International financial management 2nd by madura and fox

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Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox Tài liệu quarnt rị tài chính quốc tế International financial management 2nd by madura and fox INTERNATIONAL FINANCIAL MANAGEMENT For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it INTERNATIONAL FINANCIAL MANAGEMENT JEFF MADURA Florida Atlantic University ROLAND FOX Salford University For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it International Financial Management Second edition Jeff Madura and Roland Fox Publishing Director: Linden Harris Publisher: Brendan George Editorial Assistant: Helen Green Content Project Editor: Lucy Arthy Production Controller: Eyvett Davis Marketing Manager: Amanda Cheung Typesetter: KnowledgeWorks Global Cover design: Design Deluxe © 2011 Cengage Learning EMEA ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, or applicable copyright law of another jurisdiction, without the prior written permission of the publisher While the publisher has taken all reasonable care in the preparation of this book, the publisher makes no representation, express or implied, with regard to the accuracy of the information contained in this book and cannot accept any legal responsibility or liability for any errors or omissions from the book or the consequences thereof Products and services that are referred to in this book may be either trademarks and/or registered trademarks of their respective owners The publishers and author/s make no claim to these trademarks For product information and technology assistance, contact emea.info@cengage.com For permission to use material from this text or product, and for permission queries, email clsuk.permissions@cengage.com The Author has asserted the right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this Work British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-4080-3229-9 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire SP10 5BE United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed by R R Donnelley, China 10 – 13 12 11 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Jeff Madura: To My Parents Roland Fox: To Marlene, Anna and Joe For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ABOUT THE AUTHORS Jeff Madura is presently the SunTrust Bank Professor of Finance at Florida Atlantic University He has written several textbooks, including Financial Markets and Institutions His research on internation finance has been published in numerous journals, including Journal of Financial and Quantitative Analysis, Journal of Money, Credit and Banking, Journal of Banking and Finance, Journal of International Money and Finance, Journal of Financial Research, Financial Review, Journal of Multinational Financial Management, and Global Finance Journal He has received awards for excellence in teaching and research, and has served as a consultant for international banks, securities firms, and other multinational corporations He has served as a director for the Southern Finance Association and Eastern Finance Association, and also served as president of the Southern Finance Association Roland Fox graduated from Manchester University and joined PriceWaterhouseCoopers He subsequently worked in insurance and for a multinational company, Invensys, before taking up a lecturing post He is currently a senior lecturer in finance at Salford University He has published a number of papers on management accounting, finance and education vi For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it BRIEF CONTENTS PART I THE INTERNATIONAL FINANCIAL ENVIRONMENT 1 Multinational Financial Management: An Overview 2 International Flow of Funds 35 International Financial Markets 65 Exchange Rate Determination 113 Currency Derivatives 134 PART II EXCHANGE RATE BEHAVIOUR 193 Exchange Rate History and the Role of Governments 194 International Arbitrage and Interest Rate Parity 237 Relationships Among Inflation, Interest Rates and Exchange Rates 266 PART III EXCHANGE RATE RISK MANAGEMENT 303 Forecasting Exchange Rates 304 10 Measuring Exposure to Exchange Rate Fluctuations 337 11 Managing Transaction Exposure 369 12 Managing Economic Exposure and Translation Exposure 416 PART IV LONG-TERM ASSET AND LIABILITY MANAGEMENT 441 13 Foreign Direct Investment 442 14 Multinational Capital Budgeting 462 15 Country Risk Analysis 503 16 Long-Term Financing 537 vii For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it viii BRIEF CONTENTS PART V SHORT-TERM ASSET AND LIABILITY MANAGEMENT 569 17 Financing International Trade 570 18 Short-Term Financing 587 19 International Cash Management 612 20 Concluding Comments 641 Appendix A Answers to self-test questions 644 Appendix B Maths and statistics support 655 Glossary 668 Index 676 ONLINE ADDITIONAL READING Multinational Restructuring Multinational Cost of Capital and Capital Structure Go to: www.cengage.com/madura_fox2e For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it CONTENTS About the Authors Preface Walk through tour Exposure to exchange rate movements Exposure to foreign economies Exposure to political risk vi xviii xxi Overview of an MNC’s Cash Flows Valuation Model for an MNC PART I THE INTERNATIONAL FINANCIAL ENVIRONMENT Multinational Financial Management: An Overview Goal of the MNC Conflicts with the MNC goal Impact of management control Impact of corporate control Constraints interfering with the MNC’s goal Theories of International Business Economic theories Business theories International Business Methods International trade Using the Web: Trade conditions for industries Licensing Franchising Joint ventures Acquisitions of existing operations Establishing new foreign subsidiaries Summary of methods International Opportunities Investment opportunities Financing opportunities Opportunities in Europe http:// Updated euro information Opportunities in North and South America Opportunities in Asia Exposure to International Risk Domestic model Managing for Value: Yahoo!’s decision to expand internationally Valuing international cash flows Impact of financial management and international conditions on value Organization of the Text Summary Critical Debate Self Test Questions and Applications Advanced Questions Project Workshop Discussion in the Boardroom Running Your Own MNC Blades PLC Case Study: Decision to expand internationally Small Business Dilemma: Developing a multinational sporting goods industry 3 11 11 12 12 12 13 13 13 14 14 15 15 15 16 17 18 19 19 19 20 20 21 23 23 24 24 27 27 28 29 29 29 30 32 32 32 33 34 International Flow of Funds 35 Balance of Payments 36 37 38 38 41 Current account Financial account Overall balance of payments International Trade Flows Distribution of exports and imports for major countries Balance of trade trends Updated Trade and Investment Conditions Trade agreements 41 41 44 44 ix For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 666 www.downloadslide.net APPENDIX B MATHS AND STATISTICS SUPPORT The first step is to input the data for the two variables in two columns on a file using Excel Then, the data can be converted into percentage changes This can be easily performed with a COMPUTE statement in the third column (Column C) to derive CEXP and another COMPUTE statement in the fourth column (Column D) to derive CAUS These two columns will have a blank first row, since the percentage change cannot be computed without the previous period’s data Many students already know how to use Excel to create a COMPUTE statement and to apply the COMPUTE statement to all of the data within a column If you not, ask a friend for a few minutes of help Once you have derived CEXP and CAUS from the raw data, you can perform regression analysis as follows On the main menu, select ‘Tools’ This leads to a new menu, in which you should click on ‘Data Analysis’ Next to the ‘Input Y Range’, identify the range C2 to C24 for the dependent variable as C2:C24 Next to the ‘Input X Range’, identify the range D2 to D24 for the independent variable as D2:D24 The ‘Output Range’ specifies the location on the screen where the output of the regression analysis should be displayed In our example, F1 would be an appropriate location, representing the upper-left section of the output Then, click on OK, and within a few seconds, the regression analysis will be complete For our example, the output is listed below: SUMMARY OUTPUT Regression statistics Multiple R 0.8852 R Square 0.7836 Adjusted R Square 0.7733 Standard error 2.9115 Observations 23.0000 ANOVA df SS MS F Significance F 1.0000 644.6262 644.6262 76.0461 0.0000 Residual 21.0000 178.0125 8.4768 Total 22.0000 822.6387 Coefficients Standard Error t-Stat P-value Intercept 0.7951 0.6229 1.2763 0.2158 X Variable 0.8678 0.0995 8.7204 0.0000 Lower 95% Upper 95% Lower 95.0% Upper 95.0% À0.5004 2.0905 À0.5004 2.0905 0.6608 1.0747 0.6608 1.0747 Regression Intercept X Variable The estimate of the so-called slope coefficient is about 0.8678, which suggests that every 1% change in the Australian dollar’s exchange rate is associated with a 0.8678% change (in the same direction) in the firm’s exports to Australia The t-statistic is also estimated to determine whether the slope coefficient is For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net APPENDIX B MATHS AND STATISTICS SUPPORT 667 significantly different from zero Since the standard error of the slope coefficient is about 0.0995, the t-statistic is (0.8678 / 0.0995) ¼ 8.72 This would imply that there is a significant relationship between CAUS and CEXP The R-Square statistic suggests that about 78% of the variation in CEXP is explained by CAUS The correlation between CEXP and CAUS can also be measured by the correlation coefficient, which is the square root of the R-Square statistic If you have more than one independent variable (multiple regression), you should place the independent variables next to each other in the file Then, for the X-RANGE, identify this block of data The output for the regression model will display the coefficient, standard error, and t-statistic for each of the independent variables For multiple regression, the R-Square statistic is interpreted as the percentage of variation in the dependent variable explained by the model as a whole Using the ‘COPY’ command If you need to repeat a particular type of computation for several different cells, you can use the COPY command You must highlight the particular cells in which the computation is performed and instruct Excel (by clicking on ‘Edit’) to copy that computation to whatever range of cells you desire For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net GLOSSARY absolute advantage When one country is more efficient at producing a product or service than its trading partner absolute form of purchasing power parity this theory explains how inflation differentials affect exchange rates It suggests that prices of two products of different countries should be equal when measured by a common currency accounts receivable financing indirect financing provided by an exporter for an importer by exporting goods and allowing for payment to be made at a later date agency problem conflict of goals between a firm’s shareholders and its managers airway bill receipt for a shipment by air, which includes freight charges and title to the merchandise all-in-rate rate used in charging customers for accepting banker’s acceptances, consisting of the discount interest rate plus the commission American depository receipts (ADRs) certificates representing ownership of foreign stocks, which are traded on stock exchanges in the United States appreciation increase in the value of a currency arbitrage action to capitalize on a discrepancy in quoted prices; in many cases, there is no investment of funds tied up for any length of time Asian dollar market market in Asia in which banks collect deposits and make loans denominated in US dollars ask price price at which a trader of foreign exchange (typically a bank) is willing to sell a particular currency balance of payments statement of inflow and outflow payments for a particular country balance of trade difference between the value of merchandise exports and merchandise imports balance on goods and services balance of trade, plus the net amount of payments of interest and dividends to foreign investors and from investment, as well as receipts and payments resulting from international tourism and other transactions Bank for International Settlements (BIS) institution that facilitates cooperation among countries involved in international transactions and provides assistance to countries experiencing international payment problems Bank Letter of Credit Policy policy that enables banks to confirm letters of credit by foreign banks supporting the purchase of US exports banker’s acceptance bill of exchange drawn on and accepted by a banking institution; it is commonly used to guarantee exporters that they will receive payment on goods delivered to importers barter exchange of goods between two parties without the use of any currency as a medium of exchange Basel Accord agreement among country representatives in 1988 to establish standardized risk-based capital requirements for banks across countries bid price price that a trader of foreign exchange (typically a bank) is willing to pay for a particular currency bid/ask spread difference between the price at which a bank is willing to buy a currency and the price at which it will sell that currency bilateral netting system netting method used for transactions between two units bill of exchange (draft) promise drawn by one party (usually an exporter) to pay a specified amount to another party at a specified future date, or upon presentation of the draft bill of lading document serving as a receipt for shipment and a summary of freight charges and conveying title to the merchandise call see currency call option call option on real assets project that contains an option of pursuing an additional venture capital account account reflecting changes in country ownership of long-term and short-term financial assets carryforwards tax losses that are applied in a future year to offset income in the future year cash management optimization of cash flows and investment of excess cash central exchange rate exchange rate established between two European currencies through the 668 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net European Monetary System arrangement; the exchange rate between the two currencies is allowed to move within bands around that central exchange rate centralized cash management policy that consolidates cash management decisions for all MNC units, usually at the parent’s location coefficient of determination measure of the percentage variation in the dependent variable that can be explained by the independent variables when using regression analysis cofinancing agreements arrangement in which the World Bank participates along with other agencies or lenders in providing funds to developing countries commercial invoice exporter’s description of merchandise being sold to the buyer commercial letters of credit trade-related letters of credit comparative advantage theory suggesting that a degree of specialization by countries in products and services where they are more efficient than other products and services they produce will increase worldwide production compensation arrangement in which the delivery of goods to a party is compensated for by buying back a certain amount of the product from that same party compensatory financing facility (CFF) facility that attempts to reduce the impact of export instability on country economies consignment arrangement in which the exporter ships goods to the importer while still retaining title to the merchandise contingency graph graph showing the net profit to a speculator in currency options under various exchange rate scenarios counterpurchase exchange of goods between two parties under two distinct contracts expressed in monetary terms countertrade sale of goods to one country that is linked to the purchase or exchange of goods from that same country country risk characteristics of the host country, including political and financial conditions, that can affect an MNC’s cash flows covered interest arbitrage investment in a foreign money market security with a simultaneous forward sale of the currency denominating that security cross-border factoring factoring by a network of factors across borders The exporter’s factor can contact correspondent factors in other countries to handle the collections of accounts receivable cross exchange rate exchange rate between currency A and currency B, given the values of currencies A and B with respect to a third currency GLOSSARY 669 cross-hedging hedging an open position in one currency with a hedge on another currency that is highly correlated with the first currency This occurs when for some reason the common hedging techniques cannot be applied to the first currency A cross-hedge is not a perfect hedge, but can substantially reduce the exposure cross-sectional analysis analysis of relationships among a cross section of firms, countries, or some other variable at a given point in time currency board system for maintaining the value of the local currency with respect to some other specified currency currency call option contract that grants the right to purchase a specific currency at a specific price (exchange rate) within a specific period of time currency cocktail bond bond denominated in a mixture (or cocktail) of currencies currency diversification process of using more than one currency as an investing or financing strategy Exposure to a diversified currency portfolio typically results in less exchange rate risk than if all of the exposure was in a single foreign currency currency futures contract contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date currency put option contract granting the right to sell a particular currency at a specified price (exchange rate) within a specified period of time currency swap agreement to exchange one currency for another at a specified exchange rate and date Banks commonly serve as intermediaries between two parties who wish to engage in a currency swap current account broad measure of a country’s international trade in goods and services daily settlement payment between holders and sellers of a derivative based on movements of the underlying asset price before the maturity date Delphi technique collection of independent opinions without group discussion by the assessors who provide the opinions; used for various types of assessments (such as country risk assessment) dependent variable term used in regression analysis to represent the variable that is dependent on one or more other variables depreciation decrease in the value of a currency derivative a financial instrument (or tradable promise) whose value depends on the price of another asset An option is a derivative, its value depends on the price of the underlying asset, e.g a foreign currency A futures contract is the other main example For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 670 GLOSSARY www.downloadslide.net direct foreign investment (DFI) investment in real assets (such as land, buildings, or even existing plants) in foreign countries Direct Loan Program programme in which the Ex-Im Bank offers fixed-rate loans directly to the foreign buyer to purchase US capital equipment and services direct quotations exchange rate quotations representing the value measured by number of dollars per unit discount as related to forward rates, represents the percentage amount by which the forward rate is less than the spot rate disintermediation direct exchange between buyer and seller without the market-place as an intermediary documentary collections trade transactions handled on a draft basis documents against acceptance situation in which the buyer’s bank does not release shipping documents to the buyer until the buyer has accepted (signed) the draft documents against payment shipping documents that are released to the buyer once the buyer has paid for the draft double-entry bookkeeping accounting method in which each transaction is recorded as both a credit and a debit draft (bill of exchange) unconditional promise drawn by one party (usually the exporter) instructing the buyer to pay the face amount of the draft upon presentation dumping selling products overseas at unfairly low prices (a practice perceived to result from subsidies provided to the firm by its government) dynamic hedging strategy of hedging in those periods when existing currency positions are expected to be adversely affected, and remaining unhedged in other periods when currency positions are expected to be favourably affected economic exposure degree to which a firm’s present value of future cash flows can be influenced by exchange rate fluctuations economies of scale achievement of lower average cost per unit by means of increased production effective yield yield or return to an MNC on a short-term investment after adjustment for the change in exchange rates over the period of concern efficient frontier set of points reflecting risk-return combinations achieved by particular portfolios (so-called efficient portfolios) of assets equilibrium exchange rate exchange rate at which demand for a currency is equal to the supply of the currency for sale eurobanks commercial banks that participate as financial intermediaries in the Eurocurrency market eurobonds bonds sold in countries other than the country represented by the currency denominating them euro-clear telecommunications network that informs all traders about outstanding issues of eurobonds for sale euro-commercial paper debt securities issued by MNCs for short-term financing eurocredit loans loans of one year or longer extended by eurobanks eurocredit market collection of banks that accept deposits and provide loans in large denominations and in a variety of currencies The banks that comprise this market are the same banks that comprise the eurocurrency market; the difference is that the eurocredit loans are longer term than so-called eurocurrency loans eurocurrency market collection of banks that accept deposits and provide loans in large denominations and in a variety of currencies eurodollar term used to describe US dollar deposits placed in banks located in Europe euronotes unsecured debt securities issued by MNCs for short-term financing European Central Bank (ECB) central bank created to conduct the monetary policy for the countries participating in the single European currency, the euro European Currency Unit (ECU) unit of account representing a weighted average of exchange rates of member countries within the European Monetary System exchange rate mechanism method of linking European currency values with the European Currency Unit (ECU) exercise price (strike price) price (exchange rate) at which the owner of a currency call option is allowed to buy a specified currency; or the price (exchange rate) at which the owner of a currency put option is allowed to sell a specified currency Export-Import Bank (Ex-Im Bank) bank that attempts to strengthen the competitiveness of US industries involved in foreign trade factor firm specializing in collection on accounts receivable; exporters sometimes sell their accounts receivable to a factor at a discount factoring purchase of receivables of an exporter by a factor without recourse to the exporter financial account A term used by the IMF to replace all but minor entries in the capital account For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Financial Institution Buyer Credit Policy policy that provides insurance coverage for loans by banks to foreign buyers of exports Fisher effect theory that nominal interest rates are composed of a real interest rate and anticipated inflation fixed exchange rate system monetary system in which exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries floating rate notes (FRNs) provision of some eurobonds, in which the coupon rate is adjusted over time according to prevailing market rates foreign bond bond issued by a borrower foreign to the country where the bond is placed foreign direct investment long-term participation by one country into another country, usually involving participation in management, joint-venture, transfer of technology and expertise foreign exchange market market composed primarily of banks, serving firms and consumers who wish to buy or sell various currencies foreign investment risk matrix (FIRM) graph that displays financial and political risk by intervals, so that each country can be positioned according to its risk ratings forfaiting method of financing international trade of capital goods forward contract agreement between a commercial bank and a client about an exchange of two currencies to be made at a future point in time at a specified exchange rate forward discount percentage by which the forward rate is less than the spot rate; typically quoted on an annualized basis forward premium percentage by which the forward rate exceeds the spot rate; typically quoted on an annualized basis forward rate rate at which a bank is willing to exchange one currency for another at some specified date in the future franchising agreement by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees freely floating exchange rate system monetary system in which exchange rates are allowed to move due to market forces without intervention by country governments full compensation an arrangement in which the delivery of goods to one party is fully compensated for by buying back more than 100% of the value that was originally sold GLOSSARY 671 fundamental forecasting forecasting based on fundamental relationships between economic variables and exchange rates General Agreement on Tariffs and Trade (GATT) agreement allowing for trade restrictions only in retaliation against illegal trade actions of other countries hedge to insulate a firm from exposure to exchange rate fluctuations hostile takeovers acquisitions not desired by the target firms imperfect market the condition where, due to the costs to transfer labour and other resources used for production, firms may attempt to use foreign factors of production when they are less costly than local factors import/export letters of credit trade-related letters of credit independent variable term used in regression analysis to represent the variable that is expected to influence another (the ‘dependent’) variable indirect quotations exchange rate quotations representing the value measured by number of units per dollar interbank market market that facilitates the exchange of currencies between banks Interest Equalization Tax (IET) tax imposed by the US government in 1963 to discourage US investors from investing in foreign securities interest rate parity (IRP) theory specifying that the forward premium (or discount) is equal to the interest rate differential between the two currencies of concern interest rate parity (IRP) line diagonal line depicting all points on a four-quadrant graph that represent a state of interest rate parity interest rate parity theory theory suggesting that the forward rate differs from the spot rate by an amount that reflects the interest differential between two currencies interest rate swap agreement to swap interest payments, whereby interest payments based on a fixed interest rate are exchanged for interest payments based on a floating interest rate International Bank for Reconstruction and Development (IBRD) bank established in 1944 to enhance economic development by providing loans to countries Also referred to as the World Bank International Development Association (IDA) association established to stimulate country development; it was especially suited for less prosperous nations, since it provided loans at low interest rates International Financial Corporation (IFC) firm established to promote private enterprise within For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 672 GLOSSARY www.downloadslide.net countries; it can provide loans to and purchase stock from corporations international Fisher effect theory specifying that a currency’s exchange rate will depreciate against another currency when its interest rate (and therefore expected inflation rate) is higher than that of the other currency international Fisher effect (IFE) line diagonal line on a graph that reflects points at which the interest rate differential between two countries is equal to the percentage change in the exchange rate between their two respective currencies International Monetary Fund (IMF) agency established in 1944 to promote and facilitate international trade and financing international mutual funds (IMFs) mutual funds containing securities of foreign firms intracompany trade international trade between subsidiaries that are under the same ownership irrevocable letter of credit letter of credit issued by a bank that cannot be cancelled or amended without the beneficiary’s approval J-curve effect effect of a weaker dollar on the US trade balance, in which the trade balance initially deteriorates; it only improves once US and non-US importers respond to the change in purchasing power that is caused by the weaker dollar joint venture venture between two or more firms in which responsibilities and earnings are shared lagging strategy used by a firm to stall payments, normally in response to exchange rate projections law of one price generally in markets, one product should have one price If there are two prices then arbitrage is possible to profit from the difference (buying at the lower price and selling at the higher price) In international finance the application is to internationally traded products When converted to a common currency, the prices should be the same The difference in price is usually ascribed to market imperfections and differences in tastes leading strategy used by a firm to accelerate payments, normally in response to exchange rate expectations letter of credit (L/C) agreement by a bank to make payments on behalf of a specified party under specified conditions licensing arrangement in which a local firm in the host country produces goods in accordance with another firm’s (the licensing firm’s) specifications; as the goods are sold, the local firm can retain part of the earnings locational arbitrage action to capitalize on a discrepancy in quoted exchange rates between banks lockbox post office box number to which customers are instructed to send payment London Interbank Offer Rate (LIBOR) interest rate commonly charged for loans between Eurobanks long-term forward contracts contracts that state any exchange rate at which a specified amount of a specified currency can be exchanged at a future date (more than one year from today) Also called long forwards Louvre Accord 1987 agreement between countries to attempt to stabilize the value of the US dollar macroassessment overall risk assessment of a country without considering the MNC’s business mail float mailing time involved in sending payments by mail managed float exchange rate system in which currencies have no explicit boundaries, but central banks may intervene to influence exchange rate movements margin requirement deposit placed on a contract (such as a currency futures contract) to cover the fluctuations in the value of that contract; this minimizes the risk of the contract to the counterparty market-based forecasting use of a marketdetermined exchange rate (such as the spot rate or forward rate) to forecast the spot rate in the future marking to market daily settlement as if the current day’s price of a derivative is the price at maturity Medium-term Guarantee Program programme conducted by the Ex-Im Bank in which commercial lenders are encouraged to finance the sale of US capital equipment and services to approved foreign buyers; the Ex-Im Bank guarantees the loan’s principal and interest on these loans microassessment the risk assessment of a country as related to the MNC’s type of business mixed forecasting development of forecasts based on a mixture of forecasting techniques money market hedge use of international money markets to match future cash inflows and outflows in a given currency multibuyer policy policy administered by the Ex-Im Bank that provides credit risk insurance on export sales to many different buyers Multilateral Investment Guarantee Agency (MIGA) agency established by the World Bank that offers various forms of political risk insurance to corporations multilateral netting system complex interchange for netting between a parent and several subsidiaries multinational restructuring restructuring of the composition of an MNC’s assets or liabilities negotiable bill of lading (B/L) contract that grants title of merchandise to the holder, which allows banks to use the merchandise as collateral For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net net operating loss carrybacks practice of applying losses to offset earnings in previous years net operating loss carryforwards practice of applying losses to offset earnings in future years netting combining of future cash receipts and payments to determine the net amount to be owed by one subsidiary to another net transaction exposure consideration of inflows and outflows in a given currency to determine the exposure after offsetting inflows against outflows nominal exchange rate the exchange rate as announced in the newspapers non-deliverable forward contracts (NDFs) like a forward contract, represents an agreement regarding a position in a specified currency, a specified exchange rate, and a specified future settlement date, but does not result in delivery of currencies Instead, a payment is made by one party in the agreement to the other party based on the exchange rate at the future date nonsterilized intervention intervention in the foreign exchange market without adjusting for the change in money supply notional value an agreed amount that is not traded directly between two parties but is used as the basis for other calculations ocean bill of lading receipt for a shipment by boat, which includes freight charges and title to the merchandise open account transaction sale in which the exporter ships the merchandise and expects the buyer to remit payment according to agreed-upon terms over-hedging hedging an amount in a currency larger than the actual transaction amount parallel bonds bonds placed in different countries and denominated in the respective currencies of the countries where they are placed parallel loan loan involving an exchange of currencies between two parties, with a promise to re-exchange the currencies at a specified exchange rate and future date partial compensation an arrangement in which the delivery of goods to one party is partially compensated for by buying back a certain amount of product from the same party pegged exchange rate exchange rate whose value is pegged to another currency’s value or to a unit of account perfect forecast line a 45° line on a graph that matches the forecast of an exchange rate with the actual exchange rate petrodollars deposits of dollars by countries that receive dollar revenues due to the sale of petroleum to other countries; the term commonly refers to GLOSSARY 673 OPEC deposits of dollars in the Eurocurrency market Plaza Accord agreement among country representatives in 1985 to implement a coordinated programme to weaken the dollar political risk political actions taken by the host government or the public that affect the MNC’s cash flows portfolio the holding of a variety of assets (investments) usually of varying risk and return preauthorized payment method of accelerating cash inflows by receiving authorization to charge a customer’s bank account premium as related to forward rates, represents the percentage amount by which the forward rate exceeds the spot rate As related to currency options, represents the price of a currency option prepayment method that exporter uses to receive payment before shipping goods price-elastic sensitive to price changes privatization conversion of government-owned businesses to ownership by shareholders or individuals product cycle theory theory suggesting that a firm initially establishes itself locally and expands into foreign markets in response to foreign demand for its product; over time, the MNC will grow in foreign markets; after some point, its foreign business may decline unless it can differentiate its product from competitors Project Finance Loan Program programme that allows banks, the Ex-Im Bank, or a combination of both to extend long-term financing for capital equipment and related services for major projects purchasing power parity (PPP) line diagonal line on a graph that reflects points at which the inflation differential between two countries is equal to the percentage change in the exchange rate between the two respective currencies purchasing power parity (PPP) theory theory suggesting that exchange rates will adjust over time to reflect the differential in inflation rates in the two countries; in this way, the purchasing power of consumers when purchasing domestic goods will be the same as that when they purchase foreign goods put see currency put option put option on real assets project that contains an option of divesting part or all of the project quota maximum limit imposed by the government on goods allowed to be imported into a country random walk a process whereby prices move up or down from the previous price in an unpredictable way There is no memory further back than the For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 674 GLOSSARY www.downloadslide.net previous price (i.e no trend) Sometimes referred to as a process with a ‘unit root’ real cost of hedging the additional cost of hedging when compared to not hedging (a negative real cost would imply that hedging was more favourable than not hedging) real exchange rate the purchasing power of a currency against another currency, usually measured as an index against a basket of currencies (the real effective exchange rate index) An increase in the real exchange rate of a home currency implies that the currency is able to buy more goods than the foreign currency due to an increase in the value of the home currency and/or higher inflation in the home currency, this also implies that home currency goods are more expensive real interest rate nominal (or quoted) interest rate minus the inflation rate real options implicit options on real assets regression analysis statistical technique used to measure the relationship between variables and the sensitivity of a variable to one or more other variables regression coefficient term measured by regression analysis to estimate the sensitivity of the dependent variable to a particular independent variable reinvoicing centre facility that centralizes payments and charges subsidiaries fees for its function; this can effectively shift profits to subsidiaries where tax rates are low relative form of purchasing power parity theory stating that the rate of change in the prices of products should be somewhat similar when measured in a common currency, as long as transportation costs and trade barriers are unchanged semistrong-form efficient description of foreign exchange markets, implying that all relevant public information is already reflected in prevailing spot exchange rates sensitivity analysis technique for assessing uncertainty whereby various possibilities are input to determine possible outcomes separation theorem investors’ risk preferences are separated from that of their investments by virtue of the marketplace settlement date the date at which a financial contract ends simulation technique for assessing the degree of uncertainty Probability distributions are developed for the input variables; simulation uses this information to generate possible outcomes Single-Buyer Policy policy administered by the Ex-Im Bank that allows the exporter to selectively insure certain transactions Single European Act act intended to remove numerous barriers imposed on trade and capital flows between European countries Small Business Policy policy providing enhanced coverage to new exporters and small businesses snake arrangement established in 1972, whereby European currencies were tied to each other within specified limits special drawing rights (SDRs) reserves established by the International Monetary Fund; they are used only for intergovernment transactions; the SDR also serves as a unit of account (determined by the values of five major currencies) that is used to denominate some internationally traded goods and services, as well as some foreign bank deposits and loans spot market market in which exchange transactions occur for immediate exchange spot rate current exchange rate of currency standby letter of credit document used to guarantee invoice payments to a supplier; it promises to pay the beneficiary if the buyer fails to pay sterilized intervention intervention by the Federal Reserve in the foreign exchange market, with simultaneous intervention in the Treasury securities markets to offset any effects on the dollar money supply; thus, the intervention in the foreign exchange market is achieved without affecting the existing dollar money supply straddle combination of a put option and a call option strike price see exercise price strong-form efficient description of foreign exchange markets, implying that all relevant public information and private information is already reflected in prevailing spot exchange rates Structural Adjustment Loan (SAL) Facility facility established in 1980 by the World Bank to enhance a country’s long-term economic growth through financing projects supplier credit credit provided by the supplier to itself to fund its operations syndicate group of banks that participate in loans syndicated eurocredit loans loans provided by a group (or syndicate) of banks in the Eurocredit market target zones implicit boundaries established by central banks on exchange rates tariff tax imposed by a government on imported goods technical forecasting development of forecasts using historical prices or trends tenor time period of drafts For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net time series analysis analysis of relationships between two or more variables over periods of time time series models models that examine series of historical data; sometimes used as a means of technical forecasting by examining moving averages trade acceptance draft that allows the buyer to obtain merchandise prior to paying for it trade sanctions government imposed restrictions on international trade transaction exposure degree to which the value of future cash transactions can be affected by exchange rate fluctuations transfer pricing policy for pricing goods sent by either the parent or a subsidiary to a subsidiary of an MNC transferable letter of credit document that allows the first beneficiary on a standby letter of credit to transfer all or part of the original letter of credit to a third party translation exposure degree to which a firm’s consolidated financial statements are exposed to fluctuations in exchange rates triangular arbitrage action to capitalize on a discrepancy where the quoted cross exchange rate is not equal to the rate that should exist at equilibrium GLOSSARY 675 umbrella policy policy issued to a bank or trading company to insure exports of an exporter and handle all administrative requirements unilateral transfers accounting for government and private gifts and grants volatility the standard deviation weak-form efficient description of foreign exchange markets, implying that all historical and current exchange rate information is already reflected in prevailing spot exchange rates Working Capital Guarantee Program programme conducted by the Ex-Im Bank that encourages commercial banks to extend short-term export financing to eligible exporters; the Ex-Im Bank provides a guarantee of the loan’s principal and interest World Bank bank established in 1944 to enhance economic development by providing loans to countries World Trade Organization (WTO) organization established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord writer seller of an option Yankee stock offerings offerings of stock by non-US firms in the US markets For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net INDEX absolute advantage accounts receivable financing 572–3 acquisitions 13–14 ADRs (American depository receipts) 87–8, 110 Afghanistan 202 agency costs 3–6 agency problem 3–4 airway bills 575 Allied Research Associates, Inc 454 American depository receipts 87–8, 110 appreciation 114 arbitrage 138, 238–49 Argentina 198, 203, 217 arms exports 581–2 Asian economic crisis 19, 107–8, 209, 218–23, 527 Asian money market 80 asset management 566–7, 638–9 Avon Products Inc 589 B/C (bills of lading) 575 back-to-back loans 393 balance of payments 36–41 bancor 213 Bank for International Settlements 59 bank liquidity 224–5 bank regulations 80–1 banker’s acceptance 575, 577–9 banks central 204–8 foreign exchange 70 insider information barter 580 Basel Accords 81 bear spreads 187–8, 412 Berlin Wall 16 bid/ask spread 72–6, 136 bilateral netting systems 617 bills of exchange 571–2, 575 bills of lading 575 BIS (Bank for International Settlements) 59 blocked funds 619–20 bond markets 82–4 Bosch BP 389 Brazil 208–9, 258 Bretton Woods Agreement 213 bull spreads 186–7, 411 bureaucracy 507 Burt plc 20 business theories 11 Cadbury Schweppes 14, 371 call options 77 capital account 37, 38 Capital Asset Pricing Model 481–2 capital budgeting 463–84 blocked funds 477–8 cash flows 479–80 country risk 523–8 discounting 481–4 example 466–70 exchange rates 463, 466, 470–3 financing 475–7 government incentives 480–1 inflation 474–5 inputs 465–6 real options 481 remittances 463 required rate of return 466 risk 481–4 salvage value 478–9 simulation 484 tax 463, 466, 494–502 capital flows 54–7 capital investment 38 capital mobility 232 CAPM (Capital Asset Pricing Model) 481–2 case studies Blades plc 33, 63, 96, 132, 173–4, 230, 264–5, 294–5, 335–6, 367– 8, 403–4, 437–8, 460–1, 492–3, 535–6, 564–5, 585–6, 610, 636 Sports Exports Company 34, 64, 97, 133, 174, 231, 265, 295, 336, 368, 405, 438, 461, 493, 536, 565, 586, 611, 637 cash flows acceleration 616 banking systems 621 blocked funds 619–20 capital budgeting 479–80 company-related characteristics 620–1 currency conversion costs 616–19 currency correlations 343 estimation 340–2 foreign 90 government restrictions 621 intersubsidiary cash transfers 620 offsetting 546 optimization 616–31 overview 21–3 political risk 505 subsidiaries 613–14 cash management centralized 614–16, 622–4 currency diversification 631 dynamic hedging 631 effective yield of deposits 624–6 exchange rate forecasts 628–30 forward rates 626–7 interest rate parity 626 international Fisher effect 626–7 investments of excess cash 621–31 optimization of cash flows 616–31 subsidiary cash flows 613–14 central banks 204–8 centralized cash management 614–16, 622–4 CFF (compensatory financing facility) 57 Chicago Mercantile Exchange 142–3 Chile 222 China Asian economic crisis 221 exchange rates 47 foreign exchange controls 209 pegged exchange rates 200 Cisco Systems 160 clearing-account arrangements 580–1 CME (Chicago Mercantile Exchange) 142–3 coefficients of determination 664 Colgate 480 commercial invoices 576 comparative advantage compensation arrangements 580–1 compensatory financing facility 57 conditional currency options 164–6 consignment arrangements 572 consumer attitudes 505 contingency graphs 161–4, 180–1, 181–2, 183–4, 184–5, 187–8 copyright violations 506 corporate tax 495–7 correlation 660–1 corruption 507 counterpurchase 581 countertrade 580–1 country risk analysis 504–30 assessment techniques 516–18 capital budgeting 523–8 comparisons 521 676 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net decision-making 521 financial decisions 527–8 government takeovers 528–30 macroassessment 514 measurement 518–21 microassessment 515–16 ratings 521 covariance 660–1 covered interest arbitrage 245–9 credit markets 82 cross-hedging 394, 406–7 cross-sectional analysis 663 currency appreciation 351–2 currency boards 197–9 currency cocktail bonds 553 currency conversion 506, 616–19 currency correlations 343, 346 currency depreciation 352 currency diversification 395, 552–3, 631 currency exposure, impact measurement 342–6 currency futures closing out 148–9 credit risk 145–7 efficiency 147 forward contracts 144 options markets 77 pricing 144–5 speculation 147 transaction costs 149 currency options call options 150–7 combinations 179–90 conditional 164–6 contingency graphs 161–4 currency futures 77 exchanges 150 market efficiency 161 over-the-counter 150 pricing 175–8 put options 157–66 speculation 154–7, 159–61 currency portfolios 601–6 currency speculation 123 currency spreads 185–90, 411–15 currency straddles 160–1, 179–82, 408–10 currency strangles 182–5, 410–11 currency swaps 392–3, 547–8 currency variability 342–3 Currenex 71 current account 37–8 cylinder options 188–90 daily settlement 143 data compilation 662–3 debt financing 538–47, 554–9 debt relief programmes 581 Delphi technique 517 dependent variables 662 depreciation 114 detrending 323–5 disintermediation 68 diversification 448–52 dividend discount model 108 documentary collections 571 documents against acceptance 572 documents against payment 571 dollar (US) 69, 213–14, 215, 223–4 dollarization 200 drafts 571–2, 575 DuPont 371 dynamic hedging 631 Eastern Europe 16, 202 ECB (European Central Bank) 233 ECGD (Export Credit Guarantee Department (UK)) 581–2 economic exposure assessment 426–7 domestic firms 352–3 financing 428 fixed assets 429–30 forward contracts 427–8 hedging 424–30 home currency appreciation 351–2 home currency depreciation 352 income statements 418–19 measurement 353–7 operations 428 pricing policy 427 purchasing 428 restructuring 420–3 sources of 427 economic theories 9–10 Ecuador 200 effective financing rate 591–5 effective yield of deposits 624–6 Electricity Supply Board (Ireland) 523 EMS (European Monetary System) 214–16 Enron environmental constraints equilibrium exchange rate 115–18 ERM (Exchange Rate Mechanism) 214–16 ESB (Electricity Supply Board (Ireland)) 523 ETFs (exchange-traded funds) 111 ethical constraints EU see European Union euro 16–18, 88–9, 232–6, 546 Euro-clear 84 euro-commercial paper 588 eurobank loans 588 Eurobonds 83–4 Eurocredit loans 82 Eurocurrency market 78–9 Eurodollars 80 euronotes 588 European Central Bank 233 European monetary policy 233 European Monetary System 214–15, 215–16 European Monetary Union 216–17 European money market 78–9 INDEX 677 European Union economic integration 225 exchange rates 214 expansion 17–18 foreign direct investment 445, 455 global financial crisis 225 monetary union 214 trade barriers 48 Excel 664–7 Exchange Rate Mechanism 214–15, 215–16 exchange rates capital budgeting 463, 466, 470–3 credit in foreign markets 66 currency boards 197–9 currency option hedges 378–80 debt financing 544–7 direct intervention 205–8 economic exposure 350–7, 417–30 equilibrium 115–18 finance-related factors 123–5 fixed 195–7 forecasts 305–26, 597–9, 628–30 foreign direct investment 56–7 freely floating 200–2 fundamental forecasting 311–16 government controls 122 government intervention 204–9 government policy 210–11 history of 211–24 impact of 50–2 income levels 122 indirect intervention 208–10 inflation 118–19 interest rates 119–21 managed float systems 197 market-based forecasting 316–19 market efficiency 308–9 market expectations 123 mixed forecasting 319–20 models 296–300 movements 19–20, 114–15 nonsterilized intervention 206–7 pegged 197 probabilities 544 purchasing power parity 270–1 quotations 70–7 real 276–7 risk 99–101, 109, 235, 338–9, 439, 545–6, 549–52 simulation 544–5 speculation 125–7 sterilized intervention 206–7 systems 195–203 target zones 209–10 technical forecasting 309–10 trade disagreements 47 trade-related factors 123–5 transaction exposure 340–50, 370–95 translation exposure 357–60, 430–2 volatility 326–8 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 678 INDEX exchange-traded funds 111 excise tax 498 Export Credit Guarantee Department (UK) 581–2 factoring 573 FDI see foreign direct investment Fiat 371 financial account 37, 38 financial markets 66–7 financial risk 513–14 financing capital budgeting 475–7 costs of 540–4, 599–601 currency portfolios 601–6 debt financing 538–44 economic exposure 428 foreign 589–91 internal 588–9 long-term 538–59 opportunities 15 rates 591–5 short-term 588–606 FIRM (foreign investment risk matrix) 521 fixed exchange rate systems 195–7 Flexsys 615–16 floating rate notes 83 forecasting of exchange rates 309–26 detrending 323–5 evaluation 321–3 tests 323–5 volatility 327–8 forecasting services 320–1 foreign bonds 83 foreign currency transactions 37 foreign direct investment barriers 454–5 benefits 445–8 conditions on 455–6 cost-related motives 444–5 diversification 448–52 exchange rates 56–7 financial account 38 governments 453–6 incentives 453–4 interest rates 56 meaning of 14 motives for 443–8 privatization 55–6 restrictions 55 revenue-related motives 443 subsequent decisions 452–3 tax 56 foreign exchange controls 209 foreign exchange markets 67–77, 90–1 foreign financing 589–601 foreign investment risk matrix 521 forfaiting 580 forward contracts arbitrage 138 bid/ask spread 136 currency futures 144, 372 www.downloadslide.net discounts 136–7 economic exposure 427–8 hedging costs 375 long-term 392, 547 non-deliverable 140–1 offsetting 138–9 premiums 136–7 spot market 138 swap transactions 140 translation exposure 431–2 forward premium 251–3, 258 forward rates 70, 72, 316–19, 373–5 cash management 626–7 France 454–5 franchising 13 freely floating exchange rate systems 200–2 FRNs (floating rate notes) 83 fund transfers 506 fundamental forecasting of exchange rates 311–16 futures contracts 77 GARCH (Generalized Autoregressive Conditional Heteroskedasticity) 103 General Electric 546 Generalized Autoregressive Conditional Heteroskedasticity 103 Germany 212 GlaxoSmithKlein 545 global financial crisis 224–5 global strategies 11 GLOBEX 143 gold standard 212–14 government takeovers 528–30 Greece 225 Gulf War 527 Heavily Indebted Poor Countries 581 hedging Brazil 258 currency futures 147–8 currency options 77, 153–4, 158–9 currency spreads 411–15 currency straddles 408–10 currency strangles 410–11 dynamic 631 economic exposure 424–30 exchange rate risk 100–1, 338 forward contracts 135–6, 375 interest rate swaps 556–9 limitations 389–91 non-traditional techniques 408–15 policies 389 put options 160 transaction exposure 371–95 translation exposure 431–2 HIPC (Heavily Indebted Poor Countries) 581 Honda 424–5 Hong Kong 197, 198–9, 220 hostile takeovers 6–7 hyperinflation 212 IBM 258 IDA (International Development Association) 59 IET (Interest Equalization Tax (US)) 83 IFC (International Financial Corporation) 59, 530 IFE see international Fisher effect IMF (International Monetary Fund) 57–8, 213, 518 IMFs (international mutual funds) 111 imperfect markets theory 10 income levels and exchange rates 122 independent variables 662 indexes 658 Indonesia 198, 219–20 inflation 49, 118–19, 474–5 information costs 99 insider information insurance for government takeovers 529 integrative problems 191, 301, 439, 566–7, 638–9 Intel 71 interbank market 69 intercompany transactions 500–2 Interest Equalization Tax (US) 83 interest rate parity assessment 256–8 cash management 626 derivation 249–51 exchange rate forecasts 318–19 foreign financing 595–7 forward premium 251–3, 258 graphic analysis 253–5 international Fisher effect 286–7 interpretation 255–6 money market hedges 378 political risk 257 purchasing power parity 286–7 tax 257 testing for 255 transaction costs 257 interest rates comparisons 84–6, 590–1 credit in foreign markets 66 effective financing rate 591–5 exchange rates 119–21 foreign direct investment 56 risk 554–9 swaps 556–9 internal financing 588–9 International Accounting Standard 21 359 International Bank for Reconstruction and Development 58, 213 International Development Association 59 International Financial Corporation 59, 530 international Fisher effect cash management 626–7 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net derivation 281–2 exchange rate forecasting 318–19 foreign investment 279–80 graphic analysis 282–3 interest rate parity 286–7 purchasing power parity 279, 286–7 tests 284–5 International Monetary Fund 57–8, 213, 581 international mutual funds 111 International Swaps and Derivatives Association 59 international trade 12, 41–2, 59, 581–2 internet 6, 12, 13 intersubsidiary cash transfers 620 intersubsidiary payments matrix 617–18 investment 15, 110–12 investor monitoring Iraq 202, 506–7 IRP see interest rate parity ISDA (International Swaps and Derivatives Association) 59 iShares 111 J-curve effect 54 Japan 206, 443, 455 joint ventures 13 L/C (letters of credit) 571, 573–6 labour mobility 232 Laminar Medica 448 Latin American 18 leading and lagging 393–4 Leontief paradox letters of credit 571, 573–6 liability management 566–7, 638–9 LIBOR (London Interbank Offer Rate) 82 licensing 12–13 liquidity of currencies 116–18 liquidity of spot market 70 locational arbitrage 238–41 lockboxes 616 London Interbank Offer Rate 82 long currency straddles 179–81 long currency strangles 183–4 long-term asset management 566–7 long-term financing 538–59 long-term forward contracts 392 long-term liability management 566–7 macroassessment of country risk 514 Malaysia 219–20 managed float exchange rate systems 197 management control 4–7 margin requirements 145–6 market-based forecasting of exchange rates 316–19 market efficiency 78–9, 147, 161, 308–9, 660 marking to market 143 maximum one-day loss 348–9 Mesa Co 191 Mexico 202, 217, 444, 456 microassessment of country risk 515–16 Microsoft 505 MIGA (Multilateral Investment Guarantee Agency) 529 mixed forecasting of exchange rates 319–20 money markets 77–81 Mozambique 530 multicurrency arrangements 202–3 multicurrency exposure 344–6 Multilateral Investment Guarantee Agency 529 multilateral netting systems 617 NAFTA (North American Free Trade Agreement) 18 national income 49 NDF (non-deliverable forward contracts) 140–1 negotiable bills of lading 575 Nestle´ 125 netting 616–19 Nike 14–15, 574 non-deliverable forward contracts 140–1 nonsterilized intervention in exchange rates 206–7 North American Free Trade Agreement 18 Oakland Ltd 500 ocean bills of lading 575 oil prices 214 OPEC (Organization of Petroleum Exporting Countries) 80 open account transactions 572 optimal currency areas 232–3 Organization of Petroleum Exporting Countries 80 outsourcing 47 Panasonic (UK) Ltd 36 parallel bonds 83 parallel loans 393, 548–52 Parmalat pegged exchange rates 197–9 personal tax 498 petrodollars 80 Philips 125, 352 political risk 20–1, 257, 504–7 portfolio investment 15, 38, 56–7, 102–5, 111–12, 349–50 PPP see purchasing power parity preauthorized payments 616 prepayment 571 price-earnings ratios 108 pricing policy 427 privatization 55–6 product cycle theory 11 purchasing power parity 267–78 confounding effects 275–6 derivation 269–70 exchange rates 270–1 INDEX 679 fundamental forecasting of exchange rates 315 graphical analysis 271–3 indirect impact 278 interest rate parity 286–7 international Fisher effect 279, 286–7 over time 278 tests 273–5 put options 77 quotas 49 regional development agencies 59 regression analysis 661–7 regression coefficients 663 regulatory constraints 7–8 relative values 48 Renault 125, 371 required rate of return 109, 466 reserves 206 returns 655–7 risk free rate 109 rounding 658 Russia 202, 209, 220, 527–8 SAL (Structural Adjustment Loan) 58 SDRs (special drawing rights) 57, 213 Senior plc 483 sensitivity analysis 313 separation theorem 25 share options shareholder activism shareholder influence shareholder wealth 3–4 shares 101–10 short currency straddles 181–2 short currency strangles 184–5 short-term asset management 638–9 short-term financing 588–606 short-term liability management 638–9 Siegel’s paradox 657 Silverton Ltd 424–9 simulation 484, 544–5 Single European Act 16, 81 SkyePharma 593–5 Smithsonian Agreement 213–14 Smoot Hawley Act 1930 (USA) 46 snake system 214 South Africa 21 South Korea 220–1 Spain 523 Spartan Ltd 466–80, 524–7 special drawing rights 57, 213 specialization speculation currency bull spreads 186–7 currency futures contracts 147 currency options 154–7, 159–61 currency straddles 182 currency strangles 185 exchange rate intervention 208 exchange rates 125–7 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 680 INDEX spot market 68, 69–70, 138 spot rate 72, 316 standard deviation 659 standby letters of credit 576 sterilized intervention in exchange rates 206–7 stock exchanges 98–101 stock markets 87–90, 105, 107 straddles see currency straddles Structural Adjustment Loan 58 sub prime mortgages 224 subsidiaries 3–4, 14, 613–14 supplier credit 571 syndicated loans 82 tariffs 46, 49 tax capital budgeting 463, 466, 494–502 carrybacks 498 carryforwards 498 corporate 495–7 credits 499–500 excise 498 foreign direct investment 56 on intercompany transactions 500–2 interest rate parity 257 personal 498 share valuation 109 treaties 498–9 withholding 497–8 technical forecasting of exchange rates 309–10 terrorism 21 Thailand 218–19 www.downloadslide.net Theory of absolute and comparative advantage Third World Debt Crisis 224 time preference 109 time series analysis 663 Topeka Ltd 481 trade acceptance 572 trade agreements 44–5 trade deficits 52–4 trade disagreements 46–8 trade finance 571–82 trade sanctions 49–50 trade theory 9–10 transaction costs 99, 149, 257 transaction exposure borrowing policy 393 centralized management 371 cross-hedging 394, 406–7 currency diversification 395 currency flows 340–2 currency swaps 392–3 forward hedges 372–5, 378 futures hedges 371–2 hedging 371–95 identification 370 invoice policy 370–1 leading and lagging 393–4 long-term 391–3 measurement 342–6 money market hedges 375–8 parallel loans 393 value-at-risk 346–50 transferable letters of credit 576 translation exposure 357–60, 430–2 triangular arbitrage 241–4, 657 Ukraine 481 United Kingdom 213 United Nations Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises 48 United States devaluation 213–14 exchange rates 210 foreign direct investment 444, 455 gold standard 213–14, 224 housing boom 224 universal values 48 unsecured debt securities 588 valuation models 23–7 value-at-risk (VAR) 346–50 variance 658–60 Venezuela 202, 209 war 21, 506–7 WEBS (world equity benchmark shares) 111 withholding tax 497–8 working capital financing 579–80 World Bank 58, 213 world equity benchmark shares 111 World Trade Organization (WTO) 45, 46, 58–9 Yahoo! 24 Yankee stock offerings 87 zero cost options 188–90 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... subsidiaries A and B Financial managers of parent MNC Subsidiary financial managers of A Subsidiary financial managers of B Cash management A Cash management B Stock and debtor management A Stock and debtor... Exposure to International Risk Domestic model Managing for Value: Yahoo!’s decision to expand internationally Valuing international cash flows Impact of financial management and international. .. of parent MNC Subsidiary financial managers of A Subsidiary financial managers of B Cash management A Cash management B Stock and debtor management A Stock and debtor management B Finance A Finance
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