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International Financial Management

14th Edition

Jeff Madura Florida Atlantic University

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Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Printed in United State of America Print Number: 01 Print Year: 2020

© 2021, 2018 Cengage Learning, Inc.International Financial Management, Fourteenth Edition Jeff Madura

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Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

WCN: 02-300

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PART 1: The International Financial Environment 1 1 Multinational Financial Management: An Overview 3 2 International Flow of Funds 31 3 International Financial Markets 61 4 Exchange Rate Determination 101 5 Currency Derivatives 131

PART 2: Exchange Rate Behavior 185 6 Government Inf luence on Exchange Rates 187 7 International Arbitrage and Interest Rate Parity 227 8 Relationships among Inf lation, Interest Rates, and Exchange Rates 259

PART 3: Exchange Rate Risk Management 297 9 Forecasting Exchange Rates 299 10 Measuring Exposure to Exchange Rate Fluctuations 325 11 Managing Transaction Exposure 355 12 Managing Economic Exposure and Translation Exposure 393

PART 4: Long-Term Asset and Liability Management 413 13 Direct Foreign Investment 415 14 Multinational Capital Budgeting 435 15 International Corporate Governance and Control 475 16 Country Risk Analysis 501 17 Multinational Capital Structure and Cost of Capital 525 18 Long-Term Debt Financing 551

PART 5: Short-Term Asset and Liability Management 575 19 Financing International Trade 577 20 Short-Term Financing 595 21 International Cash Management 611

Appendix A: Answers to Self-Test Questions 643 Appendix B: Supplemental Cases 656 Appendix C: Using Excel to Conduct Analysis 676 Appendix D: International Investing Project 684 Appendix E: Discussion in the Boardroom 687 Appendix F: Use of Bitcoin to Conduct International Transactions 695 Glossary 698 Index 705

Brief Contents

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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Preface, xvii

About the Author, xxiii

PART 1: The International Financial Environment 1

1: MuLTInATIonAL FInAncIAL MAnAgEMEnT: An ovERvIEw 3 1-1 Managing the MNC, 4

1-1a How Business Disciplines Are Used to Manage the MNC, 4 1-1b Agency Problems, 4 1-1c Management Structure of an MNC, 6

1-2 Why MNCs Pursue International Business, 8 1-2a Theory of Comparative Advantage, 8 1-2b Imperfect Markets Theory, 8 1-2c Product Cycle Theory, 9

1-3 Methods to Conduct International Business, 10 1-3a International Trade, 10 1-3b Licensing, 10 1-3c Franchising, 10 1-3d Joint Ventures, 10 1-3e Acquisitions of Existing Operations, 11 1-3f Establishment of New Foreign Subsidiaries, 11 1-3g Summary of Methods, 12

1-4 Valuation Model for an MNC, 13 1-4a Domestic Valuation Model, 13 1-4b Multinational Valuation Model, 14 1-4c Uncertainty Surrounding an MNC’s Cash Flows, 17 1-4d How Uncertainty Affects the MNC’s Cost of Capital, 20

1-5 Organization of the Text, 20

2: InTERnATIonAL FLow oF FundS 31 2-1 Balance of Payments, 31

2-1a Current Account, 31 2-1b Financial Account, 32 2-1c Capital Account, 33

2-2 Growth in International Trade, 34 2-2a Events That Increased Trade Volume, 34 2-2b Impact of Outsourcing on Trade, 36 2-2c Trade Volume among Countries, 37 2-2d Trend in U.S. Balance of Trade, 37

2-3 Factors Affecting International Trade Flows, 39 2-3a Cost of Labor, 40 2-3b Inf lation, 40 2-3c National Income, 40

Contents

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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2-3d Credit Conditions, 41 2-3e Government Policies, 41 2-3f Exchange Rates, 46

2-4 International Capital Flows, 49 2-4a Factors Affecting Direct Foreign Investment, 49 2-4b Factors Affecting International Portfolio Investment, 50 2-4c Impact of International Capital Flows, 50

2-5 Agencies that Facilitate International Flows, 51 2-5a International Monetary Fund, 52 2-5b World Bank, 53 2-5c World Trade Organization, 53 2-5d International Finance Corporation, 54 2-5e International Development Association, 54 2-5f Bank for International Settlements, 54 2-5g OECD, 54 2-5h Regional Development Agencies, 54

3: InTERnATIonAL FInAncIAL MARkETS 61 3-1 Foreign Exchange Market, 61

3-1a History of Foreign Exchange, 62 3-1b Foreign Exchange Transactions, 63 3-1c Foreign Exchange Quotations, 68 3.1d Derivative Contracts in the Foreign Exchange Market, 72

3-2 International Money Market, 73 3-2a Dollar-Denominated Bank Accounts in Europe and Asia, 74 3-2b Money Market Interest Rates among Currencies, 74 3-2c Risk of International Money Market Securities, 75

3-3 International Credit Market, 76 3-3a Syndicated Loans in the Credit Market, 76

3-4 International Bond Market, 76 3-4a Eurobond Market, 77 3-4b Development of Other Bond Markets, 78 3-4c Risk of International Bonds, 78

3-5 International Stock Markets, 79 3-5a Issuance of Stock in Foreign Markets, 79 3-5b Issuance of Foreign Stock in the United States, 79 3-5c How Governance Varies among Stock Markets, 81 3-5d Integration of International Stock Markets and Credit Markets, 82

3-6 International Financial Market Crises, 82 3-6a Contagion Effects, 83

3-7 How Financial Markets Serve MNCs, 85 Appendix 3: Investing in International Financial Markets, 93

4: ExchAngE RATE dETERMInATIon 101 4-1 Measuring Exchange Rate Movements, 101 4-2 Exchange Rate Equilibrium, 102

4-2a Demand for a Currency, 103 4-2b Supply of a Currency for Sale, 104 4-2c Equilibrium Exchange Rate, 105 4-2d Change in the Equilibrium Exchange Rate, 106

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Contents v i i

4-3 Factors That Inf luence Exchange Rates, 108 4-3a Relative Inf lation Rates, 108 4-3b Relative Interest Rates, 110 4-3c Relative Income Levels, 111 4-3d Government Controls, 112 4-3e Expectations, 112 4-3f Interaction of Factors, 113 4-3g Inf luence of Factors across Multiple Currency Markets, 115 4-3h Impact of Liquidity on Exchange Rate Adjustments, 115

4-4 Movements in Cross Exchange Rates, 116 4-5 Capitalizing on Expected Exchange Rate Movements, 118

4-5a Institutional Speculation Based on Expected Appreciation, 118 4-5b Institutional Speculation Based on Expected Depreciation, 119 4-5c Speculation by Individuals, 119 4-5d Carry Trades, 120

5: cuRREncy dERIvATIvES 131 5-1 Forward Market, 131

5-1a How MNCs Use Forward Contracts, 131 5-1b Bank Quotations on Forward Rates, 132 5-1c Premium or Discount on the Forward Rate, 133 5-1d Movements in the Forward Rate over Time, 134 5-1e Offsetting a Forward Contract, 134 5-1f Using Forward Contracts for Swap Transactions, 135 5-1g Non-deliverable Forward Contracts, 135

5-2 Currency Futures Market, 136 5-2a Contract Specifications, 136 5-2b Trading Currency Futures, 137 5-2c Credit Risk of Currency Futures Contracts, 138 5-2d Comparing Currency Futures and Forward Contracts, 138 5-2e How MNCs Use Currency Futures, 139 5-2f Speculation with Currency Futures, 140

5-3 Currency Options Market, 142 5-3a Currency Options Exchanges, 142 5-3b Over-the-Counter Currency Options Market, 142

5-4 Currency Call Options, 142 5-4a Factors Affecting Currency Call Option Premiums, 143 5-4b How MNCs Use Currency Call Options, 144 5-4c Speculating with Currency Call Options, 145

5-5 Currency Put Options, 148 5-5a Factors Affecting Currency Put Option Premiums, 149 5-5b How MNCs Use Currency Put Options, 149 5-5c Speculating with Currency Put Options, 150

5-6 Other Forms of Currency Options, 152 5-6a Conditional Currency Options, 152 5-6b European Currency Options, 154

Appendix 5A: currency option Pricing, 165

Appendix 5B: currency option combinations, 169

Part 1 Integrative Problem: The International Financial Environment, 183

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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