Business: Erin Joyner Executive Product Director: Mike Schenk Sr Product Team Manager: Joe Sabatino Project Manager: Julie Dierig Content Developer: Stacey Lotkoski, MPS Product Assistant: Denisse A Zavala-Rosales © 2018, 2015 Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S copyright law, without the prior written permission of the copyright owner For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at 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local representative at www.cengage.com Project Manager: Nick Barrows Cengage Learning products are represented in Canada by Nelson Education, Ltd To learn more about Cengage Learning Solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com Printed in Canada Print Number: 01 Print Year: 2016 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Dedicated to my mother Irene Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Glossary documents against payment: shipping documents that are released to the buyer once the buyer has paid for the draft dollarization: replacement of a foreign currency with U.S dollars 699 F factor: firm specializing in collection on accounts receivable; exporters sometimes sell their accounts receivable to a factor at a discount draft (bill of exchange): unconditional promise drawn by one party (usually the exporter) instructing the buyer to pay the face amount of the draft upon presentation factor income: income (interest and dividend payments) received by investors on foreign investments in financial assets (securities) dumping: the exporting of products that were produced with the help of government subsidies factoring: purchase of receivables of an exporter by a factor without recourse to the exporter dynamic hedging: applying a hedge when the currencies held are expected to depreciate and removing any hedge when the currencies held are expected to appreciate Financial account: measures the flow of funds between countries due to direct foreign investment, portfolio investment, and other capital investment Financial Institution Buyer Credit Policy: policy that provides insurance coverage for loans by banks to foreign buyers of exports on a short-term basis E economic exposure: the sensitivity of the firm’s cash flows to exchange rate movements; sometimes referred to as operational exposure economies of scale: increased production lower average cost per unit resulting from equilibrium exchange rate: exchange rate at which demand for a currency is equal to the supply of the currency for sale Eurobonds: bonds that are sold in countries other than the country whose currency is used to denominate the bonds Euro-commercial paper: short-term financing debt securities issued by MNCs for Eurocredit loans: loans of one year or longer that are extended by banks to MNCs or government agencies in Europe Eurocredit market: collection of banks that accepts deposits and provides loans in large denominations and in a variety of currencies The banks that comprise this market are the same banks that comprise the Eurocurrency market; the difference is that the Eurocredit loans are longer term than so-called Eurocurrency loans Eurodollars: continents) dollar deposits in banks in Europe (and on other Euronotes: unsecured debt securities issued by MNCs for shortterm financing European Central Bank (ECB): central bank responsible for setting monetary policy for European countries participating in the single European currency, the euro exchange rate mechanism (ERM): method of linking European currency values with the European Currency Unit (ECU) exercise price (strike price): price (exchange rate) at which the owner of a currency call option is allowed to buy a specified currency; or the price (exchange rate) at which the owner of a currency put option is allowed to sell a specified currency Export-Import Bank (Ex-Im Bank): a bank that finances and facilitates the export of American goods and services and maintains the competitiveness of American companies in overseas markets fixed exchange rate system: an exchange rate system in which exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries floating rate notes (FRNs): a variable rate provision in some Eurobonds that adjusts the coupon rate over time according to prevailing market rates foreign bond: bond issued by a borrower foreign to the country where the bond is placed foreign exchange dealers: dealers who serve as intermediaries in the foreign exchange market by exchanging currencies desired by MNCs or individuals foreign exchange market: market composed primarily of banks, serving firms and consumers who wish to buy or sell various currencies foreign investment risk matrix (FIRM): matrix that displays the financial (or economic) and political risk by intervals (ranging across the matrix from “poor” to “good”) so that each country can be positioned in its appropriate location on the matrix based on its political rating and financial rating forfaiting: refers to the purchase of financial obligations, such as bills of exchange or promissory notes, without recourse to the original holder (usually, the exporter) forward contract: agreement to buy or sell a specified currency at a specified exchange rate on a specified future date forward market: market in which forward contracts are created forward rate: specified exchange rate within the forward contract I imperfect market: the condition where, due to the costs to transfer labor and other resources used for production, firms may attempt to use foreign factors of production when they are less costly than local factors import/export letters of credit: trade-related letters of credit independent variable: term used in regression analysis to represent the variable that is expected to influence another (the “dependent”) variable Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 700 Glossary indirect quotations: exchange rate quotations representing the value measured by number of units per dollar International Bank for Reconstruction and Development (IBRD): also referred to as the World Bank, was established in 1944 to make loans that can reduce poverty and increase economic development International Development Association: was established in1960 to make loans intended to boost economic development in less developed countries International Finance Corporation: was established in 1956 to promote private enterprise within countries International Monetary Fund (IMF): was established in 1944 to promote cooperation among countries on international monetary issues, stabilize exchange rates, and to increase international business intracompany trade: the process that companies adopt to purchase products that are produced by their subsidiaries J J-curve effect: effect of a weaker dollar on the U.S trade balance in which the trade balance initially deteriorates; it only improves once U.S and non-U.S importers respond to the change in purchasing power that is caused by the weaker dollar joint venture: or more firms a venture that is jointly owned and operated by two mail float: mailing time involved in sending payments by mail managed float: exchange rate system in which governments may intervene to prevent their currencies from moving too far in a certain direction market-based forecasting: use of a market-determined exchange rate (such as the spot rate or forward rate) to forecast the spot rate in the future Master Agreement: an agreement that provides participants in the private derivatives markets with the opportunity to establish the legal and credit terms between them for an ongoing business relationship micro-assessment of country risk: the risk assessment of a country as related to the MNC’s type of business mixed forecasting: development of forecasts based on a mixture of forecasting techniques Multibuyer Policy: policy administered by the Ex-Im Bank that provides credit risk insurance on export sales to many different buyers Multilateral Investment Guarantee Agency (MIGA): agency established by the World Bank that offers various forms of political risk insurance to corporations multilateral netting system: complex interchange for netting between a parent and several subsidiaries multinational corporations (MNCs): form of international business L lagging: strategy used by a firm to stall payments, normally in response to exchange rate projections N leading: strategy used by a firm to accelerate payments, normally in response to exchange rate expectations net operating loss carrybacks: offset earnings in previous years letter of credit (L/C): an instrument issued by a bank on behalf of the importer (buyer) promising to pay the exporter (beneficiary) upon presentation of shipping documents in compliance with the terms stipulated therein net operating loss carryforwards: offset earnings in future years licensing: an arrangement whereby one firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or other considerations firms that engage in some practice of applying losses to practice of applying losses to netting: optimizing cash flows by reducing the administrative and transaction costs that result from currency conversion locational arbitrage: the process of buying a currency at a location where it is priced cheap and then immediately selling it at some other location where it is priced higher non-deliverable forward contract (NDF): like a forward contract, represents an agreement regarding a position in a specified currency, a specified exchange rate, and a specified future settlement date, but does not result in delivery of currencies Instead, a payment is made by one party in the agreement to the other party based on the exchange rate at the future date lockboxes: post office boxes to which customers are instructed to send payment nonsterilized intervention: intervention in the foreign exchange market without adjusting for the change in money supply London Interbank Offer Rate (LIBOR): the rate most often charged for very short-term loans (such as for one day) between banks notional value: a valuation to which interest rates can be applied on a periodic basis to determine the net interest that will be paid by one party to another party M macro-assessment of country risk: a country’s overall risk assessment involving consideration of all variables that affect country risk except those that are unique to a particular firm or industry O ocean bill of lading: the carrier issues this if the merchandise is to be shipped by boat Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Glossary open account transaction: sale in which the exporter ships the merchandise and expects the buyer to remit payment according to agreed-upon terms outsourcing: party represents the process of subcontracting to a third overhedging: hedging an amount in a currency larger than the actual transaction amount 701 purchasing power parity (PPP) theory: theory suggesting that exchange rates will adjust over time to reflect the differential in inflation rates in the two countries; in this way, the purchasing power of consumers when purchasing domestic goods will be the same as that when they purchase foreign goods put option on real assets: project that contains an option of divesting part or all of the project P Q parallel bonds: bonds placed in different countries and denominated in the respective currencies of the countries where they are placed quota: maximum limit imposed by the government on goods allowed to be imported into a country parallel loan: loan involving an exchange of currencies between two parties, with a promise to re-exchange the currencies at a specified exchange rate and future date partial compensation: an arrangement in which the delivery of goods to one party is partially compensated for by buying back a certain amount of product from the same party R real cost of hedging: the additional cost of hedging when compared to not hedging (a negative real cost would imply that hedging was more favorable than not hedging) real interest rate: inflation rate nominal (or quoted) interest rate minus the pegged exchange rate: exchange rate whose value is pegged to another currency’s value or to a unit of account real options: perfect forecast line: a 45-degree line on a graph that matches the forecast of an exchange rate with the actual exchange rate regression analysis: statistical technique used to measure the relationship between variables and the sensitivity of a variable to one or more other variables petrodollars: deposits of dollars by countries that receive dollar revenues due to the sale of petroleum to other countries; the term commonly refers to OPEC deposits of dollars in the Eurocurrency market regression coefficient: term measured by regression analysis to estimate the sensitivity of the dependent variable to a particular independent variable political risk: political actions taken by the host government or the public that affect the MNC’s cash flows revaluation: central bank preauthorized payment: method of accelerating cash inflows by receiving authorization to charge a customer’s bank account revalue: to increase the value of a currency against the value of other currencies prepayment: method that exporter uses to receive payment before shipping goods revocable letter of credit: letter of credit issued by a bank that can be canceled at any time without prior notification to the beneficiary price-elastic: sensitive to price changes Primary income: component of current account, mostly composed of income earned by MNCs on their direct foreign investment, and income earned by investors who invest in foreign securities privatization: conversion of government-owned businesses to ownership by shareholders or individuals product cycle theory: theory suggesting that a firm initially establishes itself locally and expands into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets; after some point, its foreign business may decline unless it can differentiate its product from competitors Project Finance Loan Program: program that allows banks, the Ex-Im Bank, or a combination of both to extend long-term financing for capital equipment and related services for major projects purchasing power parity (PPP) line: diagonal line on a graph that reflects points at which the inflation differential between two countries is equal to the percentage change in the exchange rate between the two respective currencies implicit options on real assets an upward adjustment of the exchange rate by a S Secondary income: component of current account, mostly composed of aid, grants, and gifts from one country to another semistrong-form efficient: description of foreign exchange markets, implying that all relevant public information is already reflected in prevailing spot exchange rates sensitivity analysis: technique for assessing uncertainty whereby various possibilities are input to determine possible outcomes simulation: technique for assessing the degree of uncertainty Probability distributions are developed for the input variables; simulation uses this information to generate possible outcomes Single European Act: act intended to remove numerous barriers imposed on trade and capital flows between European countries Single-Buyer Policy: policy administered by the Ex-Im Bank that allows the exporter to selectively insure certain transactions Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 702 Glossary Small Business Policy: policy providing enhanced coverage to new exporters and small businesses time-series analysis: analysis of relationships between two or more variables over periods of time Smithsonian Agreement: conference between nations in 1971 that resulted in a devaluation of the dollar against major currencies and a widening of boundaries (2 percent in either direction) around the newly established exchange rates trade acceptance: draft that allows the buyer to obtain merchandise prior to paying for it snake: arrangement established in 1972, whereby European currencies were tied to each other within specified limits special drawing rights (SDRs): represent a unit of account that are allocated to member countries to supplement currency reserves in IMF financing spot market: market in which exchange transactions occur for immediate exchange spot rate: current exchange rate of currency standby letter of credit: document used to guarantee invoice payments to a supplier; it promises to pay the beneficiary if the buyer fails to pay sterilized intervention: intervention by the Federal Reserve in the foreign exchange market, with simultaneous intervention in the Treasury securities markets to offset any effects on the dollar money supply; thus, the intervention in the foreign exchange market is achieved without affecting the existing dollar money supply straddle: a combination of a call option and a put option with the same exercise price strangle: a combination of a put option and a call option, whereby the exercise prices are not the same strike price (exercise price): price (exchange rate) at which the owner of a currency call option is allowed to buy a specified currency; or the price (exchange rate) at which the owner of a currency put option is allowed to sell a specified currency strong-form efficient: description of foreign exchange markets, implying that all relevant public and private information is already reflected in prevailing spot exchange rates Structural Adjustment Loan (SAL): established in 1980 by the World Bank to enhance a country’s long-term economic growth through financing projects supplier credit: operations syndicate: credit provided by the supplier to itself to fund its group of banks that participate in loans T transaction exposure: the sensitivity of the firm’s contractual transactions in foreign currencies to exchange rate movements Transfer payments: sometimes referred to as secondary income in balance of payments accounting; component of current account, mostly composed of aid, grants, and gifts from one country to another transfer pricing: policy for pricing goods sent by either the parent or a subsidiary to a subsidiary of an MNC transferable letter of credit: document that allows the first beneficiary on a standby letter of credit to transfer all or part of the original letter of credit to a third party translation exposure: degree to which a firm’s consolidated financial statements are exposed to fluctuations in exchange rates triangular arbitrage: action to capitalize on a discrepancy where the quoted cross exchange rate is not equal to the rate that should exist at equilibrium U Umbrella Policy: policy issued to a bank or trading company to insure exports of an exporter and handle all administrative requirements W weak-form efficient: description of foreign exchange markets, implying that all historical and current exchange rate information is already reflected in prevailing spot exchange rates Working Capital Guarantee Program: program conducted by the Ex-Im Bank that encourages commercial banks to extend shortterm export financing to eligible exporters; the Ex-Im Bank provides a guarantee of the loan’s principal and interest World Bank: bank established in 1944 to enhance economic development by providing loans to countries World Trade Organization (WTO): organization established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord writer: seller of an option tariff: tax imposed by a government on imported goods technical forecasting: prices or trends tenor: development of forecasts using historical time period of drafts Y Yankee stock offerings: offerings of stock by non-U.S firms in the U.S markets Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Index A Absolute form of PPP, 257 Accounting, Accounting laws, 86–87 Accounts receivable financing, 582 Accretion swap, 563 Acquisitions, of existing operations, 11–12 international, 479–480 international partial, 490 privatized businesses, 490–491 Advising bank, 578 African Development Bank, 58 Agency costs, Agency problem, 4–6 corporate control of, 5–6 MNC’s, 531 parent control of, Airway bill, 579 All-in-rate, 584 Altria, 374 American depository receipts (ADR), 84–85, 101 equation, 84–85 Amortizing swap, 563 Anti-takeover amendments, by target, 480 Appreciation, 103 Arbitrage, 85, 165, 166, 167, 168, 227 comparisons, 236 covered interest, 232–236 international, 227–247 locational, 227–229 triangular, 229–232 Argentina, 41, 52, 86, 113, 151, 417, 470 Ashland, Inc., 561 Asia, 52, 76, 81, 193, 222, 484, 488, 505, 586 Asian crisis, 55, 194 exchange rate during, 223–224 interest rate during, 224 Asian Development Bank, 58, 221 Asian financial crisis, 218–224 Asian money market, 76 Ask, 67 Ask price, 67 Ask rate, 132 Assignment of proceeds, 588–589 AT&T, 81 Australia, interest rates, 77, 191, 597 Austria, 198 B Back-to-back loan, 373, 556 Bahrain, 39 Balance of payments, 33–37 Balance of trade, 34 trends, 42–43 Balance of trade deficit, exchange rate correcting, 49–50 Bank for International Settlements (BIS), 57 Bank Letter of Credit Policy, 588 Banker’s acceptance, 582, 583–585 life cycle, 585 Banks, economic development agencies, 55–58 Barter, 586 Basel Accord, 79 Basel Committee, 79 Basel II Accord, 79 Basel III Accord, 79 Basis (floating-for-floating) swap, 563 Bausch & Lomb, 52 Belgium, 198 Berlin wall, 37 Best Foods, 38 Bid, 67, 132–133 Bid/ask spread, 67–69, 132–133 accounting for, 231–232 of banks, 67 among currencies, 67–69 equation, 68 factors that affect, 69–70 Biger and Hull currency option pricing model equation, 166–167 Bilateral netting system, 615 Bill of exchange, 580, 583 Bill of lading (B/L), 579 Black & Decker, 342, 356 Black-Scholes stock OPM, 167 Blockage of funds transfers, 505 Blocked funds, 450–451, 617 Blockholders, 478 Bloody Thursday, 221 Board of directors, 477–478 Bodurtha and Courtadon, predictive ability, currency option pricing model, 167 Boeing, 10 Bolivar, 194–195 Bolivia, 66 Bond markets, 80 international, 80–81 other, 81–83 Bond offering, domestic, 528 global, 528 Bond yields, 82, 552 Bonds, 56, 80–83 Eurobonds, 80–81 in eurozone, 199 foreign, 80 impact of Greek crisis, 82–83 parallel, 80 private placement, 528 Brazil, 11, 52, 222, 484–485 interest rates, 597 Break-even salvage value, 451–452 Break-even terminal value, 451 Bretton Woods Agreement, 64, 188 Bribery, 46 Bulgaria, 4, 38, 670 Business laws, 46 C CAFTA, 39 Call option, at the money, 148 contingency graph, for buyer and seller, 147 European style, 143 to hedge payables, 144 hedge on payables, 356–363 to hedge project bidding, 144 to hedge target bidding, 145 hedging with, 357–360 in the money, 148 out of the money, 149 premium, 143 premium equation, 149 on real assets, 492–493 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 703 704 Index Callable swap, 563 Campbell Soup Co., 561 Canada, 11, 39, 40–42, 52, 86, 191, 485–487 interest rates, 55 Canon, 52 Capital, components of, 527–530 cost of, 14, 21, 535 across countries, 539–543 vs domestic firms, 536–537 multinational, 534–539 Capital account, 33, 36–37 errors and omissions in, 37 Capital asset pricing model (CAPM), 537 cost-of-equity comparison, 537–539 Capital budgeting, and exchange rate forecasting, 297–298 incorporating risk in, 512–516 multinational, 437–458 input, 439–441 subsidiary vs parent, 437–439 tax law for multinational, 469–476 Capital flows, international, 52–55 Capital goods financing, medium-term, 586 Capital management, working capital, 611–612 Capital structure decision, corporate characteristics, 531 host country characteristics, 531–532 of MNC, 530–533 subsidiary vs parent, 533–534 Caribbean, 52 Carry trade, 120–123 risk, 122–123 Carrybacks, net operating loss, 471–472 Carryforwards, net operating loss, 471–472 Cash, 507 investing excess, 618–626 Cash flow, adjustment of the estimated, 512–515 and correlation conditions, 331–332 calculation, 475 estimating, 481–482 government restrictions, 618 impact of project on prevailing, 452–453 optimizing, 614–618 Cash inflows, 531, 614–615 Cash management, 611 centralized, 613–614 international, 611–626 Cash positions, monitoring, 614 Cash shortages, 614 Cash transfers, intersubsidiary, 617 Caterpillar, 337, 556 CBOT, 142 Cemex, 84 Central America, 39 Central American Trade Agreement (CAFTA), 39 Central bank, 209 Centralized multinational financial management, Chicago Mercantile Exchange (CME), 136, 137, 139, 142 Child labor laws, 46, 47 Chile, 39, 52, 133, 222 China, 8, 11, 42, 43, 51, 52, 54, 417, 572–573 impact of the Asian crisis on, 222 pegged exchange rate system, 194 China Telecom Corp., 84 Citgo Petroleum, 52 Citigroup, 65 CME Group, 136, 142–143 Coca-Cola Co., 75, 81, 342, 374, 490 Cofinancing agreement, 56 Colgate-Palmolive, 3, 52 Commercial invoice, 579 Commercial paper, 584, 596, 618 Commission, 142 Comparative advantage, Compensating balance, 131 Compensation, 586–587 Compensatory financing facility (CFF), 56 Computers, 95 Conditional currency options, 152–154 Consignment, 581 Consumer demand, multinational capital budgeting, 439 Contract, forward, 74 Control decisions, 490–492 Conversion costs, minimizing, 615–617 Corporate control, barriers to international, 480–481 international, 429, 479–482 motives for international acquisitions, 479 trends in international acquisitions, 479–480 Corporate governance, by board members, 477–478 by institutional investors, 478 international, 477–478 by shareholder activities, 478 Corporate income tax comparison among countries, 470 Correlation coefficients, 331 Correlation conditions, and cash flow, 332 Corruption, 505–506 Cost of capital See Capital, cost of Cost of debt See Debt, cost of Cost of equity See Equity, cost of Cost of labor, 43 Costs, multinational capital budgeting, 440 Counterpurchase, 587 Countertrade, 586–587 Country, comparing risk rates, 511 Country risk, assessing, 508–509 checklist approach, 508 Delphi technique, 508 inspection visits, 509 quantitative analysis, 508–509 characteristics, 503–507 financial risk characteristics, 506–507 measuring, 507–511 political risk characteristics, 503–506 rating, 509–511 Country security laws, 46–47 Covered arbitrage, bid/ask spreads, 231–232 Covered interest arbitrage, 232–236 by non-U.S investors, 236 Credit, 36, 37 Credit crisis, credit market, 79–80 and IMF, 54 impact on stock markets, 91 Credit crisis of 2008, 80, 148, 505, 534, 575 access to funding, 596 impact on payment methods, 581 Credit market, international, 78–80 regulations, 79 syndicate loans, 78–80 Credit risk, of international bonds, 82 Credit spread, 180 Credit Suisse Group, 84 Crisis, market movements in, 113–114 Croatia, 38, 81 Cross border factoring, 582 Cross exchange rate quotations, 73–74 Cross exchange rates, 73–74, 116–117, 137, 229 Cross-border factoring, 582 Cross-hedging, 374 Currency, 48–49, 96–97 comparison of bid/ask spread among, 67–69 demand for, 105–106 diversifying cash, 623–624 European, 198–203 financing with, 596–602 inconvertibility, 505 inflow, 545 investing in, example, 619–621 minimizing conversion costs, 615–617 money market interest rates among, 76–77 repeated investing, 638 supply of, 106 Currency bear spreads, 180–181 Currency boards, 195–196 Currency bull spreads, with call options, 177–180 with put options, 180 speculating with, 180 Currency call options, 75, 142 firms use, 144–145 hedge, 357 premiums, 143–144 speculating in, 145–148 Currency correlations, 331 to net cash flows, 331–332 Currency derivatives, 74, 131–154 Currency diversification, 374 Currency diversification argument, for exchange rates, 374 Currency futures, market, 91, 136–141 MNCs using, 139–140 pricing, 139 speculation, 141 trading, 137–138 trading platforms, 138 Currency futures contract, 75, 136 credit risk of, 138 Currency markets, 115–116 Currency option combinations, 169–182 Currency option hedge, 356, 370 Currency option pricing, 165–168 boundary conditions, 165–166 Currency option pricing model, Biger and Hull model, equation, 166 European model, 167 predictive ability, Bodurtha and Courtadon, 167 Currency options, 75 basic and conditional, 152–154 conditional, 152–154 European, 154 Currency options exchanges, 142 Currency options market, 88, 142 efficiency of, 152 over-the-counter, 142 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Index Currency put option, 75, 148 hedging, 147 MNCs using, 149–150 at the money, 148 in the money, 148 out of the money, 149 premiums, 149 pricing, 167–168 speculating, 150–152 Currency put option premiums, equation, 149 Currency risk, 69 Currency speculation, 120 Currency spot rate, equation, 108–109 Currency spreads, 177–182 Currency straddles, 169–173 long, 169–171 short, 171–172 speculating with, 172–173 Currency strangles, 173–177 long, 173–175 short, 175–177 Currency swaps, 555-556 Currency volatility, 330 Current account, 33–35 Cyprus, 38, 198 Czech Republic, 38, 198 D Dairy Queen, 11 Debt, external sources, 528–529 cost of, 534 country differences, 540–541 vs equity, 535–536 Debt decision, fixed vs floating rate, 560–564 Debt denomination, analyzing alternatives, 554–555 identifying alternatives, 553–554 Debt denomination analysis, 553–555 Debt denomination decision of foreign subsidiaries, 551–553 Debt financing, long-term, 551–564 subsidiary, 533–534 using currency swaps, 555–556 using parallel loans, 556–559 Debt maturity decision, 559–560 Debt spread, 180 Debits, 34 Decentralized multinational financial management, Denmark, 38, 198 Denominations, 81 Depreciation, 103, 187 Deutsche Bank, 65 Devaluation, 187 Devalue, 187 Direct foreign investment (DFI), 11, 35, 52–53, 88, 417–430 assessing potential, 427–430 barriers to, 425–427 benefits, 421–424 cost-related motives, 418–420 economic growth, 53 exchange rates, 53 factors affecting, 52–53 government-imposed conditions, 426–427 host government views, 424–427 incentives to encourage, 425 motives for, 417–421 privatization, 52–53 restrictions, 52 revenue-related motives, 417–418 tax rates, 53 whether to pursue, 426 Direct Loan Program, 588 Direct quotations, 70 Diversification, 104–105 among countries, 424 currency, 374 international stock, 97–98 limitations of international, 98 Diversification analysis, of international projects, 422–424 Divestitures, international, 491–492 Dividend discount model, for valuing stocks, 98–101 Dividend payments, subsidiary, 612 Documentary collections, 580 Documents against acceptance, 580 Documents against payment, 580 Dollar cash flows, 14 Dollar initial outlay calculation, 481 Dollarization, 197 Domestic equity offering, 529 Domestic model, of valuation, 14 Dominican Republic, 39 Dow Chemical Co., 3, 83, 479 Draft, 580–581, 583–584 Due diligence, 482 Dumping, 45 DuPont Co., 10, 337, 357 Dynamic hedging, 625–626 E Earnings, forecasts, 403–404 remitted, 438, 489, 527 Earnings assessment, and exchange rate forecasting, 298 East Germany, 37 Eastern Europe, 37, 38, 43, 52, 198, 484 Economic exposure, 335–340 assessing, 394–395 to foreign currency appreciation, 337 to foreign currency depreciation, 336–337 managing, 393–404 measuring, 337–340 restructuring to reduce, 395–398 Economies of scale, 419 Effective financing rate, 597–598 borrowing foreign currency calculation, 597–598 calculation, 597 Effective return on foreign deposits, equation, 270 Effective yield, 618, 619–622 on foreign deposits, calculation, 619 Electronic communication networks (ECNs), 95 E-mini futures contacts, 136 Enron, Environmental barriers, to DFI, 426 Environmental restrictions, 45–46 Equilibrium exchange rate, 104, 106–107 change in, 107–108 determination, 107 Equity, cost of, 535–536 705 country differences, 541–543 external sources of, 529–530 private placement, 530 Equity offering, 529–530 domestic, 529 global, 529–530 MNC’s cost of, 534–535 Equity risk premium, 541–542 Estonia, 38, 198 Euro, 39, 63, 66, 69, 71, 72, 76, 82, 105, 120–121, 142, 193, 198 floating exchange rate, 191 impact of a country abandoning, 202–203 Eurobond market, 80–81 Eurobonds, 80, 82 denominations, 81 features of, 81 secondary market, 81 underwriting, 80 Euro-commercial paper, 596 Eurocredit loans, 78 Eurocredit market, 78 Eurodollar, 76 Euronext market, 85 Euronotes, 596 Europe, 18, 37, 43, 76, 78, 79, 82, 84, 85, 222 snake arrangement, pegged exchange rate, 192 European Bank for Reconstruction and Development, 58 European Central Bank (ECB), 198, 203, 540 European currency, 198–203 European currency options, 154 European Currency Unit (ECU), 192 European monetary system (EMS), 192–193 European money market, 76 European style call options, 143 European Union (EU), 38–39, 79, 198 Eurozone, 39, 69, 198, 199–202 crisis within, 199–202 financial flows, 199 firms and, 199 monetary policy, 198 Exam, final self exam, 633–641 Exchange clearinghouse, 138 Exchange rate, 48–50, 53, 63, 124–126, 255–275 affecting earnings, 438 changes in, 70 correcting balance of trade deficit, 49–50 cross, 73, 116–117, 118 during Asian crisis, 223–224 equilibrium, 104–108 factors that influence, 108–116 floating, 64 forecasting, 297–315 forecasting errors, 307–309 friction, 50–52 fundamental forecasting, 299–303 government controls, 112 government influence on, 187–210 and international portfolio investment, 53 and intervention, 203–207 limitations of fundamental forecasting, 302–303 market-based forecasting for, 303–306 measuring impact, 96–97 measuring movements, 103–104 mixed forecasting for, 306–307 multinational capital budgeting, 438 pegged, 191 reducing risk of foreign stocks, 97 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 706 Index Exchange rate (continued ) technical forecasting, 299 transaction exposure See Transaction exposure volatility, forecasting, 314–315 why, 297–299 Exchange rate boundaries, 203–204 Exchange rate determination, 103–123 Exchange rate equilibrium, 104–108 Exchange rate fluctuations, measuring exposure, 325–345 Exchange rate forecast, 297–299, 600–601 Exchange rate mechanism (ERM), 192 Exchange rate movement, 438 expected, 117–123, 267 measuring, 103–104 smoothing, 203 standard deviation of, 329 Exchange rate quotations, 70–74 cross, 73–74 direct, 70–72 indirect, 70–72 online sources, 72–73 source of, 72–73 Exchange rate risk, 17, 77, 78, 81, 96–97, 99–100, 323–326 alternative methods to reduce, 373–374 exposure to, 19–20, 537 of international bonds, 82 of a pegged currency, 196 relevance of, 325–326 Exchange rate system, 187–198 fixed, 187–189 freely floating, 189–190 floating, 64 managed float, 190–191 pegged, 191–196 Exchange-traded funds (ETFs), 101 Excise tax rates, 469, 471 Exercise price, 75, 143 Expenses, subsidiary, 611–612 Expiration date, 142, 143 Export credit insurance, 589 Exporters, 577, 579–581, 583–585 subsidies for, 45 Export-Import Bank (Ex-Im Bank), 587–589 Exporting, 10 Exports, 12, 18, 33–34, 39, 40 Exposure, economic, 335–340 measuring, 337–340 exchange rate risk, 19 foreign currency appreciation, 337 foreign currency depreciation, 336–337 international economic conditions, 17–19 international political risk, 19 hedging translation, 403–404 managing translation, 402–404 operating, 335 transaction, 326–335 translation, 340–343 Expropriation, 503, 517, 589 External short-term financing, 596 ExxonMobil, F Facebook, 3, 17, 418 Factor, 582 Factor income, 34 Factoring, 582–583 Federal Reserve System (the Fed), 55, 64, 203, 204, 205–209 Ferro, Fidelity, 100, 101 Finance, Financial Accounting Standards Board (FASB), 340 Financial accounts, 35–36 Financial Institution Buyer Credit Policy, 588 Financial markets, international, 63–89 serving MNCs, 88 Financial statements, 340 Financing, arrangement, 447–450 with currencies, 596–604 with currency portfolio, 602–604 external short-term, 596 foreign, 595–596 foreign, sources of, 595–596 with foreign currency, 596–602 with foreign funds, 401 internal short-term, 595–596 loans facilitating, 555–559 long-term, 429 parent, 448–450 short-term, 595–604 subsidiary, 448, 449–450 Financing costs, uncertainty, 555 Finland, 38, 198, 425 Fireman’s Fund, 52 Fisher effect, 111, 274–276 Fisher, Irving, 266 Fixed exchange rate, agreements, 64 Fixed exchange rate system, 187–189 Floating exchange rate, countries, 190–191 Floating exchange rate system, 64 Floating rate notes (FRNs), 81 Ford Motor Co., 556 Forecast bias, 307–310 graphic evaluation of, 309–311 shifts in, 312 statistical test of, 311–312 Forecast error, for exchange rates, 307–308 among currencies, 308–309 bias, 309–312 graphic evaluation, 309–311 measurement, 307–308 time horizons, 308 time periods, 308 Forecasting, exchange rates, 297–315 for exchange rates, interval, 313–315 for foreign exchange market, 297–299 fundamental, for exchange rates, 299–303 technical, for exchange rates, 299 why, 297–299 Forecasting techniques, for exchange rates, 299–307 Foreign bond, 80 Foreign capital, 53–55 Foreign currency speculation, 118–120 Foreign exchange, attributes of banks providing, 67 dealers, 65 history, 63–64 quotations, 70–74 transactions, 64–70 Foreign exchange controls, government use of, 210 Foreign exchange market, 63–75, 88 derivative contracts in, 74–75 direct intervention, 203–209 forecasting, 297–299 indirect intervention, 209–210 Foreign financing sources of, 595–596 Foreign government, 19 Foreign investment, 53, 97, 202-203 Foreign investment risk matrix (FIRM), 511 Foreign stock, reducing the exchange rate risk of, 97 in United States, 84–85 valuation, 98–101 Foreign stock listings, and SOX, 84 Foreign stock markets, 85 Foreign subsidiaries, 13, 340, 530, 551–553 establishing new, 12 Foreign target valuation, disparity, 488–489 Forfaiting, 586 Fortune Brands, Forward contracts, 74, 131, 135, 356, 363, 373, 400–401, 404 comparison to currency futures, 138–139 hedging, 400–401 long-term, 373 MNCs use, 131–132 non-deliverable, 135 offsetting, 134–135 Forward hedge, 357, 360 on payables, 357 on receivables, 367–370 Forward market, 74, 131–136 Forward premiums, 244–247 changes in, 245–247 across maturities, 244–245 variation in, 244–247 Forward rate, 74, 131, 232, 234–235 as a forecast, 303, 304–305, 600, 622 changes in, 246–247 movements, 134 premium or discount on, 133–134 Forward swap, 563 France, 38, 40, 52, 86, 198, 236, 417, 425, 587 Franchising, 11, 12 Freely floating exchange rate system, 189–190 Fuji Co., 11 Full compensation, 587 Fund transfers blockage of, 505 technology used, 614 Fundamental forecasting, 299–303 with a comprehensive model, 302 for exchange rates, 299–303 instantaneous influences in, 301 with a lagged impact, 300–301 limitations, 302–303 sensitivity analysis, 313 use of PPP, 300 Funds, internal control over, 596 Funds transfers, blockage, 505 Future spot rate, 75 Futures contracts, 356, 363 hedging, 403 Futures hedge, 356 on payables, 356–357 on receivables, 363–364 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Index Futures market, currency, 136–141 Futures position, closing out, 140 Futures rate, 75 FX Connect, 65 G Gap, GATT, 38, 57 GDP, 40 General Agreement on Tariffs and Trade (GATT) accord See GATT General Electric, 10, 52, 374 General Mills, Inc., 11 General Motors, 11, 46 Germany, 37, 38, 40, 52, 65, 198, 470 degree of financial leverage, 541 Global equity offering, 529–530 Globex system, 142 Gold standard, 64 Google, Inc., 74, 475, 479 Greece, 38, 55, 56, 82–83, 198, 200, 202 Greek crisis, 82–83 Guinness, 80 H Hedge, 139, 140, 144, 145 currency call option, 357–360 forward, 356–357 money market, 357 proxy, 374 Hedge funds, 478 Hedging, 97, 145, 325 cross-hedging, 374 with currency bear spreads, 391–392 with currency bull spreads, 390–391 with currency straddles, 388–389 with currency strangles, 390 dynamic, 625–626 and exchange rate forecasting, 297 exposure to fixed assets, 401–402 exposure to payables transactions, 356–363 exposure to receivables, 363–371 forward, 357 forward contracts, 400–401 futures contracts, 363–364 interest payments with interest rate, 561–564 leading and lagging, 374 limitations, 371–373 long-term, 372–373 overhedging, 371 selective, 355–356 swaps, 561–564 techniques, 370–371 transaction exposure, 355–356, 403–404 translation exposure, limitations, 403–404 an uncertain payment, 371 Hedging payables comparison of techniques for, 360-363 evaluating past decisions on, 363 optimal technique for, 361 real cost of, 363 techniques, 360–363 Hedging receivables, techniques, 367–370 Heineken, 35, 36, 84 Hewlett-Packard, 223 Home currency, 53, 66, 76, 136, 191–192, 198, 202 weak, 50, 207 Hong Kong, 76, 221, 696 Host government barriers, 480–481 Host government incentives, 453 Host government takeovers, preventing, 516–517 Host governments, and DFI, 424–427 Hungary, 38, 52, 81, 198, 417, 491 I IBM, 3, 8, 10, 12, 491 IMF, 55–56, 101, 194, 220, 221 funding dilemma, 56 Imperfect market, Import/export letters of credit, 578 Importers, 10, 50, 577–578, 581–584, 586–587, 588–589 Importing, 10 Imports, 12, 33–34, 39, 42 restrictions on, 45 Income level, 44 relative, 111–112 India, 39, 52, 113 interest rates, 592, 597 Indirect quotations, 70–71 Indonesia, 66, 221, 224, 553 financial crisis rescue package, 220 floating exchange rate, 191 Industry barriers, to DFI, 425 Inefficient bureaucracy, 505 Inflation, 113, 189, 195, 198, 202, 203, 267–268 and capital budget analysis, 447 impact on trade, 44 Inflation rates, relative, 109–110 Information costs, 96 Information systems, Initial investment, multinational capital budgeting, 439 Institutional speculation, 118–120 based on expected appreciation, 118–119 based on expected depreciation, 119–120 Insurance export credit, 589 for expropriation, 517 purchase, 517 Intel Corp., 8, 144, 561 Inter-American Development Bank, 58 Interbank market, 66 Interest payments, hedging with interest rate swaps, 561–564 Interest rate parity (IRP), 236–244, 600 considerations when assessing, 243–244 derivation of, 237–238 and forward premium, equation, 238–240 comparison to PPP and IFE, 275–276 derivation of, 237–238 graphic analysis, 240–242 illustration of, 240 implications of, 600 interpretation, 242 line, 241 political risk, 243 tax laws, 244 testing, 242 transaction costs, 243 Interest rate risk, of international bonds, 81–82 Interest rate swaps, hedging with interest payments, 561–564 707 illustration of, 562 limitations, 563 Interest rates, 507, 531 during Asian crisis, 223–224 among currencies, 597 government control of, 209–210 and international portfolio investment, 53 international Fisher effect, 266–275 real, 111 relative, 110–111 Internal short-term financing, 595–596 International arbitrage, 227–247 See also Arbitrage, international International Bank for Reconstruction and Development (IBRD) (World Bank), 56–57 International bond market, 80–83 International bonds, risk, 81–82 International business, methods to conduct, 10–13 pursuing, 8–9 International capital flows, 52–55 International cash management, 611–626 International Chamber of Commerce, 579 International credit market, 78–80 International Development Association (IDA), 57 International diversification, 536–537 benefits, 421–424 limitations of, 98 International divestitures, 491–492 International economic conditions, 17–19 International Financial Corporation (IFC), 57 International financial markets, 63–89 investing in, 95–101 International Fisher effect (IFE), 266–276, 621–622 derivation of, 270–272 graphic analysis of, 272–273 implications of, 267 implications of the IFE for forecasts, 305–306 implications of the IFE for two non-U.S currencies, 268 testing, 273–274 theory, 266, 275–276 International Fisher effect (IFE) line, 273 International flow of funds, 33–58 International Monetary Fund (IMF), 55–56, 101, 194, 220, 221 International money market, 75–78 See also Money market, international International money market securities, 77–78 International mutual funds (IMFs), 101 International political risk, 19 International product life cycle, International stock diversification, 97–98 International stock exchanges, 95–98 International stock markets, 83–88 International Swaps and Derivatives Association (ISDA), 564 Master Agreement, 564 International trade, 10, 13 agencies that motivate, 587–590 financing, 577–590 flows, factors affecting, 43–52 growth in, 37–43 Internet facilitating, 10 payment methods, 577–581 International trade and financial transactions, agencies that facilitate, 55–58 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 708 Index Internet, and international trade, 10 facilitates management control, Intersubsidiary cash transfers, 617 Intersubsidiary payments matrix, 615, 616 Interval forecasts, for exchange rates, 313–315 Intervention, in currency valuation, 209–210 and exchange rate, 203–209 Intervention warnings, 210 Intracompany trade, 50 Investing, in MNC stock, 104–105 internationally, 104–105 Investment, direct foreign, 11 Investment currency, appreciation in, 121, 122 Investor hedge argument, for exchange rates, 325–326 Investors, institutional, 478 Ireland, 198, 200, 418, 425 Irrevocable letter of credit, 579 iShares, 101 Issuing bank, 578 Italy, 38, 63, 86, 198, 200 J J.C Penney, 35 JPMorgan Chase & Co.,, 5, 65 Jamaica, Japan, 8, 39, 40, 42, 43, 52, 63, 80, 220, 222, 241, 417 degree of financial leverage, 540 impact of the Asian crisis on, 222 interest rates, 597 J-curve effect, 50 Johnson & Johnson, 556 Johnson Control, 561 Joint venture, 11, 12, 13 K KFC, 417 Korea, 419 L Labor laws, 46 Lagging, 374 Latin America, 52, 57, 74, 84, 210, 222, 421 Latvia, 38, 198 Leading, 374 Letters of credit (L/C), 578–580, 583 irrevocable, 579–580 standby, 583 types of, 578–580 LIBOR, 77, 528–529, 560–564 Licensing, 10, 13 Licensing agreements, 12 Liquidity, 116 Liquidity management, subsidiary, 612 Liquidity risk, of international bonds, 82 Lithuania, 38, 198 Loans, 78–79, 82, 528–529 back-to-back, 556 bank, 596 eurocredit, 78 financing costs of fixed vs floating rates, 560–561 financing costs with different maturities, 559–560 parallel, 373, 556–559 programs, 588 syndicated, 78–79, 529 Locational arbitrage, 227–229 Lockboxes, 615 London Interbank Offer Rate (LIBOR), 77, 528–529, 560–564 Long straddle, 169–172 Long-term financing DFI, 429 and exchange rate forecasting, 298 Long-term forward contracts, 373, 402 Luxembourg, 38, 198 cash flows, uncertainty, 17–20 cash flow diagram, 13 management structure, 6–8 management styles, 6, managing, 4–8 size, 536 uncertainty affects cost of capital, 21 valuation model, 13–21 Multinational financial management, 3–22 Multinational model, of valuation, 14–16 Mutual funds, international, 101 M N Maastricht Treaty, 198 Macro-assessment of country risk, 507 Mail float, 615 Malta, 38, 198 Managed float, 190–191 Managed float exchange rate system, 190–191 Management, Market, Asian money, 76 black, 197 currency options, 142 eurobond, 80–81 eurocredit, 78 forward, 74, 131–136 interbank, 66 secondary, 81 spot, 65 Market-based forecasting, for exchange rates, 303–306 Marketing, McDonald’s, 11, 80 Medium-Term Guarantee Program, 587–588 Medtronic, Merck & Co., 356, 357 Mexican peso crisis, 193 Mexico, 8, 38, 39, 42, 51, 52, 63, 84, 133, 222, 425 pegged exchange rate system, 193 Micro-assessment of country risk, 507 Mixed forecasting, for exchange rates, 306–307 Money market, 76–77, 357, 364 Asian, 76 currency options, 154 European, 76 interest rates among currencies, 76 international, 75–77 Money market hedge, 364 on payables, 357 on receivables, 364 vs forward hedge, 357 Morocco, 39, 587 Motorola, 223 Multibuyer Policy, 589 Multilateral Investment Guarantee Agency (MIGA), 57, 517 Multilateral netting system, 615 Multinational capital budgeting, 437–458 example, 441 incorporating international tax law in, 469–476 input for, 439–441 parent financing, 448–450 subsidiary financing, 448, 449–450 See also Capital budgeting, multinational Multinational corporations (MNCs), NAFTA, 38 National income, impact on trade, 44 Nestle SA, 11, 80 Net cash flows, estimating in currencies, 328 Net operating loss carrybacks, 471 Net operating loss carryforwards, 471 Net present value (NPV), calculation, 443 from acquiring firm’s perspective, 481 estimating, 482 Netherlands, 38, 52, 198 Netting, 615–617 New York Stock Exchange (NYSE), 85 Nike, 3, 8, 12, 223 Nokia, 84 Non-deliverable forward contracts (NDF), 135–136 Nonsterilized intervention, 206–207 North American Free Trade Agreement (NAFTA) See NAFTA Norway, 198 Notes, short-term, 596 Notional value, 561 NYSE, 85 NYSE Euronext, 85 O OANDA, 65 Ocean bill of lading, 579 Oman, 39 Open account transactions, 581 Operating exposure, 335 Oracle Corp., 8, 479 Organization for Economic Cooperation and Development (OECD), 58 Organization of Petroleum Exporting Countries (OPEC), 76 Outsourcing, 39–40 impact on trade, 39–40 managerial decisions, 40 Overhedging, 371 Overseas Private Investment Corporation (OPIC), 517, 589–590 Over-the-counter currency futures market, 137 Over-the-counter currency options market, 142 Over-the-counter (OTC) stock market, 101 P Parallel bonds, 80 Parallel loan, 373 using, 556–559 Parent (company), 504 Partial compensation, 587 Payables, techniques to hedge, 360–363 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Index Payment entries, 34 Payments, for merchandise and services, 34 transfer, 34 Pegged currency, interest rates, 196 Pegged exchange rate, 191 Asian, 193–194 China, 194 classification of, 196 limitations, 191–192 Venezuela, 194–195 Pegged exchange rate system, 191–196 PepsiCo, 12, 326, 374 Peru, 39 Petrodollars, 76 Piracy, restrictions on, 45 Pizza Hut, 11 Poison pills, by target, 480 Poland, 38, 52, 198 Political risk, international, 19 of interest rate parity, 243–244 Political risk characteristics for countries, 503–506 Portfolio, diversification, 623–625 exposure, 329–335 investment, 35–36 risk of two-currency, equation, 329 Portugal, 38, 55, 83, 198, 200 Pound, trends in, 121–122 PPP See Purchasing power parity Preauthorized payments, 615 Premium, 133–134, 143, 148 equation, 133–134 Prepayment, 577–578 Price, exercise, 75 multinational capital budgeting, 439–440 strike, 75 Price elastic, 49 Price index, 258–259 Pricing models, 166–168 Private equity firms, 478 Private Export Funding Corporation (PEFCO), 589 Private placement of equity, 530 Privatization, and direct foreign investment, 52–53 Privatized, 84 Privatized businesses, international acquisitions of, 490–491 Probability distribution, 601–602, 622–623 Procter & Gamble Co., 325, 372 Product cycle theory, Project assessment, for risk, 454–457 Project Finance Loan Program, 588 Protective barriers, to DFI, 425 Proxy hedge, 374 Purchasing power disparity, 261–262 Purchasing power parity (PPP), 257–266 absolute form, 257–258 comparison to IRP and IFE, 275–276 derivation, 258–259 estimate exchange rate movement, 265–266 estimating exchange rate effects, 259–260 for fundamental forecasting for exchange rates, 300 graphic analysis, 260–262 interpretations of, 257–258 limitations of, 274 relative form, 258 simplified, 260 Purchasing power parity line, 260–261 Purchasing power parity theory, testing, 263–265 Put option, 364, 366–367 contingency graph, for buyer and seller, 151–152 on real assets, 493 Put option hedge, 364 on receivables, 364–367 Put option premium, 149, 165, 166 Putable swap, 563 Put-call parity, pricing currency put options, 167–168 Q Quota, 45 Quotations, direct and indirect, 70–72 R Rate, forward, 74 spot, 65 Raw materials, 419 Real assets, call and put options, 492–493 Real cost of hedging payables, 363 Real interest rates, equation, 111 Real options, 453–454 Receivables, forward hedge on, 363–364 futures hedge on, 363–364 hedging exposure to, 363–371 money market hedge on, 364 put option hedge on, 364–367 selling futures to hedge, 139–140 Red tape barriers, to DFI, 425 Refinancing of a sight letter of credit, 585 Regional development agencies, 58 Regression analysis, 339–340 Regulatory barriers, to DFI, 426 Relative form of PPP, 258 Relative income levels, 111–112 Relative inflation rates, 109–110 Relative interest rates, 110–111 Relative PPP theory, rationale, 258 Remitted funds, multinational capital budgeting, 440 Required rate of return, 99 multinational capital budgeting, 440 Revaluation, 187 Revalue, 187 Revenue, subsidiary, 612 Risk rates, comparing country, 511 Risk, adjusting project assessment for, 454–458 of two-currency portfolio, equation, 334 Risk, country risk See Country risk Risk-adjusted discount rate, 454 Risk-free interest rates, 541 Romania, 38, 81 Royal Dutch Shell, 100 Rule 144a, 84 Russia, 66, 96, 142, 190, 210, 221 S Salvage (liquidation) value, multinational capital budgeting, 440 709 Salvage value, break-even, 451 calculation, 482 uncertain, 451–452 Sarbanes-Oxley (SOX) Act of 2002, 6, 84, 482 Secondary market, 81 Securities and Exchange Commission, 84, 142, 426 Selective hedging, 355–356 Semi-strong-form efficient, foreign exchange market, 304 Sensitivity analysis, 454–457 of fundamental forecasting for exchange rates, 313 Settlement date, 141 Shareholders, 86, 87 Shell Oil, 52 Short-term investment, and exchange rate forecasting, 297 Short-term notes, 596 Simulation, 457–458 Singapore, 39, 76, 441 Single European Act of 1987, 37–38, 79 Single-Buyer Policy, 589 Slovakia, 38, 198 Slovenia, 38, 198 Small Business Policy, 589 Smithsonian Agreement, 64, 188 Snake arrangement, pegged exchange rate, 192 Sony, 100 South America, 81, 490, 539 South Korea, 39, 133, 221–222, 418 Spain, 38, 83, 198, 200 Special drawing rights (SDRs), 56 Speculation, break-even point, 146–147 with currency futures, 141 foreign currency, 120 by individuals, 120 institutional, 118–120 by MNCs, 147–148 Speculators, 150 Spot market, 65 liquidity, 66–67 structure, 65–66 time zone, 66 use of dollar in, 66 Spot price, 174 Spot rate, 65, 108, 166 Stakeholder diversification argument, for exchange rates, 326 Stakeholder, 326 Standard deviation, 97–98 Standby letter of credit, 583 Starbucks, 418 State Street Corporation, 65 Sterilized intervention, 206–207 Stock, diversification, 97–98 in eurozone, 199–201 valuations among countries, 99–100 Stock exchange, 95–98 alliances, 96 international, 95–98 U.S., 84–85 Stock market, 85, 86, 487 characteristics, 87 comparing, 85–86 credit markets and, 87–88 governance among, 86–87 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 710 Index Stock market (continued ) impact of credit crisis, 221 international, 83–88 Stock option pricing model (OPM), 167 Stock price, exposure to translation effects, 342–343 Stockholders, 326 Straddle, 153, 172–175 long, 172–173 See also Currency straddles Strangles, 169 See also Currency strangles Strike price, 75, 180, 357 Structural Adjustment Loan (SAL), 56 Subsidiary, 530 dividend payments, 612 expenses, 611–612 liquidity management, 612 revenue, 612 Subway, 11 Supplier credit, 581 Swap market, standardization of, 564 Swap transactions, using forward contracts, 135 Swaps, types, 563–564 Swaption, 564 Sweden, 11, 38, 198 Switzerland, 198 Syndicate loans, 78–79 Syndicate, 78 T Taiwan, 133, 220 Takeovers by host governments, preventing, 516–517 target, 479 Target, 479 of takeovers, 479 valuation, 482–484 valuing a foreign, 481–482 Target valuation disparity, foreign target, 488–489 Tariff, 45 Tax breaks, 46 Tax credits, 472–473 Tax differentials, 437 Tax laws, among countries, 469–475 differential, 244 MNCs, impact on, 475–476 multinational capital budgeting, 440, 441 regarding interest rate parity, 244 Tax rates, 53 among countries, 471 and international portfolio investment, 53 personal and excise, 471 Tax treaties, 472 Taxes, 99–100 corporate income tax among countries, 469–470 intercompany transactions, 473–475 withholding, 471 Technical forecasting, for exchange rates, 299 Tenor, 581 Terminal value, break-even, 451 Text, organization of, 21–22 Thailand, 133 financial crisis, 218–224 floating exchange rate, 191 rescue package, 220 and Southeast Asia, 220 3M Co., 9, 223 Trade, acceptance, 581 agreements, 39 and cost of labor, 43 and credit conditions, 44 and government policies, 44–45 and inflation, 44 and national income, 44 barriers, 37, 38 countertrade, 586–587 deficit, 34 finance methods, 581–587 international, 10, 37–43, 587–590 intracompany, 50 outsourcing, 39–40 restrictions, 45–46 See also International trade Trade flows, international, 43–52 Trade volume, 37–39 among countries, 40–42 events that increased, 37–39 between United States and other countries, 40–42 Transaction costs, arbitrage reducing, 236 of interest rate parity, 243 reduction in, 95–96 Transaction exposure, 326–335, 393 based on value at risk, 332–335 hedging, 355–356 to exchange rate risk, 326–335 of an MNC’s portfolio, 329–332 Transfer payments, 34 Translation effects, and stock price, 342–343 Translation exposure, 340–343, 393 determinants of, 340–342 increased, 404 managing, 402–404 Triangular arbitrage, 229–232 bid/ask spread, 231–232 gains from, 230–232 realignment due to, 232 U Ukraine, 81 Umbrella Policy, 589 Underwriting, Eurobonds, 80 “Uniform Customs and Practice for Documentary Credits,” 579 Unilever, 38 United Kingdom, 38, 39, 41, 42, 52, 65, 80, 84, 86, 105 183, 190, 198, 241, 242 interest rates, 597 rescuing failing firms, 541 United Nations Monetary and Financial Conference, 55 United States, 4, 8, 14, 18, 33, 34, 36, 38, 39, 40, 42–43, 52, 136, 190, 194, 426 Asian crisis and, 223 cost of debt, 541 degree of financial leverage, 541 foreign stocks, 84–85 interest rates, 597 rescuing failing firms, 541 stock exchange, 86 Uruguay Round, 38, 57 of GATT, 38 V Valuation, MNC, uncertainty, 17 of MNC cash flows over multiple periods, 15–16 of MNC that uses multiple currencies, 15 Valuation equation, 14–15 for multiple periods, 15–16 multinational, 14–15 Valuation model, of MNC, 13–21 Value-added tax (VAT), 469 Value-at-risk (VaR) method of assessing exposure, 332–335 estimating, 335 limitations, 335 longer time horizon, 331 transaction exposure of portfolio, 334–335 Vanguard, 101 Venezuela, pegged exchange rate, 194–195 Vietnam, 4, 66 Virgin Islands, 8, 52 Volatile, 104 Volkswagen, 80 W Wal-Mart, 418 Walt Disney, 80, 372 War, 505 Weak-form efficient, foreign exchange market, 299, 304 Websites, 10 West Germany, 37 Western Europe, 37, 38, 43, 421 Working Capital Guarantee Program, 587–588 World Bank, 56–57, 221, 517 See also International Bank for Reconstruction and Development (IBRD) World equity benchmark shares (WEBS), 101 World Trade Organization (WTO), 57 WorldCom, Writer, 145 X Xerox, Corp., 11 Y Yankee stock offerings, 84 Yield curve, assessment, 559 Yields, foreign and domestic, 621–622 Yuan, 51, 210 Yum Brands, 417 Z Zero-coupon swap, 563 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Direct Exchange Rates over Time continued Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203 This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version Copyright 2018 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part WCN 02-200-203