International financial management (9/e): part 2

Part 1 book “international financial management” has contents: managing transaction exposure, managing economic exposure and translation exposure, direct foreign investment, multinational capital budgeting, international acquisitions, country risk analysis, multinational cost of capital and capital structur,… and other contents.

11: Managing Transaction Exposure Recall from the previous chapter that a multinational corporation (MNC) is exposed to exchange rate fluctuations in three ways: (1) transaction exposure, (2) economic exposure, and (3) translation exposure This chapter focuses on the management of transaction exposure, while the following chapter focuses on the management of economic and translation exposure By managing transaction exposure, financial managers may be able to increase cash flows and enhance the value of their MNCs The specific objectives of this chapter are to: ■ compare the techniques commonly used to hedge payables, ■ compare the techniques commonly used to hedge receivables, ■ explain how to hedge long-term transaction exposure, and ■ suggest other methods of reducing exchange rate risk when hedging techniques are not available Transaction Exposure Transaction exposure exists when the anticipated future cash transactions of a fi rm are affected by exchange rate fluctuations A U.S fi rm that purchases Mexican goods may need pesos to buy the goods Though it may know exactly how many pesos it will need, it doesn’t know how many dollars will be needed to be exchanged for those pesos This uncertainty occurs because the exchange rate between pesos and dollars fluctuates over time A U.S.-based MNC that will be receiving a foreign currency is exposed because it does not know how many dollars it will obtain when it exchanges the foreign currency for dollars If transaction exposure exists, the fi rm faces three major tasks First, it must identify its degree of transaction exposure Second, it must decide whether to hedge this exposure Finally, if it decides to hedge part or all of the exposure, it must choose among the various hedging techniques available Each of these tasks is discussed in turn Identifying Net Transaction Exposure Before an MNC makes any decisions related to hedging, it should identify the individual net transaction exposure on a currency-by-currency basis The term net here refers to the consolidation of all expected inflows and outflows for a particular time and currency The management at each subsidiary plays a vital role in reporting its expected inflows and outflows Then a centralized group consolidates the subsidiary reports to identify, for the MNC as a whole, the expected net positions in each foreign currency during several upcoming periods The MNC can identify its exposure by reviewing this consolidation of subsidiary positions For example, one subsidiary may have net receivables in Mexican pesos months from now, while a different subsidiary has net payables in pesos If the peso appreciates, this will be favorable to the fi rst subsidiary and unfavorable to the second 307 308 Part 3: Exchange Rate Risk Management subsidiary For the MNC as a whole, however, the impact is at least partially offset Each subsidiary may desire to hedge its net currency position in order to avoid the possible adverse impacts on its performance due to fluctuation in the currency’s value The overall performance of the MNC, however, may already be insulated by the offsetting positions between subsidiaries Therefore, hedging the position of each individual subsidiary may not be necessary Eastman Kodak Co uses a centralized currency management approach to manage its transaction exposure Kodak bills its subsidiaries in their local currencies The rationale behind this strategy is to shift the foreign exchange exposure from the subsidiaries to the parent company The parent receives foreign currencies from its subsidiaries overseas and converts them to U.S dollars It can maintain the currencies as foreign deposits if it believes the currencies will strengthen against the U.S dollar in the near future ■ E X A M P L E Adjusting the Invoice Policy to Manage Exposure In some circumstances, the U.S fi rm may be able to modify its pricing policy to hedge against transaction exposure That is, the fi rm may be able to invoice (price) its exports in the same currency that will be needed to pay for imports Stovall, Inc., has continual payables in Mexican pesos because a Mexican exporter sends goods to Stovall under the condition that the goods be invoiced in Mexican pesos Stovall also exports products (invoiced in U.S dollars) to other corporations in Mexico If Stovall changes its invoicing policy from U.S dollars to pesos, it can use the peso receivables from its exports to pay off its future payables in pesos It is unlikely, however, that Stovall would be able to (1) invoice the precise amount of peso receivables to match the peso payables and (2) perfectly time the inflows and outflows to match each other ■ E X A M P L E Because the matching of inflows and outflows in foreign currencies does have its limitations, an MNC will normally be exposed to some degree of exchange rate risk and, therefore, should consider the various hedging techniques identified next Aligning Manager Compensation with Hedging Goals If managers of a subsidiary are compensated according to the subsidiary’s earnings, the managers will want to hedge some currency positions that could adversely affect their earnings For an MNC with many subsidiaries, some currency positions at subsidiaries will offset each other, so that a hedge by one subsidiary could actually increase the MNC’s overall exposure An MNC can use a centralized system for assessing and hedging exposure to ensure that its subsidiaries not hedge However, this system can affect the cash flows and performance of each subsidiary and, therefore, may affect the compensation to the managers of each subsidiary The MNC’s parent can implement a compensation system that does not penalize the managers of subsidiaries if their cash flows are reduced due to adverse currency movements ■ GOVE ER RN NA AN NC CE E Hedging Exposure to Payables An MNC may decide to hedge part or all of its known payables transactions so that it is insulated from possible appreciation of the currency It may select from the following hedging techniques to hedge its payables: • Futures hedge • Forward hedge • Money market hedge • Currency option hedge Chapter 11: Managing Transaction Exposure 309 Before selecting a hedging technique, MNCs normally compare the cash flows that would be expected from each technique The proper hedging technique can vary over time, as the relative advantages of the various techniques may change over time Each technique is discussed in turn, with examples provided The techniques can be compared to determine the appropriate technique to hedge a particular position Forward or Futures Hedge on Payables Forward contracts and futures contracts allow an MNC to lock in a specific exchange rate at which it can purchase a specific currency and, therefore, allow it to hedge payables denominated in a foreign currency A forward contract is negotiated between the fi rm and a fi nancial institution such as a commercial bank and, therefore, can be tailored to meet the specific needs of the fi rm The contract will specify the: • currency that the fi rm will pay • currency that the fi rm will receive • amount of currency to be received by the fi rm • rate at which the MNC will exchange currencies (called the forward rate) • future date at which the exchange of currencies will occur Coleman Co is a U.S.-based MNC that will need 100,000 euros in one year It could obtain a forward contract to purchase the euros in one year The one-year forward rate is $1.20, the same rate as currency futures contracts on euros If Coleman purchases euros one year forward, its dollar cost in one year is: E X A M P L E Cost in $ Payables Forward rate 100,000 euros $1.20 $120,000 H T T P : // http://www bmonesbittburns.com/ economics/fxrates Forward rates for the euro, British pound, Canadian dollar, and Japanese yen for 1-month, 3-month, 6-month, and 12-month maturities These forward rates indicate the exchange rates at which positions in these currencies can be hedged for specific time periods ■ The same process would apply if futures contracts were used instead of forward contracts The futures rate is normally very similar to the forward rate, so the main difference would be that the futures contracts are standardized and would be purchased on an exchange, while the forward contract would be negotiated between the MNC and a commercial bank Forward contracts are commonly used by large corporations that desire to hedge For example, DuPont Co often has the equivalent of $300 million to $500 million in forward contracts at any one time to cover open currency positions, while Union Carbide has more than $100 million in forward contracts Money Market Hedge on Payables A money market hedge involves taking a money market position to cover a future payables or receivables position If a fi rm has excess cash, it can create a simplified money market hedge Recall that Coleman Co needs 100,000 euros in one year If it has cash, it could convert dollars into euros and deposit them in a bank for one year Assuming that it could earn percent on this deposit, it would need to deposit euros today, as shown here: E X A M P L E Deposit amount to hedge payables 100,000 euros 95,238 euros 1 05 Assuming a spot rate today of $1.18, the dollars needed to make the deposit today are estimated below: Deposit amount in dollars ‫ ؍‬95,238 euros ؋ $1.18 ‫ ؍‬$112,381 ■ 310 Part 3: Exchange Rate Risk Management In many cases, MNCs prefer to hedge payables without using their cash balances A money market hedge can still be used in this situation, but it requires two money market positions: (1) borrowed funds in the home currency and (2) a short-term investment in the foreign currency If Coleman Co did not have cash available, it could borrow the funds that it needs Assuming that Coleman can borrow dollars at an interest rate of percent, it would borrow the funds needed to make the deposit, and at the end of the year it would repay the loan: E X A M P L E Dollar amount of loan repayment ‫ ؍‬$112,381 ؋ (1 ؉ 08) ‫ ؍‬$121,371 ■ Hedging with a Money Market Hedge versus a Forward Hedge Should an MNC implement a forward contract hedge or a money market hedge? Since the results of both hedges are known beforehand, the fi rm can implement the one that is more feasible If interest rate parity (IRP) exists, and transaction costs not exist, the money market hedge will yield the same results as the forward hedge This is so because the forward premium on the forward rate reflects the interest rate differential between the two currencies The hedging of future payables with a forward purchase will be similar to borrowing at the home interest rate and investing at the foreign interest rate The hedging of future receivables with a forward sale is similar to borrowing at the foreign interest rate and investing at the home interest rate Even if the forward premium generally reflects the interest rate differential between countries, the existence of transaction costs may cause the results from a forward hedge to differ from those of the money market hedge Call Option Hedge Firms recognize that hedging techniques such as the forward hedge and money market hedge can backfi re when a payables currency depreciates or a receivables currency appreciates over the hedged period In these situations, an unhedged strategy would likely outperform the forward hedge or money market hedge The ideal hedge would insulate the fi rm from adverse exchange rate movements but allow the fi rm to benefit from favorable exchange rate movements Currency options exhibit these attributes However, a fi rm must assess whether the advantages of a currency option hedge are worth the price (premium) paid for it Details on currency options are provided in Chapter The following discussion illustrates how they can be used in hedging Hedging Payables with Currency Call Options A currency H T T P : // http://www.phlx.com/ products/currency/currency html Provides various currency option contracts that can be used to hedge positions call option provides the right to buy a specified amount of a particular currency at a specified price (called the strike price, or exercise price) within a given period of time Yet, unlike a futures or forward contract, the currency call option does not obligate its owner to buy the currency at that price If the spot rate of the currency remains lower than the exercise price throughout the life of the option, the fi rm can let the option expire and simply purchase the currency at the existing spot rate On the other hand, if the spot rate of the currency appreciates over time, the call option allows the fi rm to purchase the currency at the exercise price That is, the fi rm owning a call option has locked in a maximum price (the exercise price) to pay for the currency Yet, it also has the flexibility to let the option expire and obtain the currency at the existing spot rate when the currency is to be sent for payment Cost of Hedging with Call Options Based on a Contingency Graph The cost of hedging with call options is not known with certainty at the time that the options are purchased It is only known once the Chapter 11: Managing Transaction Exposure 311 payables are due and the spot rate at that time is known For this reason, an MNC attempts to determine what the cost of hedging with call options would be based on various possible spot rates that could exist for the foreign currency at the time that payables are due This cost of hedging includes the price paid for the currency, along with the premium paid for the call option If the spot rate of the currency at the time payables are due is less than the exercise price, the MNC would let the option expire because it could purchase the currency in the foreign exchange market at the spot rate If the spot rate is equal to or above the exercise price, the MNC would exercise the option and pay the exercise price for the currency An MNC can develop a contingency graph that determines the cost of hedging with call options for each of several possible spot rates when payables are due It may be especially useful when a MNC would like to assess the cost of hedging for a wide range of possible spot rate outcomes Recall that Coleman Co considers hedging its payables of 100,000 euros in one year It could purchase call options on 100,000 euros so that it can hedge its payables Assume that the call options have an exercise price of $1.20, a premium of $.03, and an expiration date of one year from now (when the payables are due) Coleman can create a contingency graph for the call option hedge, as shown in Exhibit 11.1 The horizontal axis shows several possible spot rates of the euro that could occur at the time payables are due, while the vertical axis shows the cost of hedging per euro for each of those possible spot rates At any spot rate less than the exercise price of $1.20, Coleman would not exercise the call option, so the cost of hedging would be equal to the spot rate at that time, along with the premium For example, if the spot rate was $1.16 at the time payables were due, Coleman would pay that spot rate along with the $.03 premium per unit At any spot rate more than or equal to the exercise price of $1.20, Coleman would exercise the call option, and the cost of hedging would be equal to the price paid per euro ($1.20) along with the premium of $.03 per euro Thus, the cost of hedging is $1.23 for all spot rates beyond the exercise price of $1.20 ■ E E X X A M P L E Cost of Hedging (Includes Price Paid per Euro Plus Option Premium) Exhibit 11.1 Contingency Graph for Hedging Payables with Call Options Excercise Price = $1.20 Premium = $.03 $1.23 $1.15 $1.15 $1.20 $1.25 $1.30 312 Part 3: Exchange Rate Risk Management Exhibit 11.1 illustrates the advantages and disadvantages of a call option for hedging payables The advantage is that the call option provides an effective hedge, while also allowing the MNC to let the option expire if the spot rate at the time payables are due is lower than the exercise price However, the obvious disadvantage of the call option is that a premium must be paid for it To compare a hedge with a call option to a hedge with a forward contract, recall from a previous example that Coleman Co could purchase a forward contract on euros for $1.20, which would result in a cost of hedging of $1.20 per euro, regardless of what the spot rate is at the time payables are due because a forward contract, unlike a call option, creates an irrevocable obligation to execute This could be reflected on the same contingency graph in Exhibit 11.1 as a horizontal line beginning at the $1.20 point on the vertical axis and extending straight across for all possible spot rates In general, the forward rate would result in a lower cost of hedging than currency call options if the spot rate is relatively high at the time payables are due, while currency call options would result in a lower cost of hedging than the forward rate if the spot rate is relatively low at the time payables are due Cost of Hedging with Call Options Based on Currency Forecasts While the contingency graph can determine the cost of hedging for various possible spot rates when payables are due, it does not consider an MNC’s currency forecasts Thus, it does not necessarily lead the MNC to a clear decision about whether to hedge with currency options An MNC may wish to incorporate its own forecasts of the spot rate at the time payables are due, so that it can more accurately estimate the cost of hedging with call options Recall that Coleman Co considers hedging its payables of 100,000 euros with a call option that has an exercise price of $1.20, a premium of $.03, and an expiration date of one year from now Also assume that Coleman’s forecast for the spot rate of the euro at the time payables are due is as follows: E X A M P L E • $1.16 (20 percent probability) • $1.22 (70 percent probability) • $1.24 (10 percent probability) The effect of each of these scenarios on Coleman’s cost of payables is shown in Exhibit 11.2 Columns and simply identify the scenario to be analyzed Column shows the premium per unit paid on the option, which is the same regardless of the spot rate that occurs when payables are due Column shows the amount that Coleman would pay per euro for the payables under each scenario, assuming that it owned call options If Scenario occurs, Coleman will let the options expire and purchase euros in the spot market for $1.16 each Exhibit 11.2 Use of Currency Call Options for Hedging Euro Payables (Exercise Price ϭ $1.20, Premium ϭ $.03) (3) (4) (5) ‫( ؍‬4) ؉ (3) (6) Scenario Spot Rate When Payables Are Due Premium per Unit Paid on Call Options Amount Paid per Unit When Owning Call Options Total Amount Paid per Unit (Including the Premium) When Owning Call Options $ Amount Paid for 100,000 Euros When Owning Call Options $1.16 $.03 $1.16 $1.19 $119,000 1.22 03 1.20 1.23 123,000 1.24 03 1.20 1.23 123,000 (1) (2) Chapter 11: Managing Transaction Exposure 313 If Scenario or occurs, Coleman will exercise the options and therefore purchase euros for $1.20 per unit, and it will use the euros to make its payment Column 5, which is the sum of columns and 4, shows the amount paid per unit when the $.03 premium paid on the call option is included Column converts column into a total dollar cost, based on the 100,000 euros hedged ■ Consideration of Alternative Call Options Several different types of call options may be available, with different exercise prices and premiums for a given currency and expiration date The tradeoff is that an MNC can obtain a call option with a lower exercise price but would have to pay a higher premium Alternatively, it can select an option that has a lower premium but then must accept a higher exercise price Whatever call option is perceived to be most desirable for hedging a particular payables position would be analyzed as explained in the example above, so that it could then be compared to the other hedging techniques Summary of Techniques Used to Hedge Payables The techniques that can be used to hedge payables are summarized in Exhibit 11.3, with an illustration of how the cost of each hedging technique was measured for Coleman Co (based on the previous examples) Notice that the cost of the forward Exhibit 11.3 Comparison of Hedging Alternatives for Coleman Co Forward Hedge Purchase euros year forward Dollars needed in year ϭ payables in € ϫ forward rate of euro ϭ 100,000 euros ϫ $1.20 ϭ $120,000 Money Market Hedge Borrow $, convert to €, invest €, repay $ loan in year Amount in € to be invested ϭ € 100,000 ϩ 05 ϭ 95,238 euros Amount in $ needed to convert into € for deposit ϭ €95,238 ϫ $1.18 ϭ $112,381 Interest and principal owed on $ loan after year ϭ $112,381 ϫ (1 ϩ 08) ϭ $121,371 Call Option Purchase call option (The following computations assume that the option is to be exercised on the day euros are needed, or not at all Exercise price ϭ $1.20, premium ϭ $.03.) Exercise Option? Total Price (Including Option Premium) Paid per Unit Total Price Paid for 100,000 Euros Probability $.03 No $1.19 $119,000 20% 1.22 03 Yes 1.23 123,000 70 1.24 03 Yes 1.23 123,000 10 Possible Spot Rate in One Year Premium per Unit Paid for Option $1.16 314 Part 3: Exchange Rate Risk Management hedge or money market hedge can be determined with certainty, while the currency call option hedge has different outcomes depending on the future spot rate at the time payables are due Selecting the Optimal Technique for Hedging Payables An MNC can select the optimal technique for hedging payables by following these steps First, since the futures and forward hedge are very similar, the MNC only needs to consider whichever one of these techniques it prefers Second, when comparing the forward (or futures) hedge to the money market hedge, the MNC can easily determine which hedge is more desirable because the cost of each hedge can be determined with certainty Once that comparison is completed, the MNC can assess the feasibility of the currency call option hedge The distribution of the estimated cash outflows resulting from the currency call option hedge can be assessed by estimating its expected value and by determining the likelihood that the currency call option hedge will be less costly than an alternative hedging technique Recall that Coleman Co needs to hedge payables of 100,000 euros Coleman’s costs of different hedging techniques can be compared to determine which technique is optimal for hedging the payables Exhibit 11.4 provides a graphic comparison of the cost of hedging resulting from using different techniques (which were determined in the previous examples in this chapter) For Coleman, the forward hedge is preferable to the money market hedge because it results in a lower cost of hedging payables The cost of the call option hedge is described by a probability distribution because it is dependent on the exchange rate at the time that payables are due The expected value of the cost if using the currency call option hedge is: E X A M P L E Expected value of cost $119,000 20% 1 $123,000 80% $122,200 The probability of the future spot rate being $1.22 (70 percent) and probability of the future spot rate being $1.24 (10 percent) are combined in the calculation because they result in the same cost The expected value of the cost when hedging with call options exceeds the cost of the forward rate hedge When comparing the distribution of the cost of hedging with call options to the cost of the forward hedge, there is a 20 percent chance that the currency call option hedge will be cheaper than the forward hedge There is an 80 percent chance that the currency call option hedge will be more expensive than the forward hedge Overall, the forward hedge is the optimal hedge ■ The optimal technique to hedge payables may vary over time depending on the prevailing forward rate, interest rates, call option premium, and the forecast of the future spot rate at the time payables are due Optimal Hedge versus No Hedge Even when an MNC knows what its future payables will be, it may decide not to hedge in some cases It needs to determine the probability distribution of its cost of payables when not hedging as explained next Coleman Co has already determined that the forward rate is the optimal hedging technique if it decides to hedge its payables position Now it wants to compare the forward hedge to no hedge E X A M P L E Exhibit 11.4 Graphic Comparison of Techniques to Hedge Payables Probability 100% 80% Forward Hedge 60% 40% 20% 0% $120,000 $ to be paid in year Probability 100% 80% Money Market Hedge 60% 40% 20% 0% $121,371 $ to be paid in year Probability 100% 80% Currency Call Option Hedge 60% 40% 20% 0% $119,000 $123,000 $ to be paid in year Probability 100% 80% No Hedge 60% 40% 20% 0% $116,000 $122,000 $ to be paid in year $124,000 316 Part 3: Exchange Rate Risk Management Based on its expectations of the euro’s spot rate in one year (as described earlier), Coleman Co can estimate its cost of payables when unhedged: Possible Spot Rate of Euro in One Year Dollar Payments When Not Hedging ‫ ؍‬100,000 Euros ؋ Possible Spot Rate Probability $1.16 $116,000 20% $1.22 $122,000 70% $1.24 $124,000 10% This probability distribution of costs when not hedging is shown in the bottom graph of Exhibit 11.4 and can be compared to the cost of the forward hedge in that exhibit The expected value of the payables when not hedging is estimated as: Expected value of payables $116,000 20% 1 $122,000 70% 1 $124,000 10% $121,000 This expected value of the payables is $1,000 more than if Coleman uses a forward hedge In addition, the probability distribution suggests an 80 percent probability that the cost of the payables when unhedged will exceed the cost of hedging with a forward contract Therefore, Coleman decide to hedge its payables position with a forward contract ■ Evaluating the Hedge Decision MNCs can evaluate hedging decisions that they made in the past by estimating the real cost of hedging payables, which is measured as: RCHp Cost of hedging payables Cost of payables if not hedged After the payables transaction has occurred, an MNC may assess the outcome of its decision to hedge Recall that Coleman Co decided to hedge its payables with a forward contract, resulting in a dollar cost of $120,000 Assume that on the day that it makes its payment (one year after it hedged its payables), the spot rate of the euro is $1.18 Notice that this spot rate is different from any of the three possible spot rates that Coleman Co predicted This is not unusual, as it is difficult to predict the spot rate, even when creating a distribution of possible outcomes If Coleman Co had not hedged, its cost of the payables would have been $118,000 (computed as 100,000 euros ϫ $1.18) Thus, Coleman’s real cost of hedging is: E X A M P L E RCHp Cost of hedging payables Cost of payables if not hedged $120,000 $118,000 $2,000 ■ In this example, Coleman’s cost of hedging payables turned out to be $2,000 more than if it had not hedged However, Coleman is not necessarily disappointed in its decision to hedge That decision allowed it to know exactly how many dollars it would need to cover its payables position and insulated the payment from movements in the euro Hedging Exposure to Receivables An MNC may decide to hedge part or all of its receivables transactions denominated in foreign currencies so that it is insulated from the possible depreciation of those currencies It can apply the same techniques available for hedging payables to hedge Glossary carryforwards tax losses that are applied in a future year to offset income in the future year cash management optimization of cash flows and investment of excess cash central exchange rate exchange rate established between two European currencies through the European Monetary System arrangement; the exchange rate between the two currencies is allowed to move within bands around that central exchange rate centralized cash flow management policy that consolidates cash management decisions for all MNC units, usually at the parent’s location coefficient of determination measure of the percentage variation in the dependent variable that can be explained by the independent variables when using regression analysis cofinancing agreements arrangement in which the World Bank participates along with other agencies or lenders in providing funds to developing countries commercial invoice exporter’s description of merchandise being sold to the buyer commercial letters of credit trade-related letters of credit comparative advantage theory suggesting that specialization by countries can increase worldwide production compensation arrangement in which the delivery of goods to a party is compensated for by buying back a certain amount of the product from that same party Compensatory Financing Facility (CFF) facility that attempts to reduce the impact of export instability on country economies consignment arrangement in which the exporter ships goods to the importer while still retaining title to the merchandise contingency graph graph showing the net profit to a speculator in currency options under various exchange rate scenarios counterpurchase exchange of goods between two parties under two distinct contracts expressed in monetary terms countertrade sale of goods to one country that is linked to the purchase or exchange of goods from that same country country risk characteristics of the host country, including political and fi nancial conditions, that can affect an MNC’s cash flows covered interest arbitrage investment in a foreign money market security with a simultaneous forward sale of the currency denominating that security cross exchange rate exchange rate between currency A and currency B, given the values of currencies A and B with respect to a third currency cross-border factoring factoring by a network of factors across borders The exporter’s factor can contact correspondent factors in other countries to handle the collections of accounts receivable cross-hedging hedging an open position in one currency with a hedge on another currency that is highly correlated with the fi rst currency This occurs when for some reason the common hedging techniques cannot be applied to the 659 fi rst currency A cross-hedge is not a perfect hedge, but can substantially reduce the exposure cross-sectional analysis analysis of relationships among a cross section of fi rms, countries, or some other variable at a given point in time currency board system for maintaining the value of the local currency with respect to some other specifi ed currency currency call option contract that grants the right to purchase a specific currency at a specific price (exchange rate) within a specific period of time currency cocktail bond bond denominated in a mixture (or cocktail) of currencies currency diversification process of using more than one currency as an investing or fi nancing strategy Exposure to a diversified currency portfolio typically results in less exchange rate risk than if all of the exposure was in a single foreign currency currency futures contract contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date currency option combination the use of simultaneous call and put option positions to construct a unique position to suit the hedger’s or speculator’s needs Two of the most popular currency option combinations are straddles and strangles currency put option contract granting the right to sell a particular currency at a specified price (exchange rate) within a specified period of time currency swap agreement to exchange one currency for another at a specified exchange rate and date Banks commonly serve as intermediaries between two parties who wish to engage in a currency swap current account broad measure of a country’s international trade in goods and services D Delphi technique collection of independent opinions with- out group discussion by the assessors who provide the opinions; used for various types of assessments (such as country risk assessment) dependent variable term used in regression analysis to represent the variable that is dependent on one or more other variables depreciation decrease in the value of a currency devaluation a downward adjustment of the exchange rate by a central bank devalue to reduce the value of a currency against the value of other currencies direct foreign investment (DFI) investment in real assets (such as land, buildings, or even existing plants) in foreign countries Direct Loan Program program in which the Ex-Im Bank offers fi xed rate loans directly to the foreign buyer to purchase U.S capital equipment and services direct quotations exchange rate quotations representing the value measured by number of dollars per unit discount as related to forward rates, represents the 660 Glossary percentage amount by which the forward rate is less than the spot rate documentary collections trade transactions handled on a draft basis documents against acceptance situation in which the buyer’s bank does not release shipping documents to the buyer until the buyer has accepted (signed) the draft 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 double-entry bookkeeping accounting method in which each transaction is recorded as both a credit and a debit 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 dumping selling products overseas at unfairly low prices (a practice perceived to result from subsidies provided to the fi rm by its government) dynamic hedging strategy of hedging in those periods when existing currency positions are expected to be adversely affected, and remaining unhedged in other periods when currency positions are expected to be favorably affected Eurocurrency market collection of banks that accept depos- E F economic exposure degree to which a fi rm’s present value factor fi rm specializing in collection on accounts receivable; of future cash flows can be influenced by exchange rate fluctuations economies of scale achievement of lower average cost per unit by means of increased production effective yield yield or return to an MNC on a short-term investment after adjustment for the change in exchange rates over the period of concern efficient frontier set of points reflecting risk-return combinations achieved by particular portfolios (so-called efficient portfolios) of assets equilibrium exchange rate exchange rate at which demand for a currency is equal to the supply of the currency for sale Eurobanks commercial banks that participate as fi nancial intermediaries in the Eurocurrency market Eurobonds bonds sold in countries other than the country represented by the currency denominating them Euro-clear telecommunications network that informs all traders about outstanding issues of Eurobonds for sale Euro-commercial paper debt securities issued by MNCs for short-term fi nancing Eurocredit loans loans of one year or longer extended by Eurobanks Eurocredit market collection of banks that accept deposits and provide 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 exporters sometimes sell their accounts receivable to a factor at a discount factor income income (interest and dividend payments) received by investors on foreign investments in fi nancial assets (securities) factoring purchase of receivables of an exporter by a factor without recourse to the exporter Financial Institution Buyer Credit Policy policy that provides insurance coverage for loans by banks to foreign buyers of exports Fisher effect theory that nominal interest rates are composed of a real interest rate and anticipated inflation fixed exchange rate system monetary system in which exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries floating rate notes (FRNs) provision of some Eurobonds in which the coupon rate is adjusted 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 market market composed primarily of banks, serving fi rms and consumers who wish to buy or sell various currencies foreign investment risk matrix (FIRM) graph that displays fi nancial and political risk by intervals, so that each country can be positioned according to its risk ratings forfaiting method of fi nancing international trade of capital goods its and provide loans in large denominations and in a variety of currencies Eurodollar term used to describe U.S dollar deposits placed in banks located in Europe Euronotes unsecured debt securities issued by MNCs for short-term fi nancing European Central Bank (ECB) central bank created to conduct the monetary policy for the countries participating in the single European currency, the euro European Currency Unit (ECU) unit of account representing a weighted average of exchange rates of member countries within the European Monetary System 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) bank that attempts to strengthen the competitiveness of U.S industries involved in foreign trade Glossary 661 forward contract agreement between a commercial bank and interest rate parity (IRP) theory specifying that the forward a client about an exchange of two currencies to be made at a future point in time at a specified exchange rate forward discount percentage by which the forward rate is less than the spot rate; typically quoted on an annualized basis forward premium percentage by which the forward rate exceeds the spot rate; typically quoted on an annualized basis forward rate rate at which a bank is willing to exchange one currency for another at some specified date in the future franchising agreement by which a fi rm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees freely floating exchange rate system monetary system in which exchange rates are allowed to move due to market forces without intervention by country governments full compensation an arrangement in which the delivery of goods to one party is fully compensated for by buying back more than 100 percent of the value that was originally sold fundamental forecasting forecasting based on fundamental relationships between economic variables and exchange rates premium (or discount) is equal to the interest rate differential between the two currencies of concern interest rate parity (IRP) line diagonal line depicting all points on a four-quadrant graph that represent a state of interest rate parity interest rate parity theory theory suggesting that the forward rate differs from the spot rate by an amount that reflects the interest differential between two currencies interest rate swap agreement to swap interest payments, whereby interest payments based on a fi xed interest rate are exchanged for interest payments based on a fl oating interest rate G General Agreement on Tariffs and Trade (GATT) agreement allowing for trade restrictions only in retaliation against illegal trade actions of other countries gold standard era in which each currency was convertible into gold at a specified rate, allowing the exchange rate between two currencies to be determined by their relative convertibility rates per ounce of gold H hedge to insulate a fi rm from exposure to exchange rate fluctuations hostile takeovers acquisitions not desired by the target fi rms I imperfect market the condition where, due to the costs to transfer labor and other resources used for production, fi rms 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 indirect quotations exchange rate quotations representing the value measured by number of units per dollar interbank market market that facilitates the exchange of currencies between banks Interest Equalization Tax (IET) tax imposed by the U.S government in 1963 to discourage U.S investors from investing in foreign securities International Bank for Reconstruction and Development (IBRD) bank established in 1944 to enhance economic development by providing loans to countries Also referred to as the World Bank International Development Association (IDA) association established to stimulate country development; it was especially suited for less prosperous nations, since it provided loans at low interest rates International Financial Corporation (IFC) fi rm established to promote private enterprise within countries; it can provide loans to and purchase stock of corporations international Fisher effect theory specifying that a currency’s exchange rate will depreciate against another currency when its interest rate (and therefore expected inflation rate) is higher than that of the other currency international Fisher effect (IFE) line diagonal line on a graph that reflects points at which the interest rate differential between two countries is equal to the percentage change in the exchange rate between their two respective currencies International Monetary Fund (IMF) agency established in 1944 to promote and facilitate international trade and fi nancing international mutual funds (IMFs) mutual funds containing securities of foreign fi rms International Swaps and Derivatives Association (ISDA) a global trade association representing leading participants in the privately negotiated derivatives industry intracompany trade international trade between subsidiaries that are under the same ownership irrevocable letter of credit letter of credit issued by a bank that cannot be canceled or amended without the beneficiary’s approval issuing bank bank that issues a letter of credit 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 venture between two or more fi rms in which responsibilities and earnings are shared 662 Glossary L Multibuyer Policy policy administered by the Ex-Im Bank lagging strategy used by a fi rm to stall payments, normally in response to exchange rate projections leading strategy used by a fi rm to accelerate payments, nor- mally in response to exchange rate expectations letter of credit (L/C) agreement by a bank to make payments on behalf of a specified party under specified conditions licensing arrangement in which a local fi rm in the host coun- try produces goods in accordance with another fi rm’s (the licensing fi rm’s) specifications; as the goods are sold, the local fi rm can retain part of the earnings locational arbitrage action to capitalize on a discrepancy in quoted exchange rates between banks lockbox post office box number to which customers are instructed to send payment London Interbank Offer Rate (LIBOR) interest rate commonly charged for loans between Eurobanks long-term forward contracts contracts that state any exchange rate at which a specified amount of a specified currency can be exchanged at a future date (more than one year from today) Also called long forwards Louvre Accord 1987 agreement between countries to attempt to stabilize the value of the U.S dollar M macroassessment overall risk assessment of a country without considering the MNC’s business mail float mailing time involved in sending payments by mail managed float exchange rate system in which curren- cies have no explicit boundaries, but central banks may intervene to influence exchange rate movements margin requirement deposit placed on a contract (such as a currency futures contract) to cover the fluctuations in the value of that contract; this minimizes the risk of the contract to the counterparty 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 Medium-Term Guarantee Program program conducted by the Ex-Im Bank in which commercial lenders are encouraged to fi nance the sale of U.S capital equipment and services to approved foreign buyers; the Ex-Im Bank guarantees the loan’s principal and interest on these loans microassessment 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 money market hedge use of international money markets to match future cash inflows and outflows in a given currency 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 restructuring restructuring of the composition of an MNC’s assets or liabilities N negotiable bill of lading contract that grants title of mer- chandise to the holder, which allows banks to use the merchandise as collateral net operating loss carrybacks practice of applying losses to offset earnings in previous years net operating loss carryforwards practice of applying losses to offset earnings in future years netting combining of future cash receipts and payments to determine the net amount to be owed by one subsidiary to another net transaction exposure consideration of inflows and outflows in a given currency to determine the exposure after offsetting inflows against outflows non-deliverable forward contracts (NDFs) 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 nonsterilized intervention intervention in the foreign exchange market without adjusting for the change in money supply notional value an amount agreed upon by the parties in an interest rate swap O ocean bill of lading receipt for a shipment by boat, which includes freight charges and title to the merchandise open account transaction sale in which the exporter ships the merchandise and expects the buyer to remit payment according to agreed-upon terms overhedging hedging an amount in a currency larger than the actual transaction amount P parallel bonds bonds placed in different countries and de- nominated in the respective currencies of the countries where they are placed parallel loan loan involving an exchange of currencies between two parties, with a promise to reexchange 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 Glossary buying back a certain amount of product from the same party pegged exchange rate exchange rate whose value is pegged to another currency’s value or to a unit of account perfect forecast line a 45-degree line on a graph that matches the forecast of an exchange rate with the actual exchange rate 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 Plaza Accord agreement among country representatives in 1985 to implement a coordinated program to weaken the dollar political risk political actions taken by the host government or the public that affect the MNC’s cash flows preauthorized payment method of accelerating cash inflows by receiving authorization to charge a customer’s bank account premium as related to forward rates, represents the percentage amount by which the forward rate exceeds the spot rate As related to currency options, represents the price of a currency option prepayment method that exporter uses to receive payment before shipping goods price-elastic sensitive to price changes privatization conversion of government-owned businesses to ownership by shareholders or individuals product cycle theory theory suggesting that a fi rm initially establish itself locally and expand 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 fi nancing 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 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 see currency put option put option on real assets project that contains an option of divesting part or all of the project Q quota maximum limit imposed by the government on goods allowed to be imported into a country 663 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 cost of hedging payables is equal to the cost of hedging payables less the cost of payables if not hedged real interest rate nominal (or quoted) interest rate minus the inflation rate real options implicit options on real assets regression analysis statistical technique used to measure the relationship between variables and the sensitivity of a variable to one or more other variables regression coefficient term measured by regression analysis to estimate the sensitivity of the dependent variable to a particular independent variable reinvoicing center facility that centralizes payments and charges subsidiaries fees for its function; this can effectively shift profits to subsidiaries where tax rates are low relative form of purchasing power parity theory stating that the rate of change in the prices of products should be somewhat similar when measured in a common currency, as long as transportation costs and trade barriers are unchanged revaluation an upward adjustment of the exchange rate by a central bank revalue to increase the value of a currency against the value of other currencies revocable letter of credit letter of credit issued by a bank that can be canceled at any time without prior notification to the beneficiary S 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-Buyer Policy policy administered by the Ex-Im Bank that allows the exporter to selectively insure certain transactions Single European Act act intended to remove numerous barriers imposed on trade and capital flows between European countries Small Business Policy policy providing enhanced coverage to new exporters and small businesses 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 664 Glossary snake arrangement established in 1972, whereby European currencies were tied to each other within specified limits special drawing rights (SDRs) reserves established by the International Monetary Fund; they are used only for intergovernment transactions; the SDR also serves as a unit of account (determined by the values of five major currencies) that is used to denominate some internationally traded goods and services, as well as some foreign bank deposits and loans 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 combination of a put option and a call option strangle a currency option combination; similar to a straddle strike price see exercise price strong-form efficient description of foreign exchange markets, implying that all relevant public information and private information is already reflected in prevailing spot exchange rates Structural Adjustment Loan (SAL) Facility facility established in 1980 by the World Bank to enhance a country’s long-term economic growth through fi nancing projects supplier credit credit provided by the supplier to itself to fund its operations syndicate group of banks that participate in loans syndicated Eurocredit loans loans provided by a group (or syndicate) of banks in the Eurocredit market T target zones implicit boundaries established by central banks on exchange rates tariff tax imposed by a government on imported goods technical forecasting development of forecasts using historical prices or trends tenor time period of drafts time-series analysis analysis of relationships between two or more variables over periods of time time-series models models that examine series of historical data; sometimes used as a means of technical forecasting by examining moving averages trade acceptance draft that allows the buyer to obtain merchandise prior to paying for it transaction exposure degree to which the value of future cash transactions can be affected by exchange rate fluctuations 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 fi rst 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 fi rm’s consolidated fi nancial 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 unilateral transfers accounting for government and private gifts and grants W weak-form efficient description of foreign exchange mar- kets, 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 short-term export fi nancing 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 Y Yankee stock offerings offerings of stock by non-U.S fi rms in the U.S markets Index 3M Co., 7, 185 A Absolute forecast error, 263–265, 269, 272–273, 276, 278–279, 599, 603 Absolute form of PPP, 214–215 Acceptance commission, 539 Accounting distortions, 359 Accounting standards, 77, 295 Accounts receivable, 5, 533, 538, 545, 547, 567, 569–570 Accounts receivable fi nancing, 533 Accretion swap, 519 Adidas, 33, 346 ADR See American depository receipt Advising bank, 534, 536 African Development Bank, 45 Agency cost, 4, 17, 19, 21, 487 Agency problem, 3–4, 16–17, 19, 70, 241, 359, 406, 487 AIG, 544 Air Products and Chemicals, 117 Airway bill, 536 All-in rate, 539 Altria, 330 American Brands, American depository receipt, 67–68, 82–83 American Express, American-style option, 126 Amortizing swap, 519 AMSCO International, Anheuser-Busch, 17–18 Antipollution law, 381 Arbitrage, 67–68, 106, 110, 135–138, 153, 162, 188–205, 207–213, 232–233, 236, 240, 242, 244, 553–554, 581–582, 588 Archipelago, 77 Arm’s-length transaction, 420 Ashland, Inc., 519 Asian crisis, 36, 43, 46, 73, 80, 99, 116, 161, 171, 176–177, 179, 182–187, 211, 235, 262, 300, 334, 409, 424, 436, 440, 462, 551, 565–566, 586 Asian Development Bank, 45, 183 Asian dollar market, 61 Asian money market, 60–61 Ask quote, 54–55, 72–73, 104, 170, 191, 196, 212 Ask rate See Ask quote Assignment of proceeds, 537 At the money, 115, 119, 127, 130, 140, 244, 247, 337, 343 AT&T, 8, 371 Audi, 164, 373, 444, 544 Avon Products, Inc., 551 B B/L See Bill of lading Back-to-back loan See Parallel loan Balance of payments, 22–24, 46–47, 427 Balance of trade, 23, 26, 28–29, 32, 34–38, 44, 46–47, 49, 152, 155, 160, 174, 243, 245, 452 Bank for International Settlements, 45 Bank Letter of Credit Policy, 543 Bank of America, 44, 65 Bank of America International, 65 Banker’s acceptance, 532–533, 536, 538–539, 540, 545 Bankruptcy, 424, 473–475, 498 Barriers to trade See Trade barrier Barter, 541 Basel Accord, 62 Basel Committee, 62 Basel II Accord, 62 Basis swap, 520 Bausch & Lomb, 40 Bear spread, 132, 147, 150–151, 337, 344–345 Berlin Wall, 28 Beta, 475–476, 495–498, 524, 601 Bid bond, 537 Bid quote, 54–55, 72–73, 196–197 Bid rate See Bid quote Bid/ask spread, 54–56, 73, 99, 104, 114, 189, 191–192, 260 Biger and Hull option pricing model, 136–137 Bilateral netting system, 573 Bill of exchange See Draft Bill of lading, 535–536 BIS See Bank for International Settlements Black & Decker, 295, 325, 372 Blockbuster Video, Blocked funds, 395, 401, 491 Bloody Thursday, 80, 182, 187 665 666 Index Bloomberg, 75, 213, 239, 499, 526, 568, 590 Boeing, Borden, Inc., 422 Break-even salvage value, 401–402, 410–411 Bretton Woods Agreement, 42, 51, 155 Broadcom, 448 Broker, 52, 65, 82, 96, 108–111, 114, 130, 517, 537, 544 Brokerage fees, 110, 118–119, 122 Brokerage fi rm, 52, 82–83, 108–109, 111, 114 Bull spread, 132, 147–151, 337, 343–344 Bureaucracy, 447, 449, 455–456, 465, 467, 470 Business cycle, 168, 374, 449, 570 C CAFTA See Central American Trade Agreement Call See Currency call option Call option hedge See Currency option hedge Call option on real assets, 437–438 Call premium, 122, 135, 313 Call provision, 65 Callable swap, 520 Campbell Soup Co., 519 Canon, 40 Cap, 520 Capital account, 22–24, 46–47 Capital asset pricing model, 475–476, 496, 498–499, 604 Capital budgeting, 251, 272, 341, 369, 375, 387, 389–403, 405–415, 417, 419, 421, 423–424, 435, 437–439, 441, 459–460, 462, 465–468, 471–472, 474, 481–482, 498, 528 Capital gain, 82, 392, 411–413, 430, 436, 441–442, 497 Capital ratio, 62 Capital structure, 241, 364, 369, 443, 472–473, 475, 477, 479–483, 485–499, 524, 527, 598, 601 CAPM See Capital asset pricing model Carryback See Net operating loss carryback Carryfoward See Net operating loss carryforward Cash management, 5, 53, 262–263, 569, 571–572, 576, 578, 590 Caterpillar, Inc., 292 CD See Certificate of deposit Central American Trade Agreement, 31 Central bank, 43, 45, 62, 100–101, 107, 130, 155, 157–158, 160, 163, 165–172, 175–186, 211, 240–241, 243, 273, 303, 477 Centralized cash management, 571–573, 577–578, 587 Centralized management style, Certificate of deposit, 24, 35, 54, 237, 244–245, 326, 328 CFF See Compensatory fi nancing facility Chaebol, 183 Charles Schwab Inc., 83 Checklist approach, 453–454, 465 Chicago Board Options Exchange, 114 Chicago Mercantile Exchange, 108–109, 111, 114, 134, 278 CIA, 372, 471 Cisco Systems, 371 Citgo Petroleum, 40 Citibank, 51 Citicorp International, 65, 424 Citigroup, 44, 51, 262 Clearing cost, 56 Clearing-account arrangement See Exchange clearinghouse Clearinghouse, 110–111 CME See Chicago Mercantile Exchange Coca-Cola Co., 2, 17, 59, 297, 325, 330, 371, 435, 474, 507 Code of ethics, 16 Cofi nancing agreement, 44 Colgate-Palmolive, 2, 40, 281, 297, 372 Collar, 520 Collateral, 62, 114, 464, 486, 536, 541–544, 568, 598 Commercial bank, 44, 50–51, 54–55, 58–59, 64, 71–72, 93, 95, 103, 110, 114, 124, 170, 185, 188, 262, 309, 317, 462, 498, 510, 534, 542, 544–545, 549 Commercial invoice, 535, 537 Commercial paper, 529, 539, 549, 577 Commerzbank, 558 Commitment, 32, 63, 65, 101, 177, 277, 305, 325, 363–364, 538 Compensatory fi nancing facility, 43 Conditional currency option, 124–125 Confidence level, 286, 288–289, 303, 602 Confounding effect, 222 Conglomerate, 183, 424 Consignment, 530–532, 545, 548 Consolidated earnings See Consolidated fi nancial statements Consolidated fi nancial statements, 251, 295–298, 357, 359–361, 604 Conti Currency, 262 Contingency graph, 122–124, 131, 139–142, 144–146, 149–151, 311–312, 318 Conversion rate, 68 Convertibility clause, 65 Copyright, 8, 448 Corporate control, Corporate treasurer, 263 Correlation, 79–80, 92, 283–287, 289, 297, 299, 302, 304–305, 329–330, 375–378, 478, 562–563, 585, 595 Correlation coefficient, 79, 284, 289, 376, 563, 595 Correspondent bank See Advising bank Corruption, 70, 181, 382, 447, 449–450, 465, 468 Cost of capital, 12, 14–15, 18, 241, 252, 369, 371, 391, 393, 405, 412, 436, 468, 472–483, 485, 487–499, 501, 524, 527, 528, 598 Cost of debt, 12, 76, 472, 477–478, 480, 482, 487, 496–497, 498–499, 501, 527 Cost of equity, 12, 76, 475, 477–480, 483–484, 489, 493, 495–496, 498, 526–527, 604 Cost of fi nancing, 64, 369, 502, 504, 513, 523, 598 Cost of goods sold, 48, 74, 238, 277, 300, 347, 353–354, 361, 363, 385, 419–420, 428–430, 440, 589 Cost of new common equity, 472 Cost of production, 374, 600 Cost of retained earnings, 472 Counterpurchase, 541–542 Countertrade, 533, 541–542, 545–546 Country risk, 19, 302, 369, 384, 401, 443, 446–447, 449, 450–471, 474–476, 487–488, 491, 493–495, 498, 499, 527, 598, 602 Covered interest arbitrage, 153, 188, 194–205, 207–212, 232–233, 236, 240, 242, 553–554, 581–582, 588 Credit rating, 12, 44, 183, 496, 568 Index Credit risk, 63, 111, 166–167, 464, 486, 493, 508, 534, 538–539, 541–542 Cross exchange rate, 58, 73, 75, 108, 153, 191, 193, 197, 207, 212–213, 240, 242–243 Cross-border factoring, 534 Cross-hedging, 329–330, 333 Cumulative NPV, 393–394, 396, 399, 401, 403, 460–461 Currency (in)convertibility, 381, 447–448, 464–465, 544 Currency bear spread See Bear spread Currency board, 161–163 Currency bull spread See Bull spread Currency call option, 59, 115–117, 119, 120, 126–130, 136, 176, 244, 310, 312–315, 324, 337 Currency cocktail bond, 514 Currency derivative, 103, 124, 128–129, 133, 236, 244, 295 Currency futures contract, 59, 103, 108–115, 122, 126–128, 130, 132–134, 152, 230, 236–237, 244, 278–279, 309, 317–318, 324–325, 330–332, 357, 510–511, 598 Currency futures market, 58–59, 70, 78, 103, 108–109, 112, 130 Currency option, 59, 70, 103, 114–115, 117, 119–120, 122–128, 130–139, 148, 152, 176, 244, 271–272, 308, 310, 312, 324, 330–334 Currency option combinations, 139 Currency option hedge, 308, 310, 324, 331 Currency option pricing, 135–137, 272 Currency put option, 59, 119–121, 124, 126–129, 137–138, 147, 176, 318–321, 323–324, 326, 331, 333, 335 Currency reserves, 43, 161, 241 Currency risk, 56 Currency spread, 147 Currency straddle See Straddle Currency swap, 391, 508–510, 521, 523–524, 526 Currenex, 52–53 Current account, 23–26, 34, 36, 46–47, 49 D DaimlerChrysler, 372 Dairy Queen, Dealer, 52, 65, 170, 189–190, 193, 517, 520, 549 Debt ratio, 473 Decentralized management style, Default risk, 64, 97, 162, 194, 205, 224, 234, 237, 519 Deficit unit, 59 Delphi technique, 453–455, 465 Demand for funds, 41, 63, 180, 477 Depreciation, 37, 48, 57, 74, 77–78, 82, 85, 97–99, 108, 120, 126, 150–151, 155, 157, 160, 166, 179, 184, 186–187, 212, 217–218, 224, 227, 234–235, 240, 243, 247, 254, 261–262, 274–275, 277–279, 285, 290–292, 299, 305–306, 317, 360, 363–364, 385, 392–395, 398–399, 405, 408, 411, 413, 416, 429, 580, 583–584, 594, 602–603, 605 Deutsche Bank, 51 Devaluation, 155, 160, 396 DFI See Direct foreign investment Direct foreign investment, 10, 17, 21, 24–25, 38–40, 46, 71, 154–155, 370–375, 377–386, 409, 415–416, 418, 422, 424, 436, 446–447, 453, 455, 463–464, 468, 470–471, 598, 600 667 Direct intervention, 154, 168–172, 174–177, 180–182, 184, 186–187, 240–241, 244, 246, 303 Direct Loan Program, 543, 546 Direct quotation, 56–58, 74, 276 Discount broker, 109 Discount rate, 12, 387, 393–394, 396, 398–399, 401, 403–407, 409, 429, 437, 459–461, 465, 468–471, 482, 484, 498, 502, 521, 539 Dividend discount model, 81 Dividend income, 41, 82, 418, 493 Documentary collections, 532 Documents against acceptance, 532 Documents against payment, 532 Dollarization, 163 Double taxation, 418 Dow Chemical, 2, 281, 422 Draft, 530–533, 535, 538–540, 545, 547 Dumping, 32, 184, 297 DuPont, 8, 251, 297, 309, 325, 466 Dynamic hedging, 586 E Earnings before interest and taxes, 420 Earnings before taxes, 348, 362, 419–420, 429, 484 Eastman Kodak, 281, 308, 325, 328, 372 ECB See European Central Bank ECN See Electronic communication network Economic exposure, 280, 282, 289–292, 294, 296–297, 299–301, 304–307, 334, 346–348, 350–357, 359, 360–365, 367, 522, 551, 598–599, 603 Economies of scale, 30, 351, 361, 372, 374, 383, 422 ECU See European Currency Unit Effective fi nancing rate, 552–553, 556–563, 565, 597, 599, 603, 605 Effective yield, 570, 579–589, 591–595, 597, 599, 603, 605 Efficient frontier See Frontier of efficient portfolios Efficient market hypothesis, 270 Electronic communication network, 77 Eli Lilly & Co., Emerging market, 64, 70, 77, 93, 107, 184, 186, 260, 284, 357, 371, 379, 427, 433, 452 EMS See European Monetary System Enron, 3, 68, 425 Environmental constraints, 381, 488 Equilibrium exchange rate, 85–92, 97–98, 174, 222, 232 Equilibrium interest rate, 41 Equity swap, 520 ERM See Exchange rate mechanism ETF See Exchange-traded fund Ethical constraints, 16 EU See European Union Eurobank, 549 Eurobond, 64–65, 508 Euro-clear, 65 Euro-commercial paper, 549 Eurocredit loans, 63, 73 Eurocredits See Eurocredit loans Eurocurrency deposit, 577 Eurocurrency market, 60, 577 Eurodollar, 60, 577 668 Index Euronext market, 69 Euronote, 549 European Bank for Reconstruction and Development, 45 European Central Bank, 165–166, 175, 477 European Currency Unit, 159 European Monetary System, 159 European money market, 60–61, 73 European Union, 30–31, 62, 160, 165, 372–373, 375, 423, 448 European-style option, 126 Exchange clearinghouse, 110–111, 541 Exchange rate mechanism, 159 Exchange rate risk, 14–15, 18–19, 55, 64, 75–79, 82, 100, 103–104, 107, 127, 134, 152, 162, 166–167, 178, 187, 194, 233, 249, 262, 280–281, 285, 297–298, 300, 302–303, 305, 307–308, 325, 327, 330–331, 333, 336, 341, 346–347, 350, 362, 364, 367, 372, 384, 398, 409, 411–412, 445, 467, 474–475, 479–483, 488–489, 491, 493, 496–499, 506–511, 513, 515, 521–523, 525–526, 528, 558, 564–566, 568, 570–571, 579, 585–586, 588, 590, 598–601 Exchange-traded fund, 82–83 Excise tax, 415, 417 Exercise price See Strike price Ex-Imbank See Export-Import Bank of the United States Expected value, 278, 313–314, 316, 321, 323, 332, 342–343, 356, 364, 438, 461–462, 467–469, 506, 556–557, 560–561, 564, 566, 583–584, 588, 593 Expiration date, 114–122, 124, 126–127, 129–130, 133– 134, 137, 139–140, 143–145, 147, 150, 236, 243, 272, 311–313, 318, 320, 333, 335–336, 340–341, 343 Export credit, 44, 533–534, 542–544 Export-Import Bank of the United States, 542–546, 548 Expropriation, 404, 447, 457, 463–464, 544 ExxonMobil, 2, 38, 474 F Factor income, 22–23, 25 Factoring, 533–534, 541, 545, 547 Factors of production, 6, 16, 372, 374–375, 382 FASB See Financial Accounting Standards Board Fed See Federal Reserve System Federal Reserve Bank of St Louis, 28, 102 Federal Reserve System, 130, 167–171, 175–176, 221, 244, 246, 337 Ferro, Fidelity, 83–84 Financial Accounting Standards Board, 295–296 Financial Institution Buyer Credit Policy, 543 Financial leverage See Leverage Financial risk, 446, 450, 455–456, 467 Fireman’s Fund, 40 FIRM See Foreign investment risk matrix First City Bank in Thailand, 424 Fiscal policy, 165, 301 Fisher effect, 92, 153, 187, 214, 223, 225–229, 231–237, 239, 240, 242, 244–245, 247, 260, 276, 335, 337, 410, 507, 523, 581, 588, 603 Fixed asset, 24, 356–357 Fixed exchange rate system, 154–156, 158 Fixed rate payer, 517 Floating rate bond, 518, 522 Floating rate note, 65 Floating rate system, 50, 156–157, 164 Floor, 76–77, 82, 108–110, 114, 135 Floor broker, 82, 109, 130 FMC, 59 Ford Motor Co., 371–372, 382, 422, 450, 508 Forecast bias, 265–267, 273, 275 Forecast error See Absolute forecast error Foreign bond, 25, 64 Foreign exchange market, 1, 50–53, 70–71, 75, 87–88, 90–93, 95, 97, 124, 126, 130, 154–155, 158–160, 162, 167–171, 173–174, 176–184, 186–190, 197, 207–208, 212–213, 241–243, 269–270, 274, 311, 318, 558, 586 Foreign investment risk matrix, 457 Foreign target See Target fi rm Forfaiting See Medium-term capital goods fi nancing Forward contract, 59, 71, 73, 78, 103–108, 110–112, 114, 116, 126–130, 133, 152, 182, 194–196, 200, 202, 205, 211–213, 234, 236, 239, 244, 275–276, 309–310, 312, 316–317, 319–320, 324, 326, 328–337, 354, 357–360, 391, 410–412, 469, 508, 523, 586, 598–602, 605 Forward discount See Forward rate discount Forward hedge, 308, 310, 313–316, 321, 323–324, 330–335, 340, 358, 554 Forward market, 58–59, 70, 75, 103–104, 236, 301, 333, 508, 521, 554–555, 581 Forward premium See Forward rate premium Forward rate discount, 105, 127, 199–204, 207–211, 231, 261, 587 Forward rate premium, 105–106, 127, 194, 196, 198–207, 209–211, 233, 236, 239, 242–243, 246–247, 259–261, 273, 310, 554–555, 581–582, 603 Forward swap, 520 Franchising, 7, 9–11, 16 Freely floating exchange rate system, 156–157 FRN See Floating rate note Front-end management fee, 63 Frontier of efficient portfolios, 377–378 Fuji Co., Full compensation, 542 Full-service broker, 109 Functional currency, 296 Fundamental forecasting, 254–255, 257–258, 261–262, 269, 273–274, 278 Futures contract See Currency futures contract Futures hedge, 308–309, 313, 317, 321, 324 FX Alliance LLC, 51 G GATT See General Agreement on Tariffs and Trade GDP See Gross domestic product General Agreement on Tariffs and Trade, 30, 44 General Electric, 8, 40, 328–329, 371–372, 507 General Mills, Inc., 9, 325 General Motors, 9, 292, 372–373, 508 Gerber Products, 435 Index Gillette, 297, 509 Global debt offering, 501 Global equity offering, 500 Globalization, 45, 530 GLOBEX, 109, 114 Gold standard, 50–51 Goldman Sachs, 262 Goodyear Tire & Rubber Co., 172 Government bond offering, 508 Great Depression, 51 Gross domestic product, 26, 165, 451–454, 464 GTE, 519 Guinness, 64 Gulf War, 163 H Heineken, 25 Hewlett-Packard, 38, 185, 371, 501 High-yield debt, 507 Home Depot, Honeywell, 372, 507 I IBM, 2, 6, 8, 10, 24, 38, 297, 364–365, 371, 386, 466, 501 IBRD See International Bank for Reconstruction and Development IDA See International Development Association IET See Interest Equalization Tax IFC See International Financial Corp IFE See International Fisher effect IFE line, 228–230 IGA, Inc., IMF See International Monetary Fund IMF See International mutual fund Imperfect market, 6, 16–17 Imperfect markets theory, 5–6, 16, 18 Implicit call option, 404 Implied standard deviation, 271–272 Import/export letter of credit See Letter of credit In the money, 115, 119, 140, 144, 169, 317–318, 538 Income gains, 296 Independent agent, 416 Independent variable, 49, 255, 294, 336, 365, 386, 599 Indirect intervention, 154, 171–172, 174–177, 182, 184, 186, 241, 244, 246, 303 Indirect quotation, 56–58, 66, 67 Inflation, 2, 34, 36–37, 45–48, 89–95, 97–101, 152–153, 156–157, 159–160, 163, 165, 171, 173, 175, 214–227, 229, 231–245, 247, 254–258, 261–262, 272–278, 280, 294, 296, 302, 374, 385, 396, 455–456, 467, 581 Information cost, 76–77, 476 Initial margin, 109, 111 Inspection visit, 453–454, 465 Instinet, 77 Intel, 6, 35, 116, 290, 448, 519 Inter-American Development Bank, 45 Interbank market, 52, 61, 95–96, 100 Intercompany transaction, 415, 419–420 669 Interest Equalization Tax, 64 Interest rate parity, 130, 188–189, 191, 193, 195, 197–205, 207–211, 213–214, 231–232, 234, 236–237, 242, 244–245, 247, 260, 272–274, 276, 304, 310, 330, 332–333, 335–337, 410, 412, 496, 508, 553–555, 565–566, 581–582, 587–588, 599–600, 602–603 Interest rate risk, 325, 347, 408, 515, 517 Interest rate swap, 510, 517–520, 524 Interlake, International acquisition, 9, 382, 422–425, 427, 429, 431, 433–435, 437–441, 443, 445 International alliance, 77, 434–436, 439 International arbitrage See Arbitrage International Bank for Reconstruction and Development, 43–45, 68, 182–183, 464 International bond market, 50, 64–65, 72, 74 International Chamber of Commerce, 535 International credit market, 50, 63, 71–72 International Development Association, 45 International diversification, 73, 79–80, 82–83, 370, 375, 475 International divestiture, 434, 436, 439 International Financial Corp., 44, 464 International Fisher effect, 153, 187, 214, 223–237, 239–240, 242, 244–245, 247, 260, 276, 335, 337, 410, 523, 581, 588, 603 International Monetary Fund, 42–43, 179 International money market, 50, 59–61, 71–74, 188, 529, 577–578, 596 International mutual fund, 82, 84 International stock market, 50, 66–68, 71–72, 83 International Swaps and Derivatives Association, 520 Intersubsidiary payments matrix, 573–574 Intracompany trade, 38 Inventory cost, 56 Investment bank, 39, 65, 67, 68, 72, 262, 277, 425, 517 Investment guarantee program, 464 Invoice policy, 308 IRP See Interest rate parity Irrevocable letter of credit, 534–535 ISD See Implied standard deviation ISDA See International Swaps and Derivatives Association ISDA Master Agreement, 520 Issuing bank, 531, 534–536, 538–539 J J.C Penney, 24, 384, 467–468 J.P Morgan Chase, 44, 51 J-curve effect, 37–38 Johnson & Johnson, 436, 508 Johnson Controls, 519 Joint probability, 461, 468, 560–561, 593–594 Joint venture, 7, 9–11, 16–18, 166, 370–372, 374, 383–384, 386, 435, 439, 447, 471, 527–528, 568, 590 K KFC, 371 Kraft Foods, 571 670 Index L L/C See Letter of credit Labor cost, 2, 30, 32, 372, 390, 481, 600 Labor strike, 258, 446 Lagging, 329–330, 332, 575, 588 Layoffs, 373, 426–427 Leading, 329–330, 332, 422, 520, 575, 588 Lease payment, 398, 400 Less developed country, 409, 476, 496 Letter of credit, 531–541, 543, 546–547 Leverage, 46, 373, 478, 492–495 LIBOR See London Interbank Offer Rate Library of Congress, 451 Licensing, 7–11, 16–18, 166, 435, 439 Liquidation value See Salvage value Liquidity, 53, 59, 65, 66, 72, 88, 104, 114, 371, 478, 500, 515, 539, 543, 549–550, 570–571 Litton Industries, 172 Loanable funds, 210, 477, 487 Locational arbitrage, 153, 188–191, 193, 197, 207, 209, 212, 236, 242 Lockbox, 573, 576 London Interbank Offer Rate, 63, 73, 517–520, 524, 549 Long-term capital gain, 82 Long-term forward contract, 328, 330, 357, 391 Long-term forward rate, 260 Lucent Technologies, 371 M Macroassessment of country risk, 451–453 Macrofi nancial risk, 453 Macropolitical risk, 453 Mail float, 573 Managed float exchange rate system, 158 Margin, 109, 111–112, 114, 177, 212, 305, 385, 440 Margin requirement, 111, 113 Market capitalization, 70 Market efficiency, 112, 122, 269, 274, 278 Market share, 9, 18, 30–32, 299, 354, 356, 370, 382, 390, 422, 433, 440, 448, 477 Marketable securities, 401 Market-based forecasting, 258, 273 Matsushita Electrical Industrial Co., 372 Maximum one-day loss, 286, 288 Maytag Corp., 172 McDonald’s, 9, 64, 297 MCI Communications, 40 Medium-term capital goods fi nancing, 533, 541, 545–546 Medium-Term Guarantee Program, 542–543 Medtronic, Merchandise exports and imports, 22–23 Merck, 172, 281, 325 Merrill Lynch, 84 Mexican peso crisis, 160 Microassessment of country risk, 452–453, 466 Microfi nancial risk, 453 Micropolitical risk, 453 Microsoft, 448 MIGA See Multilateral Investment Guarantee Agency Minority shareholder, 487–488 Mixed forecasting, 261, 273 Monetary policy, 165–166, 301, 477 Money market account, 54 Money market hedge, 308–310, 313–315, 317–318, 321, 324, 326, 330–332, 336, 339, 359, 598, 600, 604 Money market security, 25, 73, 78, 225, 232, 241, 550, 582, 586 Money market yield, 93 Money supply, 165, 167, 169–172 Monopolistic advantage, 371, 374 Morgan Stanley, 373 Motorola, 10, 33, 185, 371 Multilateral Investment Guarantee Agency, 44, 464 Multilateral netting system, 573, 575 Multinational restructuring, 369, 422, 434, 438–439, 445 Mutual fund, 3, 64, 82, 84 N NAFTA See North American Free Trade Agreement National income, 34, 45–46, 48, 99, 173, 181, 451 NDF See Non-deliverable forward contract Negotiable B/L, 536 Nestlé SA, Net operating loss carryback, 415, 417 Net operating loss carryforward, 415, 417 Net present value, 387–388, 392, 394–398, 406–412, 419, 423–424, 430–431, 436, 438, 440–444, 459–462, 465, 467–469, 472, 477, 481–485, 496–499, 511, 524, 528, 598, 602, 604–605 Net transaction exposure, 304–305, 307 Netting, 148, 345, 573–576, 587 Nike, 2, 6, 10, 33, 185, 211, 346, 383, 410, 450, 452, 495, 507, 534 Nissan Motor Co., 372 Nominal forecast error, 265 Nominal interest rate, 91–92, 211, 223–225, 230–232, 234–235, 239, 242, 244, 261, 272–273, 276, 477, 581, 599 Non-deliverable forward contract, 107–108 Nonsterilized intervention, 169–170, 175–177 Nonvoting stock, 489 Normal distribution, 409 Nortel Networks, 371 North American Free Trade Agreement, 30 Northwest Airlines, 40 Notional value, 518–519 NPV See Net present value O Ocean bill of lading, 536 OECD See Organization for Economic Cooperation and Development Off-balance sheet item, 62 OPEC See Organization of Petroleum Exporting Countries Open account transaction, 532, 547, 567 OPIC See Overseas Private Investment Corporation Opportunity cost, 56, 104, 148, 150–151, 400, 472, 478, 480, 498 Index Option writer, 141 Order cost, 56 Ordinary income tax rates, 82 Organization for Economic Cooperation and Development, 45 Organization of Petroleum Exporting Countries, 60 OTC market See Over-the-counter market Out of the money, 115, 119, 120, 127, 140, 147, 149, 343 Outsourcing, 32–33, 243, 245 Overdraft facilities, 570 Overhead expense, 392, 411, 421 Overhedging, 326, 330–331, 336, 339 Overseas Private Investment Corporation, 464, 542, 544–546 Over-the-counter currency futures market, 108 Over-the-counter market, 84, 114 671 Purchasing power disparity, 218–219 Purchasing power parity, 153, 179, 214–223, 231–234, 236– 238, 242, 244, 257, 274, 280, 300, 335–336, 507, 581 Purely domestic fi rm, 4, 11–14, 17, 292, 294 Put See Currency put option Put option hedge See Currency option hedge Put option on real assets, 437–438 Put option premium, 119–120, 127, 131, 135–140, 142, 144, 146, 150, 338–339 Putable swap, 520 Put-call parity, 137–138 Q Quantitative analysis, 453–455, 465, 470 Quota, 31, 35, 43, 99, 173, 215, 243, 466, 570 P R P/E ratio See Price-earnings ratio Parallel bond, 64 Parallel loan, 328, 330, 510–513, 601, 604 Partial acquisition, 434–435, 439 Partial compensation, 542 Partially owned subsidiary, 488 PEFCO See Private Export Funding Corporation Pegged exchange rate system, 158–160, 174, 182 Pension fund, 3, 64 Perfect forecast line, 266–268 Performance bond, 537 Petrodollars, 60 Piracy, 35 Pizza Hut, 9, 371 Plain vanilla swap, 517 Pollution control, 381–382, 447–448 Portfolio variance, 376, 562, 595 PPP See Purchasing power parity PPP line, 218–220, 222 Preauthorized payment, 573 Predex, 262 Prepayment, 530–532, 545, 547 Price index, 216–217 Price-earnings method, 81 Price-earnings multiple, 478–480 Price-earnings ratio, 81, 295, 431 Price-elastic, 36 Private Export Funding Corporation, 542, 544–546 Private placement, 500–501 Privatization, 28, 40, 67, 435 Pro forma fi nancial statement, 419–420 Probability distribution, 256–257, 272, 275, 277, 286, 288–289, 314, 316, 319, 321, 323, 332–334, 336, 339, 395, 405, 459, 481–482, 506, 517, 525, 528, 556–558, 561–562 Procter & Gamble, 9, 281, 328 Product cycle theory, 5–7, 16–18 Profit margin, 20, 305 Project fi nance, 464, 543 Project Finance Loan Program, 543 Promissory note, 539–541 Protective covenant, 65 Random error, 294 Random walk, 223 Real asset, 71, 370, 403, 437–438 Real cost of hedging payables, 316, 332 Real exchange rate, 223 Real GDP growth, 452–453 Real interest rate, 91–92, 98–99, 220, 234, 237, 242, 256–257, 274–275, 336 Real option, 395, 403–404, 437 Red tape, 381 Reference index, 107–108 Reference rate, 107 Regression analysis, 49, 220, 230, 236, 255–258, 274–275, 294–295, 300–301, 304, 336, 352–354, 365, 386, 454, 599 Regression coefficient, 83, 99, 220, 230, 255–257, 266, 274–275, 294, 300 Regulatory constraints, 381 Relative form of PPP, 215, 217 Reporting currency, 295–296 Required rate of return, 12, 14, 81, 391–394, 400–402, 406, 408–410, 423, 430–431, 433–434, 439–442, 459, 465–469, 472, 476, 480–484, 494, 498–499, 524, 527–528, 601 Research and development, 361, 417, 421, 570, 575 Reserves See Currency reserves Restructuring, 281, 348, 350–351, 356, 369, 422–423, 429, 434, 437–439, 445, 467, 598 Retail transaction, 55, 73 Retained earnings, 388–389, 400, 407, 472, 486–487, 496, 598 Return on investment, 260, 263, 375, 572, 580, 593 Revocable letter of credit, 534 Risk aversion, 325, 556, 565, 583 Risk management, 520 Risk premium, 42, 64, 81, 162, 441, 477–478, 480, 482, 491, 493–494, 498, 598 Risk-adjusted discount rate, 404 Rockwell International, 422 Royal Dutch Shell, 82 R-squared, 352–353, 365, 386 Rule 144A, 67 672 Index S SAL See Structural Adjustment Loan Salomon Smith Barney, 65 Salvage value, 303, 391–396, 399–402, 406–407, 409–411, 413, 423–424, 459–462, 468–469, 497 Sanyong Paper, 424 Sara Lee Corp., Sarbanes-Oxley Act, 3, 68, 425 SBC Communications, Scott Paper Co., 422 SDR See Special Drawing Right SEC See Securities and Exchange Commission Securities and Exchange Commission, 67, 77, 114 Selling and administrative expenses, 429–430, 440 Semistrong-form efficiency, 273 Sensitivity analysis, 292, 404–406, 409, 419, 431, 482 September 11, 2001, 17, 47, 73, 80, 99, 176, 209, 275, 335, 384, 408, 441, 447, 449, 451, 462, 466–467, 495, 546, 566, 588 Service exports and imports, 22–23 Settlement date, 59, 107–115, 118, 128, 130, 132, 134, 244 Shareholder wealth, 2, 4, 11, 16, 18, 40, 370, 372, 388 Shell Oil, 40 Sight draft See Draft Simulation, 404–407, 482, 506, 517, 522 Single European Act, 30, 62, 167, 372 Single-Buyer Policy, 544 Small Business Policy, 544, 546 Smithsonian Agreement, 51, 155 Snake, 159 Sony, 82, 372 SOX See Sarbanes-Oxley Act Special Drawing Right, 43, 514 Speculation, 93, 97, 100–101, 110–111, 119, 124, 127, 182, 230, 259 Spot market, 51–54, 58, 70, 74–75, 88, 107, 112, 117–118, 121, 123, 125, 129, 135–137, 191, 196, 246, 312, 324, 326, 341–342, 410, 605 Spreader, 132, 147–151, 345 Sprint Corp., Stakeholder diversification, 281 Standby letter of credit, 537 Sterilized intervention, 169–170, 175 Straddle, 122, 130–131, 139–147, 337–338, 341–343 Strangle, 131–132, 139, 143–147, 338, 342–343 Strike price, 59, 114–125, 127–133, 135–138, 140–151, 236, 243, 247, 272, 310–314, 318–321, 331, 333–339, 340– 341, 343–345, 411, 437, 438, 520, 600 Strong-form efficiency, 273 Structural Adjustment Loan, 44 Substitutes, 45, 89, 215, 222–223, 380 Subway Sandwiches, Supplier credit, 530 Supply of funds, 41, 515 Surplus unit, 59 Swap dealer See Dealer Swap transaction, 106–107 Swaption, 520 Swiss stock exchange, 76–77 Sybron, Syndicate, 63–65, 69, 541, 549 Syndicated loan, 63–64, 73 Synoptics, Systematic risk, 476, 498 T Takeovers, 451, 463 Target capital structure, 492–495, 497, 601 Target fi rm, 422–428, 433–434, 438–440 Tariff, 30–31, 35, 45–47, 100, 161, 173, 215, 372–373, 466 Tax credit, 392, 411, 415, 418, 427, 477, 488, 527 Tax deduction, 390, 416–417 Technical analysis, 253, 270, 274, 278 Technical factors, 253 Technical forecasting, 253–254, 261–262, 273, 275, 278 Tenor, 536 Theory of comparative advantage, 5–6, 16–17 Time draft See Draft Time value of money, 511, 538 Toshiba, 33 Toyota, 33, 295, 300, 373 Trade acceptance, 532, 536 Trade barrier, 28, 30–31, 35, 45–47, 92, 94, 98, 167, 215, 222, 236, 258, 371–372, 374, 382, 446, 530 Trade cycle, 530 Trade name, Trade restriction See Trade barrier Tradebook, 77 Trademark, 8, 23 Trading company, 544 Trading desk, 53 Trading pit, 109 Transaction cost, 67–68, 76, 82, 110–111, 114, 122–123, 128, 167, 191, 204–205, 207–210, 254, 310, 372, 500, 514, 573, 575, 578 Transaction exposure, 280, 282–283, 286, 288, 290, 292, 297, 299–300, 304–309, 326, 328–333, 338–340, 346, 351, 358–359, 362, 598 Transfer payments, 23 Transfer pricing, 419–421, 575 Transferable letter of credit, 537 Translation exposure, 280, 282, 295–299, 301, 303–307, 346–347, 351–353, 357–361, 363–365, 367, 598 Treasury bill, 162, 205, 209–210, 234, 539, 577, 588, 590, 596 Triangular arbitrage, 153, 188, 191–193, 195, 197, 207–209, 211–212, 240, 242, 244 Trigger, 124–127, 197, 253 Triple taxation, 418 Turnover, 67, 434, 448 U U.S Census Bureau, 27 U.S Treasury, 24, 64, 210, 588, 590 Umbrella Policy, 544 Underwriting, 63, 65 Underwriting syndicate, 69 Unemployment, 26, 31, 156–157, 159, 163, 172–174, 183, 380, 382, 386, 409, 451, 575 Index Uniform Customs and Practice for Documentary Credits, 535 Unilever, 30 Union Carbide, 309, 519 United Nations, 42 United Technologies, 371 Unsystematic risk, 476 Uruguay Round, 30, 44 V Value-added tax, 181, 415, 417 Value-at-risk, 286, 288–289, 303, 602 Vanguard, 84 VAR See Value-at-risk Variable rate debt, 510, 519 Variation margin, 109 VAT See Value-added tax Verizon, 8, 519 Volkswagen, 64, 172, 372–373 W Wal-Mart, 18, 73–74, 371 Walt Disney, 64, 300, 328, 384, 408, 450, 501 War in Iraq, 163–164, 449, 468 Warner-Lambert Co., 436 WEBS See World equity benchmark shares Weighted average cost of capital, 12, 14–15, 18, 472, 481–482, 495 Whitney Group, 59 Wholesale transaction, 55 Wholly owned subsidiary, 494 673 Withholding tax, 64, 388–390, 392–394, 396, 399–401, 411, 413, 415–418, 424, 427, 437, 444, 447, 459–462, 468, 488–491, 527–528, 590 Working capital, 389–390, 392, 394, 411, 413, 436, 533, 540, 542, 545–547, 568–571 Working capital fi nancing, 540 Working Capital Guarantee Program, 542, 546 World Bank See International Bank for Reconstruction and Development World equity benchmark shares, 83 World Trade Organization, 44 World War I, 26, 51, 183 WorldCom, 3, 68, 425 Writer See Option writer WTO See World Trade Organization X Xerox Corp., Y Yahoo!, 19, 422 Yamaichi Securities Co., 183 Yankee stock offering, 67 Yield curve, 205, 515–517 Yield to maturity, 502 Yum Brands, 371 Z Zero-coupon swap, 520 ... C $20 0 ϭ 150.0 (6) Total cost of materials in U.S $ C$100 ϭ 75.00 C $20 0 ϭ 160.00 C$100 ϭ 80 C $20 0 ϭ 170.00 C$100 ϭ 85.00 $20 0.0 $21 5.00 $21 0.00 $22 0 $22 0.00 $22 5.00 $ 60 $ 62 $ 60 $ 62 $ 60 $ 62. .. 90 Days Spot Rate for the Thai Baht in 90 Days 5% $1.45 $. 020 0 20 1.47 $. 021 3 30 1.48 $. 021 7 25 1.49 $. 022 0 15 1.50 $. 023 0 1. 52 $. 023 5 SMALL BUSINESS 339 Blades’ next sales to and purchases from... 100,000 Euros When Owning Call Options $1.16 $.03 $1.16 $1.19 $119,000 1 .22 03 1 .20 1 .23 123 ,000 1 .24 03 1 .20 1 .23 123 ,000 (1) (2) Chapter 11: Managing Transaction Exposure 313 If Scenario or occurs,