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

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

Laurent L. Jacque

ISBN: 978-1-119-55046-4 October 2019 832 Pages

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Description

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 Finance, Islamic 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