Multinational financial management 10th shapiro

Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 708 Shapiro f01.tex Tenth Edition MULTINATIONAL FINANCIAL MANAGEMENT ALAN C SHAPIRO University of Southern California V1 - July 26, 2013 5:03 P.M Page i Shapiro f01.tex V1 - July 26, 2013 5:03 P.M Page ii To my parents, Hyman and Lily Shapiro, for their encouragement, support, and love VICE PRESIDENT & PUBLISHER EXECUTIVE EDITOR CONTENT EDITOR ASSITANT EDITOR SENIOR EDITORIAL ASSISTANT ASSOCIATE DIRECTOR OF MARKETING SENIOR MARKETING MANAGER MARKETING ASSISTANT EDITORIAL OPERATIONS MANAGER PRODUCT DESIGNER SENIOR MEDIA SPECIALIST SENIOR PRODUCTION AND MANUFACTURING MANAGER ASSOCIATE PRODUCTION MANAGER George Hoffman Joel Hollenbeck Jennifer Manias Courtney Luzzi Erica Horowitz Amy Scholz Jesse Cruz Justine Kay Yana Mermel Allison Morris Elena Santa Maria Janis Soo Joel Balbin This book was set in 10.5/12 Berkeley Book by Laserwords Private Limited and printed and bound by R R Donnelley/Jefferson City The cover was printed by R R Donnelley/Jefferson City This book is printed on acid free paper Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright © 2014, 2010, 2006, 2003 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return mailing label are available at www.wiley.com/go/returnlabel If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy Outside of the United States, please contact your local sales representative Library of Congress Cataloging-in-Publication Data Shapiro, Alan C Multinational financial management / Alan C Shapiro –Tenth Edition pages cm Includes bibliographical references and index ISBN 978-1-118-57238-2 (pbk.) International business enterprises—Finance I Title HG4027.5.S47 2013 658.15’99–dc23 2013027964 Printed in the United States of America 10 Shapiro ftoc.tex V1 - July 25, 2013 6:47 P.M CONTENTS Preface Selected Currencies and Symbols Symbols and Acronyms xiii xvii xix Part I Environment of International Financial Management and Theme of This Book 40 Relationship to Domestic Financial Management 41 Introduction: Multinational Enterprise Multinational Financial Management Learning Objectives 1.1 The Rise of the Multinational Corporation Evolution of the Multinational Corporation Search for Raw Materials 10 Market Seeking 10 Cost Minimization 13 Knowledge Seeking 16 Keeping Domestic Customers 17 Exploiting Financial Market Imperfections 17 The Process of Overseas Expansion by Multinationals 17 Exporting 18 Overseas Production 18 Licensing 19 Trade-offs Between Alternative Modes of Overseas Expansion 19 A Behavioral Definition of the Multinational Corporation 20 The Global Manager 23 1.2 The Internationalization of Business and Finance 23 Political and Labor Union Concerns about Global Competition 24 Consequences of Global Competition 31 1.3 Multinational Financial Management: Theory and Practice 38 Criticisms of the Multinational Corporation 39 Functions of Financial Management 39 Arbitrage 41 Market Efficiency 41 Capital Asset Pricing 42 The Importance of Total Risk 43 The Global Financial Marketplace 43 The Role of the Financial Executive in an Efficient Market 44 1.4 Outline of the Book 44 Environment of International Financial Management 44 Foreign Exchange and Derivatives Markets 45 Foreign Exchange Risk Management 45 Financing the Multinational Corporation 45 Foreign Investment Analysis 45 Multinational Working Capital Management 45 The Determination of Exchange Rates Learning Objectives 52 2.1 Setting the Equilibrium Spot Exchange Rate Demand for a Currency 53 Supply of a Currency 53 Factors That Affect the Equilibrium Exchange Rate 54 Relative Inflation Rates Relative Interest Rates 52 53 54 55 iii Page iii Shapiro ftoc.tex V1 - July 25, 2013 6:47 P.M iv Contents Relative Economic Growth Rates 55 Political and Economic Risk 55 Calculating Exchange Rate Changes 58 2.2 Expectations and the Asset Market Model of Exchange Rates 59 The Nature of Money and Currency Values 62 Central Bank Reputations and Currency Values 64 Price Stability and Central Bank Independence Currency Boards 69 Dollarization 71 Expectations and Currency Values 72 65 79 The Effects of Foreign Exchange Market Intervention 80 2.4 The Equilibrium Approach to Exchange Rates 82 Disequilibrium Theory and Exchange Rate Overshooting 82 The Equilibrium Theory of Exchange Rates and Its Implications 83 2.5 Summary and Conclusions 85 The International Monetary System 88 Learning Objectives 88 3.1 Alternative Exchange Rate Systems 89 The Trilemma and Exchange Rate Regime Choice 90 Free Float 92 Managed Float 92 Target-Zone Arrangement 95 Fixed-Rate System 95 3.2 A Brief History of the International Monetary System 98 The Classical Gold Standard 99 How the Classical Gold Standard Worked in Practice: 1821–1914 101 The Gold Exchange Standard and Its Aftermath: 1925–1944 101 102 The Bretton Woods System: 1946–1971 104 Lessons and Red Flags from Bretton Woods 105 2.3 The Fundamentals of Central Bank Intervention 74 How Real Exchange Rates Affect Relative Competitiveness 74 Foreign Exchange Market Intervention 76 Mechanics of Intervention 78 Sterilized versus Unsterilized Intervention Competitive Devaluations 101 Bretton Woods Conference and the Postwar Monetary System 101 Role of the IMF 101 Role of the World Bank 102 Role of the Bank for International Settlements The Post-Bretton Woods System: 1971 to the Present 105 Assessment of the Floating-Rate System 109 Increasing Currency Volatility 109 Requirements for Currency Stability 110 3.3 The European Monetary System and Monetary Union 110 The Exchange-Rate Mechanism 110 Lessons from the European Monetary System 111 The Currency Crisis of September 1992 111 The Catalyst 111 The High Cost of Intervention 112 The Exchange Rate Mechanism Is Abandoned in August 1993 112 The Catalyst 112 Governments Surrender to the Market A Postmortem on the EMS 113 European Monetary Union 113 114 Maastricht Convergence Criteria 114 Launch of the Euro 114 EMU and the European Welfare State 115 Consequences of EMU 117 Performance of the Euro 118 Optimum Currency Area 121 Cracks in the Eurozone–the Periphery States Fracture 124 The Catalyst—Divergences in Prices 124 Euro Structural Flaws 127 Disparate Growth Rates Heightened Tensions Lessons from EMU and the Euro 131 Exchange Rate Regimes Today 131 3.4 Emerging Market Currency Crises 132 Transmission Mechanisms 132 Trade Links 132 Financial System 132 Debt Policy 133 Origins of Emerging Market Crises Moral Hazard 133 Fundamental Policy Conflict 133 133 127 Page iv Shapiro ftoc.tex V1 - July 25, 2013 6:47 P.M v Contents Policy Proposals for Dealing with Emerging Market Crises 133 Currency Controls 134 Freely Floating Currency 134 Permanently Fixed Exchange Rate Better Information 134 3.5 Summary and Conclusions 134 135 Parity Conditions in International Finance and Currency Forecasting 138 Learning Objectives 138 4.1 Arbitrage and the Law of One Price 138 4.2 Purchasing Power Parity 143 The Lesson of Purchasing Power Parity 146 Expected Inflation and Exchange Rate Changes 148 The Monetary Approach 148 Empirical Evidence 149 4.3 The Fisher Effect 152 Empirical Evidence 154 Adding Up Capital Markets Internationally 159 4.4 The International Fisher Effect 159 Empirical Evidence 161 4.5 Interest Rate Parity Theory 163 Empirical Evidence 167 4.6 The Relationship Between the Forward Rate and the Future Spot Rate 168 Empirical Evidence 170 4.7 Currency Forecasting 171 Requirements for Successful Currency Forecasting 171 Market-Based Forecasts 172 Forward Rates Interest Rates 172 177 The Balance of Payments and International Economic Linkages Learning Objectives 183 5.1 Balance-of-Payments Categories 184 203 Protectionism 204 Ending Foreign Ownership of Domestic Assets 205 Boosting the Saving Rate 206 External Policies 207 Current-Account Deficits and Unemployment 208 The Bottom Line on Current-Account Deficits and Surpluses 210 5.4 Summary and Conclusions 210 Country Risk Analysis 214 Learning Objectives 214 6.1 Measuring Political Risk 215 Political Stability 216 Economic Factors 217 Subjective Factors 217 Fundamental Analysis 172 Technical Analysis 174 Model Evaluation 174 Forecasting Controlled Exchange Rates 4.8 Summary and Conclusions 177 Lagged Effects 202 J-Curve Theory 202 Devaluation and Inflation 203 U.S Deficits and the Demand for U.S Assets 172 172 Model-Based Forecasts Current Account 185 Capital Account 188 Financial Account 188 Balance-of-Payments Measures 188 The Missing Numbers 190 5.2 The International Flow of Goods, Services, and Capital 190 Domestic Saving and Investment and the Financial Account 190 The Link between the Current and Financial Accounts 191 Government Budget Deficits and Current-Account Deficits 194 The Current Situation 196 5.3 Coping with the Current-Account Deficit 199 Currency Depreciation 199 183 Political Risk and Uncertain Property Rights Capital Flight 223 Culture 225 6.2 Economic and Political Factors Underlying Country Risk 226 Fiscal Irresponsibility 226 Monetary Instability 229 Controlled Exchange Rate System 230 Wasteful Government Spending 230 218 Page v Shapiro ftoc.tex V1 - July 25, 2013 6:47 P.M vi Contents Resource Base 231 Country Risk and Adjustment to External Shocks 232 Market-Oriented versus Statist Policies 232 The Mathematics of Sovereign Debt Analysis 245 Country Risk and the Terms of Trade The Government’s Cost/Benefit Calculus 248 Lessons from the International Debt Crisis 250 Why Capitalism Works 233 Statist Policies Constrain Growth 235 Why Statist Policies Persist 236 Key Indicators of Country Risk and Economic Health 237 Market-Oriented Policies Work 240 Market-Oriented Reform in Latin America Obstacles to Economic Reform 242 Onset of the Crisis 250 Reform Takes Hold 250 Debt Relief 250 The Crisis Ends 251 Lessons from Successful Economic Reform 251 241 6.3 Country Risk Analysis in International Lending 244 247 6.4 Summary and Conclusions 251 Part II Foreign Exchange and Derivatives Markets 255 7.1 The Foreign Exchange Market Advantages and Disadvantages of Futures Contracts 286 Arbitrage between the Futures and Forward Markets 286 Learning Objectives 256 Organization of the Foreign Exchange Market 257 The Participants 258 8.2 The Clearing System 260 Electronic Trading 261 7.2 Size 262 The Spot Market Spot Quotations 264 264 The Mechanics of Spot Transactions The Forward Market 272 Forward Quotations 274 8.3 272 8.4 Exchange Risk 276 Cross Rates 276 7.4 Forward Contract Maturities 277 Summary and Conclusions 277 Currency Futures and Options 8.1 Learning Objectives 280 Futures Contracts 280 289 293 294 Option Pricing and Valuation 295 Using Forward or Futures Contracts versus Options Contracts 296 Futures Options 301 Reading Currency Futures and Options Prices 302 Summary and Conclusions 305 Swaps and Interest Rate Derivatives 9.1 Markets Currency Options 286 Market Structure 287 Using Currency Options Currency Spread Knockout Options Transaction Costs 266 Cross Rates 267 Currency Arbitrage 269 Settlement Date 271 Exchange Risk 271 7.3 Forward Contract versus Futures Contract 282 256 280 312 Learning Objectives 312 Interest Rate and Currency Swaps Interest Rate Swaps 313 312 The Classic Swap Transaction 313 Cost Savings Associated with Swaps 315 Currency Swaps 316 Interest Rate/Currency Swaps 318 Page vi Shapiro ftoc.tex V1 - July 25, 2013 6:47 P.M Page vii vii Contents Dual Currency Bond Swaps 9.2 Part III 10 and 322 Economic Advantages of Swaps 324 Interest Rate Forwards and Futures 324 Forward Forwards 324 Forward Rate Agreement 325 Eurodollar Futures 326 9.3 9.4 9.5 Structured Notes 328 Inverse Floaters 329 Callable Step-Up Note 330 Step-Down Coupon Note 330 Credit Default Swaps 330 Summary and Conclusions 332 Foreign Exchange Risk Management Risk Shifting 359 Pricing Decisions 359 Exposure Netting 360 Currency Risk Sharing 361 Currency Collars 362 Cross-Hedging 366 Foreign Currency Options 366 Measuring and Managing Translation Transaction Exposure 336 Learning Objectives 336 10.1 Alternative Measures of Foreign Exchange Exposure 337 Translation Exposure 337 Transaction Exposure 338 Operating Exposure 338 10.2 Alternative Currency Translation Methods 338 Current/Noncurrent Method 339 Monetary/Nonmonetary Method 339 Temporal Method 339 Current Rate Method 340 10.3 Transaction Exposure 341 10.4 Designing a Hedging Strategy 342 Objectives 343 Costs and Benefits of Standard Hedging Techniques 346 Costs of Hedging 346 Benefits of Hedging 347 Exposure Netting 349 Centralization versus Decentralization 349 Managing Risk Management 350 Accounting for Hedging and FASB 133 351 Empirical Evidence on Hedging 352 10.5 Managing Translation Exposure 352 Funds Adjustment 352 Evaluating Alternative Hedging Mechanisms 353 10.6 Managing Transaction Exposure 354 Forward Market Hedge 355 The True Cost of Hedging Money Market Hedge 356 357 335 Using Options to Hedge Bids 367 Using Options to Hedge Other Currency Risks 368 Options versus Forward Contracts 369 10.7 Summary and Conclusions 370 11 Measuring and Managing Economic Exposure 379 Learning Objectives 379 11.1 Foreign Exchange Risk and Economic Exposure 379 Real Exchange Rate Changes and Exchange Risk 381 Importance of the Real Exchange Rate 382 Inflation and Exchange Risk 383 Competitive Effects of Real Exchange Rate Changes 384 11.2 The Economic Consequences of Exchange Rate Changes 387 Transaction Exposure 387 Operating Exposure 387 11.3 Identifying Economic Exposure 391 Aspen Skiing Company 391 ´ Petroleos Mexicanos 392 Toyota Motor Company 393 11.4 Calculating Economic Exposure 393 Spectrum’s Accounting Exposure 395 Shapiro ftoc.tex V1 - July 25, 2013 6:47 P.M viii Contents Spectrum’s Economic Exposure 395 Market Selection Pricing Strategy Product Strategy Scenario 1: All Variables Remain the Same 395 Scenario 2: Krona Sales Prices and All Costs Rise; Volume Remains the Same 396 Scenario 3: Partial Increases in Prices, Costs, and Volume 397 Case Analysis 398 Production Management of Exchange Risk 405 Input Mix 405 Shifting Production Among Plants 406 Plant Location 407 Raising Productivity 407 11.5 An Operational Measure of Exchange Risk 398 Limitations 399 Empirical Results 400 401 401 403 Planning for Exchange Rate Changes Financial Management of Exchange Risk 411 11.7 Summary and Conclusions 416 11.6 Managing Operating Exposure 401 Marketing Management of Exchange Risk 401 Part IV Financing the Multinational Corporation Regional Development Banks National Development Banks 12 International Financing and National Capital Markets 422 Learning Objectives 422 12.1 Corporate Sources and Uses of Funds 423 Financial Markets versus Financial Intermediaries 423 Financial Systems and Corporate Governance 424 Globalization of Financial Markets 427 Financial Regulation and Deregulation Financial Innovation 429 427 12.2 National Capital Markets as International Financial Centers 431 International Financial Markets 434 Foreign Access to Domestic Markets 435 The Foreign Bond Market The Foreign Bank Market The Foreign Equity Market 435 436 436 Globalization of Financial Markets Has Its Downside 447 12.3 Development Banks 448 The World Bank Group 448 IBRD 448 IFC 448 IDA 449 Regional and National Development Banks 449 Private Sector Alternatives 12.4 Project Finance 452 12.5 Summary and Conclusions 13 408 421 449 450 450 453 The Euromarkets 455 Learning Objectives 455 13.1 The Eurocurrency Market 455 Modern Origins 456 Eurodollar Creation 456 Eurocurrency Loans 458 Terms 458 Multicurrency Clauses 459 Relationship Between Domestic and Eurocurrency Money Markets 460 Interest Differentials 460 Eurocurrency Spreads 460 Euromarket Trends 461 13.2 Eurobonds 462 Swaps 463 Links Between the Domestic and Eurobond Markets 463 Placement 463 Currency Denomination 463 Interest Rates on Fixed-Rate Eurobonds 463 Interest Rates on Floating-Rate Eurobonds 465 Page viii Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 693 www.freebookslides.com INDEX A Absolute advantage, 48 Accelerating collections, 615 Acceptance, 593 banker’s, 593, 594, 598–600, 634 trade, 593 Account capital, 188 current, 185–87, 211 financial, 188, 211 Accounting, for intangible benefits, 558 Accounting exposure, 337, 395 Accounts capital, 184 current, 184 entries in US balance-of-payment, 186 financial, 184 link between current and financial, 191–94 nostro, 272 Accounts receivable management, 628–29 credit extension, 628–29 Adaptation, 584 Adjusted expected values, 563 Adjusted present value (APV), 560 approach, 559–60 Ad valorem tariffs, 649 Advance pricing agreements (APA), 652 Advantage absolute, 48 comparative, 4, 48 competitive, 5, 16, 538, 550 Advertising, 12, 538 Advising bank, 588 African Development Bank (AFDB), 450 Aggregate domestic spending, 194 Agriculture, deregulation of, 243 All-equity rate, 559 Allied Irish Banks, 351 All-in costs, 317, 463 comparison of, in Eurobond issue, 464 Allocation, optimal international asset, 527–28 American Depositary Receipts (ADR), 525, 526 American Depositary Shares (ADS), 525 American Express, 639–40 American Motors Corporation (AMC), 582 American option, 287 value of, 296 American terms, 264 Analysis break-even, 637 country risk, 214–52 foreign investment, 560–64 fundamental, 172, 174 political risk, 572–74 technical, 174 trend, 174 Anglo-Irish Bank, 131 Annual exchange rate change, 490 APA See Advance pricing agreements (APA) Apple Computer, 187–88 Appreciation, 52, 382 calculation of, 59 euro, 389 of yen, 58 APT See Arbitrage pricing theory (APT) APV See Adjusted present value (APV) Arab Fund for Economic and Social Development (AFESD), 450 Arbitrage, 41, 138–42 covered interest, 164–65 currency, 162, 269–70 financial market, 645 forward-futures, 286 between futures and forward markets, 286 international tax, 466 regulatory, 427 regulatory system, 645 risk, 41 tax, 41, 645 triangular currency, 269, 270 Arbitrage pricing theory (APT), 42, 43 Arbitrageurs, 259 ARCO Chemical, 22 Argentina currency, 69–71 future loan rate, 325 hyperinflation in, 70 monetary policy in, 80 Arm’s-length prices, 650 Asia Avon in, 415 currency crisis in, 132–33 sinking of currencies in, 60–62 trade barriers in, 16 Asiacurrency market, 473–74 Asiadollar market See Asiacurrency market Asian Development Bank (ADB), 450 Asian Tigers, world financial market and, 29–31 Ask rate, 54 Aspen Skiing Company, 391–92 Assembly, Asset market model defined, 60 of exchange rates, 59–74 Assets current, 613 demand for US, 203–4 ending foreign ownership of domestic, 205 fixed-rate, 312 held abroad, 223 Assignment, 591 Association of International Bond Dealers, 462 Atlantic Development Group for Latin America (ADELA), 449–50 At-the-money, 287 Australia, inflation in, 67 Automobile industry, 540 Japanese, 205, 405, 410–11, 545–46 United States, 31–32 Avon, 415 B Back-to-back loans, 657–59 structure of, 657 Baht, dollar versus, 59 Bailouts, Irish, 130–31 Balance basic, 189 net liquidity, 189 official reserve transactions, 189 Balance of payments, 183–211 boosting saving rate, 206 capital account, 188 categories of, 184–90 current account, 185–87 current-account deficit, 199–210 current-account deficits and surpluses, 210 current-account deficits and unemployment, 208 current situation, 196–99 deficits, 104, 217 defined, 184 ending foreign ownership of domestic assets, 205 external policies, 207–8 financial account, 188 government budget deficits and current-account deficits, 194–95 international flow of goods, services, and capital, 190–99 link between current and financial, 191–94 measures, 188–90 missing numbers in, 190 national economic activity and, 193 protectionism, 204 surpluses, 217 United States, 186 Balance sheet exposure, 337 initial, 566 Bank credit, 634–35 banker’s acceptance, 634 discounting, 634 line of credit, 634 overdraft, 634 revolving credit agreement, 634 term loans, 634 Banker’s acceptance, 593, 594, 598–600, 634 creating, 598–99 evaluating, 600 example of, 599 terms of, 599–600 Bank for International Settlements (BIS), 263, 313 role of, 102 Banking, 24 crisis, 42 universal, 426 Bank loans, 633–36 interest on, 635–36 Bank of England, 68 Bank of Korea, 189–90 Bank of New York Mellon, 620 Bank relations, 627 Bankruptcy, 453 Banks advising, 588 central, 64–73 commercial, 424 development, 448–51 693 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 694 www.freebookslides.com 694 Banks (continued) Federal Reserve, 261 international trade and, 595 tender panel of, 469 Barter, 609 Base case, 557 Basel rules, 428–29 Base portfolio, 483–87 Basic balance, 188 Basis points, 458 Basis swap, 313 Bear spread, 293 ‘‘Beggar-thy-neighbor” devaluation, 101 Below-market financing, 496 Benefit/cost ratio, 582–83 Bentsen, Lloyd, 183 Bias, home, 524 Bid-ask spread, 266 Bid rate, 54 Bilateral netting, 618–19 Bill of exchange, 592 Bill of lading (B/L), 597 clean, 597 foul, 597 on-board, 597 received-for-shipping, 597 straight, 597 Biogen, hedging and, 298–300 Black-market exchange rates, 177 Black-Scholes option pricing model, 307–9 shortcomings of, 309 Blair, Tony, 123 Blocked funds, 573 Boeing Airlines, 342 Bolivia hyperinflation in, 140–41 money supply in, 141 Bond market, 471 Bonds, 125, 158 convertible, 436 dragon, 474 dual currency, 322 equity-related, 436 fixed-rate, 313 global, 435 initial performance, 282 maintenance performance, 282 performance, 282 privately placed, 423 publicly issued, 423 Samurai, 435 Shogun, 435 sovereign, 491 total dollar return and, 529 Yankee, 435 zero-coupon, 498 Bookkeeping, double-entry, 185, 210, 211 Borrowing, cost of, 467–68 Brandes, George, 336 Brazil interest rates in, 153 operating exposure and, 414 real exchange rate and, 385 trilemma and, 96 Break-even analysis, 637 Break-even price, 289 Bretton Woods Agreement, 104 Bretton Woods system, 88, 91, 104–5 collapse of, 96 lessons learned from, 105 BRIC countries, 9, 520 exchange rates, 97 Index trilemma and, 96 Bridgestone, 547 Brokers, foreign exchange, 258 Budget deficit, in Spain, 246 Budgeting, 624–27 capital, 554–78 Budgets dispute in Italy, 116 federal, 202 Buffett, Warren, 207 Bull spread, 293 Bundesbank, 112, 113 Business, internationalization of, 23–37 Business cycle, 487 Business Environment Risk Intelligence (BERI), 216, 218 Buyback, 609 Buyer credits, 602 C Cable remittances, 616 Calculation of appreciation, 59 of exchange rates, 58 Callable step-up note, 330 Call options, 287 currency, 368 profit from buying, 290 profit from selling, 291 purchased-pound, 292 speculating with yen, 291 value of, 295 Call provisions, 465 Canada, interest rates in, 158–59 Cannibalization, 556 Canon, strategy points of, 549 Capital, 82 controls, 499 cost of, 476 debt, 488–90 equity, 477–78 for foreign investments, 476–503 intangible, 20, 536 international flow of, 190–99 low-cost, 607 mobility, 523 private, 225 working, 45, 568–69, 613, 628 Capital account, 184, 188 Capital asset pricing, 41, 42 Capital asset pricing model (CAPM), 42, 43, 477, 478, 479, 481, 483, 559, 560 empirical evidence, 486 Capital budgeting, 554–78 adjusted present value approach, 559–60 alternative frameworks, 559–60 basics of, 555–60 foreign project appraisal and, 564–72 growth options and project evaluation, 574–77 incremental cash flows, 556–58 issues in foreign investment analysis, 560–64 net present value, 555–56 political risk analysis and, 572–74 Capital flight, 223–25 from India, 224 Capital investments, for soda production and bottling, 539 Capitalism, 232 crony, 61 functioning of, 233 income per capita and, 233 Capital market, 428 competition and, 440–44 imperfections, 44 integration, 154, 155 segmentation, 500 Capital market segmentation, 154, 155 in France, 157–58 Capital productivity, 433 Capital transfers, 191 CAPM See Capital asset pricing model (CAPM) Carrier Lumber Ltd., futures and, 301 Carry trade, 162 Carter, Jimmy, 152 Cash-flow exposure, 341 Cash flows discounted, 574 estimation of project, 565–69 incremental, 556–58 net, 571 parent, 569–72 parent versus project, 561–62 statement of projected, 413 tax factors, 562 Cash in advance, 587 Cash planning and budgeting, 624–27 multinational cash mobilization, 625–27 Cash pool, 623 Caterpillar, 8, 610 CDS See Credit default swaps (CDS) CEJ (Continental European and Japanese) countries, 424 Central bank Chinese, 97 currency values and, 64–73 economic growth and, 66 European, 114, 117, 118, 121, 122, 134 expectations of, 64 independence, 65–67 inflation and, 66 intervention, 74–82 monetary policy and, 67 monetize the deficit and, 65 money supply and, 82 sterilized versus unsterilized intervention, 79 Centralization, 349–50 Certificates of deposit (CD), 599 Charting, 174 Chicago Board of Trade (CBOT), 282 Chicago Mercantile Exchange (CME), 280, 285, 301, 302, 303, 326 Chile exchange rate, mismanagement of, 386–87 nominal and real exchange rates for, 386 China Beijing Jeep, 582–83 central bank in, 97 exports, 6, 200–201 government incompetence in, 236 iPhone and, 187–88 IPOs and, 433 manufacturing in, 200–201 property rights in, 219 revaluation of currency, 77 surpluses in, 192–93 trilemma and, 96 yen and, 76–78 CHIPS See Clearing House Interbank Payments System (CHIPS) Classical gold standard, 99–100 1821– 1914, 101 fiat money, 99 price-specie-flow mechanism, 99, 100 Classical trade theory, Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 695 www.freebookslides.com 695 Index Clean B/L, 597 Clean draft, 593 Clean float, 92 Clean L/C, 591 Cleared funds, 625 Clearing House Interbank Payments System (CHIPS), 260, 261 Clearing system, 260–61 Clinton, Bill currency markets and, 73–74 on NAFTA, 32–33 CME See Chicago Mercantile Exchange (CME) Coca-Cola, 8, 10, 538, 539 advertising, 12 Cold War, 60 Collection, of funds, 615–17 accelerating, 615 Command economy, 233 Commercial banks, 424 Commercial invoice, 597–98 Commercial paper (CP), 600, 636–37 Commodity prices, 232 Commodity product, 239 Communism, collapse of, 111–12 Comparative advantage, 4, 48 Compensating balance requirements, 635 Compensation, 37, 38 Competition capital markets and, 428, 440–44 in foreign market, 545 global, 23, 24–26, 31 Japanese, 31–32 price, service, Third World and, 26 Competitive advantage, 5, 16, 538 estimating longevity of, 550 Competitive devaluation, 102–3 Competitive exposures, 401 Concession agreement, 581 Conditionality, 102 Confirmed L/C, 591 Consignment, 594 Consular invoice, 598 Consumer price index (CPI), 99 Contract note, 272 Contracts forward, 273 forward or futures versus options, 296–98 forward versus futures, 282–86, 284 futures, 280–86 futures option, 302 options, 303 put futures option, 302 specifications for foreign currency futures, 281 specifications for PHLX standardized currency option, 288 Controlled exchange rates, forecasting, 177 Controlled exchange rate system, 230 Control Risks’ Country Risk Forecasts, 216 Convergys Corporation, overseas risks faced by, 215 Conversion rates, for euro, 115 Convertibility Act, 69 Convertible bonds, 436 Core nations, Corporate governance, 424–27 Corporate international diversification, 480, 538 Corporate sources, 423–30 financial markets versus financial intermediaries, 423–24 financial systems and corporate governance, 424–27 globalization of financial markets, 427–30 Corporations, multinational See Multinational corporation (MNC) Cost/benefit analysis, of international cash management system, 621 Cost minimization, 13 Cost of capital, 476 estimating foreign project, 559 impact of globalization on, 484–86 internationalizing, 500–501 weighted average, for foreign projects, 478 Cost of debt capital, 488–90 Costs of borrowing, 467–68 of capital for foreign investments, 476–503 of debt capital, 488–90 of equity capital, 477–78 of Euro-medium-term notes program, 471 of factoring, 601–2 of hedging, 356–57 opportunity, 356 production, 567–68 reduction of, 543 transaction, 358 Counterpurchase, 609 Countertrade, 608–10 Country risk, 215 adjustment to external shocks and, 232 controlled exchange rate system, 230 economic and political factors underlying, 226–44 fiscal irresponsibility, 226–27 government cost/benefit calculus, 248 key indicators of, 237–44 market-oriented versus statist policies, 232–37 monetary instability, 229 resource base, 231 terms of trade and, 247 wasteful government spending, 230 Country risk analysis, 214–52 defined, 214 in international lending, 244–51 measuring political risk, 215–25 Coupon swap, 313 Covenants, 423 Covered interest arbitrage, 164–65 Covered interest differentials, 163 computing, 167 Covered interest rate, 168 CP See Commercial paper (CP) CPI See Consumer price index (CPI) Crawling peg system, 94, 96 Creative destruction, 26 European Union and, 27–29 Credit, 184 interaffiliate trade, 644 Credit default swaps (CDS), 330–31 Credit extension, 628–29 evaluating overseas, 629 Credits, 211 buyer, 602 supplier, 602 Credit terms, 628 Crony capitalism, 61 Cross-hedging, 366 Cross-investment, 540 Cross rates, 267–68 arbitraging currency, 271 currency, 268 Culture, political risk and, 225 Currency adoption of common, 117 arbitrage, 162, 269–70 arbitraging between interest rates and, 276–77 in Argentina, 69–71 Asian, sinking of, 60–62 Asian crisis, 132–33 call options, 292 central bank and, 64–73 control measures, 91 controls, 134, 156, 573–74 crisis of September 1992, 111–12 cross rates, 268 cylinder, 365 de facto, 118 demand for, 53 denomination, 463 of denomination, 393 depreciation, 141, 199–204, 563 of determination, 393 devaluation, 30 dollarization, 71–72 emerging market, crises, 132–35 floating, 52 fluctuations, 336 foreign, 146 freely floating, 134 functional, 375 hard, 352 with high interest rates, 161 home, 142, 145 local, 412, 413, 526 markets, 73–74 optimum area, 121–23 pegged, 52 peso, 63–64 range forward, 363, 364 reference, 53 reporting, 375 revaluation of Chinese currency, 77 soft, 352 South Korea and, 414 stability, 110 supply of, 53–54 swaps, 312–24, 316–24 Swiss, 78 values, 43, 62–63 values, expectations and, 72–73 volatility, 88, 109 Currency board, 69, 95 disadvantages of, 71 Currency call option, 368 Currency collars, 362–65 Currency exchange rate, 508 Currency forecasting, 171–77 controlled exchange rates, 177 market-based, 172 model-based, 172–74 model evaluation, 174–77 requirements for successful, 171–72 Currency futures, reading, 302–4 Currency options, 286–302, 368, 369 currency spread, 293, 294 defined, 287 foreign, 366–70 forward or futures contracts versus options contracts, 296–98 futures options, 301–2 knockout options, 294–95 market structure, 287–89 option pricing and valuation, 295–96 using, 289–95 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 696 www.freebookslides.com 696 Currency put option, (continued) Currency put option, 368 Currency risk management, 494 Currency risk sharing, 361–62 Currency spread, 293, 294 Currency translation methods, 338–41 current/noncurrent method, 339 current rate method, 340–41 monetary/nonmonetary method, 339 temporal method, 339 Current account, 184, 185–87, 211 balances as percentage of GDP, 187 balance versus dollar, 202 deficit, 194–95, 199–210, 210 global, 197 link with financial account, 191–94 US balance on, 196 Current-account surplus, 209 Current assets, 613 Current liabilities, 613 Current/noncurrent method, 339 Current rate method, 340–41 Curve shifts supply and demand, 92 Customers, domestic, 17, 546–47 Cylinder, 365 Cypress Semiconductor, 630 D Daimler-Benz, Yankee bonds and, 440 DaimlerChrysler, 21, 545 hedging operating exposure, 411 Danish krone, 366, 382 Debit, 184, 211 Debt equity financing versus, 499 equity versus, 662–65 government, 128 gross government, 227 policy, 133 Debt capital, cost of, 488–90 Debt/GDP ratio, 245 Debt relief, 250–51 Debt-to-equity ratios, 492 Decentralization, 349–50 Decision financing, 39 investment, 39 pricing, 359–60 De facto currency, 118 De facto devaluation, 447 Deficit balance-of-payments, 104, 217 current-account, 194–95, 199–210, 208 current-account surplus and, 209 dollar and, 200 government budget, 194–95 monetizing the, 65, 227 trade, 119, 192 United States, 203–4 Deindustrialization, of United States, 34–37 Dell, 21 Delta Airlines, 604–5 Demand for currency, 53 curve shift, 92 for money, 62 price elasticity of, 388 Depreciation, 52, 168, 382 currency, 141, 199–204, 563 of euro, 489 Index foreign currency, 402 tax shield, 563 Deregulation, 5, 313 of agriculture, 243 financial, 423, 427–29 Derivatives, 280 exotic, 350 Derivatives markets, 45 Design, Destruction, creative, 26 Deutsche Bank, global share, 526 Deutsche Bank Eurasia Group Stability Index, 216 Deutsche mark (DM), 104 pound versus, 81 Deutsche Telekom, 439 Deutsche Termin Borse (DTB), 282 Devaluation, 52, 171 ‘‘beggar-thy-neighbor,” 101 competitive, 101, 102–3 currency, 30 de facto, 447 inflation and, 203 of peso, 64 Developed countries, 523 interest rates in, 158 Developing countries correlation with US market, 516 currency controls in, 156 flows of foreign direct investment to, 13 investment tin infrastructure project with private participation in, 451 Development banks, 448–51 private sector alternatives, 450–51 regional and national, 449–50 World Bank Group, 448–49 Differentiated (distinct) products, 388 Direct integration, vertical, 20 Direct investment, 24, 188, 244 horizontal, 536 Direct quotation, 264 calculating for Brazilian real, 268–69 calculating for euro, 270 calculating for pound, 268 Dirty float, 93 Disbursement, of funds, 615–17 Discounted cash flow (DCF), 574 Discounting, 600–601, 634 Discount rates adjusting, 562–63 for foreign investments, 479–88 foreign project, 481 Disequilibrium, 166 Disequilibrium theory, 82–83 Disinflation, 95 Diversifiable risk, 42 Diversification corporate international, 480, 538 gains from, 511–15 international, 40, 510–18 international portfolio, 480 recent correlations, 515–18 stock, 527 Dividends, 660–62 exchange controls, 662 financing requirements, 662 joint ventures, 662 tax effects, 660–62 Documentary draft, 593 Documentary L/C, 590, 591 Documents, in international trade, 597–98 bill of lading, 597 commercial invoice, 597–98 consular invoice, 598 insurance certificate, 598 Dollar advantages of strong and weak, 75 baht versus, 59 carry trade and, 162 cash flows under debt and equity financing, 664 changes in, 93 Clinton, 74 currency swap, 318 current-account balance versus, 202 deficit and, 200 global financial crisis and, 108–9 government actions and statements on value, 107 interest rate/currency swap, 320–21 value of, 106 value of, 1970–2012, 76 yen versus, 58 Yugoslav dinar versus, 59 Dollarization, 71–72, 404 stabilization by, 72 Domestic capital asset pricing model (Domestic CAPM), 486 Domestic credit markets, 461 Domestic customers, 17 keeping, 546–47 Domestic financial management, 41 Domestic markets foreign access to, 435–47 links with Eurobond markets, 463–65 Domestic money markets, Eurocurrency and, 460 Domestic saving, 190–91 Double-entry bookkeeping, 185, 210, 211 Dow Chemical, 317–18, 319 exposure netting and, 360–61 Draft, 592–94 clean, 593 documentary, 593 sight, 593 time, 593 Dragon bond, 474 Drawdown, 458 Drawdown flexibility, 470 Dual currency bond, 322 swaps, 322–23 E EAFE See Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index East Asian Tigers, 232 Eastern Europe privatization in, 243, 244 strategies for economic success in, 243–44 Eastman Kodak Company, 320–21, 409 ECB See European Central Bank (ECB) Economic exposure, 338, 379–417 calculating, 393–98 defined, 380 economic consequences of exchange rate changes, 387–91 foreign exchange risk and, 379–87 identifying, 391–93 managing operating exposure, 401–16 minimizing, 344 operational measure of exchange risk, 398–401 time pattern of, 380 Economic forces, Economic freedom, 233 economic growth and, 234 Economic growth Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 697 www.freebookslides.com 697 Index central bank and, 66 disparate, in Eurozone, 127–28 economic freedom and, 234 relative, 55 Economic health, key indicators of, 237–44 Economic policy, in Mexico, 241 Economic power, centralization of, 235 Economic reform, 220 in India, 234–35 international debt crisis and, 250, 251 obstacles to, 242–43 in Russia, 237 in West Germany, 240 Economic rent, 535 Economic risk, 55 analysis, 562–63 Economics financial, 41 Keynesian, 227 Economic shocks, 90 Economies of scale, 11, 402, 538 foreign direct investment and, 543 Economies of scope, 539 Economist Intelligence Unit (EIU), 216, 222 Economy command, 233 global, 32 of Iceland, 162–63 market, 232 open, 238 political, 214 ECU See European Currency Unit (ECU) EEC See European Economic Community (EEC) Effective interest rate, 635 Efficiency, market, 170 Efficient frontier, 514, 528 Efficient market, 41–42 role of financial executive in, 44 Electronic industry, Japanese, 542 Electronic trading, 261–62 Emerging market currency crises, 132–35 origins of, 133 policy proposals for dealing with, 133–35 transmission mechanisms, 132–33 Emerging markets, 511 investing in, 518–24 risk and return for, 519 US market and, 520, 521 England classical gold standard and, 101 euro and, 123–24 mark versus pound, 81 ˆ 434 Entrepots, Equilibrium approach, to exchange rates, 82–84 disequilibrium theory, 82–83 exchange rate overshooting, 82–83 implications of, 83–84 Equilibrium exchange rate factors affecting, 54–57 impact of inflation on, 55 political and economic risk, 55 relative economic growth rates, 55 relative inflation rates, 54–55 relative interest rates, 55 Equilibrium exchange rates, 54 Equilibrium rate, 78 Equilibrium spot exchange rate, 53–59 Equity, 441 debt versus, 662–65 Equity capital, cost of, 477–78 Equity financing, debt versus, 499 Equity-related bonds, 436 Equity warrants, 436 ERM See Exchange-rate mechanism (ERM) Euro, 53, 159, 304, 403 American filmmakers and, 380–81 appreciation, 389 calculating direct quote for, 270 changes in, 93 conversion rates for, 115 crisis, 615–16 currency swap, 318 declining, 297–98 depreciation of, 489 England and, 123–24 European manufacturers and, 381 fluctuation in, 119 futures, 366 launch of, 114 lessons from, 131 performance of, 118–21 price quotes, 360 pricing December call option, 311 response to European Constitution and, 120 structural flaws in, 127 Sweden’s rejection of, 115–16 Eurobanks, 455, 458 Eurobond market, 455 Eurobonds, 313, 455, 462–68 Eurocurrency loans versus, 467–68 fixed-rate, 463–65 floating-rate, 465 links between domestic market and, 463–65 note issuance facilities versus, 470 rationale for existence of market, 465–67 retirement, 465 swaps, 463 zero-coupon, 321 Euro-commercial paper (Euro-CP), 472–73 Euro-CP See Euro-commercial paper (Euro-CP) Eurocurrency, 313 spread of, 460 Eurocurrency loans, 458–60 calculating annual cost of, 459 Eurobonds versus, 467–68 Siemens negotiates, 459 Eurocurrency market, 455–62 domestic money market versus, 460 Eurodollar creation, 456–58 Euromarket trends, 461–62 loans, 458–60 modern origins of, 456 Eurocurrency markets, 167 Eurodollars, 455, 459, 462 creation of, 456–58 futures, 326–27, 327 Euromarkets, 434, 455–74 Asiacurrency market, 473–74 Eurobonds, 462–68 Euro-commercial paper, 472–73 Eurocurrency market, 455–62 note issuance facilities and Euronotes, 468–72 trends, 461–62 Euro-medium-term notes (Euro-MTNs), 470–72 characteristics of, 471–72 costs of program, 471 reasons for success, 471 risks, 472 Euromoney, 216 Euronotes, 468–72 Europe 1992, 539, 546 European Bank for Reconstruction and Development (EBRD), 450 European Central Bank (ECB), 78, 114, 117, 118, 121, 122, 134 European Constitution, France and, 120 European Currency Unit (ECU), 110 European Economic Community (EEC), 110 European Investment Bank (EIB), 449 European Monetary System (EMS), 95, 110–32, 157 abandonment of exchange-rate mechanism, 112–14 currency crisis of September 1992, 111–12 current exchange rate regimes, 131–32 European Monetary Union, 114–21 exchange-rate mechanism, 110–11 lessons from, 111 optimum currency area, 121–31 postmortem on, 113–14 European Monetary Union (EMU), 114–21 comparative statistics for countries of, 118 consequences of, 117–18 euro, launch of, 114 European welfare state and, 115–16 Greece, 129–30 Maastricht convergence criteria, 114 performance of euro, 118–21 European option, 287 European terms, 264 European Union (EU), 89, 110 creative destruction and, 27–29 euro and, 118 GDP growth in, 27 labor productivity in, 28 unemployment rate in, 28 European welfare state, EMU and, 115–16 Eurozone, 53, 54, 81, 91, 92, 117, 130, 248, 250 deficits in, 116 disparate growth rates in, 127–28 fracture of periphery states, 124 Evaluation criteria, 550 Exchange, foreign, 45 Exchange controls, 645, 652, 662 Exchange of principals, 317 Exchange-rate mechanism (ERM), 110–11, 112, 157 abandonment of, 112–14 Exchange rates, 49–50, 126 alternative systems, 89–96 annual change, 490 asset market model of, 59–74 black-market, 177 BRIC countries, 97 calculating changes and inflation, 383, 563–64 calculating changes in, 58 changes in, 148 in Chile, 386–87 competitiveness and, 74–76 controlled, 177 currency, 508 current, 131–32 declining, 297 defined, 53 determination of, 52–85 economic consequences of changes, 387–91 equilibrium, 54 equilibrium approach to, 82–84 equilibrium spot, 53–59 equilibrium theory and, 83–84 excess variable and, 84 fixed, 95, 105 fluctuating, 93 foreign, 265 free float, 92 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 698 www.freebookslides.com 698 Exchange rates (continued) freely floating, 52 historical, 339 inflation-adjusted, 75 instability of, 89 managed float, 92–94 nominal, 75, 81, 146, 147, 381, 382 operating exposure and, 387–91 overshooting, 82–83 pegging, 106 permanently fixed, 134 planning for changes in, 408–10 purchasing power parity and, 151 real, 74–76, 146, 147, 381–82, 384–87 rising, 298 transaction exposure and, 387 trilemma, 90–91 Exchange risk, 271, 276, 380 financial management of, 411–13 on foreign securities, 530–31 hedging currency risk, 530–31 inflation and, 383–84 marketing management of, 401–4 operational measure of, 398–401 production management of, 405–8 questions for identifying, 394 real exchange risk changes and, 381–82 Exchange-traded options, 287 Exercise price, 287 Exotic derivatives, 350 Expansion overseas, 17–20 typical foreign, 18 Expenditure, national, 191 Expiration date, 287 Export credit agency (ECA), 605 Export-credit insurance, 606 Foreign Credit Insurance Association, 606 Export financing, 602–6 government-subsidized, 607–8 Export-Import Bank (Ex-Im Bank), 602–4 Exports, 17, 18, 92, 187, 387 Chinese, 6, 200–201 earnings on, 570 loss of competitiveness, 60–61 Exposure accounting, 337, 395 balance-sheet, 337 cash-flow, 341 centralization versus decentralization, 349–50 comparisons between, 337 competitive, 401 economic, 338, 379–417 operating, 338, 380, 387–91, 401–16 transaction, 338, 341–42, 354–70, 380, 387 translation, 337–38, 352–54 Exposure netting, 349, 353, 360–61 managing transaction exposure with, 361 Expropriation, 215, 572 consequences of, 573 Externalized production, 14 External policies, 207–8 Exxon, 466 F Factoring, 601–2 evaluating cost of, 601–2 Factors of production, specialized, 48–49 Fair trade, 26 FannieMae See Federal National Mortgage Association (FNMA) Index FCIA See Foreign Credit Insurance Association (FCIA) FDIC See Federal Deposit Insurance Corporation (FDIC) Federal budget, 202 Federal Deposit Insurance Corporation (FDIC), 456 Federal National Mortgage Association (FNMA), 322, 323 Federal Reserve, 65, 72, 73, 82, 105, 134 banks, 261 Fed funds, 261 Fedwire, 261 Fees, 557, 570, 653–54 Fiat, 540 Fiat money, 64, 85, 99 Finance, internationalization of, 23–37 Financial account, 184, 188, 211 domestic saving and investment and, 190–91 link with current account, 191–94 Financial Accounting Standards Board (FASB), 338, 395 Financial bubble, 61 bursting of, 61–62 Financial channels, 644 Financial crisis, dollar and, 108–9 Financial deregulation, 423 Financial economics, 41 Financial executive, role of, 44 Financial innovation, 429–30 Financial institutions, failure of, 42 Financial intermediaries, financial markets versus, 423–24 Financial management domestic, 41 of exchange risk, 411–13 functions of, 39–40 international, 44–45 multinational, 2–45 theory and practice, 38–44 Financial market arbitrage, 645 Financial market imperfection, 538 Financial markets exploiting imperfections, 17 financial intermediaries versus, 423–24 foreign access to domestic, 435–47 foreign bank market, 436 foreign bond market, 435–36 foreign equity market, 436–40 globalization of, 427–30 international, 434–35 role and consequences of well-functioning, 431 world, 29–31 Financial shocks, 428–29 Financial statement, impact of translation alternatives, 340 Financial systems corporate governance and, 424–27 as transmission mechanism, 132–33 Financing, 566 bankers’ acceptances, 598–600 below-market, 496 discounting, 600–601 equity, 499 export, 602–6 factoring, 601–2 foreign trade, 586–611 forfaiting, 602 intercompany, 633 international trade, 595 local currency, 633 low-cost opportunities, 496–501 mixed-credit, 604 requirements, 662 short-term, 631–39 techniques in international trade, 598–602 Financing decision, 39 FINCO, 621 Fiscal irresponsibility, 226–27 Japan and, 227–29 Fiscal year ending (FYE), 408 Fisher effect (FE), 139, 142, 152–59, 177 empirical evidence, 154–59 international, 159–63 Fixed exchange rates, 95, 105 Fixed-for-fixed currency swap, 316, 317–18, 319 Fixed rate, 313, 314 Fixed-rate assets, 312 Fixed-rate bonds, 313 Fixed-rate Eurobonds, 463–65 Fixed-rate issues, 435 Fixed-rate system, 94, 95 forecasting in, 173 Flexibility drawdown, 470 timing, 470, 644–46 Float, 615 clean, 92 dirty, 93 free, 92 managed, 92–94 Floating currency, 52 Floating-rate, 313, 314 Floating-rate Eurobonds, 465 Floating-rate notes (FRN), 328, 435, 465 Floating-rate system, 109–10 currency volatility and, 109–10 requirements for currency stability, 110 Flow-back effect, 393 Fluctuations, 94 FNMA See Federal National Mortgage Association (FNMA) Forces, economic, Ford, 545, 577 Ford II, Henry, 554 Forecasting accurate versus profitable, 176 controlled exchange rates, 177 currency, 171–77 (See also Currency forecasting) in fixed-rate system, 173 international Fisher effect, 160 sales and revenue, 566–67 with unbiased forward rate, 169 Foreign bank market, 436 Foreign bond market, 435–36 Foreign Corrupt Practices Act, 215 Foreign Credit Insurance Association (FCIA), 606 Foreign currency, 146 Foreign currency options, 366–70 hedging bids with, 367 hedging other currency risks, 368–70 Foreign direct investment (FDI), 6, 8, 9, 10, 127, 219, 535 cost reduction, 543 domestic customers, keeping, 546–47 economies of scale, 543 flows of, to developing countries, 13 inflows and outflows in United States, 11 knowledge seeking, 544–46 multiple sourcing, 544 stock of world wide, 12 survival and, 543–47 Foreign equity market, 436–40 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 699 www.freebookslides.com 699 Index Foreign exchange, 45 controls, 620 pricing, 267 risk management, 45 trading volume, 262 Foreign exchange brokers, 258 Foreign exchange exposure, 337–38 operating exposure, 338 transaction exposure, 338 translation exposure, 337–38 Foreign exchange market, 256–77 circadian rhythms of, 258 clearing system, 260–61 electronic trading, 261–62 forward market, 272–77 organization of, 257–64 participants in, 258–62 purpose of, 257 size of, 262–64 spot market, 264–72 structure of, 260 traders, 259 Foreign exchange market intervention, 76, 78 effects of, 80–81 Foreign exchange markets, 152 Foreign exchange quotes, 264 Foreign exchange rates, 265 Foreign exchange risk, 337 economic exposure and, 379–87 management, 344 Foreign investment, 31, 547 analysis, 45 capital for, 476–503 discount rates for, 479–88 Philippines and, 222 proxy companies, 482–83 reverse, 11 stock market and, 480–81 Foreign investment analysis exchange rate changes and inflation, 563–64 issues in, 560–64 parent versus project cash flows, 561–62 political and economic risk analysis, 562–63 Foreign market betas, 511 Foreign markets, 11, 512 competition in, 545 Foreign production, 19 Foreign project appraisal, 564–72 Foreign projects discount rates, 481 estimating cost of capital in, 559 weighted average cost of capital for, 478 Foreign securities, exchange risk on, 530–31 Foreign subsidiary capital structure, 491–96 cost-minimizing approach to global capital structure, 495–96 currency risk management, 494 leasing and taxes, 495 leverage and foreign tax credits, 494–95 political risk management, 493–94 Foreign tax credit (FTC), 494–95, 647 Foreign trade countertrade, 608–10 documents in, 597–98 financing, 586–611 financing techniques in, 598–602 government sources of export financing and credit insurance, 602–8 payment terms in, 586–96 Foreign trade organizations (FTO), 609 Forfaiting, 602 Fortune, Forward borrowing rate, 327–28 Forward contracts, 273 futures contract versus, 282–86, 284 hedging future payment with, 274 maturities, 277 options contracts versus, 296–98 options versus, 369–70 Forward discount, 139, 140, 167, 274, 275 Forward forward, 324–25 Forward-futures arbitrage, 286 Forward market, 257, 272–77 arbitrage between futures and, 286 Forward market hedge, 355–57 true cost of hedging, 356–57 Forward premium, 139, 140, 274, 275 Forward prices, 264 Forward quotations, 274–77 cross rates, 276 exchange risk, 276 Forward rate, 53 calculation using interest rate parity, 166 empirical evidence, 170–71 market-based forecasts and, 172 relationship between future spot rate and, 168–71 as unbiased predictors of future spot rates, 139 Forward rate agreement (FRA), 325–26 Foul B/L, 597 FRA See Forward rate agreement (FRA) France capital market segmentation in, 157–58 European Constitution and, 120 inflation in, 122 Franklin, Benjamin, 613 Free float, 92 Freely floating currency, 134 Freely floating exchange rate, 52 Free trade, 26, 109 pact, 32 Friedman, Milton, 88 FRN See Floating-rate notes (FRN) Frontier markets, 524 Functional currency, 375 factors indicating, 376 Fundamental analysis, 172, 174 Funds blocked, 573 cleared, 625 collection and disbursement of, 615–17 global, 527 good, 615 international, 527 regional, 527 single-country, 527 Funds adjustment, 352–53 Futures contract, 280–86 advantages and disadvantages of, 286 daily settlement with, 283 forward contracts versus, 284 forward contract versus, 282–86 hedging forward borrowing rate with, 327–28 options contracts versus, 296–98 Futures market, arbitrage between forward and, 286 Futures option contracts, 302 Futures options, 301–2 Futures options quotations, 304 Future spot rate empirical evidence, 170–71 relationship with forward rate, 168–71 South African, 174 G Gains, computing, 285 Gavin, John, 214 GDP See Gross domestic product (GDP) GE See General Electric (GE) General Electric (GE), 13, 23, 312, 356, 357, 359, 368, 610 currency risk sharing, 362–65 euro exposure, 355 globalization by, 6–7, 23 risks and benefits of globalization, 40 General Motors, 39, 422, 545, 610 global equity issue, 446 General Motors Acceptance Corporation (GMAC), 471, 472 Germany current-account surplus in, 209 deutsche mark, 104 fall of communism and, 111–12 hyperinflation in, 65 inflation in, 112, 113 labor costs, decline in, 124 reforms in, 240 withholding tax in, 428 GlaxoSmithKline, 544, 615–16, 618, 654 Global bond, 435 Global capital asset pricing model (global CAPM), 483 Global capital structure, cost-minimizing approach to, 495–96 Global CAPM See Global capital asset pricing model (global CAPM) Global competition, 23 consequences of, 31 political and labor union concerns about, 24–26 Global depositary receipts (GDR), 525 Global economy, 2–3, 32 Global expansion strategy, designing, 547–50 auditing effectiveness of entry modes, 549 evaluation criteria, 550 longevity of competitive advantage, estimating, 550 mode of entry, selecting, 548–49 profitable investments, 548 Global financial marketplace, 43–44 Global funds, 527 Globalization, 3, consequences of, 36 financial innovation, 429–30 of financial markets, 427–30 financial regulation and deregulation, 427–29 impact on cost of capital, 484–86 of medical systems, 6–7 Nestl´e and, 485–86 process, 17 risks and benefits of, 40 Global manager, 23 Global portfolio, 485 Global registered share (GRS), 526 Global remittance policy, designing behavioral consequences, 667 information requirements, 667 prerequisites, 666–67 Global-scanning capability, 16, 541 Global shares, 447 GMAC See General Motors Acceptance Corporation (GMAC) Gold, rising prices, 391 Gold Exchange Standard, 101–2 Bretton Woods Conference and postwar monetary systems, 101 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 700 www.freebookslides.com 700 Gold Exchange Standard (continued) competitive devaluations, 101 role of Bank for International Settlements, 102 role of IMF, 101–2 role of World Bank, 102 Goldman Sachs, 331 Gold standard, 98 classical, 99–100 Good funds, 615 Goods, international flow of, 190–99 Government budget deficit, 194–95 Government credit, 499 Government sources, of export financing and credit insurance, 602–8 Export-Import Bank (Ex-Im Bank), 602–4 Private Export Funding Corporation, 605 taking advantage of, 607–8 trends, 605–6 Government spending, 226 wasteful, 230 Government subsidies, 499–500 Government-subsidized export financing export financing strategy, 607 import financing strategy, 607–8 Gramm, Phil, 183 Greece, 128 corruption in, 129–30 Greenspan, Alan, 73 Gross domestic product (GDP), 64, 85, 114, 195, 196 current account balances as percentage of, 187 government debt and, 128 gross government debt as percentage of, 227 growth in United States versus EU, 27 nominal, 245 per capita, 217, 221 real, 228 trade balance and, 192 Gross government debt, 227 Group of Five (G-5 nations), 105 Group of 20 (G-20), 89 Group of Seven (G-7), 74, 106 Growth options, 574–77 H Hard currency, 352 borrowing, 353 Hedgers, 260 Hedging, 337 accounting for, 351 bids, with foreign currency options, 367 Biogen and, 298–300 centralization versus decentralization, 349–50 comparing alternatives, 358 costs and benefits of standard techniques, 346–49 costs of, 345 cross-hedging, 366 currency risk, 530–31 designing strategy, 342–52 empirical evidence on, 352 evaluating alternative mechanisms, 353–54 exposure netting, 349 forward borrowing rate, 327–28 objectives, 343–45 with other currency risks, 368–70 policy, 412 selective, 348 Statement of Financial Accounting Standards No 133 (FASB 133) and, 351 structured notes and, 328 translation exposure, 352 Index true cost of, 356–57 Herstatt risk, 272 Hewlett-Packard, currency options and, 368 Historical exchange rate, 339 Home bias, 524 Home currency (HC), 142, 145 Honda, 16 Hong Kong, 222, 224 Hong Kong Futures Exchange (HKFE), 282 Horizontal direct integration, 20 Horizontal direct investment, 536 Hudson Bay Trading Company, raw materials and, 10 Hyperinflation, 65 in Argentina, 70 in Bolivia, 140–41 Hyperinflationary country, 375 I IBM, 556 IBRD See World Bank Iceland, economy of, 162–63 IFC Emerging Markets Index, 521, 524 IMF See International Monetary Fund (IMF) IMM See International Monetary Market (IMM) Implied volatility, 308–9 Import earnings on, 570 substitution, 235 Import Certificates (IC), 207 Import financing strategy, 607–8 Import-substitution development strategy, 232 Incentives, 238, 499–500 Income national, 190 subpart F, 653 Income per capita, economic freedom and, 233 Incremental cash flow accounting for intangible benefits, 558 base case, 557 cannibalization, 556 fees and royalties, 557 opportunity cost, 556–57 sales creation, 556 transfer pricing, 557 Incremental cash flows, 556–58 India capital flight from, 224 government ownership in, 242 reform in, 234–35 Indirect quotation, 264 Industrial organization (IO), 536 Industries manufacturing, 34, 35 oligopolistic, 17 Industry beta, 483 Inflation, 74, 125, 155 in Australia, 67 central bank and, 66 devaluation and, 203 differential, 145 exchange rate changes and, 563–64 exchange risk and, 383–84 expected, 148 in France, 122 in Germany, 112, 113 high, 230 impact on equilibrium exchange rate, 55 rates, 139 relative, 54–55 Inflation-adjusted exchange rate, 75 Initial performance bond, 282 Initial public offerings (IPO), 433–34, 446 share of global, 442, 443–44 Innovation, financial, 429–30 Innovation-based multinationals, 538 Input mix, 405–6 Instability, of exchange rates, 89 Institutional Investor, 216 Insurance, 580–81 export-credit, 606 short-term, 606 Insurance certificate, 598 Intangible benefits accounting for, 558 from investing in Japan, 558 Intangible capital, 20, 536 Integration, 16, 541 capital market, 90, 154, 155 vertical, 536 Intel, 13 Interaffiliate fund flows, 618 Interaffiliate trade credit, 644 Inter-American Development Bank (IADB), 449 Interbank market, 257 Intercompany financing, 633 Intercompany fund-flow mechanisms, 647–65 dividends, 660–62 equity versus debt, 662–65 fees and royalties, 653–54 intercompany loans, 657–60 leading and lagging, 654–56 reinvoicing centers, 652–53 tax factors, 647–48 transfer pricing, 648–52 Intercompany loans, 633, 657–60 back-to-back, 657–59 parallel, 659–60 Intercompany payment matrix, 619 Interest on bank loans, 635–36 real, 55 relative, 55 Interest rate/currency swaps, 318, 320–21 Interest rate differential, 153 Interest rate parity (IRP), 139 calculating forward rate with, 166 empirical evidence, 167 example of, 163 put-call option, 309–11 theory, 163–67 Interest rates, 82, 312–32, 577 arbitraging between currency and, 276–77 Brazilian, 153 in Canada, 158–59 differentials, 163, 460 divergence of, 126 domestic and Eurocurrency credit markets, 461 effective, 635 Eurodollar futures, 326–27 on fixed-rate Eurobonds, 463–65 on floating-rate Eurobonds, 465 forecasting international Fisher effect with, 160 forward forward, 324–25 forward rate agreement, 325–26 forwards and futures, 324–28 high, 161 market-based forecasts and, 172 nominal, 142, 155 nominal versus real, 157 real, 142 structured notes, 328–30 swaps, 313–16 uncovered versus covered, 168 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 701 www.freebookslides.com 701 Index United States, 156 volatility, 329 Interest subsidies, 566 Interest tax shield, 560 Intermediation, securitization versus, 430 Internal interest rates (IIR), 624 Internalization, 20, 536 Internalized production, 14 Internal Revenue Services (IRS), 647 International asset allocation, 527–28 International Bank for Reconstruction and Development (IBRD) See World Bank International bond investing, 527 International cash management, 614–27 American Express, 639–40 bank relations, 627 cash planning and budgeting, 624–27 collection and disbursement of funds, 615–17 management of short-term investment portfolio, 622–23 optimal worldwide cash levels, 623–24 organization, 614 payments netting in, 617–21 International debt crisis (1982), 250–51 debt relief, 250–51 end of, 251 lessons from successful economic reform, 251 onset of, 250 reform and, 250 International Development Association (IDA), 448, 449 International Diesel Corporation (IDC), 564–72 financing, 566–67 present value of, 568 International diversification, 40, 510–18 barriers to, 524–27 correlations and gains from, 511–15 efficient frontier and, 514 gains from, 513 International equity investing barriers to international diversification, 524–27 in emerging markets, 518–24 international diversification, 510–18 risks and benefits of, 508–27 International finance, parity conditions in, 138–79 International Finance Corporation (IFC), 448–49, 451 International financial management, environment of, 44–45 International financial markets, 434–35 International financing, 422–53 corporate sources, 423–30 development banks, 448–51 national capital markets as centers, 431–47 project finance, 452–53 International Fisher effect (IFE), 139, 159–63, 177 empirical evidence, 161–62 failure of, 161 forecasting interest rates with, 160 International funds, 527 Internationalization, of business and finance, 23–37 International lending country risk analysis in, 244–51 sovereign debt analysis and, 245–46 International Monetary Fund (IMF), 29, 56, 101, 127, 132, 133 role of, 101–2 International Monetary Market (IMM), 280 International monetary system, 88–136 assessment of floating-rate system, 109–10 Bretton Woods system, 104–5 classical gold standard, 99–100 defined, 89 European Monetary System (EMS), 110–32 fixed-rate system, 95 history of, 98–110 instability in, 89 post-Bretton Woods system, 105–7 target-zone arrangement, 95 International portfolio diversification, 480 International portfolio investment, 508–31, 538 International Swaps and Derivatives Association (ISDA), 331 International tax arbitrage, 466 International trade See also Foreign trade consequences of, 47–50 documents in, 597–98 financing techniques in, 598–602 monetary prices and exchange rates, 49–50 origins of, 47–50 payment terms in, 586–96 specialized factors of production, 48–49 tariffs, 50 International Trade Administration (ITA), 596 Intervention central bank, 74–82 cost of, 112 foreign exchange market, 76, 78, 80–81 mechanics of, 78 sterilized versus unsterilized, 79 In-the-money, 287 Intrinsic value, 295 Inventory advance purchases, 630–31 control, 630 stockpiling, 631 Inventory management, 629–31 advance inventory purchases, 630–31 inventory stockpiling, 631 production location and inventory control, 630 Inverse floaters, 329, 465 Investing in emerging markets, 518–24 equity, 508–27 international bond, 527 in memory chips, 558 portfolio, 529 Investment capital, 539 decision, 39 direct, 24, 188, 244 domestic, 190–91 flows, 25 foreign, 31, 479–88, 547, 560–64 horizontal direct, 20 initial outlay, 565 international portfolio, 538 portfolio, 188, 508–31 position of United States, 194 profitable, 548 real, 191 reverse foreign, 11 structuring, 581–82 Investment banker, 423 Invoice, commercial, 597–98 iPhone, 187–88 Ireland Allied Irish Banks, 351 bailouts in, 130–31 Irrevocable L/C, 591 Italy budget dispute in, 116 cash management system in, 624 J Japan automobile industry in, 205, 410–11, 545–46 competition and US auto industry, 31–32 economic performance in, 228 electronic industry in, 542 fiscal irresponsibility and, 227–29 intangible benefits from investing in, 558 US chipmakers production in, 543–44 J-curve theory, 202–3 Jefferson, Thomas, 455 Job creation, 32 United States, 37 Joint ventures, 496, 652, 662 J.P Morgan Chase Bank, 658 K Keiretsu, 425 Keynesian economics, 227 Knockout options, 294–95 Knowledge seeking, 16–17 foreign direct investment and, 544–46 Komineft, 219 L Labor markets, 122 Labor productivity, United States versus EU, 28 Labor unions, global competition and, 24–26 Latin America capital flight from, 223–25 currency, 69–71 market-oriented reform in, 241 private capital in, 225 stocks, 522, 523 Law of one price, 138–42 oil levies and, 142 Leading and lagging, 644, 654–56 advantages, 656 fund-transfer effects of, 655 government restrictions, 656 shifting liquidity, 655–56 Learning curve, 540 Leasing, taxes and, 495 Leigh, Edward, 256 Lender of last resort, 71 Lending, international, 244–51 Leptokurtic, 309 Less-developed countries (LDC), 226, 232, 449, 479, 480 debt relief in, 250 Letter of credit (L/C), 587–92 clean, 591 confirmed, 591 documentary, 590 irrevocable, 591 nondocumentary, 591 online alternatives, 591–92 relationships among parties to, 590 transferable, 591 unconfirmed, 591 Leverage, 494–95 Liabilities, current, 613 LIBOR See London Interbank Offered Rate (LIBOR) Licensing, 19, 536 Life-cycle hypothesis, 206 Line of credit, 634 Liquidity, 62, 262, 524 lack of, 509 shifting, 655–56 store of, 62 Listed options, 287 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 702 www.freebookslides.com 702 Loan payments, (continued) Loan payments, 569–70 Loans back-to-back, 657–59 bank, 633–36 Eurocurrency, 458–60, 467–68 flexibility of, 468 forward rate agreement and, 326 future rate, 325 intercompany, 633, 657–60 maturity of, 458, 468 multicurrency clauses, 459–60 parallel, 659–60 size of issue, 468 speed, 468 taxes and, 489 term, 634 terms, 458 Local currency financing, 633 Local currency (LC), 412, 413, 526 Local stakeholders, 583 Lock box, 616 London interbank bid (LIBID), 461 London Interbank Offered Rate (LIBOR), 313, 314, 325, 326, 327, 328, 329, 330, 457, 458, 465, 469 London International Financial Futures Exchange (LIFFE), 282, 327 Long, 273 Loss, computing, 285 Lost sales, 571–72 Louvre Accord, 106 Low-cost capital, 607 Low-cost financing opportunities, 496–501 M Maastricht criteria, 114 Maastricht Treaty, 114, 115 Macroeconomic accounting identities, 190 Macroeconomic policies, 238 Maintenance performance bond, 282 Malaysia, currency markets and, 345 Managed float, 92–94 Management, working capital, 45 Manager, global, 23 Mankiw, Gregory, 14 Manufacturing, 34, 187–88, 244 change in industry, 35 in China, 200–201 European, 381 productivity, 35 March´e a` Termes des Instruments Financiers (MATIF), 282 Marc Rich & Co., 610, 667–68 Marginal tax rate, 489 Market-based forecasts, 172 forward rate, 172 interest rates, 172 Market economy, 232 Market efficiency, 41–42, 170 Market imperfections, 536–37, 645 Marketing, Marketing management, of exchange risk, 401–4 market selection, 401 pricing strategy, 401–2 product strategy, 403–4 Market-oriented policies, 240 statist policies versus, 232–37 Market-oriented reform, in Latin America, 241 Market prices, 233 Market risk premium, 477, 487–88 Markets Index Asiacurrency, 473–74 bond, 471 capital, 428, 440–44 currency, 73–74 derivatives, 45 efficient, 41–42 emerging, 511, 518–24 Eurobond, 455 Eurocurrency, 167, 455–62 foreign, 11, 512 foreign bank, 436 foreign bond, 435–36 foreign equity, 436–40 foreign exchange, 152, 256–77 forward, 257, 272–77 frontier, 524 over-the-counter, 287–89 retail, 288 spot, 257, 264–72 volatility, 516 wholesale, 288 Market seeking, 10–13 Market selection, 401 Market structure, 287–89 Market value, 509 Marking to market, 283 Mature multinationals, 538–40 Maturity choice of, 470 of loans, 458 McDonald, Robert A., 25 McDonald’s, 10, 144, 219, 538 advertising, 12 Meese, Richard, 176 Memory chips, investing in, 558 Mexico economic policies in, 241 foreign exchange risk and, 345–46 monetary policy in, 80 peso, 63–64 Michelin, 316, 317–19 Mixed-credit financing, 604 Model-based forecasts, 172–74 fundamental analysis, 172, 174 technical analysis, 174 Model evaluation, 174–77 Mode of entry auditing effectiveness of, 549 selecting, 548–49 Mode of transfer, 644 Monetary approach, 148–49 Monetary base, 79 Monetary instability, 229 Monetary/nonmonetary method, 339 Monetary policy, 63, 65, 71, 89 Argentina versus Mexico, 80 central bank and, 67 independent, 90 stable, 140 Monetary prices, 49–50 Monetary theory, 140 Monetary union, 110, 117 Monetizing the deficit, 65, 227 Money demand for, 62 fiat, 64, 85, 99 nature of, 62–63 quantity theory of, 148 as store of liquidity, 62 as store of value, 62 Money market hedge, 357–58 Money market instruments, 623 Money markets, domestic versus Eurocurrency, 460 Money supply, 81 in Bolivia, 141 central bank and, 82 United States, 100 Moody’s Investor Services, 216 Moral hazard, 61, 102, 133 Morgan Stanley Capital International Europe, Australia, Far East (EAFE) Index, 511, 512, 513, 514, 515, 517, 518, 528 Morgan Stanley Capital International (MSCI) World Index, 511, 512, 518, 521, 528 risk and return for, 522 Mortgage-backed securities (MBS), 429 Morton Thiokol, 627–28 MSCI See Morgan Stanley Capital International (MSCI) World Index Multicurrency clauses, 459–60 Multilateral netting, 618–19 payment flows before, 618, 620 Multinational cash mobilization, 625–27 Multinational corporation (MNC), 244 behavioral definition of, 20–23 capital budgeting for, 554–78 collection of receivables by, 615 cost minimization, 13 countertrade, 608–10 criticisms of, 39 currency translation methods and, 338 defined, domestic customers, 17 economic exposure and, 390 effects of exchange rate changes on, 390 evolution of, 8–17 exchange rates and, 88 financial market imperfections and, 17, 537 financing, 45 foreign investment and, 483 foreign subsidiary capital structure and, 491 holding cash overseas, 548 incentives, 499 knowledge seeking, 16–17 licensing, 19 market risk premium, 487–88 market seeking, 10–13 outsourcing and offshoring, 14–16 overseas expansion by, 17–20 overseas production, 18–19 product and factor market imperfections, 536–37 rate of return on shares of, 480 raw materials, search for, 10 rise of, 3–23 theory of, 536–37 United States, Multinational enterprise, 2–45 foreign direct investment and survival, 543–47 innovation-based, 538 mature, 538–40 senescent, 541 strategy of, 537–47 Multinational financial management, 2–45 theory and practice, 38–44 Multinational financial system global remittance policy, designing, 665–67 intercompany fund-flow mechanisms, 647–65 managing, 643–69 mode of transfer, 644 timing flexibility, 644–46 value of, 644–47 Multiple sourcing, 544 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 703 www.freebookslides.com 703 Index N NAFTA See North American Free Trade Agreement (NAFTA) Nasdaq, 446, 447, 526 National capital markets, as international financial centers, 431–47 National development banks, 450 National Enterprise Board (NEB), 564 National expenditure, 191 National income, 190 National product, 190 National Semiconductor, 617 Nation-state, threats to, 216–17 Nestl´e, 10, 500, 538 advertising, 12 globalization and, 485–86 working capital, charges for, 628 Net cash flows, 571 financial structure and, 413 Net income, 568 Net international wealth, 194 Net liquidity balance, 189 Net present value (NPV), 491, 535, 555–56 Netting center, 619 Neutral zone, 361 New York Mercantile Exchange, 282 New York Stock Exchange (NYSE), 440, 444, 447, 501, 525, 526 delistings by foreign companies from, 445 Nissan, 407–8 Nixon, Richard, 105 No-arbitrage condition, 269 Nominal exchange rate, 75, 81, 146, 147, 381, 382 Nominal gross domestic product, 245 Nominal interest rate, 142, 155 real versus, 157 Nominal rate, 153 Nondiversifiable risk, 42, 477 Nondocumentary L/C, 591 Nonrecourse, 601 North American Free Trade Agreement (NAFTA), 31 debate over, 32–33 protectionists and, 33–34 Nostro account, 272 Note issuance facilities (NIF), 468–72 Eurobonds versus, 470 Euro-medium-term notes, 470–72 short-term, 468 Notional principal, 313, 330 Novo Industri, 500–501 O Obama, Barack, 239 Official reserve transactions balance, 189 Offsetting trade, 284 Offshoring, 13, 14 Oil levies, law of one price and, 142 Oligopolistic industries, 17 On-board B/L, 597 OPEC, 132 Open account, 594–95 selling, 594 Open economy, 238 Open interest, 281 Open-market operation, 79 Open trade, 28 Operating exposure, 338, 380, 387–91 financial management of exchange risk, 411–13 managing, 401–16 marketing management of exchange risk, 401–4 planning for exchange rate changes, 408–10 production management of exchange risk, 405–8 Operating policies, 582–84 adaptation, 584 benefit/cost ratio, 582–83 local stakeholders, developing, 583 OPIC See Overseas Private Investment Corporation (OPIC) Opportunity cost, 356 incremental cash flows and, 556–57 Optimal international asset allocation, 527–28 Optimal worldwide cash levels, 623–24 evaluation and control, 624 Optimum currency area, 121–23 Option pricing using Black-Scholes, 307–9 currency, 297 valuation and, 295–96 Options American, 287 call, 287 European, 287 exchange-traded, 287 forward contracts versus, 369–70 futures, 301–2 growth, 574–77 knockout, 294–95 listed, 287 OTC currency, 287 put, 287 Options contracts, forward or futures versus, 296–98 Options prices, reading, 302–4 Order-to-delivery cycle, reduction in, 21 Organization for Economic Cooperation and Development (OECD), 67, 94, 208, 248, 424, 609 Osaka Stock Exchange, 425 OTC currency options, 287 Out-of-the-money, 287 Outright rate, 274 Outsourcing, 13, 14, 24, 405 debate over, 14–16 United States and, 15 Outstrike, 294 Overdraft, 634 Overdue accounts, collecting, 595–96 Overseas expansion, by multinationals, 17–20 licensing, 19 tradeoffs between modes of, 19–20 Overseas Private Investment Corporation (OPIC), 580 Overseas production, 18–19 Over-the-counter (OTC) market, 287–89, 305 P Panama, dollarization in, 71 Parallel loans, 659–60 structure of, 659 Parent cash flows earnings on imports, 570 estimated present value of project, 570–71 estimation of, 569–72 loan payments, 569–70 lost sales, 571–72 project versus, 561–62 remittances, 570 Parity conditions arbitrage and law of one price, 138–42 defined, 138 Fisher effect, 152–59 forward rate and future spot rate, 168–71 interest rate parity theory, 163–67 in international finance and currency forecasting, 138–79 international Fisher effect, 159–63 purchasing power parity, 143–51 Par value, 95 Payback period, 562–63 Payment, methods of, 595 Payments netting, in international cash management, 617–21 analysis, 621 bilateral and multilateral, 618–19 foreign exchange controls, 620 information requirements, 619–20 Payment terms, in international trade, 586–96 banks and trade financing, 595 cash in advance, 587 collecting overdue accounts, 595–96 consignment, 594 draft, 592–94 letter of credit, 587–92 open account, 594–95 PEFCO See Private Export Funding Corporation (PEFCO) Pegged currency, 52 Pegging, 94 PepsiCo, 539 Performance bond call, 282 computing, 285 Performance bonds, 282 Permanently fixed exchange rates, 134 Perot, Ross, on NAFTA, 32–33 Peso, 63–64 devaluation of, 64 problem, 170 transaction exposure, 370 ´ Petroleos Mexicanos, 392–93 Philadelphia Stock Exchange (PHLX), 282, 287 Philippines, foreign investment and, 222 PHLX FOREX Options, 287 Plant location, 405, 407 Plantronics, hedging and, 358–59 Plaza Agreement, 106 Policy conflict, 133 debt, 133 external, 207–8 hedging, 412 macroeconomic, 238 market-oriented, 240 in Mexico, 241 monetary, 63, 65, 71, 89 proposals for dealing with emerging market crises, 133–35 reserve, 189–90 Political economy, 214 Political risk, 55, 632 analysis, 562–63 capital flight and, 223 culture and, 225 economic factors, 217 management, 493–94 managing, 580–84 measuring, 215–25 operating policies, 582–84 preinvestment planning, 580–82 subjective factors, 217–25 uncertain property rights and, 218, 220 in Venezuela, 220–22 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 704 www.freebookslides.com 704 Political risk analysis, (continued) Political risk analysis, 572–74 blocked funds, 573 expropriation, 572 Political Risk Services (PRS), 216 Political stability, 216, 245 POR See Profit Opportunity Recommendation (POR) Porsche, 411–12 Portfolio investments, 188 international, 508–31 Portfolios base, 483–87 global, 485 guidelines, 622–23 investing, 529 return rate, 527 returns, 513 standard deviation, 515 Position sheet, 272 Post-Bretton Woods system, 105–1–7 Pounds calculating direct quote for, 268 call futures option contract, 302 mark versus, 81 short, 273 value of dollar in terms of, 106 Poverty, 25 PPP See Purchasing power parity (PPP) Preinvestment planning, 580–82 avoidance, 580 insurance, 580–81 negotiating the environment, 581 structuring investment, 581–82 Preliminary commitment, 603 Present value, project, 569 Price adjustment clause, 361 Price competition, Price elasticity of demand, 388 Price indices, wholesale, 99 Prices, 49–50 arm’s-length, 650 break-even, 289 commodity, 232 divergence in, 124–26 exercise, 287 forward, 264 gold, 391 market, 233 options, 302–4 retail, 149 spot, 264 stability, 65–67 strike, 287 transfer, 644 Price-specie-flow mechanism, 99, 100 Pricing capital asset, 41, 42 decisions, 359–60 flexibility, 387–88 strategy, 401–2 transfer, 557, 648–52, 667–68 Primary budget balance, 245 Private capital, in Latin America, 225 Private Export Funding Corporation (PEFCO), 605 Privately placed bonds, 423 Private placements, 424 Private sector alternatives, 450–51 Privatization, 115, 243, 244 gains from, 241–42 Privatizing, 241 Index Procter & Gamble, 10, 13, 25, 464, 538 advertising, 12 Procurement, sources of, 608 Product cycles, 409 Product development, Product innovation, 404 Production, 5, 543–44 cost estimates, 567–68 externalized, 14 foreign, 19 internalized, 14 location, 630 lower-cost sites of, 16 overseas, 18–19 Production management, of exchange rate, 405–7 input mix, 405–6 plant location, 407 raising productivity, 407 shifting production among plants, 406–7 Production shifting, 406–7 Productivity capital, 433 government ownership and, 242 manufacturing, 35 raising, 407 rise in, 36 Products commodity, 239 differentiation, 388–89 national, 190 Product sourcing, 405 Product strategy, 403–4 Profit from buying call option, 290 from buying put option, 292 from selling call option, 291 from selling put option, 293 Profitability disguising, 652 true, 561 Profitable investments, awareness of, 548 Profit Opportunity Recommendation (POR) rankings, 218 Project beta, 478 Project cash flows additions to working capital, 568–69 estimated project present value, 569 estimating incremental, 561–62 estimation of, 565–69 financing, 566 initial investment outlay, 565 interest subsidies, 566 parent versus, 561–62 production cost estimated, 567–68 projected net income, 568 sales and revenue forecasts, 566–67 terminal value, 569 Project evaluation, 574–77 Project finance, 452–53 Property rights in China, 219 financial markets and, 432 uncertain, 218, 220 Protectionism, 204 Protectionists, 26 Democrats as, 33–34 Proxy companies, 482–83 adjusted US industry beta, 483 local, 482–83 proxy industry, 483 Proxy industry, 483 Publicly issued bonds, 423 Purchased-pound call options, 292 Purchasing power, 65 Purchasing power parity (PPP), 139, 142, 143–51, 177, 383 absolute, 143 actual exchange rates and, 151 empirical evidence, 149–51 expected inflation and exchange rate changes, 148 forecasting South African future spot rate, 174 fundamental analysis and, 174 lessons from, 146–48 monetary approach, 148–49 rate, 145 rate, calculation of, 145 relative, 144 Put-call option interest rate parity, 309–11 Put futures option contract, 302 Put options, 287 currency, 368 profit from buying, 292 profit from selling, 293 Q Quantitative easing (QE2), 103 Quantity theory of money, 148 Quota, 204 Quotation direct, 264 forward, 274–77 futures options, 304 indirect, 264 spot, 264–71 R Range forward, 363, 364 Rates ask, 54 bid, 54 cross, 267–68, 276 equilibrium, 78 exchange (See Exchange rates) fixed, 313, 314 floating, 313, 314 forward, 53 inflation, 139 interest, 82, 126, 139, 312–32 nominal, 153 outright, 274 purchasing power parity, 145 real interest, 55 relative economic growth, 55 relative inflation, 54–55 relative interest, 55 spot, 53 swap, 274 unbiased forward rate, 169 unemployment (See Unemployment rate) Rationalization, 16, 541 Raw materials, search for, 10 R&D See Research and development (R&D) Real exchange rate, 146, 381–82 calculation for yen, 147 competitive effects of changes, 384–87 competitiveness and, 74–76 defined, 75 importance of, 382 Real interest rate, 55, 142 nominal versus, 157 Real investment, 191 Received-for-shipping B/L, 597 Recourse, 601 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 705 www.freebookslides.com 705 Index Reference currency, 53 Reference entity, 330 Reference obligation, 330 Regional banks, European Bank for Reconstruction and Development (EBRD), 450 Regional Bell Operating Companies (RBOC), 576 Regional development banks, 449–50 African Development Bank (AFDB), 450 Arab Fund for Economic and Social Development (AFESD), 450 Asian Development Bank (ADB), 450 Atlantic Development Group for Latin America (ADELA), 449–50 European Investment Bank (EIB), 449 Inter-American Development Bank (IADB), 449 Regional funds, 527 Regression, 399 Regulation financial, 427–29 Japanese, 432 Regulatory arbitrage, 427 Regulatory system arbitrage, 645 Reinvoicing centers, 652–53 Relative economic growth, 55 Relative inflation rates, 54–55 Reporting currency, 375 Research and development (R&D), 12, 20, 24, 29, 404, 538, 546, 548, 549, 576 Reserve policy, Korean, 189–90 Resource base, 231 Retail market, 288 Retail prices, 149 Retirement, Eurobond, 465 Returns deviation of, 510 in emerging markets, 519 for MSCI, 522 Revaluation, 52 of yuan, 97 Revenue forecasts, 566–67 Reverse foreign investment, 11 Revolving credit agreement, 634 Revolving underwriting facility (RUF), 469 Ricardo, David, Right of offset, 317 Risk, 577 country, 215 currency, hedging with, 368–70 diversifiable, 42 in emerging markets, 519 of Euro-medium-term notes, 472 exchange, 271, 276, 380, 381–82, 383–84 foreign exchange, 337, 344, 379–87 hedging currency, 530–31 Herstatt, 272 international equity investing, 508–27 for MSCI, 522 nondiversifiable, 42, 477 overseas, 215 political, 215–25, 632 political and economic, 55 settlement, 272 systematic, 42, 477, 560 terms-of-trade, 247 total, 43 total corporate, 560 unsystematic, 42 Risk arbitrage, 41 Risk management, 350–51 currency, 494 foreign exchange, 45 political, 493–94 Risk-return tradeoff, 510 Risk shifting, 359 Rogoff, Kenneth, 176 Round trip, 281 Royalties, 557, 570, 653–54 Rubles, 56–57 Rule 144A, 445, 467, 525 Russia Komineft, 219 reform in, 237 trilemma and, 96 S Sales, lost, 571–72 Sales creation, 556 Sales forecasts, 566–67 Same-day value, 616 Samurai bonds, 435 Sarbanes-Oxley Act of 2002, 440 Saving, domestic, 190–91 Saving rate, boosting, 206 Seagate Technology, 13 Section 482, of US Revenue Code, 650 Securities and Exchange Commission (SEC), 445, 508, 525, 636 Securitization, 423 intermediation versus, 430 Segmentation, capital market, 154, 155, 500 Seignorage, 72, 118 Selective hedging, 348 Self-help, 240 Senescent multinationals, 541 Service competition, Services, international flow of, 190–99 Settlement date, 271 Settlement risk, 272 Shareholders, global, 445 Shareholder value, 38 Shelf registration, 467 Shinsei Bank, 432 Shogun bonds, 435 Short, 273 Short-term financing, 631–39 bank loans, 633–36 calculating dollar costs of alternative options, 637–39 commercial paper, 636–37 intercompany financing, 633 key factors in, 631–32 local currency financing, 633 objectives, 632–33 options, 633–37 Short-term insurance, 606 Short-term investment portfolio, management of, 622–23 guidelines, 622–23 Short-term note issuance facilities (SNIF), 468 Siemens AG, 459 Sight drafts, 593 Singapore International Monetary Exchange (SIMEX), 282, 326, 327 Single-country funds, 527 Smith, Adam, 2, 4, 422, 476, 643 Smithsonian Agreement, 105 Smoot-Hawley tariff, 193 Socialism, 233 Social media, 428 Society for Worldwide Interbank Financial Telecommunications See SWIFT (Society for Worldwide Interbank Financial Telecommunications) Soft currency, 352 Sonat, 491, 492 South Africa, future spot rate in, 174 Sovereign bond, 491 Sovereign debt analysis, 245–46 Sovereign risk premium, 488 spreads, 490 Sovereign wealth funds (SWF), 198–99 Spain, budget deficit in, 246 Spectrum Manufacturing AB, 394, 395 accounting exposure, 395 economic exposure, 395–98 projected operations for, 396, 397 Speculators, 260 Spending, government, 230 Spot market, 257, 264–72 cross rates, 267–68 currency arbitrage, 269–70 exchange risk, 271 mechanics of spot transactions, 272 settlement date, 271 spot quotations, 264–71 transaction costs, 266–67 Spot price, 264 buying call option, 290 profit from selling put options, 293 selling call option, 291 Spot quotations, 264–71 Spot rate, 53 Spot transactions, mechanics of, 272 Stability currency, 110 political, 216, 245 Stability and Growth Pact, 114, 116 Stable monetary policy, 140 Stakeholders, local, 583 Standard & Poor, 216, 521 Standard Portfolio Analysis of Risk, 283 Statement of Financial Accounting Standards No 52 (FASB 52), 338, 375–78 application of, 377–78 Statement of Financial Accounting Standards No 133 (FASB 133), 351 State-owned enterprises (SOE), 433 Statism, 240 Statistical discrepancy, 190 Statist policies growth constraint by, 235 market-oriented versus, 232–37 persistence of, 236–37 Stein, Herbert, 183 Step-down coupon note, 330 Sterilization, 64 Sterilized intervention, 79, 80 Stimulus package, 239 Stock diversification, 527 Stock market brokers in, 259 drop in, 30 foreign investments and, 480–81 Stocks Latin America, 522, 523 total dollar return and, 529 Store of value, 62 Straight B/L, 597 Strike price, 287 Strong dollar, 75 Structured notes, 328–30 callable step-up note, 330 inverse floaters, 329 step-down coupon note, 330 Subpart F income, 653 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 706 www.freebookslides.com 706 Subprime mortgage crisis, (continued) Subprime mortgage crisis, 433 Subsidiary capital structure, 493 Subsidies government, 499–500 interest, 566 Supplier credits, 602 Supply of currency, 53–54 curve shift, 92 money, 81, 82 Surplus balance-of-payments, 217 current-account, 209 Surpluses, 192–93 Swap rate, 274 Swaps, 257, 312–24, 463 all-in cost, 317 classic swap transaction, 313–15 cost savings associated with, 315 credit default, 330–31 currency, 316–24 dual currency bond, 322–23 economic advantages of, 324 exchange of principals, 317 fixed-for-fixed currency, 316, 317–18, 319 interest rate, 313–16 interest rate/currency swap, 318 payments on fixed-for-floating interest rate, 315 payments over two-year life, 316 right of offset, 317 structured notes, 328–30 Sweden, rejection of euro by, 115–16 Swedish Export Credit Corporation (SEK), 429–30 SWF See Sovereign wealth funds (SWF) SWIFT (Society for Worldwide Interbank Financial Telecommunications), 257, 616 Swiss franc, 107–8, 275 calculation of PPP rate for, 145 pricing European call option, 308 put futures option contract, 302 Swiss National Bank, 78 Switzerland, currency in, 78 Systematic risk, 42, 477, 560 T T-account, 273, 355, 357, 361 Target capital structure, 478 Target-zone arrangement, 95 Tariffs, 50, 204, 649–52 ad valorem, 649 Smoot-Hawley, 193 Tax arbitrage, 41, 645 Tax effects, 648–49 of dividends, 660–62 Taxes, 498–99 debt versus equity financing, 499 leasing and, 495 loans and, 489 zero-coupon bonds, 498 Tax evasion, 667–68 Tax factors, 562 Tax shield, depreciation, 563 Technical analysis charting, 174 trend analysis, 174 Temporal method, 339 Tender panel, of banks, 469 Tennyson, Alfred Lord, 280 Terminal value, 569 Term loans, 634 Index Terms, of loans, 458 Terms of trade country risk and, 247 risk, 247 Texas Instruments (TI), 13, 607 Third World competition and, 26 market-oriented policies in, 240 3M, Time draft, 593 Time value, 295 Timing flexibility, 470, 644–46 Tire industry, 541–42 Tokyo International Financial Futures Exchange (TIFFE), 282 Tokyo Stock Exchange, 425, 445, 446, 509, 513 Toshiba, 410 Total corporate risk, 560 Total dollar return bonds, 529 measuring from foreign portfolio investing, 529 stocks, 529 Total risk, importance of, 43 Toyo Kogyo, financial distress and, 426 Toyota Motor Company, 393, 408, 540, 545–46, 668 Trade balance, 192 carry, 162 deficit, 119, 192, 200, 207 electronic, 261–62 fair, 26 foreign, 586–611 free, 26, 32, 109 gains from, 48 growth of, 25 international, 47–50 J-curve theory, 202–3 lagged effects, 202 links, 132 offsetting, 284 open, 28 restrictions, 204 terms of, 48, 247 Trade acceptance, 593 Trade barriers, in Asia, 16 Tradeoffs between modes of overseas expansion, 19–20 risk-return, 510 Traders, 259 Transaction costs, 266–67, 358 bid-ask spread, 266 Transaction exposure, 338, 341–42, 380, 387 computing, 342 cross-hedging, 366 currency collars, 362–65 currency risk sharing, 361–62 exposure netting, 360–61, 361 foreign currency options, 366–70 forward market hedge, 355–57 managing, 354–70 minimizing, 344 money market hedge, 357–58 peso and, 370 pricing decisions, 359–60 risk shifting, 359 Transactions, classic swap, 313–135 Transferable L/C, 591 Transfer pricing, 557, 644, 648–52 disguising profitability, 652 evaluation and control, 652 exchange controls, 652 joint ventures, 652 tariffs, 649–52 tax effects, 648–49 tax evasion and, 667–68 Translation, currency, 338–41 Translation exposure, 337–38 evaluating alternative hedging mechanisms, 353–54 funds adjustment, 352–53 hedging, 352 managing, 352–54 minimizing, 343 Transmission mechanisms, 132–33 debt policy, 133 financial system, 132–33 trade links, 132 Treasury workstation, 617 Trend analysis, 174 Triangular currency arbitrage, 269, 270 Trilemma, 90–91 BRIC countries and, 96 capital market integration, 90 independent monetary policy, 90 stable exchange rate, 90 True profitability, 561 U UCP 600, 587 Unbiased forward rate (UFR), 169, 177 Unbiased predictor, 161 Unconfirmed L/C, 591 Uncovered interest rate, 168 Underwriting, 423 Unemployment rate current-account deficit and, 208 United States, 37 United States versus EU, 28 Uniform Customs and Practice for Documentary Credits (UCP), 587 Unilateral transfers, 185 United Auto Workers (UAW), 31 United Fruit Company (UFC), 573 United Nations, 216 United States auto industry and Japan, 31–32 balance of payments, 186 balance on current account, 196 Chinese exports to, 200–201 deficit, 203–4 deindustrialization of, 34–37 demand for assets, 203–4 equity raised in US public markets, 441 Federal Reserve, 65 foreign direct investment inflows and outflows in, 11 GDP growth in, 27 inflation, impact on equilibrium exchange rate, 55 interest rates in, 156 international investment position of, 194 internationalization of economy, labor productivity in, 28 loss of AAA rating, 247 market, 520, 521 money supply, 100 multinational corporations in, outsourcing and, 15 saving rate in, 206 trade deficit, 200 unemployment rate in, 28, 37 Universal banking, 426 Unlevering, 559 Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 707 www.freebookslides.com 707 Index Unsterilized intervention, 79, 80 Unsystematic risk, 42 V Valuation currency option pricing and, 297 option pricing and, 295–96 Value intrinsic, 295 of MNC network of financial linkages, 645–46 time, 295 Value additivity principle, 555 Value date, 271 Value-dating, 627 Venezuela per capita GDP in, 221 political risk in, 220–22 Vertical direct integration, 20 Vertical integration, 536 Volatility implied, 308–9 interest rate, 329 market, 516 Volatility smile, 309 Volcker, Paul, 72, 73, 105 Weak dollar, 75 Wealth, net international, 194 Weighted average cost of capital (WACC), 478, 559 estimating, 478, 479 Welfare state, European, 115–16 Wholesale market, 288 Worker compensation, rise in, 36 Working capital, 568–69, 613, 628 management, 45 World Bank, 89, 448, 451 role of, 102 World Bank Group, 448–49 World economy, transformation of, 2–3 World financial markets, Asian Tigers and, 29–31 World-scale, 543 World Trade Organization (WTO), 25, 32, 103 Worldwide capital structure, establishing, 490–96 foreign subsidiary capital structure, 491–96 joint ventures, 496 WTO See World Trade Organization (WTO) X W Wages, rise in, 36 Wal-Mart, 11, 24, 538 Waste management, in Australia, 438 Xerox, 549, 658 Y Yampel, Jacob, 220 Yankee bonds, 435 Yankee stock issues, 438 Yen, 73, 80, 105 appreciation of, 58, 384 appreciation versus depreciation, 382 automobile industry and, 405 calculation of real exchange rate for, 147 carry trade and, 162 cash flows with debenture currency swap, 323 China and, 76–78 speculating with call option, 291 Toshiba and, 410 value of dollar in terms of, 106 Yuan exports and, 200–201 revaluation of, 97 undervaluation of, 148 Yugoslav dinar, dollar versus, 59 Z Zero-coupon bonds, 498 Zero-sum game, 290 Zimbabwe, 229–30 ... Domestic Financial Management 41 Introduction: Multinational Enterprise Multinational Financial Management Learning Objectives 1.1 The Rise of the Multinational Corporation Evolution of the Multinational. . .Shapiro bindex.tex V2 - July 25, 2013 7:18 P.M Page 708 Shapiro f01.tex Tenth Edition MULTINATIONAL FINANCIAL MANAGEMENT ALAN C SHAPIRO University of Southern California... Consequences of Global Competition 31 1.3 Multinational Financial Management: Theory and Practice 38 Criticisms of the Multinational Corporation 39 Functions of Financial Management 39 Arbitrage 41 Market