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International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

Laurent L. Jacque

ISBN: 978-1-118-78362-7

Mar 2014

768 pages



A thorough introduction to corporate finance from a renowned professor of finance and banking

As globalization redefines the field of corporate finance, international and domestic finance have become almost inseparably intertwined. It's increasingly difficult to understand what is happening in capital markets without a firm grasp of currency markets, the investment strategies of sovereign wealth funds, carry trade, and foreign exchange derivatives products. International Corporate Finance offers thorough coverage of the international monetary climate, including Islamic finance, Asian banking, and cross-border mergers and acquisitions. Additionally, the book offers keen insight on global capital markets, equity markets, and bond markets, as well as foreign exchange risk management and how to forecast exchange rates.

  • Offers a comprehensive discussion of the current state of international corporate finance
  • Provides simple rules and pragmatic answers to key managerial questions and issues
  • Includes case studies and real-world decision-making situations

For anyone who wants to understand how finance works in today's hyper-connected global economy, International Corporate Finance is an insightful, practical guide to this complex subject.

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Preface xvii

Acknowledgments xxiii

About the Author xxv

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 18

Questions for Discussion 19

References 19

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 38

Controlled Exchange Rates 44

Summary 49

Appendix 2A: The Purchasing Power Parity Hypothesis 49

Questions for Discussion 58

Problems 58

References 61

Chapter 3 Yesterday and Yesteryear: A Brief History of the International Monetary System 63

Chronology of the International Monetary System 64

The Gold Standard (1878−1914, 1925−1931) 67

The Bretton Woods System (1944−1971) 69

Managed Floating Exchange Rates (1973−) 73

European Monetary System and the European Currency Unit (1979−1999) 74

Emerging Markets Currency Regimes and Crises 78

European Monetary Union and the Birth of the Euro (1999−Present) 81

Today and Tomorrow: The Current Map of Exchange Rates 85

Summary 88

Questions for Discussion 89

Problems 90

References 92

Chapter 4 The Balance of Payments 93

Fundamentals of Balance of International Payments Accounting 94

Current Account 99

Capital Account 101

Official Reserve Account 102

Statistical Discrepancies: Errors and Omissions 103

Balance of Payments and the Foreign Exchange Market 103

Debtor versus Creditor Nations 107

Linking the Balance of Payments to National Income 109

Summary 111

Questions for Discussion 112

Problems 113

References 115

PART TWO The Foreign Exchange Market and Currency Derivatives 117

Chapter 5 The Foreign Exchange Market 119

How Forex Is Traded: The Institutional Framework 120

Foreign Exchange Products 128

Exchange Rate Quotations 131

Summary 143

Questions for Discussion 144

Problems 144

References 147

Chapter 6 Interest Rate Arbitrage and Parity 149

Interest Rate Arbitrage Theorem 150

Interest Rate Parity 158

Uncovered Interest Rate Arbitrage and the Carry Trade 166

Summary 169

Appendix 6A: Interest Rate Parity and Asymmetric Taxation 170

Appendix 6B: The Linkages between Interest, Inflation, and Exchange Rates 171

Questions for Discussion 177

Problems 177

References 183

Chapter 7 Currency Futures, Options, and Swaps 185

A Brief History of Derivatives 186

Currency Futures 190

Currency Options 195

Risk Profile of Currency Options 198

Option Strategies 200

Put-Call Parity Theorem 206

The Valuation of Currency Options 209

Derivatives and Zero-Premium Options 215

Currency Swaps 218

Interest Rate Swaps 224

Summary 226

Questions for Discussion 227

Problems 228

References 231

PART Three International Financing 233

Chapter 8 The International Financial Sector and the Dynamics of Global Capital Markets 235

Financing as a Global Procurement Decision 236

The Financial System and Financial (Dis)Intermediation 238

Securitization and the (Lower) Cost of Consumer Financing 241

Deregulation 249

Mapping the Financial System/Capital Market Emergence Process 252

Summary 259

Questions for Discussion 260

Problems 260

References 263

Chapter 9 Sourcing Equity Globally 265

A Grand Tour of Equity Markets 266

Global Equity Financing as a Procurement Decision 273

Internationalizing the Cost of Capital: The Landmark Case of Novo Industri 274

Why Do Firms Cross-List? 279

How to Source Equity Globally 281

Summary 286

Questions for Discussion 288

Problems 288

References 290

Chapter 10 Sourcing Debt from Global Bond Markets 291

The International Debt Procurement Decision 292

Grand Tour of the Global Debt Market 293

Cost of Foreign Currency Debt Financing 299

Debt Refinancing 304

The International Debt Financing Conundrum 307

Summary 309

Questions for Discussion 310

Problems 311

References 315

Chapter 11 International Trade Financing 317

A Brief History of International Trade 317

The Trilogy of Risks in Exporting 318

Managing Credit Risk 321

Managing Currency Risk 322

Managing Country Risk 323

The Mechanics of Trade Financing with a Letter of Credit 324

Financing Exports 327

Pre-Export Financing 330

Government-Sponsored Export Credit Agencies 332

Summary 333

Questions for Discussion 333

Problems 334

Chapter 12 Asian Finance and Banking 337

Asian Finance: Common Historical Roots, Diverse Paths 338

Adaptive Responses: Crises and Institutional Change in Asian Finance 342

Business Organization, Corporate Ownership, and Governance 346

Capital Market Development 356

Capital Structure and the Cost of Capital 364

Performance, Value, and the Practice of Corporate Finance 366

Summary 368

Questions for Discussion 369

References 369

Chapter 13 Islamic Banking and Finance 371

The Underlying Principles of Islamic Finance 372

The Evolution of Islamic Finance 376

Islamic Financing Products 380

Shariah-Compliant Asset Management 386

Islamic Banking 388

Islamic Finance and the Global Financial Meltdown 392

Summary 394

Questions for Discussion 395

References 395

PART FOUR Managing Foreign Exchange Risk 397

Chapter 14 The Case for Foreign Exchange Risk Management 399

Defining Foreign Exchange Risk Management and Its Objectives 400

Can Hedging Currency Risk Increase the Value of the Firm? 403

When Is Hedging Currency Risk Irrelevant? 406

From Hedging to Managing Currency Risk 407

The Building Blocks of Foreign Exchange Risk Management 409

Summary 410

Appendix 14A: Foreign Exchange Risk Management: What Do Firms Do? 411

Questions for Discussion 412

References 412

Chapter 15 Forecasting Exchange Rates 413

Market-Based Forecasts 414

Model-Based Forecasts: Technical versus Econometric Modeling Approaches 419

Composite Forecasts 426

How to Use Currency Forecasts 427

Summary 427

Appendix 15A: Forecasting Pegged Yet Adjustable Exchange Rates 428

Questions for Discussion 434

Problems 434

References 437

Chapter 16 Managing Transaction Exposure 439

Measuring Transaction Exposure 440

The Mechanics of Hedging Transaction Exposure 444

Hedging and Financing International Trade 456

Eliminating Foreign Exchange Rate Risk in Long-Term Contracts 457

Exchange Rate Risk in International Bidding 463

How Much to Hedge Transaction Exposure 467

Summary 468

Questions for Discussion 468

Problems 469

References 475

Chapter 17 Managing Translation Exposure 477

What Is Translation Exposure? 477

Should Translation Exposure Be Hedged? 478

Alternative Translation Methods 479

The Mechanics of Contractual Hedging 485

The Mechanics of Financial Hedging 492

Summary 496

Appendix 17A: Accounting Valuation and the Concept of Translation Exposure 497

Questions for Discussion 501

Problems 502

References 506

Chapter 18 Managing Economic Exposure 507

A Taxonomy of Economic Exposures 508

Toward an Operational Measure of Economic Exposure 514

Managing Operating Exposure 518

Summary 523

Questions for Discussion 524

Problems 524

References 527

PART FIVE Cross-Border Valuation and Foreign Investment Analysis 529

Chapter 19 Foreign Market Entry Strategies and Country Risk Management 531

Contractual Modes of Foreign Market Entry 532

Foreign Market Entry through Foreign Direct Investments 537

Country Risk 539

Costs/Benefits of Foreign Direct Investment to Host Countries 544

Summary 548

Questions for Discussion 549

References 549

Chapter 20 International Capital Budgeting 551

The Foreign Direct Investment Decision-Making Process 551

A Primer on Evaluating Investment Opportunities 554

What Is Different about Evaluating Foreign Investment Proposals? 556

Case Study: Renault Invests in India 560

Global Cost of Equity Capital 571

Summary 575

Appendix 20A: Adjusted Present Value 576

Appendix 20B: Real Options 579

Questions for Discussion 587

Problems 587

References 591

Chapter 21 Cross-Border Mergers and Acquisitions 593

A Brief History of Mergers and Acquisitions 594

The Industrial Logic of Mergers and Acquisitions 594

Are Cross-Border Acquisitions Different? 596

Valuation of Foreign Acquisitions 600

Ciments Lafarge Enters Vietnam 602

Summary 610

Questions for Discussion 610

Problems 610

Chapter 22 Project Finance 613

What Is Project Finance? 614

On Allocating Risks 617

Anatomy of Project Finance: The Case of the Ras Laffan Liquefied Natural Gas Company 619

Valuing Project Finance: The Esty Model 621

Summary 628

Questions for Discussion 629

References 630

Chapter 23 Global Investing 631

The Basics of International Portfolio Management 632

The Gains from International Diversification 640

Trials and Tribulations in Foreign Equity Investing 647

Currency Risk in Global Investing 649

Alternative Modes of Investing in Foreign Equity 651

The New Landscape of Global Investing 652

Summary 657

Appendix 23A: In Search of Alpha at Global Thematic Partners (GTP) 657

Questions for Discussion 662

Problems 662

References 664

PART SIX Managing the Multinational Financial System 665

Chapter 24 International Control Conundrum 667

A Primer on Managerial Control 668

The International Control Conundrum 672

Currency Space Mapping 674

EVA-Based Contingent Budgeting and Performance Assessment 677

Summary 683

Appendix 24A: Applying the EVA-Based Control System 684

Questions for Discussion 689

References 689

Chapter 25 Managing the Multinational Financial System 691

A Primer on International Taxation 691

The Multinational Financial System 695

Exploiting the System’s Potential to Minimize Global Tax Liabilities 697

Designing a Global Dividends Remittance Strategy 702

Centralizing Cash Management 705

Summary 714

Questions for Discussion 715

Problems 716

References 717

Appendix: Answers to Selected Problems 719

About the Companion Website 727

Index 729