Table of Contents

Part 1 The Global Financial Environment 1

1 Introduction 3

1.1 Reasons to Study International Finance 4

1.2 Company Goals and Functions of Financial Management 6

1.3 Multinational Companies and Their Performance 9

1.4 Principles of Global Finance 12

1.5 Agency Theory and Corporate Governance 18

1.6 Environmental Differences 23

1.7 The Structure of the Book 25

1.8 Summary 25

2 Motives for World Trade and Foreign Investment 29

2.1 Motives for Foreign Trade 29

2.2 Economic Integration 38

2.3 Motives for Foreign Investment 44

2.4 A Synthesis of Foreign Trade and Investment Theories 48

2.5 Summary 50

2.6 Problems 50

3 Balance of Payments and International Monetary System 53

3.1 An Overview of the Balance of Payments 54

3.2 A Successful Foreign Exchange System 66

3.3 The International Monetary Fund 68

3.4 Summary 73

3.5 Problems 74

Part 2 Corporate Foreign Exchange Risk Management 75

4 The Foreign Exchange Market and Parity Conditions 79

4.1 Participants in the Exchange Market 80

4.2 Spot Exchange Quo tation: Spot Exchange Rate 84

4.3 Forward Exchange Quotation: Forward Exchange Rate 90

4.4 International Parity Conditions 94

4.5 Arbitrage 103

4.6 Summary 110

4.7 Problems 111

5 Currency Futures and Options 115

5.1 The Currency Futures Market 115

5.2 The Currency Options Market 125

5.3 Futures Options 136

5.4 Summary 138

5.5 Problems 138

6 Financial Swaps 143

6.1 The Emergence of the Swap Market 143

6.2 Plain Vanilla Swaps 148

6.3 Motivations for Swaps 153

6.4 Summary 157

6.5 Problems 157

7 Managing Transaction Exposure and Economic Exposure 159

7.1 Basic Nature of Foreign Exchange Exposure 160

7.2 Transaction Exposure Management 165

7.3 Economic Exposure Management 174

7.4 Summary 177

7.5 Problems 178

8 Translation Exposure Management 181

8.1 Translation Rules 181

8.2 FASB No. 8 and FASB No. 52 185

8.3 Hedging Translation Exposure 190

8.4 Summary 192

8.5 Problems 193

Part 3 The Global Financing Strategy 195

9 International Financial Markets 197

9.1 Eurocurrency Markets 197

9.2 Eurocurrency Interbank Market 203

9.3 The Asian Currency Market 209

9.4 The International Capital Market 211

9.5 International Loans 218

9.6 Financial Crises of Industrialized Countries 222

9.7 Summary 225

9.8 Problems 226

10 Financing International Transactions 229

10.1 Basic Documents in Foreign Trade 229

10.2 The Payment Terms of Export Transactions 239

10.3 Sources of Financing Foreign Trade 245

10.4 Internal Sources of Funds for Foreign Investment 252

10.5 External Sources of Funds for Foreign Investment 255

10.6 Development Banks 264

10.7 Summary 271

10.8 Problems 272

Part 4 The Global Investment Strategy 275

11 International Working Capital Management 277

11.1 Basic Concepts of Working Capital Management 278

11.2 Cash Management 291

11.3 Accounts Receivable Management 299

11.4 Inventory Management 301

11.5 Summary 304

11.6 Problems 305

12 International Portfolio Investment 307

12.1 Key Terminology 308

12.2 Benefits of International Diversification 316

12.3 Methods of International Diversification 321

12.4 Summary 325

12.5 Problems 325

13 The Cost of Capital for Foreign Projects 327

13.1 The Weighted Average Cost of Capital 327

13.2 Optimum Capital Structure 332

13.3 Marginal Cost of Capital and Investment Decisions 335

13.4 Cultural Values and Capital Structure 337

13.5 Summary 340

13.6 Problems 340

14 Foreign Direct Investment Analysis 343

14.1 How to Invest Abroad: Modes of Foreign Investment 344

14.2 The Foreign Investment Decision Process 347

14.3 Portfolio Theory 361

14.4 Capital Budgeting Theory and Practice 363

14.5 Motives for Cross-Border Mergers and Acquisitions 366

14.6 Political Risk Management 371

14.7 Summary 379

14.8 Problems 380

15 Corporate Performance of Foreign Operations 385

15.1 Global Control System and Performance Evaluation 386

15.2 International Taxation 397

15.3 Transfer Pricing and Tax Planning 407

15.4 Summary 410

15.5 Problems 411

Index 415