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International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, 2nd Edition

International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, 2nd Edition

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9781119550464
  • Published In: October 2019
  • Format: Paperback , 832 pages
  • Jurisdiction: International ? Disclaimer:
    Countri(es) stated herein are used as reference only

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  • Contents 
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    As globalization is redefining the field of corporate finance, international finance is now part and parcel of the basic literacy of any financial executive. This is why International Corporate Finance is a “must” text for upper-undergraduates, MBAs aspiring to careers in global financial services and budding finance professionals.

    International Corporate Finance offers thorough coverage of the international monetary system, international financing, foreign exchange risk management and cross-border valuation. Additionally, the book offers keen insight on how disintermediation, deregulation and securitization are re-shaping global capital markets.

    What is different about International Corporate Finance?

    • Each chapter opens with a real-life mini-case to anchor theoretical concepts to managerial situations.
    • Provides simple decision rules and “how to do” answers to key managerial issues.
    • Cross-border Mergers & Acquisitions, Project FinanceIslamic Finance, Asian Banking & Finance are completely new chapters that no other textbooks currently cover.
    • Accompanied with a comprehensive instructor support package which includes case studies, an Instructor’s Manual, PowerPoint slides, Multiple Choice Questions and more.
  • Preface xvii

    Acknowledgments xxv

    About the Author xxvii

    Chapter 1 What is International Corporate Finance? 1

    The Uneven Reach of Globalization 2

    The Rise of the Multinational Corporation 3

    What is Different about International Corporate Finance? 6

    Risks in the Wonderland of International Finance 8

    Internationalization and the Locus of the Finance Function 12

    The International Control Conundrum 15

    Exploiting The Multinational Enterprise System 16

    Summary 19

    Questions for Discussion 19

    References 20

    Part One The International Monetary Environment 21

    Chapter 2 Exchange Rates Regimes 23

    Some First Principles about Exchange Rate Determination 24

    World Map of Exchange Rate Regimes: The Flexibility × Convertibility Space 29

    Floating Exchange Rates 31

    Stabilized or Pegged Exchange Rates 39

    Controlled Exchange Rates 46

    To Float or to Fix: The Trilemma of International Finance 49

    Summary 50

    Questions for Discussion 51

    Problems 52

    Internet Exercises 54

    References 54

    Chapter 3 Yesterday and Yesteryear 57

    Chronology of the International Monetary System 58

    The Gold Standard (1878–1914, 1925–1931) 61

    The Bretton Woods System (1944–1971) 63

    Managed Floating Exchange Rates (1973–Present) 67

    European Monetary System and the European Currency Unit (1979–1999) 68

    Emerging Markets Currency Regimes and Crises 72

    European Monetary Union and the Birth of the Euro (1999–Present) 76

    Today and Tomorrow: The Current Map of Exchange Rates 84

    Summary 86

    Questions for Discussion 87

    Problems 88

    Internet Exercises 90

    References 90

    Case Study 3.1: Will the Eurozone Shutter? Plant Location and Exchange Rates for Hyundai 91

    Chapter 4 The Balance of Payments 99

    Fundamentals of Balance of International Payments Accounting 100

    Current Account 105

    Financial Account 107

    Official Reserve Account 109

    Statistical Discrepancies: Errors and Omissions 111

    Balance of Payments and the Foreign Exchange Market 111

    Debtor Versus Creditor Nations 115

    Linking the Balance of Payments to National Income 118

    Summary 119

    Questions for Discussion 120

    Problems 121

    Internet Exercises 122

    References 124

    Case Study 4.1: When One of the BRIC(k)s Falls: Trials and Tribulations of the Indian Rupee 124

    Part Two The Foreign Exchange Market and Currency Derivatives 129

    Chapter 5 The Foreign Exchange Market 131

    How Forex is Traded: The Institutional Framework 132

    Foreign Exchange Products 140

    Exchange Rate Quotations 142

    Summary 155

    Questions for Discussion 156

    Problems 157

    Internet Exercises 160

    References 160

    Case Study 5.1: Banco Mercantil Internacional’s Forex Losses 160

    Chapter 6 Interest Rate Arbitrage and Parity 165

    Interest Rate Arbitrage Theorem 166

    Interest Rate Parity 174

    Uncovered Interest Rate Arbitrage and the Carry Trade 181

    Summary 184

    Appendix 6A: Transaction Costs: Interest Rate Arbitarge with Bid-Ask Spreads (Advanced) 185

    Appendix 6B: Interest Rate Parity and Asymmetric Taxation 187

    Questions for Discussion 188

    Problems 188

    Internet Exercises 195

    References 195

    Case Study 6.1: Brazil Rede Globo’s Short-Term Funding 195

    Chapter 7 Purchasing Power Parity and the International Parities Framework 199

    Purchasing Power Parity 200

    The Linkages Between Interest, Inflation, and Exchange Rates 213

    Questions for Discussion 220

    Problems 220

    Internet Exercises 221

    References 222

    Chapter 8 Currency Futures and Options 223

    A Brief History of Derivatives 223

    Currency Futures 228

    Currency Options 234

    Risk Profile of Currency Options 236

    Option Strategies 239

    Put-Call Parity Theorem 245

    The Valuation of Currency Options 248

    Derivatives and Zero-Premium Options 254

    Summary 258

    Appendix 8A: Pricing Currency Options 259

    Questions for Discussion 261

    Problems 261

    Internet Exercises 264

    References 264

    Case Study 8.1: Daewoo’s Unorthodox Funding Strategy 264

    Part Three International Financing 269

    Chapter 9 The International Financial Sector and the Dynamics of Global Capital Markets 271

    Financing as a Global Procurement Decision 272

    The Financial System and Financial (Dis)Intermediation 273

    Securitization and the (Lower) Cost of Consumer Financing 281

    Deregulation 287

    Mapping the Financial System/Capital Market Emergence Process 290

    Summary 297

    Questions for Discussion 298

    Problems 298

    Internet Exercises 300

    References 300

    Case Study 9.1: How Thai Airways FOILs Jet Fuel Price Risk 301

    Chapter 10 Sourcing Equity Globally 307

    A Grand Tour of Equity Markets 308

    Global Equity Financing as a Procurement Decision 317

    Internationalizing the Cost of Capital: The Landmark Case of Novo Industri 318

    Why do Firms Cross-List? 323

    How to Source Equity Globally 325

    Summary 331

    Questions for Discussion 332

    Problems 333

    Internet Exercises 334

    References 335

    Case Study 10.1: Jazztel’s Foreign IPO 335

    Chapter 11 Sourcing Debt from Global Bond Markets 345

    The International Debt Procurement Decision 346

    Grand Tour of the Global Debt Market 347

    Cost of Foreign Currency Debt Financing 356

    Debt Refinancing 361

    The International Debt Financing Conundrum 364

    Summary 366

    Questions for Discussion 366

    Problems 367

    Internet Exercises 372

    References 372

    Case Study 11.1: McDonald’s Dim Sum Bonds: “Lovin’ It” 372

    Chapter 12 Currency, Interest Rate, and Credit Default Swaps 377

    Currency Swaps 378

    Interest Rate Swaps 383

    Credit Default Swaps 391

    Summary 397

    Questions for Discussion 397

    Problems 398

    Internet Exercises 400

    References 400

    Case Study 12.1: The Demise of AIG 400

    Chapter 13 International Trade Financing 405

    A Brief History of International Trade 406

    The Trilogy of Risks in Exporting 407

    Managing Credit Risk 409

    Managing Currency Risk 410

    Managing Country Risk 411

    The Mechanics of Trade Financing with a Letter of Credit 412

    Financing Exports 415

    Pre-Export Financing 418

    Government-Sponsored Export Credit Agencies 422

    Summary 423

    Questions for Discussion 424

    Problems 424

    Internet Exercises 426

    Case Study 13.1: Warrick Pharmaceuticals Inc. 426

    Part Four Managing Foreign Exchange Risk 431

    Chapter 14 The Case for Foreign Exchange Risk Management 433

    Defining Foreign Exchange Risk Management and its Objectives 435

    Can Hedging Currency Risk Increase the Value of the Firm? 437

    When is Hedging Currency Risk Irrelevant? 440

    From Hedging to Managing Currency Risk 441

    The Building Blocks of Foreign Exchange Risk Management 443

    Summary 445

    Appendix 14A: Foreign Exchange Risk Management: What do Firms do? 446

    Questions for Discussion 446

    References 447

    Case Study 14.1: Bio-Oils Energy S.L. 447

    Chapter 15 Forecasting Exchange Rates 455

    Market-Based Forecasts 456

    Model-Based Forecasts: Technical Versus Econometric Modeling Approaches 461

    Composite Forecasts 468

    How to Use Currency Forecasts 469

    Summary 470

    Appendix 15A: Forecasting Pegged Yet Adjustable Exchange Rates 470

    Questions for Discussion 476

    Problems 477

    Internet Exercises 479

    References 479

    Case Study 15.1: Euclides Engineering, Ltd. 480

    Chapter 16 Managing Transaction Exposure 483

    Measuring Transaction Exposure 484

    The Mechanics of Hedging Transaction Exposure 488

    Hedging and Financing International Trade 500

    Eliminating Foreign Exchange Rate Risk in Long-Term Contracts 501

    Exchange Rate Risk in International Bidding 508

    How Much to Hedge Transaction Exposure 512

    Summary 513

    Questions for Discussion 514

    Problems 514

    References 520

    Case Study 16.1: Hedging Currency Risk at TT Textiles 521

    Chapter 17 Managing Translation Exposure 531

    What is Translation Exposure? 531

    Should Translation Exposure be Hedged? 532

    Alternative Translation Methods 533

    The Mechanics of Contractual Hedging 539

    The Mechanics of Financial Hedging 546

    Summary 550

    Appendix 17A: Accounting Valuation and the Concept of Translation Exposure 551

    Questions for Discussion 555

    Problems 555

    Internet Exercises 560

    References 560

    Case Study 17.1: Wilkinson Sword’s Trials and Tribulations in Turkey 560

    Chapter 18 Managing Economic Exposure 567

    A Taxonomy of Economic Exposures 568

    Toward an Operational Measure of Economic Exposure 575

    Managing Operating Exposure 578

    Summary 583

    Questions for Discussion 584

    Problems 584

    References 587

    Case Study 18.1: Peugeot Citroën SA’s Economic Exposure to the South Korean Won 588

    Part Five Cross-Border Valuation and Foreign Investment Analysis 591

    Chapter 19 Foreign Market Entry Strategies and Country Risk Management 593

    Contractual Modes of Foreign Market Entry 594

    Foreign Market Entry Through Foreign Direct Investments 599

    Country Risk 600

    Costs/Benefits of Foreign Direct Investment to Host Countries 608

    Summary 612

    Questions for Discussion 613

    Internet Exercises 613

    References 614

    Case Study 19.1: Carrefour’s Indian Entry Strategy 614

    Chapter 20 International Capital Budgeting 619

    The Foreign Direct Investment Decision-Making Process 619

    A Primer on Evaluating Investment Opportunities 622

    What is Different About Evaluating Foreign Investment Proposals? 624

    Case Study: Renault Invests in India 629

    Global Cost of Equity Capital 639

    Optimal Worldwide Capital Structure 643

    Summary 644

    Appendix 20A: Adjusted Present Value 645

    Appendix 20B: Real Options 648

    Questions for Discussion 656

    Problems 656

    Internet Exercises 660

    References 660

    Chapter 21 Cross-Border Mergers and Acquisitions 661

    A Brief History of Mergers and Acquisitions 662

    The Industrial Logic of Mergers and Acquisitions 662

    Are Cross-Border Acquisitions Different? 664

    Valuation of Foreign Acquisitions 671

    Ciments Lafarge Enters Vietnam 673

    Summary 680

    Questions for Discussion 681

    Problems 681

    Internet Exercises 683

    Case Study 21.1: Etihad’s Proposed Acquisition of Malaysia Airlines 684

    Chapter 22 Project Finance 689

    What is Project Finance? 690

    Anatomy of Project Finance: The Case of the Ras Laffan Liquefied Natural Gas Company 696

    Valuing Project Finance: The Esty Model 696

    Summary 704

    Questions for Discussion 705

    References 705

    Case Study 22.1: Clean Infra Ltd Project Finance 706

    Chapter 23 Global Investing 713

    The Basics of International Portfolio Management 714

    The Gains from International Diversification 722

    Trials and Tribulations in Foreign Equity Investing 729

    Currency Risk in Global Investing 730

    Alternative Modes of Investing in Foreign Equity 733

    The New Landscape of Global Investing 734

    Summary 741

    Appendix 23A: In Search of Alpha at Global Thematic Partner is found on the Book Website at www.wiley.com/go/intlcorpfinance2e 741

    Questions for Discussion 742

    Problems 742

    Internet Exercises 744

    References 744

    Part Six Managing the Multinational Financial System 747

    Chapter 24 Managing the Multinational Financial System 749

    A Primer on International Taxation 749

    The Multinational Financial System 753

    Exploiting the System’s Potential to Minimize Global Tax Liabilities 755

    Designing a Global Dividends Remittance Strategy 761

    Centralizing Cash Management 765

    Summary 774

    Questions for Discussion 775

    Problems 775

    Internet Exercises 777

    References 777

    Appendix: Answers to Selected Problems 779

    About the Companion Website 787

    Index 789

    Continued on the Website

    Chapter 25 International Control Conundrum (extension of Part 6) 805

    A Primer on Managerial Control 806

    The International Control Conundrum 809

    EVA-Based Contingent Budgeting and Performance Assessment 815

    Summary 821

    Appendix 25A: Applying The EVA-Based Control System 822

    Questions for Discussion 826

    References 826

    Chapter 26 Asian Finance and Banking (extension of Part 3) 827

    Asian Finance: Common Historical Roots, Diverse Paths 828

    Adaptive Responses: Crises and Institutional Change in Asian Finance 832

    Business Organization, Corporate Ownership, and Governance 836

    Corporate Governance 841

    Capital Market Development 846

    Capital Structure and the Cost of Capital 855

    Performance, Value, and the Practice of Corporate Finance 857

    Summary 860

    Questions for Discussion 860

    References 861

    Chapter 27 Islamic Banking and Finance (extension of Part 3) 863

    The Underlying Principles of Islamic Finance 864

    The Evolution of Islamic Finance 868

    Islamic Financing Products 872

    Shariah-Compliant Asset Management 879

    Islamic Banking 880

    Islamic Finance and the Global Financial Meltdown 885

    Summary 886

    Questions for Discussion 888

    References 888

    Case Study 27.1: When Emirates Airline Taps Islamic Finance 888

    Appendix 23A to Chapter 23: In Search of Alpha at Global Thematics Partners (GTP) 894

    Glossary 899

  • Laurent L. Jacque (Boston, MA) is the Walter B. Wriston Professor of International Finance & Banking at the Fletcher School of Law and Diplomacy (Tufts University) and Director of its International Business Studies Program. From 2004 to 2007 he was Fletcher’s Academic Dean and as such responsible for the design and the establishment of the new Master of International Business degree and the Center for Emerging Market Enterprises. Since 1990 he has also held a joint appointment at the HEC School of Management (France) as a Professor of Economics, Finance, and International Business.

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