Multinational Finance : Evaluating Opportunities, Costs, and Risks of Operations

by Butler, Kirt C.

• ISBN13: 9781118270127
• ISBN10: 1118270126
• Edition: 5th
• Format: Paperback
• Copyright: 2012-09-19
• Publisher: Wiley

Summary

This book has modular structure that promotes flexibility in coverage. Chapter 4 on the international parity conditions extends the discounted cash flow algebra of the first course in finance to a multi-currency setting. In particular, it develops and applies the algebra of moving cash flows over time and across currencies. Advanced material is placed in an appendix. Advanced material is placed in chapter appendices so that study can be tailored to each individual's objectives, interests, and level of preparation. In Multinational Finance, the chapter on Managing Transaction Exposure to Currency Risk provides an overview and comparison of the various derivative instruments and their use in risk hedging. This allows the more in- depth chapters on derivatives to be skipped without loss of continuity. Multinational Finance emphasizes the managerial aspects of multinational finance with graphs, figures, and a liberal use of real-world examples. The text presents an in-depth treatment of the international financial environment, including currency and Eurocurrency markets and the international parity conditions. The text includes detailed treatments of futures, options, and swaps and their use in currency risk management. Entire chapters are devoted to managing the multinational treasury, as well as to managing the multinational's exposures to transaction, operating, translation, and country risks. The valuation and structure of multinational operations. The heart of the text is the valuation and management of the multinational corporation's investments. The chapter on cross-border capital budgeting in the 4th (2008) edition is much more extensive than in competing texts, addressing valuation in disequilibrium conditions as well as special circumstances such as expropriation risk, subsidized financing, and blocked funds. The 5th edition (2012) will expand the treatment of parity disequilibria to include exchange rate expectations that differ from parity and the project's operating exposure to currency risk. (This work has already been completed and an article is under review at a major journal. The resulting treatment turns out to be both simpler and more general than the treatment in the 4th edition. No competing texts discuss these real-world issues.) Other chapters cover multinational financing, taxation, international investments as real options, and international corporate governance. Distinctive chapters on key topics. Distinctive chapters are devoted to topics of special interest to practitioners of multinational finance.

Author Biography

KIRT C. BUTLER is an Associate Professor in the Department of Finance and Director of Study Abroad for the Eli Broad College of Business at Michigan State University, where he teaches multinational finance and global strategy. His research has appeared in a variety of academic and practitioner journals, including the Journal of Finance, Journal of Accounting Research, Financial Analysts Journal, Journal of Portfolio Management, Journal of International Money and Finance, and the Journal of International Business Studies, among others. Professor Butler's academic research has been profiled in the New York Times, Time, and Money magazines, and on the CNN and CNBC websites. He has a PhD in finance and also holds an MBA in finance from the College of Business, an MS in computer science from the College of Engineering, and a BA in psychology from the Honors College, all from Michigan State University.

Table of Contents

Preface xv

Acknowledgments xix

PART ONE The International Financial Environment

CHAPTER 1 An Introduction to Multinational Finance 3

Executive Summary 3

1.1 The Goals of the Multinational Corporation 3

1.2 The Challenges of Multinational Operations 6

1.3 The Opportunities of Multinational Operations 9

1.4 Financial Management of the Multinational Corporation 15

1.5 Summary 16

Key Terms 17

Conceptual Questions 17

CHAPTER 2 World Trade and the International Monetary System 19

Executive Summary 19

2.1 Integration of the World’s Markets 19

2.2 Balance-of-Payments Statistics 22

2.3 Exchange Rate Systems 25

2.4 A Brief History of the International Monetary System 28

2.5 The Global Financial Crisis of 2008 40

2.6 Summary 41

Key Terms 42

Conceptual Questions 42

Problems 43

Suggested Readings 43

CHAPTER 3 Foreign Exchange and Eurocurrency Markets 45

Executive Summary 45

3.1 Characteristics of Financial Markets 45

3.2 The Eurocurrency Market 46

3.3 The Foreign Exchange Market 51

3.4 Foreign Exchange Rates and Quotations 57

3.5 The Empirical Behavior of Exchange Rates 64

3.6 Summary 67

Key Terms 68

Conceptual Questions 69

Problems 69

Suggested Readings 71

CHAPTER 4 The International Parity Conditions and Their Consequences 73

Executive Summary 73

4.1 The Law of One Price 73

4.2 Exchange Rate Equilibrium 76

4.3 Interest Rate Parity and Covered Interest Arbitrage 80

4.4 Less Reliable International Parity Conditions 83

4.5 The Real Exchange Rate 88

4.6 Exchange Rate Forecasting 94

4.7 Summary 96

Key Terms 97

Conceptual Questions 98

Problems 98

Suggested Readings 102

Appendix 4A: Continuous Compounding 102

Problems 106

PART TWO Derivative Securities for Financial Risk Management

CHAPTER 5 Currency Futures and Futures Markets 109

Executive Summary 109

5.1 Financial Futures Exchanges 109

5.2 The Operation of Futures Markets 111

5.3 Futures Contracts 112

5.4 Forward versus Futures Market Hedges 115

5.5 Futures Hedges Using Cross-Exchange Rates 119

5.6 Hedging with Currency Futures 120

5.7 Summary 129

Key Terms 131

Conceptual Questions 131

Problems 132

Suggested Readings 133

CHAPTER 6 Currency Options and Options Markets 135

Executive Summary 135

6.1 What Is an Option? 135

6.2 Option Payoff Profiles 138

6.3 Currency Option Values Prior to Expiration 143

6.4 Hedging with Currency Options 147

6.5 Exchange Rate Volatility Revisited (Advanced) 152

6.6 Summary 158

Key Terms 159

Conceptual Questions 159

Problems 159

Suggested Readings 161

Appendix 6A: Currency Option Valuation 161

Key Terms 168

Problems 168

Suggested Readings 170

CHAPTER 7 Currency Swaps and Swaps Markets 171

Executive Summary 171

7.1 The Growth of the Swaps Market 171

7.2 Swaps as Portfolios of Forward Contracts 172

7.3 Currency Swaps 176

7.4 Interest Rate Swaps 183

7.5 Other Types of Swaps 187

7.6 Hedging the Swap Bank’s Exposure to Financial Price Risk 189

7.7 Summary 190

Key Terms 190

Conceptual Questions 191

Problems 191

Suggested Readings 193

PART THREE Managing the Risks of Multinational Operations

CHAPTER 8 Multinational Treasury Management 197

Executive Summary 197

8.1 Determining Financial Goals and Strategies 197

8.2 Managing the Corporation’s International Trade 199

8.3 Financing the Corporation’s International Trade 205

8.4 Managing the Multinational Corporation’s Cash Flows 209

8.5 Currency Risk Management in the Multinational Corporation 211

8.6 Summary 224

Key Terms 224

Conceptual Questions 225

Problems 225

Suggested Readings 226

Appendix 8A: The Rationale for Hedging Currency Risk 227

Key Terms 237

Conceptual Questions 237

Problems 237

Suggested Readings 238

CHAPTER 9 Managing Transaction Exposure to Currency Risk 239

Executive Summary 239

9.1 An Example of Transaction Exposure to Currency Risk 239

9.2 Managing Transaction Exposures Internally 240

9.3 Managing Transaction Exposure in Financial Markets 247

9.4 Treasury Management in Practice 255

9.5 Summary 260

Key Terms 261

Conceptual Questions 261

Problems 261

Suggested Readings 263

CHAPTER 10 Managing Operating Exposure to Currency Risk 265

Executive Summary 265

10.1 Operating Exposures to Currency Risk 265

10.2 The Exposure of Shareholders’ Equity 269

10.3 Managing Operating Exposure in the Financial Markets 274

10.4 Managing Operating Exposure through Operations 279

10.5 Pricing Strategy and the Firm’s Competitive Environment 281

10.6 Summary 285

Key Terms 286

Conceptual Questions 286

Problems 286

Suggested Readings 288

CHAPTER 11 Managing Translation Exposure and Accounting for Financial Transactions 291

Executive Summary 291

11.1 The Current Rate Method of Financial Accounting Standard No. 52 291

11.2 Corporate Hedging of Translation Exposure 294

11.3 Accounting for Financial Market Transactions 298

11.4 Accounting, Disclosure, and Corporate Hedging Activities 304

11.5 Summary 307

Key Terms 308

Conceptual Questions 308

Problems 309

Suggested Readings 311

PART FOUR Valuation and the Structure of Multinational Operations

CHAPTER 12 Foreign Market Entry and Country Risk Management 315

Executive Summary 315

12.1 Strategic Entry into International Markets 316

12.2 Country Risk Assessment 322

12.3 Strategies for Managing Country Risk 331

12.4 Protecting the Multinational’s Competitive Advantages 338

12.5 Summary 342

Key Terms 343

Conceptual Questions 343

Problems 344

Suggested Readings 345

CHAPTER 13 Multinational Capital Budgeting 347

Executive Summary 347

13.1 The Algebra of Multinational Capital Budgeting 347

13.2 An Example: Wendy’s Restaurant in Neverland 350

13.3 International Parity Disequilibria 354

13.4 Special Circumstances in Cross-Border Investments 360

13.5 Summary 367

Key Terms 368

Conceptual Questions 368

Problems 368

Suggested Readings 373

CHAPTER 14 Multinational Capital Structure and Cost of Capital 375

Executive Summary 375

14.1 Capital Structure and the Cost of Capital 375

14.2 Project Valuation and the Cost of Capital 380

14.3 The Cost of Capital on Multinational Operations 390

14.4 Sources of Funds for Multinational Operations 394

14.5 The International Evidence on Capital Structure 401

14.6 Summary 402

Key Terms 403

Conceptual Questions 404

Problems 405

Suggested Readings 408

CHAPTER 15 Taxes and Multinational Corporate Strategy 411

Executive Summary 411

15.1 The Objectives of National Tax Policy 411

15.2 Types of Taxation 413

15.3 U.S. Taxation of Foreign-Source Income 417

15.4 Taxes and Organizational Form 423

15.5 Transfer Pricing and Tax Planning 425

15.6 Taxes and the Location of Foreign Assets and Liabilities 428

15.7 Summary 432

Key Terms 433

Conceptual Questions 433

Problems 434

Suggested Readings 435

CHAPTER 16 Real Options and Cross-Border Investment Strategy 437

Executive Summary 437

16.1 Real Options and the Theory and Practice of Investment 437

16.2 Market Entry as a Simple Real Option 439

16.3 Uncertainty and the Value of the Option to Invest 447

16.4 Market Entry as a Compound Real Option 451

16.5 The Real Option Approach as a Complement to Net Present Value 454

16.6 Summary 457

Key Terms 458

Conceptual Questions 458

Problems 458

Suggested Readings 462

CHAPTER 17 Corporate Governance and the International Market for Corporate Control 465

Executive Summary 465

17.1 Corporate Governance 466

17.2 The International Market for Corporate Control 478

17.3 The International Evidence on Mergers and Acquisitions 484

17.4 Summary 488

Key Terms 489

Conceptual Questions 489

Problems 490

Suggested Readings 491

PART FIVE International Portfolio Investment and Asset Pricing

CHAPTER 18 International Capital Markets 495

Executive Summary 495

18.1 Domestic and International Bond Markets 495

18.2 Domestic and International Stock Markets 502

18.3 International Investment Vehicles 510

18.4 Share Prices in International Markets 515

18.5 Asset Allocation Policy and Investment Style 519

18.6 Cross-Border Financial Statement Analysis 521

18.7 Summary 524

Key Terms 526

Conceptual Questions 526

Problems 527

Suggested Readings 528

CHAPTER 19 International Portfolio Diversification 531

Executive Summary 531

19.1 The Algebra of Portfolio Diversification 531

19.2 Returns on Foreign Investments 541

19.3 The Benefits of International Portfolio Diversification 548

19.4 Home Bias 551

19.5 Summary 557

Key Terms 558

Conceptual Questions 558

Problems 559

Suggested Readings 560

CHAPTER 20 International Asset Pricing 563

Executive Summary 563

20.1 The International Capital Asset Pricing Model 563

20.2 Factor Models and Arbitrage Pricing Theory 568

20.3 Factor Models for International Assets 571

20.4 Momentum Strategies 580

20.5 Contemporary Asset Pricing Models 582

20.6 Summary 583

Key Terms 584

Conceptual Questions 584

Problems 585

Suggested Readings 588

Notes 591

Solutions to Even-Numbered Problems 607

Symbols and Acronyms 635

Useful Rules and Formulas 637

Useful Websites 641

Glossary 643

Index 663