FGV International Financial Management Business in Several Countries Discussion Read Chapters 13 & 14 International Financial Management 11th Edition Jef

FGV International Financial Management Business in Several Countries Discussion Read Chapters 13 & 14

International Financial Management 11th Edition

Jeff Madura

978-0-538482967

Cengage

Chapter 13

Assume that you wanted to expand your Learning English business to other non-U.S. countries where some individuals may want to speak English.

a. Explain why you might be able to stabilize the profits of your total business in this manner. Review the motives for direct foreign investment that are identified in this chapter. Which of these motives are most important?

b. Why would a city such as Montreal be a less desirable site for your business than a city such as Mexico City?

c. Describe the conditions in which your total business would experience weak effects even if the business was spread across 3 or 4 countries.

d. What factors affect the probability of these conditions occurring? (In other words, explain why the conditions could occur in one set of countries, but not another set of countries).

e. What data would you review to assess the probability of these conditions occurring?

f. Consider that the prevailing service you offer is teaching individuals in Mexico to speak English, and your business has already created some supplemental pamphlets and CDs that translate common Spanish terms into English. How could you expand your business in a manner that may allow you to benefit from economies of scale (and perhaps even benefit from your existing business reputation)? When you attempt to benefit from economies of scale, do you forgo diversification benefits? Explain.

g. How would you come to a decision on whether to pursue business expansion that capitalizes on economies of scale even if it would forgo diversification benefits? Do you think economies of scale would be more important or less important than diversification for your business?

h. Is there any way to achieve economies of scale and yet still achieve diversification benefits?

Chapter 14

a. Review the different items that are used in the multinational capital budgeting example (Spartan Inc.). Describe the items that would be included on a spreadsheet if you were to conduct a multinational capital budgeting analysis of investing dollars to expand your existing language business in a different location.

b. Assume that you recognize your limitations in predicting the future exchange rate of the invoice currency for your expanded business. You think that there are several possible exchange rate scenarios, each with equal probability of occurrence. Explain how you could use this information to estimate the future NPV and make a decision about whether to accept or reject the project.

c. Now assume that there is also much uncertainty about the demand for your service by individuals. Explain how you can attempt to incorporate this uncertainty along with the uncertainty of exchange rate movements so that you can make a decision about whether to accept or reject the project.

d. Explain how you would derive a required rate of return for your capital budgeting analysis. What type of information would you use to derive the required rate of return? This is an electronic version of the print textbook. Due to electronic rights restrictions,
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International Financial
Management
11TH EDITION
JEFF MADURA
Florida Atlantic University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
International Financial Management,
11th Edition
Jeff Madura
Vice President of Editorial, Business: Jack
W. Calhoun
Editor-in-Cheif: Joe Sabatino
Executive Editor: Mike Reynolds
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Printed in the United States of America
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Dedicated to Mary
Brief Contents
Preface
xxi
About the Author
xxix
PART 1: The International Financial Environment
1
2
3
4
5
Multinational Financial Management: An Overview
International Flow of Funds 29
International Financial Markets 57
Exchange Rate Determination 99
Currency Derivatives 123
PART 2: Exchange Rate Behavior
6
7
8
175
Government Influence on Exchange Rates 177
International Arbitrage and Interest Rate Parity 211
Relationships among Inflation, Interest Rates, and Exchange Rates
PART 3: Exchange Rate Risk Management
9
10
11
12
1
3
281
Forecasting Exchange Rates 283
Measuring Exposure to Exchange Rate Fluctuations 311
Managing Transaction Exposure 341
Managing Economic Exposure and Translation Exposure 379
PART 4: Long-Term Asset and Liability Management
13
14
15
16
17
18
401
Direct Foreign Investment 403
Multinational Capital Budgeting 421
International Corporate Governance and Control 457
Country Risk Analysis 483
Multinational Capital Structure and Cost of Capital 507
Long-Term Debt Financing 531
PART 5: Short-Term Asset and Liability Management
19 Financing International Trade 559
20 Short-Term Financing 579
21 International Cash Management 601
Appendix A: Answers to Self-Test Questions 635
Appendix B: Supplemental Cases 648
Appendix C: Using Excel to Conduct Analysis 669
Appendix D: International Investing Project 676
Appendix E: Discussion in the Boardroom 679
Glossary 687
Index 695
iv
241
557
Contents
Preface xxi
About the Author xxix
PART 1: The International Financial Environment
1
1: MULTINATIONAL FINANCIAL MANAGEMENT: AN OVERVIEW
3
Managing the MNC, 3
How Business Disciplines Are Used to Manage the MNC, 4
Agency Problems, 4
Management Structure of an MNC, 6
Why Firms Pursue International Business, 8
Theory of Comparative Advantage, 8
Imperfect Markets Theory, 8
Product Cycle Theory, 8
How Firms Engage in International Business, 9
International Trade, 10
Licensing, 10
Franchising, 11
Joint Ventures, 11
Acquisitions of Existing Operations, 11
Establishing New Foreign Subsidiaries, 11
Summary of Methods, 12
Valuation Model for an MNC, 13
Domestic Model, 13
Multinational Model, 14
Valuation of an MNC That Uses Two Currencies, 14
Valuation of an MNC That Uses Multiple Currencies, 15
Uncertainty Surrounding an MNC’s Cash Flows, 16
How Uncertainty Affects the MNC’s Cost of Capital, 17
Organization of the Text, 18
Summary, 19
Point Counter-Point: Should an MNC Reduce Its Ethical Standards to Compete
Internationally?, 19
Self-Test, 19
Questions and Applications, 20
Advanced Questions, 21
Discussion in the Boardroom, 24
Running Your Own MNC, 24
Blades, Inc. Case: Decision to Expand Internationally, 24
Small Business Dilemma: Developing a Multinational Sporting Goods Corporation, 25
v
vi
Contents
Internet/Excel Exercises, 26
Online Articles with Real World Examples, 26
Term Paper on the International Credit Crisis, 27
2: INTERNATIONAL FLOW OF FUNDS
29
Balance of Payments, 29
Current Account, 29
Capital and Financial Accounts, 31
Growth in International Trade, 32
Events That Increased Trade Volume, 32
Impact of Outsourcing on Trade, 34
Trade Volume among Countries, 35
Trend in U.S. Balance of Trade, 37
Factors Affecting International Trade Flows, 38
Cost of Labor, 39
Impact of Inflation, 39
Impact of National Income, 39
Impact of Government Policies, 39
Impact of Exchange Rates, 42
International Capital Flows, 46
Factors Affecting Direct Foreign Investment, 46
Factors Affecting International Portfolio Investment, 47
Impact of International Capital Flows, 47
Agencies that Facilitate International Flows, 49
International Monetary Fund, 49
World Bank, 50
World Trade Organization, 50
International Financial Corporation, 51
International Development Association, 51
Bank for International Settlements, 51
OECD, 51
Regional Development Agencies, 51
Summary, 52
Point Counter-Point: Should Trade Restrictions Be Used to Influence Human Rights
Issues?, 52
Self-Test, 52
Questions and Applications, 53
Advanced Questions, 53
Discussion in the Boardroom, 54
Running Your Own MNC, 54
Blades, Inc. Case: Exposure to International Flow of Funds, 54
Small Business Dilemma: Identifying Factors That Will Affect the Foreign Demand at the
Sports Exports Company, 55
Internet/Excel Exercises, 55
Online Articles with Real World Examples, 56
3: INTERNATIONAL FINANCIAL MARKETS
Foreign Exchange Market, 57
History of Foreign Exchange, 57
57
Contents
vii
Foreign Exchange Transactions, 58
Foreign Exchange Quotations, 60
Interpreting Foreign Exchange Quotations, 63
International Money Market, 68
Origins and Development, 68
Money Market Interest Rates among Currencies, 69
International Credit Market, 71
Regulations in the Credit Market, 71
Syndicated Loans in the Credit Market, 73
Impact of the Credit Crisis on the Credit Market, 73
International Bond Market, 74
Eurobond Market, 75
Development of Other Bond Markets, 76
Risk of International Bonds, 76
Impact of the Greek Crisis on Bonds, 77
International Stock Markets, 78
Issuance of Stock in Foreign Markets, 78
Issuance of Foreign Stock in the United States, 79
Non-U.S. Firms Listing on U.S. Exchanges, 80
Investing in Foreign Stock Markets, 81
How Financial Markets Serve MNCs, 84
Summary, 85
Point Counter-Point: Should Firms That Go Public Engage in International
Offerings?, 85
Self-Test, 85
Questions and Applications, 85
Advanced Questions, 86
Discussion in the Boardroom, 87
Running Your Own MNC, 87
Blades, Inc. Case: Decisions to Use International Financial Markets, 88
Small Business Dilemma: Use of the Foreign Exchange Markets by the Sports Exports
Company, 88
Internet/Excel Exercises, 89
Online Articles with Real World Examples, 89
Appendix 3: Investing in International Financial Markets, 90
4: EXCHANGE RATE DETERMINATION
Measuring Exchange Rate Movements, 99
Exchange Rate Equilibrium, 100
Demand for a Currency, 101
Supply of a Currency for Sale, 101
Equilibrium, 102
Factors That Influence Exchange Rates, 103
Relative Inflation Rates, 104
Relative Interest Rates, 105
Relative Income Levels, 106
Government Controls, 107
Expectations, 107
Interaction of Factors, 108
Influence of Factors across Multiple Currency Markets, 109
99
viii
Contents
Movements in Cross Exchange Rates, 110
Explaining Movements in Cross Exchange Rates, 111
Anticipation of Exchange Rate Movements, 112
Institutional Speculation Based on Expected Appreciation, 112
Institutional Speculation Based on Expected Depreciation, 112
Speculation by Individuals, 113
The “Carry Trade”, 114
Summary, 115
Point Counter-Point: How Can Persistently Weak Currencies Be Stabilized?, 116
Self-Test, 116
Questions and Applications, 116
Advanced Questions, 117
Discussion in the Boardroom, 120
Running Your Own MNC, 120
Blades, Inc. Case: Assessment of Future Exchange Rate Movements, 120
Small Business Dilemma: Assessment by the Sports Exports Company of Factors That Affect
the British Pound’s Value, 121
Internet/Excel Exercises, 122
Online Articles with Real World Examples, 122
5: CURRENCY DERIVATIVES
Forward Market, 123
How MNCs Use Forward Contracts, 123
Non-Deliverable Forward Contracts, 126
Currency Futures Market, 127
Contract Specifications, 128
Trading Currency Futures, 129
Trading Platforms for Currency Futures, 129
Comparison to Forward Contracts, 129
Credit Risk of Currency Futures Contracts, 130
How Firms Use Currency Futures, 131
Closing Out a Futures Position, 131
Speculation with Currency Futures, 132
Currency Options Market, 133
Option Exchanges, 133
Over-the-Counter Market, 134
Currency Call Options, 134
Factors Affecting Currency Call Option Premiums, 135
How Firms Use Currency Call Options, 135
Speculating with Currency Call Options, 136
Currency Put Options, 139
Factors Affecting Currency Put Option Premiums, 139
Hedging with Currency Put Options, 139
Speculating with Currency Put Options, 140
Contingency Graph for a Purchaser of a Call Option, 142
Contingency Graph for a Seller of a Call Option, 143
Contingency Graph for a Buyer of a Put Option, 143
Contingency Graph for a Seller of a Put Option, 143
123
Contents
ix
Conditional Currency Options, 143
European Currency Options, 145
Summary, 145
Point Counter-Point: Should Speculators Use Currency Futures or Options?, 146
Self-Test, 146
Questions and Applications, 147
Advanced Questions, 149
Discussion in the Boardroom, 153
Running Your Own MNC, 153
Blades, Inc. Case: Use of Currency Derivative Instruments, 153
Small Business Dilemma: Use of Currency Futures and Options by the Sports Exports
Company, 154
Internet/Excel Exercises, 155
Online Articles with Real World Examples, 155
Appendix 5A: Currency Option Pricing, 156
Appendix 5B: Currency Option Combinations, 160
Part 1 Integrative Problem: The International Financial Environment, 173
PART 2: Exchange Rate Behavior
6: GOVERNMENT INFLUENCE ON EXCHANGE RATES
Exchange Rate Systems, 177
Fixed Exchange Rate System, 177
Freely Floating Exchange Rate System, 179
Managed Float Exchange Rate System, 180
Pegged Exchange Rate System, 181
Dollarization, 186
A Single European Currency, 186
Monetary Policy in the Eurozone, 187
Impact on Firms in the Eurozone, 187
Impact on Financial Flows in the Eurozone, 187
Exposure of Countries within the Eurozone, 188
Government Intervention, 189
Reasons for Government Intervention, 189
Direct Intervention, 189
Indirect Intervention, 192
Intervention as a Policy Tool, 193
Influence of a Weak Home Currency, 193
Influence of a Strong Home Currency, 194
Summary, 195
Point Counter-Point: Should China Be Forced to Alter the Value of Its Currency?, 196
Self-Test, 196
Questions and Applications, 196
Advanced Questions, 197
Discussion in the Boardroom, 199
Running Your Own MNC, 199
175
177
x
Contents
Blades, Inc. Case: Assessment of Government Influence on Exchange Rates, 199
Small Business Dilemma: Assessment of Central Bank Intervention by the Sports Exports
Company, 200
Internet/Excel Exercises, 201
Online Articles with Real World Examples, 201
Appendix 6: Government Intervention during the Asian Crisis, 202
7: INTERNATIONAL ARBITRAGE AND INTEREST RATE PARITY
211
International Arbitrage, 211
Locational Arbitrage, 211
Triangular Arbitrage, 213
Covered Interest Arbitrage, 216
Comparison of Arbitrage Effects, 220
Interest Rate Parity (IRP), 220
Derivation of Interest Rate Parity, 221
Determining the Forward Premium, 222
Graphic Analysis of Interest Rate Parity, 224
How to Test Whether Interest Rate Parity Exists, 226
Interpretation of Interest Rate Parity, 226
Does Interest Rate Parity Hold?, 226
Considerations When Assessing Interest Rate Parity, 227
Variation in Forward Premiums, 228
Forward Premiums across Maturities, 228
Changes in Forward Premiums over Time, 229
Summary, 231
Point Counter-Point: Does Arbitrage Destabilize Foreign Exchange Markets?, 231
Self-Test, 232
Questions and Applications, 232
Advanced Questions, 234
Discussion in the Boardroom, 238
Running Your Own MNC, 238
Blades, Inc. Case: Assessment of Potential Arbitrage Opportunities, 238
Small Business Dilemma: Assessment of Prevailing Spot and Forward Rates by the Sports
Exports Company, 239
Internet/Excel Exercise, 239
Online Articles with Real World Examples, 240
8: RELATIONSHIPS AMONG INFLATION, INTEREST RATES, AND EXCHANGE
RATES
241
Purchasing Power Parity (PPP), 241
Interpretations of Purchasing Power Parity, 241
Rationale behind Relative PPP Theory, 242
Derivation of Purchasing Power Parity, 242
Using PPP to Estimate Exchange Rate Effects, 243
Graphic Analysis of Purchasing Power Parity, 244
Testing the Purchasing Power Parity Theory, 246
Why Purchasing Power Parity Does Not Occur, 249
Contents
xi
International Fisher Effect (IFE), 250
Fisher Effect, 250
Using the IFE to Predict Exchange Rate Movements, 251
Implications of the International Fisher Effect, 252
Derivation of the International Fisher Effect, 253
Graphic Analysis of the International Fisher Effect, 255
Tests of the International Fisher Effect, 257
Limitations of the IFE, 258
IFE Theory versus Reality, 259
Comparison of the IRP, PPP, and IFE, 260
Summary, 261
Point Counter-Point: Does PPP Eliminate Concerns about Long-Term Exchange Rate
Risk?, 261
Self-Test, 262
Questions and Applications, 262
Advanced Questions, 264
Discussion in the Boardroom, 268
Running Your Own MNC, 268
Blades, Inc. Case: Assessment of Purchasing Power Parity, 268
Small Business Dilemma: Assessment of the IFE by the Sports Exports Company, 269
Internet/Excel Exercises, 269
Online Articles with Real World Examples, 270
Part 2 Integrative Problem: Exchange Rate behavior, 271
Midterm Self-Exam, 272
PART 3: Exchange Rate Risk Management
9: FORECASTING EXCHANGE RATES
Why Firms Forecast Exchange Rates, 283
Forecasting Techniques, 284
Technical Forecasting, 284
Fundamental Forecasting, 286
Market-Based Forecasting, 290
Mixed Forecasting, 292
Guidelines for Implementing a Forecast, 293
Forecast Error, 293
Measurement of Forecast Error, 293
Forecast Errors among Time Horizons, 294
Forecast Errors over Time Periods, 294
Forecast Errors among Currencies, 295
Forecast Bias, 296
Graphic Evaluation of Forecast Bias, 297
Comparison of Forecasting Methods, 298
Forecasting under Market Efficiency, 299
Using Interval Forecasts, 300
Methods of Forecasting Exchange Rate Volatility, 300
Summary, 301
281
283
xii
Contents
Point Counter-Point: Which Exchange Rate Forecast Technique Should MNCs Use?, 302
Self-Test, 302
Questions and Applications, 303
Advanced Questions, 304
Discussion in the Boardroom, 307
Running Your Own MNC, 307
Blades, Inc. Case: Forecasting Exchange Rates, 307
Small Business Dilemma: Exchange Rate Forecasting by the Sports Exports Company, 308
Internet/Excel Exercises, 309
Online Articles with Real World Examples, 309
10: MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS
311
Relevance of Exchange Rate Risk, 311
The Investor Hedge Argument, 312
Currency Diversification Argument, 312
Stakeholder Diversification Argument, 312
Response from MNCs, 313
Transaction Exposure, 313
Estimating “Net” Cash Flows in Each Currency, 313
Exposure of an MNC’s Portfolio, 315
Transaction Exposure Based on Value at Risk, 318
Economic Exposure, 322
Exposure to Local Currency Appreciation, 322
Exposure to Local Currency Depreciation, 324
Economic Exposure of Domestic Firms, 324
Measuring Economic Exposure, 324
Translation Exposure, 327
Determinants of Translation Exposure, 327
Exposure of an MNC’s Stock Price to Translation Effects, 329
Summary, 329
Point Counter-Point: Should Investors Care about an MNC’s Translation Exposure?, 330
Self-Test, 330
Questions and Applications, 331
Advanced Questions, 332
Discussion in the Boardroom, 337
Running Your Own MNC, 337
Blades, Inc. Case: Assessment of Exchange Rate Exposure, 338
Small Business Dilemma: Assessment of Exchange Rate Exposure by the Sports Exports
Company, 339
Internet/Excel Exercises, 339
Online Articles with Real World Examples, 340
11: MANAGING TRANSACTION EXPOSURE
Policies for Hedging Transaction Exposure, 341
Hedging Most of the Exposure, 341
Selective Hedging, 341
341
Contents
xiii
Hedging Exposure to Payables, 342
Forward or Futures Hedge on Payables, 342
Money Market Hedge on Payables, 343
Call Option Hedge on Payables, 343
Comparison of Techniques to Hedge Payables, 346
Evaluating the Hedge Decision, 349
Hedging Exposure to Receivables, 349
Forward or Futures Hedge on Receivables, 349
Money Market Hedge on Receivables, 350
Put Option Hedge on Receivables, 350
Comparison of Techniques for Hedging Receivables, 353
Evaluating the Hedge Decision, 356
Summary of Hedging Techniques, 356
Limitations of Hedging, 357
Limitation of Hedging an Uncertain Payment, 357
Limitation of Repeated Short-Term Hedging, 357
Alternative Hedging Techniques, 359
Leading and Lagging, 360
Cross-Hedging, 360
Currency Diversification, 360
Summary, 361
Point Counter-Point: Should an MNC Risk Overhedging?, 361
Self-Test, 362
Questions and Applications, 362
Advanced Questions, 365
Discussion in the Boardroom, 370
Running Your Own MNC, 370
Blades, Inc. Case: Management of Transaction Exposure, 371
Small Business Dilemma: Hedging Decisions by the Sports Exports Company, 372
Internet/Excel Exercises, 372
Online Articles with Real World Examples, 373
Appendix 11: Nontraditional Hedging Techniques, 374
12: MANAGING ECONOMIC EXPOSURE AND TRANSLATION EXPOSURE
Managing Economic Exposure, 379
Assessing Economic Exposure, 380
Restructuring to Reduce Economic Exposure, 381
Issues Involved in the Restructuring Decision, 383
A Case on Hedging Economic Exposure, 384
Savor Co.’s Dilemma, 385
Assessment of Economic Exposure, 385
Assessment of Each Unit’s Exposure, 386
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