563087099

ninth edition

Jeff MaduraFlorida Atlantic University

THOIVISOINI

*

A u s t r a l i a • B r a z i l C a n a d a • M e x i c o • S i n g a p o r e • S p a i n • U n i t e d K i n g d o m • U n i t e d S t a t e s

Contents

Preface, xvii

Part 1: The InternationalFinancial Environment 1Chapter 1: Multinational FinancialManagement: An Overview 2Managing the MNC, 2

Facing Agency Problems, 3

Governance: How SOX Improved Corporate Governance

of MNCs, 3

Management Structure of an MNC, 4Why Firms Pursue International Business, 5

Theory of Comparative Advantage, 6Imperfect Markets Theory, 6Product Cycle Theory, 6 /

How Firms Engageun International Business, 7International Trade, 8Licensing, 8Franchising, 9Joint Ventures, 9Acquisitions of Existing Operations, 9Establishing New Foreign Subsidiaries, 9Summary of Methods, 10

Valuation Model for an MNC, 11Domestic Model, 11Valuing International Cash Flows, 12Uncertainty Surrounding an MNCs Cash Flows, 14

Organization of the Text, 15

Summary, 16

Point Counter-Point: Should an MNC Reduce Its EthicalStandards to Compete Internationally?, 16

Self Test, 16

Questions and Applications, 17

Advanced Questions, 17

Discussion in the Boardroom, 19

Running Your Own MNC, 19

Blades, Inc. Case: Decision to Expand Internationally, 19

Small Business Dilemma: Developing a Multinational

Sporting Goods Corporation, 20

Internet/Excel Exercises, 21

Chapter 2: InternationalFlow of Funds 22Balance of Payments, 22

Current Account, 22Capital and Financial Accounts, 23

International Trade Flows, 25Distribution of U.S. Exports and Imports, 26U.S. Balance-of-Trade Trend, 26

International Trade Issues, 28Events That Increased International Trade, 28Trade Friction, 31

Governance: Should Managers Outsource to Satisfy

Shareholders?, 32Factors Affecting International Trade Flows, 34

Impact of Inflation, 34Impact of National Income, 34Impact of Government Policies, 35Impact of Exchange Rates, 35Interaction of Factors, 36

Correcting a Balance-of-Trade Deficit, 36Why a Weak Home Currency Is Not

a Perfect Solution, 37International Capital Flows, 38

Distribution ofDFIby U.S. Firms, 38Distribution of DEI in the United States, 39Factors Affecting DFI, 40Factors Affecting International Portfolio

Investment, 41Impact of International Capital Flows, 41

Agencies That Facilitate International Flows, 42International Monetary Fund, 42World Bank, 43World Trade Organization, 44International Financial Corporation, 44

vii

viii Contents

International Development Association, 45Bank for International Settlements, 45Organization for Economic Cooperation and

Development, 45Regional Development Agencies, 45

How International Trade Affects an MNCs Value, 45

Summary, 46

Point Counter-Point: Should Trade Restrictions Be Used toInfluence Human Rights Issues?, 46

Self Test, 46





Blades, Inc. Case: Exposure to International

Flow of Funds, 48

Small Business Dilemma: Identifying Factors That Will Affect

the Foreign Demand at the Sports Exports Company, 48


Chapter 3: InternationalFinancial Markets 50Foreign Exchange Market, 50

History of Foreign Exchange, 50Foreign Exchange Transactions, 51Foreign Exchange Quotations, 54Interpreting Foreign Exchange Quotations, 56Forward, Futures, and Options Markets, 58

International Money Market, 59Origins and Development, 60Money Market Interest Rates among Currencies, 61Standardizing Global Bank Regulations, 61

International Credit Market, 63Syndicated Loans, 63

International Bond Market, 64Eurobond Market, 64Development of Other Bond Markets, 65

International Stock Markets, 66Issuance of Stock in Foreign Markets, 66Issuance of Foreign Stock in the United States, 66Listing of Stock by Non-U.S. Firms on U.S. Stock

Exchanges, 67Governance: Effect of Sarbanes-Oxley Act on Foreign

Stock Offerings, 67

Investing in Foreign Stock Markets, 67How Stock Market Characteristics Vary among

Countries, 70How Financial Markets Facilitate MNC Functions, 70

Summary, 71

Point Counter-Point: Should Firms That Go Public Engagein International Offerings?, 72

Self Test, 72





Blades, Inc. Case: Decisions to Use International Financial

Markets, 74

Small Business Dilemma: Use of the ForeignExchange Markets by the Sports ExportsCompany, 75


Appendix 3: Investing in InternationalFinancial Markets, 76

Chapter 4: ExchangeRate Determination 85Measuring Exchange Rate Movements, 85Exchange Rate Equilibrium, 86

Demand for a Currency, 87Supply of a Currency for Sale, 87Equilibrium, 88

Factors That Influence Exchange Rates, 89Relative Inflation Rates, 89Relative Interest Rates, 90Relative Income Levels, 92Government Controls, 92Expectations, 93Interaction of Factors, 93

Speculating on Anticipated Exchange Rates, 95

Summary, 97

Point Counter-Point: How Can Persistently WeakCurrencies Be Stabilized?, 97

Self Test, 98





Blades, Inc. Case: Assessment of Future Exchange Rate

Movements, 101

Small Business Dilemma: Assessment by the SportsExports Company of Factors That Affect the BritishPound's Value, 101


Chapter 5: CurrencyDerivativesForward Market, 103

How MNCs Use Forward Contracts, 104Non-Deliverable Forward Contracts, 107

Currency Futures Market, 108Contract Specifications, 108Trading Futures, 108

103

Contents IX

Comparison of Currency Futures and ForwardContracts, 110

Pricing Currency Futures, 110Credit Risk of Currency Futures Contracts, 111Speculation with Currency Futures, 111How Firms Use Currency Futures, 112Closing Out a Futures Position, 113Trading Platforms for Currency Futures, 114

Currency Options Market, 114Option Exchanges, 114Over-the-Counter Market, 114

Currency Call Options, 115Factors Affecting Currency Call Option

Premiums, 115How Firms Use Currency Call Options, 116Speculating with Currency Call Options, 117

Currency Put Options, 119Factors Affecting Currency Put Option

Premiums, 119 \Hedging with Currency Put Options, 120Speculating with Currency Put Options, 120

Contingency Graphs for Currency Options, 122Contingency Graph for a Purchaser of a Call

Option, 122Contingency Graph for a Seller of a Call Option, 123Contingency Graph for a Buyer of a Put Option, 124Contingency Graph for a Seller of a Put

Option, 124Governance: Should an MNCs Managers Use Currency

Derivatives to Speculate?, 124 •Conditional Currency Options,,124European Currency Options, 126Summary, 126 V

Point Counter-Point: Should Speculators Use CurrencyFutures or Options?, 126

Self Test, 127





Blades, Inc. Case: Use of Currency Derivative

Instruments, 133

Small Business Dilemma: Use of Currency Futures

and Options by the Sports Exports Company, 134


Appendix 5A: Currency OptionPricing, 135

Appendix 5B: Currency OptionCombinations, 139

Part 1 Integrative Problem:The International FinancialEnvironment, 152

Part 2: ExchangeRate Behavior 153

Chapter 6: GovernmentInfluence on Exchange Rates 154Exchange Rate Systems, 154

Filled Exchange Rate System, 154Freely Floating Exchange Rate System, 156Managed Float Exchange Rate System, 158Pegged Exchange Rate System, 158Currency Boards Used to Peg Currency Values, 161Dollarization, 163Classification of Exchange Rate Arrangements, 163

A Single European Currency, 164Membership, 165Impact on European Monetary Policy, 165Impact on Business within Europe, 165Impact on the Valuation of Businesses in Europe, 166Impact on Financial Flows, 166Impact on Exchange Rate Risk, 167Status Report on the Euro, 167

Government Intervention, 167Reasons for Government Intervention, 167Direct Intervention, 168Indirect Intervention, 171

Intervention as a Policy Tool, 172Influence of a Weak Home Currency on the

Economy, 172Influence of a Strong Home Currency on the

Economy, 172

Summary, 174

Point Counter-Point: Should China Be Forced to Alter theValue of Its Currency?, 174

Self Test, 175





Blades, Inc. Case: Assessment of Government Influence on

Exchange Rates, 177

Small Business Dilemma: Assessment of Central Bank

Intervention by the Sports Exports Company, 178

Internet/Excel Exercises, 178Appendix 6: Government Interventionduring the Asian Crisis, 179

Chapter 7: InternationalArbitrage and InterestRate Parity 188International Arbitrage, 188

Locational Arbitrage, 188

Contents

Triangular Arbitrage, 191Covered Interest Arbitrage, 194Comparison of Arbitrage Effects, 197

Interest Rate Parity (IRP), 198Derivation of Interest Rate Parity, 198Determining the Forward Premium, 199Graphic Analysis of Interest Rate Parity, 200How to Test Whether Interest Rate

Parity Exists, 202Interpretation of Interest Rate Parity, 202Does Interest Rate Parity Hold?, 203Considerations When Assessing Interest Rate

Parity, 204Forward Premiums across Maturity Markets, 205Changes in Forward Premiums, 206

Governance: How Arbitrage Reduces the Need to MonitorTransaction Costs, 207

Summary, 207

Point Counter-Point: Does Arbitrage Destabilize ForeignExchange Markets?, 208

Self Test, 208





Blades, Inc. Case: Assessment of Potential Arbitrage

Opportunities, 211

Small Business Dilemma: Assessment of PrevailingSpot and Forward Rates by the Sports ExportsCompany, 213


Chapter 8: Relationshipsamong Inflation, Interest Rates,and Exchange Rates 214Purchasing Power Parity (PPP), 214

Interpretations of Purchasing Power Parity, 214Rationale behind Purchasing Power Parity

Theory, 215Derivation of Purchasing Power Parity, 216Using PPP to Estimate Exchange Rate Effects, 217Graphic Analysis of Purchasing Power Parity, 218Testing the Purchasing Power Parity Theory, 219Why Purchasing Power Parity Does Not Occur, 222Purchasing Power Parity in the Long Run, 223

International Fisher Effect (IFE), 223Relationship with Purchasing Power Parity, 223Implications of the IFE for Foreign Investors, 224Derivation of the International Fisher Effect, 225Graphic Analysis of the International

Fisher Effect, 227Tests of the International Fisher Effect, 229

Why the International Fisher Effect DoesNot Occur, 231

Comparison of the IRP, PPP, and IFE Theories, 231Summary, 232Point Counter-Point: Does PPP Eliminate Concerns about

Long-Term Exchange Rate Risk?, 233

Self Test, 233





Blades, Inc. Case: Assessment of Purchasing

Power Parity, 238

Small Business Dilemma: Assessment of the IFE by the

Sports Exports Company, 239

Internet/Excel Exercises, 239Part 2 Integrative Problem:Exchange Rate Behavior, 24OMidterm Self Exam, 241

Part 3: Exchange RateRisk Management 249

Chapter 9: ForecastingExchange Rates 250Why Firms Forecast Exchange Rates, 250Forecasting Techniques, 252

Technical Forecasting, 253Fundamental Forecasting, 254Market-Based Forecasting, 258Mixed Forecasting, 261

Forecasting Services, 262Reliance on Forecasting Services, 262

Forecast Error, 263Potential Impact of Forecast Errors, 263Measurement of Forecast Error, 263Forecast Accuracy over Time, 264Forecast Accuracy among Currencies, 264Forecast Bias, 265Graphic Evaluation of Forecast

Performance, 266Comparison of Forecasting Methods, 269Forecasting under Market Efficiency, 269

Governance: Governance of Managerial Forecasting, 270Using Interval Forecasts, 270

Methods of Forecasting Exchange RateVolatility, 271

Summary, 272

Point Counter-Point: Which Exchange Rate ForecastTechnique Should MNCs Use?, 272

Contents xi

Self Test, 273





Blades, Inc. Case: Forecasting Exchange Rates, 277

Small Business Dilemma: Exchange Rate Forecasting by

the Sports Exports Company, 278


Chapter 1O: MeasuringExposure to Exchange RateFluctuations 280Is Exchange Rate Risk Relevant?, 280

Purchasing Power Parity Argument, 280The Investor Hedge Argument, 280Currency Diversification Argument, 281Stakeholder Diversification Argument, 281Response from MNCs, 281

Types of Exposure, 281Transaction Exposure, 282

Estimating "Net" Cash Flows in EachCurrency, 282

Measuring the Potential Impact of theCurrency Exposure, 284

Assessing Transaction Exposure Based onValue at Risk, 286

Economic Exposure, 289Economic Exposure to Local Currency

Appreciation, 291Economic Exposure to Local Currency

Depreciation, ir291Economic Exposure of Domestic Firms, 292Measuring Economic Exposure, 292

Translation Exposure, 295Does Translation Exposure Matter?, 295Determinants of Translation Exposure, 296Examples of Translation Exposure, 297

Summary, 297

Point Counter-Point: Should Investors Care about anMNCs Translation Exposure?, 298

Self Test, 298





Blades, Inc. Case: Assessment of Exchange Rate

Exposure, 304

Small Business Dilemma: Assessment of ExchangeRate Exposure by the Sports ExportsCompany, 305


Chapter 11: ManagingTransaction Exposure 307Transaction Exposure, 307

Identifying Net Transaction Exposure, 307Adjusting the Invoice Policy to Manage

Exposure, 308

Governance: Aligning Manager Compensation with

Hedging'Goals, 308Hedging Exposure to Payables, 308

Forward or Futures Hedge on Payables, 309Money Market Hedge on Payables, 309

r Call Option Hedge, 310Summary of Techniques Used to Hedge

Payables, 313Selecting the Optimal Technique for Hedging

Payables, 313OptimalfHedge versus No Hedge, 316Evaluating the Hedge Decision, 316

Hedging Exposure To Receivables, 317Forward or Futures Hedge on

Receivables, 317Money Market Hedge on Receivables, 317Put Option Hedge, 318Selecting the Optimal Technique for Hedging

Receivables, 320Optimal Hedge versus No Hedge, 323Evaluating the Hedge Decision, 323Comparison of Hedging Techniques, 324Hedging Policies of MNCs, 325

Limitations of Hedging, 326Limitation of Hedging an Uncertain

Amount, 326Limitation of Repeated Short-Term

Hedging, 326Hedging Long-Term Transaction

Exposure, 328Long-Term Forward Contract, 328Parallel Loan, 328

Alternative Hedging Techniques, 329Leading and Lagging, 329Cross-Hedging, 329Currency Diversification, 329

Summary, 330

Point Counter-Point: Should an MNC RiskOverhedging?, 330

Self Test, 331





Blades, Inc. Case: Management of TransactionExposure, 338

xii Contents

Small Business Dilemma: Hedging Decisions by the SportsExports Company, 340


Appendix 11: NontraditionalHedging Techniques, 341

Part 4: Long-TermAsset and LiabilityManagement 369

Chapter 12: ManagingEconomic Exposure andTranslation Exposure 346Economic Exposure, 346

Use of Projected Cash Flows to Assess EconomicExposure, 347

How Restructuring Can Reduce EconomicExposure, 348

Issues Involved in the RestructuringDecision, 351

A Case Study in Hedging Economic Exposure, 352Savor Co.'s Dilemma, 352Assessment of Economic Exposure, 352Assessment of Each Unit's Exposure, 353Identifying the Source of the Unit's

Exposure, 353Possible Strategies to Hedge Economic

Exposure, 354Savor's Hedging Solution, 356Limitations of Savor's Optimal Hedging

Strategy, 356Hedging Exposure to Fixed Assets, 356Managing Translation Exposure, 357

Use of Forward Contracts to Hedge TranslationExposure, 357

Limitations of Hedging TranslationExposure, 358

Governance: Governing the Hedge of TranslationExposure, 359

Summary, 359 /'

Point Counter-Point: Can an MNC Reduce the Impactof Translation Exposure by Communicating, 360

Self Test, 360





Blades, Inc. Case: Assessment of Economic

Exposure, 363

Small Business Dilemma: Hedging the Sports ExportsCompany's Economic Exposure to ExchangeRate Risk, 364


Part 3 Integrative Problem:Exchange Rate RiskManagement, 366

Chapter 13: DirectForeign Investment 370Motives for Direct Foreign Investment, 370

Revenue-Related Motives, 370Cost-Related Motives, 371

Governance: Selfish Managerial Motives for DFI, 373

Comparing Benefits of DFI among Countries, 373Comparing Benefits of DFI over Time, 374

Benefits of International Diversification, 375Diversification Analysis of International

Projects, 377Diversification^ among Countries, 379

Decisions Subsequent to DFI, 380Host Government Views of DFI, 380

Incentives to Encourage DFI, 380Barriers to DFI, 381Government-Imposed Conditions to Engage

in DFI, 382

Summary, 382

Point Counter-Point: Should MNCs Avoid DFI in Countrieswith Liberal Child Labor Laws?, 382

Self Test, 383





Blades, Inc. Case: Consideration of Direct Foreign

Investment, 385

Small Business Dilemma: Direct Foreign Investment

Decision by the Sports Exports Company, 386


Chapter 14: MultinationalCapital Budgeting 387Subsidiary versus Parent Perspective, 387

Tax Differentials, 387Restricted Remittances, 388Excessive Remittances, 388Exchange Rate Movements, 388Summary of Factors, 388

Input for Multinational Capital Budgeting, 389Multinational Capital Budgeting Example, 391

Background, 391Analysis, 392

Factors to Consider in Multinational CapitalBudgeting, 395Exchange Rate Fluctuations, 395

Contents xiii

Inflation, 396Financing Arrangement, 397Blocked Funds, 400Uncertain Salvage Value, 401Impact of Project on Prevailing Cash Flows, 402Host Government Incentives, 403Real Options, 403

Adjusting Project Assessment for Risk, 404Risk-Adjusted Discount Rate, 404Sensitivity Analysis, 404Simulation, 405

Governance: Controls over International ProjectProposals, 406

Summary, 406

Point Counter-Point: Should MNCs Use Forward Rates toEstimate Dollar Cash Flows of Foreign Projects?, 406

Self Test, 407





Blades, Inc. Case: Decision by Blades, Inc., to Invest in

Thailand, 412

Small Business Dilemma: Multinational Capital Budgeting

by the Sports Exports Company, 414

Internet/Excel Exercises, 414Appendix 14: IncorporatingInternational Tax Laws inMultinational Capital Budgeting, 415

Chapter 15: InternationalAcquisitions ;» 422Background on International Acquisitions, 422

Trends in International Acquisitions, 423Model for Valuing a Foreign Target, 423Market Assessment of International

Acquisitions, 424Assessing Potential Acquisitions after the Asian

Crisis, 424Assessing Potential Acquisitions in Europe, 425

Governance: Impact of the Sarbanes-Oxley Act on thePursuit of Targets, 425

Factors That Affect the Expected Cash Flows of theForeign Target, 425Target-Specific Factors, 425Country-Specific Factors, 426

Example of the Valuation Process, 427International Screening Process, 427Estimating the Target's Value, 428Changes in Valuation over Time, 431

Why Valuations of a Target May Vary among MNCs, 433Estimated Cash Flows of the Foreign Target, 433

Exchange Rate Effects on the Funds Remitted, 434Required Return of Acquirer, 434

Other Types of Multinational Restructuring, 434International Partial Acquisitions, 434International Acquisitions of Privatized

Businesses, 435International Alliances, 435International Divestitures, 436

Restructuring Decisions as Real Options, 437Call Option on Real Assets, 437Put Option on Real Assets, 438

,Summary, 438

Point Counter-Point: Can a Foreign Target Be AssessedLike Any Other Asset?, 439

Self Test, 439





Blades, Inc. Case: Assessment of an Acquisition in

Thailand, 443

Small Business Dilemma: Multinational Restructuring by the



Chapter 16: CountryRisk Analysis 446Why Country Risk Analysis Is Important, 446Political Risk Factors, 447

Attitude of Consumers in the Host Country, 447Actions of Host Government, 447Blockage of Fund Transfers, 448Currency Inconvertibility, 448War, 449Bureaucracy, 449Corruption, 449

Financial Risk Factors, 450Indicators of Economic Growth, 450

Types of Country Risk Assessment, 451Macroassessment of Country Risk, 451Microassessment of Country Risk, 452

Techniques to Assess Country Risk, 453Checklist Approach, 453Delphi Technique, 453Quantitative Analysis, 454Inspection Visits, 454Combination of Techniques, 454

Measuring Country Risk, 454Variation in Methods of Measuring Country

Risk, 457Using the Country Risk Rating for Decision

Making, 457

xiv Contents

Comparing Risk Ratings among Countries, 457Actual Country Risk Ratings across Countries, 457Incorporating Country Risk in Capital Budgeting, 459

Adjustment of the Discount Rate, 459Adjustment of the Estimated Cash Flows, 459How Country Risk Affects Financial

Decisions, 462

Governance: Governance over the Assessment

of Country Risk, 462Reducing Exposure to Host Government Takeovers, 463

Use a Short-Term Horizon, 463Rely on Unique Supplies or Technology, 463Hire Local Labor, 463Borrow Local Funds, 463Purchase Insurance, 464Use Project Finance, 464

Summary, 465

Point Counter-Point: Does Country Risk Matter for U.S.Projects?, 465

Self Test, 465





Blades, Inc. Case: Country Risk Assessment, 469

Small Business Dilemma: Country Risk Analysis at the



Chapter 17: Multinational Costof Capital and Capital Structure 472Background on Cost of Capital, 472

Comparing the Costs of '/Equity and Debt, 472Cost of Capital for MNCs, 473

Cost-of-Equity Comparison Using the CAPM, 475Implications ofth'e CAPM for an MNCs Risk, 476

Costs of Capital across Countries, 477Country Differences in the Cost of Debt, 477Country Differences in the Cost of Equity, 478Combining the Costs of Debt and Equity, 480Estimating the Cost of Debt and Equity, 480

Using the Cost of Capital for Assessing ForeignProjects, 481Derive Net Present Values Based on the Weighted

Average Cost of Capital, 481Adjust the Weighted Average Cost of Capital for the

Risk Differential, 482Derive the Net Present Value of the Equity

Investment, 482The MNCs Capital Structure Decision, 486

Influence of Corporate Characteristics, 486Influence of Country Characteristics, 487

Revising the Capital Structure in Response toChanging Conditions, 488

Interaction between Subsidiary and Parent FinancingDecisions, 489Impact of Increased Debt Financing by the

Subsidiary, 490Impact of Reduced Debt Financing by the

Subsidiary,^491Summary of Interaction between Subsidiary and

Parent Financing Decisions, 491Local versus Global Target Capital Structure, 492

Offsetting a Subsidiary's High Degree of Financial

:Leverage, 492Offsetting a Subsidiary's Low Degree of Financial

Leverage, 492Limitations in Offsetting a Subsidiary's Abnormal

Degree of Financial Leverage, 492Summary, 493 ?Point Counter-Point: Should the Reduced Tax Rate on

Dividends Affect an MNCs Capital Structure?, 493

Self Test, 494





Blades, Inc. Case: Assessment of Cost of Capital, 497

Small Business Dilemma: Multinational Capital Structure

Decision at the Sports Exports Company, 499


Chapter 18: Long-TermFinancing 500Long-Term Financing Decision, 500

Sources of Equity, 500Sources of Debt, 501

Governance: Stockholder versus Creditor

Conflict, 501Cost of Debt Financing, 501

Measuring the Cost of Financing, 502Actual Effects of Exchange Rate Movements on

Financing Costs, 504Assessing the Exchange Rate Risk of Debt

Financing, 506Use of Exchange Rate Probabilities, 506Use of Simulation, 506

Reducing Exchange Rate Risk, 507Offsetting Cash Inflows, 507Forward Contracts, 508Currency Swaps, 508Parallel Loans, 510Diversifying among Currencies, 514

Interest Rate Risk from Debt Financing, 515The Debt Maturity Decision, 515

Contents xv

The Fixed versus Floating Rate Decision, 517Hedging with Interest Rate Swaps, 517Plain Vanilla Swap, 517

Summary, 521

Point Counter-Point: Will Currency Swaps Result in LowFinancing Costs?, 521

Self Test, 521





Blades, Inc. Case: Use of Long-Term Financing, 524

Small Business Dilemma: Long-Term Financing Decision by

the Sports Exports Company, 525

Internet/Excel Exercises, 526Part 4 Integrative Problem:Long-Term Asset and LiabilityManagement, 527

Part 5: Short-Term Asset andLiability Management 529

Chapter 19: FinancingInternational Trade 530Payment Methods for International Trade, 530

Prepayment, 531Letters of Credit (L/Cs), 531Drafts, 532Consignment, 532Open Account, 532

Trade Finance Method's, 533Accounts Receivable Financing, 533Factoring, 533Letters of Credit (L/Cs), 534Banker's Acceptance, 538Working Capital Financing, 540Medium-Term Capital Goods Financing

(Forfaiting), 541Countertrade, 541

Agencies That Motivate International Trade, 542Export-Import Bank of the United States, 542Private Export Funding Corporation

(PEFCO), 544Overseas Private Investment Corporation

(OPIC), 544 '

Summary, 545

Point Counter-PointrDo Agencies That FacilitateInternational Trade Prevent Free Trade?, 545

Self Test, 545





Blades, Inc. Case: Assessment of International Trade

Financing in Thailand, 546

Small Business Dilemma: Ensuring Payment for Products

Exported by the Sports Exports Company, 548

Internet/Excel Exercise, 548

Chapter 2O: Short-TermFinancing 549Sources of Short-Term Financing, 549

Short-Term Notes, 549Commercial Paper, 549Bank Loans, 549

Internal Financing by MNCs, 550

Governance: Governance over Subsidiary Short-Term

Financing,550Why MNCs Consider Foreign Financing, 550

Foreign Financing to Offset Foreign CurrencyInflows, 550

Foreign Financing to Reduce Costs, 551Determining the Effective Financing Rate, 552Criteria Considered for Foreign Financing, 553

Interest Rate Parity, 553The Forward Rate as a Forecast, 554Exchange Rate Forecasts, 555

Actual Results from Foreign Financing, 558Financing with a Portfolio of Currencies, 558

Portfolio Diversification Effects, 561Repeated Financing with a Currency

Portfolio, 562

Summary, 564

Point Counter-Point: Do MNCs Increase Their Risk WhenBorrowing Foreign Currencies?, 564

Self Test, 564





Blades, Inc. Case: Use of Foreign Short-Term

Financing, 567

Small Business Dilemma: Short-Term Financing by the



Chapter 21: InternationalCash Management 569Multinational Management of Working Capital, 569

Subsidiary Expenses, 569Subsidiary Revenue, 570Subsidiary Dividend Payments, 570Subsidiary Liquidity Management, 570

xvi Contents

Centralized Cash Management, 571Governance: Monitoring of MNC Cash Positions, 571

Techniques to Optimize Cash Flows, 572Accelerating Cash Inflows, 572Minimizing Currency Conversion Costs, 573Managing Blocked Funds, 575Managing Intersubsidiary Cash Transfers, 575

Complications in Optimizing Cash Flow, 576Company-Related Characteristics, 576Government Restrictions, 576Characteristics of Banking Systems, 576

Investing Excess Cash, 576How to Invest Excess Cash, 577Centralized Cash Management, 577Determining the Effective Yield, 579Implications of Interest Rate Parity, 581Use of the Forward Rate as a Forecast, 581Use of Exchange Rate Forecasts, 582Diversifying Cash across Currencies, 585Dynamic Hedging, 586

Summary, 586

Point Counter-Point: Should Interest Rate Parity PreventMNCs from Investing in Foreign Currencies?, 587

Self Test, 587





Blades, Inc. Case: International Cash Management, 589

Small Business Dilemma: Cash Management at the Sports

Exports Comp'any, 590


Appendix 21: Investing in a Portfolio ofCurrencies, 592

Part,5 Integrative Problem:Short-Term Asset and LiabilityManagement, 596

Final Self Exam, 598

Appendix A: Answers to Self Test Questions, 606Appendix B: Supplemental Cases, 618Appendix C: Using Excel to Conduct Analysis, 640Appendix D: International Investing Project, 647Appendix E: Discussion in the Boardroom, 650Glossary, 658Index, 665

Documents

563087099