international finance answer each question. The midterm exam is worth 15% of your final grade and covers the material from Chapters 9 14 & 16. In -

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1) Lexington Co. is a U.S.based MNC with subsidiaries in most major countries. Each subsidiary is responsible for forecasting the future exchange rate of its local currency relative to the U.S. dollar. Comment on this policy. How might Lexington Co. ensure consistent forecasts among the different subsidiaries?
2) In August 2001, Woodsen Inc. of Pittsburgh, PA considered the development of a large subsidiary in Greece. In response to the September 11, 2001 terrorist attack on the U.S., its expected cash flows and earnings from this acquisition were reduced only slightly. Yet, the firm decided to retract its offer because of an increase in its required rate of return on the project, which caused the NPV to be negative. Explain why the required rate of return on its project may have increased after the attack.
3) Packer, Inc., a U.S. producer of computer disks, plans to establish a subsidiary in Mexico in order to penetrate the Mexican market. Packers executives believe that the Mexican pesos value is relatively strong and will weaken against the dollar over time. If their expectations about the peso value are correct, how will this affect the feasibility of the project? Explain.
4) UVA Co. is a U.S.based MNC that obtains 40 percent of its foreign supplies from Thailand. It also borrows Thailands currency (the baht) from Thai banks and converts the baht to dollars to support U.S. operations. It currently receives about 10 percent of its revenue from Thai customers. Its sales to Thai customers are denominated in baht. Explain how UVA Co. can reduce its economic exposure to exchange rate fluctuations.
5) If the potential return is high enough, any degree of country risk can be tolerated. Do you agree with this statement? Why or why not? Do you think that a proper country risk analysis can replace a capital budgeting analysis of a project considered for a foreign country? Explain.

Extra Credit: Can only be attempted is all 5 exam questions are answered. 2 pts. Possible.
If the Trump Administration does impose even more restrictions on Chinese imports as they claim they will, would the amount of DFI by China change at all and if so how?. Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

Direct Exchange Rates
over Time

Continued on Inside Back Cover
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

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International Financial
Management

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International Financial
tnemeganaM

13th Edition

Jeff Madura
Florida Atlantic University

International Financial Management,
13th Edition
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Printed in Canada
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Dedicated to my mother Irene

Brief Contents

PART 1: The International Financial Environment 1
1 Multinational Financial Management: An Overview 3
2 International Flow of Funds 33
3 International Financial Markets 63
4 Exchange Rate Determination 103
5 Currency Derivatives 131

PART 2: Exchange Rate Behavior 185
6 Government Influence on Exchange Rates 187
7 International Arbitrage and Interest Rate Parity 227
8 Relationships among Inflation, Interest Rates, and Exchange Rates 257

PART 3: Exchange Rate Risk Management 295
9 Forecasting Exchange Rates 297
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 415
13 Direct Foreign Investment 417
14 Multinational Capital Budgeting 437
15 International Corporate Governance and Control 477
16 Country Risk Analysis 503
17 Multinational Capital Structure and Cost of Capital 527
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 697
Index 705

Contents

Preface, xix

About the Author, xxvi

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, 11
1-3d Joint Ventures, 11
1-3e Acquisitions of Existing Operations, 11
1-3f Establishment of New Foreign Subsidiaries, 12
1-3g Summary of Methods, 12

1-4 Valuation Model for an MNC, 13
1-4a Domestic Model, 14
1-4b Multinational Model, 14
1-4c Uncertainty Surrounding an MNCs Cash Flows, 17
1-4d Summary of International Effects, 20
1-4e How Uncertainty Affects the MNCs Cost of Capital, 21

1-5 Organization of the Text, 21

2: INTERNATIONAL FLOW OF FUNDS 33
2-1 Balance of Payments, 33

2-1a Current Account, 33
2-1b Financial Account, 35
2-1c Capital Account, 36
2-1d Relationship between the Accounts, 37

2-2 Growth in International Trade, 37
2-2a Events That Increased Trade Volume, 37
2-2b Impact of Outsourcing on Trade, 39
2-2c Trade Volume among Countries, 40
2-2d Trend in U.S. Balance of Trade, 42

2-3 Factors Affecting International Trade Flows, 43
2-3a Cost of Labor, 43

2-3b Inflation, 44
2-3c National Income, 44
2-3d Credit Conditions, 44
2-3e Government Policies, 44
2-3f Exchange Rates, 48

2-4 International Capital Flows, 52
2-4a Factors Affecting Direct Foreign Investment, 52
2-4b Factors Affecting International Portfolio Investment, 53
2-4c Impact of International Capital Flows, 53

2-5 Agencies That Facilitate International Flows, 55
2-5a International Monetary Fund, 55
2-5b World Bank, 56
2-5c World Trade Organization, 57
2-5d International Finance Corporation, 57
2-5e International Development Association, 57
2-5f Bank for International Settlements, 57
2-5g OECD, 58
2-5h Regional Development Agencies, 58

3: INTERNATIONAL FINANCIAL MARKETS 63
3-1 Foreign Exchange Market, 63

3-1a History of Foreign Exchange, 63
3-1b Foreign Exchange Transactions, 64
3-1c Foreign Exchange Quotations, 70
3-1d Derivative Contracts in the Foreign Exchange Market, 74

3-2 International Money Market, 75
3-2a European and Asian Money Markets, 76
3-2b Money Market Interest Rates among Currencies, 76
3-2c Risk of International Money Market Securities, 77

3-3 International Credit Market, 78
3-3a Syndicated Loans in the Credit Market, 78
3-3b Bank Regulations in the Credit Market, 79
3-3c Impact of the Credit Crisis, 79

3-4 International Bond Market, 80
3-4a Eurobond Market, 80
3-4b Development of Other Bond Markets, 81
3-4c Risk of International Bonds, 81
3-4d Impact of the Greece Crisis, 82

3-5 International Stock Markets, 83
3-5a Issuance of Stock in Foreign Markets, 83
3-5b Issuance of Foreign Stock in the United States, 84
3-5c Comparing the Size among Stock Markets, 85
3-5d How Governance Varies among Stock Markets, 86
3-5e Integration of International Stock Markets and Credit Markets, 87

3-6 How Financial Markets Serve MNCs, 88

Appendix 3: Investing in International Financial Markets, 95

4: EXCHANGE RATE DETERMINATION 103
4-1 Measuring Exchange Rate Movements, 103
4-2 Exchange Rate Equilibrium, 104

4-2a Demand for a Currency, 105
4-2b Supply of a Currency for Sale, 106

x Contents

4-2c Equilibrium Exchange Rate, 106
4-2d Change in the Equilibrium Exchange Rate, 107

4-3 Factors That Influence Exchange Rates, 108
4-3a Relative Inflation Rates, 109
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, 114
4-3g Influence of Factors across Multiple Currency Markets, 115
4-3h Impact of Liquidity on Exchange Rate Adjustments, 116

4-4 Movements in Cross Exchange Rates, 116
4-5 Capitalizing on Expected Exchange Rate Movements, 117

4-5a Institutional Speculation Based on Expected Appreciation, 118
4-5b Institutional Speculation Based on Expected Depreciation, 119
4-5c Speculation by Individuals, 120
4-5d The Carry Trade, 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, 141

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

Contents xi

PART 2: Exchange Rate Behavior 185

6: GOVERNMENT INFLUENCE ON EXCHANGE RATES 187
6-1 Exchange Rate Systems, 187

6-1a Fixed Exchange Rate System, 187
6-1b Freely Floating Exchange Rate System, 189
6-1c Managed Float Exchange Rate System, 190
6-1d Pegged Exchange Rate System, 191
6-1e Dollarization, 197
6-1f Black Markets for Currencies, 197

6-2 A Single European Currency, 198
6-2a Monetary Policy in the Eurozone, 198
6-2b Impact on Firms in the Eurozone, 199
6-2c Impact on Financial Flows in the Eurozone, 199
6-2d Impact of Eurozone Country Crisis on Other Eurozone Countries, 199
6-2e Impact of a Country Abandoning the Euro, 202

6-3 Direct Intervention, 203
6-3a Reasons for Direct Intervention, 203
6-3b The Direct Intervention Process, 204
6-3c Direct Intervention as a Policy Tool, 207
6-3d Speculating on Direct Intervention, 208

6-4 Indirect Intervention, 209
6-4a Government Control of Interest Rates, 209
6-4b Government Use of Foreign Exchange Controls, 210

Appendix 6: Government Intervention during the Asian Crisis, 218

7: INTERNATIONAL ARBITRAGE AND INTEREST RATE PARITY 227
7-1 Locational Arbitrage, 227

7-1a Gains from Locational Arbitrage, 228
7-1b Realignment due to Locational Arbitrage, 228

7-2 Triangular Arbitrage, 229
7-2a Gains from Triangular Arbitrage, 230
7-2b Realignment due to Triangular Arbitrage, 232

7-3 Covered Interest Arbitrage, 232
7-3a Covered Interest Arbitrage Process, 232
7-3b Realignment due to Covered Interest Arbitrage, 234
7-3c Arbitrage Example When Accounting for Spreads, 235
7-3d Covered Interest Arbitrage by Non-U.S. Investors, 236
7-3e Comparing Different Types of Arbitrage, 236

7-4 Interest Rate Parity (IRP), 236
7-4a Derivation of Interest Rate Parity, 237
7-4b Determining the Forward Premium, 238
7-4c Graphic Analysis of Interest Rate Parity, 240
7-4d How to Test Whether Interest Rate Parity Holds, 242
7-4e Does Interest Rate Parity Hold?, 242
7-4f Considerations When Assessing Interest Rate Parity, 243

7-5 Variation in Forward Premiums, 244
7-5a Forward Premiums across Maturities, 244
7-5b Changes in Forward Premiums over Time, 245

xii Contents

8: RELATIONSHIPS AMONG INFLATION, INTEREST RATES,
AND EXCHANGE RATES 257

8-1 Purchasing Power Parity (PPP), 257
8-1a Interpretations of Purchasing Power Parity, 257
8-1b Rationale behind Relative PPP Theory, 258
8-1c Derivation of Purchasing Power Parity, 258
8-1d Using PPP to Estimate Exchange Rate Effects, 259
8-1e Graphic Analysis of Purchasing Power Parity, 260
8-1f Testing the Purchasing Power Parity Theory, 263
8-1g Does Purchasing Power Parity Exist?, 265

8-2 International Fisher Effect (IFE), 266
8-2a Deriving a Countrys Expected Inflation Rate, 266
8-2b Estimating the Expected Exchange Rate Movement, 267
8-2c Implications of the International Fisher Effect, 267
8-2d Derivation of the International Fisher Effect, 270
8-2e Graphic Analysis of the International Fisher Effect, 272
8-2f Testing the International Fisher Effect, 273
8-2g Limitations of the IFE Theory, 274
8-2h IFE Theory versus Reality, 275
8-2i Comparison of IRP, PPP, and IFE Theories, 275

Part 2 Integrative Problem: Exchange Rate Behavior, 286
Midterm Self-Exam, 287

PART 3: Exchange Rate Risk Management 295

9: FORECASTING EXCHANGE RATES 297
9-1 Why Firms Forecast Exchange Rates, 297
9-2 Forecasting Techniques, 299

9-2a Technical Forecasting, 299
9-2b Fundamental Forecasting, 299
9-2c Market-Based Forecasting, 303
9-2d Mixed Forecasting, 306

9-3 Assessment of Forecast Performance, 307
9-3a Measurement of Forecast Error, 307
9-3b Forecast Errors among Time Horizons, 308
9-3c Forecast Errors over Time Periods, 308
9-3d Forecast Errors among Currencies, 308
9-3e Comparing Forecast Errors among Forecast Techniques, 309
9-3f Graphic Evaluation of Forecast Bias, 309
9-3g Statistical Test of Forecast Bias, 311
9-3h Shifts in Forecast Bias over Time, 312

9-4 Accounting for Uncertainty Surrounding Forecasts, 312
9-4a Sensitivity Analysis Applied to Fundamental Forecasting, 313
9-4b Interval Forecasts, 313

10: MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS 325
10-1 Relevance of Exchange Rate Risk, 325
10-2 Transaction Exposure, 326

10-2a Estimating Net Cash Flows in Each Currency, 328
10-2b Transaction Exposure of an MNCs Portfolio, 329

Contents xiii

10-2c Transaction Exposure Based on Value at Risk, 332
10-3 Economic Exposure, 335

10-3a Exposure to Foreign Currency Depreciation, 336
10-3b Exposure to Foreign Currency Appreciation, 337
10-3c Measuring Economic Exposure, 337

10-4 Translation Exposure, 340
10-4a Determinants of Translation Exposure, 340
10-4b Exposure of an MNCs Stock Price to Translation Effects, 342

11: MANAGING TRANSACTION EXPOSURE 355
11-1 Policies for Hedging Transaction Exposure, 355

11-1a Hedging Most of the Exposure, 355
11-1b Selective Hedging, 355

11-2 Hedging Exposure to Payables, 356
11-2a Forward or Futures Hedge on Payables, 356
11-2b Money Market Hedge on Payables, 357
11-2c Call Option Hedge on Payables, 357
11-2d Comparison of Techniques for Hedging Payables, 360
11-2e Evaluating Past Decisions on Hedging Payables, 363

11-3 Hedging Exposure to Receivables, 363
11-3a Forward or Futures Hedge on Receivables, 363
11-3b Money Market Hedge on Receivables, 364
11-3c Put Option Hedge on Receivables, 364
11-3d Comparison of Techniques for Hedging Receivables, 367
11-3e Evaluating Past Decisions on Hedging Receivables, 370
11-3f Summary of Hedging Techniques, 370

11-4 Limitations of Hedging, 371
11-4a Limitation of Hedging an Uncertain Payment, 371
11-4b Limitation of Repeated Short-Term Hedging, 371

11-5 Alternative Methods to Reduce Exchange Rate Risk, 373
11-5a Leading and Lagging, 374
11-5b Cross-Hedging, 374
11-5c Currency Diversification, 374

Appendix 11: Nontraditional Hedging Techniques, 388

12: MANAGING ECONOMIC EXPOSURE AND TRANSLATION
EXPOSURE 393

12-1 Managing Economic Exposure, 393
12-1a Assessing Economic Exposure, 394
12-1b Restructuring to Reduce Economic Exposure, 395
12-1c Limitations of Restructuring Intended to Reduce Economic Exposure, 398

12-2 A Case Study on Hedging Economic Exposure, 398
12-2a Savor Co.s Assessment of Economic Exposure, 398
12-2b Possible Strategies for Hedging Economic Exposure, 400

12-3 Managing Exposure to Fixed Assets, 401
12-4 Managing Translation Exposure, 402

12-4a Hedging Translation Exposure with Forward Contracts, 403
12-4b Limitations of Hedging Translation Exposure, 403

Part 3 Integrative Problem: Exchange Risk Management, 412

xiv Contents

PART 4: Long-Term Asset and Liability Management 415

13: DIRECT FOREIGN INVESTMENT 417
13-1 Motives for Direct Foreign Investment, 417

13-1a Revenue-Related Motives, 417
13-1b Cost-Related Motives, 418
13-1c Comparing Benefits of DFI among Countries, 420

13-2 Benefits of International Diversification, 421
13-2a Diversification Analysis of International Projects, 422
13-2b Diversification among Countries, 424

13-3 Host Government Impact on DFI, 424
13-3a Incentives to Encourage DFI, 425
13-3b Barriers to DFI, 425

13-4 Assessing Potential DFI, 427
13-4a A Case Study of Assessing Potential DFI, 427
13-4b Evaluating DFI Opportunities That Pass the First Screen, 429

14: MULTINATIONAL CAPITAL BUDGETING 437
14-1 Subsidiary versus Parent Perspective, 437

14-1a Tax Differentials, 437
14-1b Restrictions on Remitted Earnings, 438
14-1c Exchange Rate Movements, 438
14-1d Summary of Factors That Distinguish the Parent Perspective, 438

14-2 Input for Multinational Capital Budgeting, 439
14-3 Multinational Capital Budgeting Example, 441

14-3a Background, 441
14-3b Analysis, 442

14-4 Other Factors to Consider, 443
14-4a Exchange Rate Fluctuations, 444
14-4b Inflation, 447
14-4c Financing Arrangement, 447
14-4d Blocked Funds, 450
14-4e Uncertain Salvage Value, 451
14-4f Impact of Project on Prevailing Cash Flows, 452
14-4g Host Government Incentives, 453
14-4h Real Options, 453

14-5 Adjusting Project Assessment for Risk, 454
14-5a Risk-Adjusted Discount Rate, 454
14-5b Sensitivity Analysis, 454
14-5c Simulation, 457

Appendix 14: Incorporating International Tax Law in Multinational
Capital Budgeting, 469

15: INTERNATIONAL CORPORATE GOVERNANCE AND CONTROL 477
15-1 International Corporate Governance, 477

15-1a Governance by Board Members, 477
15-1b Governance by Institutional Investors, 478
15-1c Governance by Shareholder Activists, 478

15-2 International Corporate Control, 479
15-2a Motives for International Acquisitions, 479
15-2b Trends in International Acquisitions, 479

Contents xv

15-2c Barriers to International Corporate Control, 480
15-2d Model for Valuing a Foreign Target, 481

15-3 Factors Affecting Target Valuation, 482
15-3a Target-Specific Factors, 482
15-3b Country-Specific Factors, 483

15-4 A Case Study of Valuing a Foreign Target, 484
15-4a International Screening Process, 484
15-4b Estimating the Targets Value, 485
15-4c Uncertainty Surrounding the Targets Valuation, 487
15-4d Changes in Market Valuation of Target over Time, 487

15-5 Disparity in Foreign Target Valuations, 488
15-5a Expected Cash Flows of the Foreign Target, 488
15-5b Exchange Rate Effects on Remitted Earnings, 489
15-5c Required Return of Acquirer, 489

15-6 Other Corporate Control Decisions, 490
15-6a International Partial Acquisitions, 490
15-6b International Acquisitions of Privatized Businesses, 490
15-6c International Divestitures, 491

15-7 Corporate Control Decisions as Real Options, 492
15-7a Call Option on Real Assets, 492
15-7b Put Option on Real Assets, 493

16: COUNTRY RISK ANALYSIS 503
16-1 Country Risk Characteristics, 503

16-1a Political Risk Characteristics, 503
16-1b Financial Risk Characteristics, 506

16-2 Measuring Country Risk, 507
16-2a Techniques for Assessing Country Risk, 508
16-2b Deriving a Country Risk Rating, 509
16-2c Comparing Risk Ratings among Countries, 511

16-3 Incorporating Risk in Capital Budgeting, 512
16-3a Adjustment of the Discount Rate, 512
16-3b Adjustment of the Estimated Cash Flows, 512
16-3c Analysis of Existing Projects, 515

16-4 Preventing Host Government Takeovers, 516
16-4a Use a Short-Term Horizon, 516
16-4b Rely on Unique Supplies or Technology, 516
16-4c Hire Local Labor, 516
16-4d Borrow Local Funds, 516
16-4e Purchase Insurance, 517
16-4f Use Project Finance, 517

17: MULTINATIONAL CAPITAL STRUCTURE AND COST OF CAPITAL 527
17-1 Components of Capital, 527

17-1a Retained Earnings, 527
17-1b Sources of Debt, 528
17-1c External Sources of Equity, 529

17-2 The MNCs Capital Structure Decision, 530
17-2a Influence of Corporate Characteristics, 531
17-2b Influence of Host Country Characteristics, 531
17-2c Response to Changing Country Characteristics, 532

xvi Contents

17-3 Subsidiary versus Parent Capital Structure Decisions, 533
17-3a Impact of Increased Subsidiary Debt Financing, 533
17-3b Impact of Reduced Subsidiary Debt Financing, 533
17-3c Limitations in Offsetting a Subsidiarys Leverage, 534

17-4 Multinational Cost of Capital, 534
17-4a MNCs Cost of Debt, 534
17-4b MNCs Cost of Equity, 534
17-4c Estimating an MNCs Cost of Capital, 535
17-4d Comparing Costs of Debt and Equity, 535
17-4e Cost of Capital for MNCs versus Domestic Firms, 536
17-4f Cost-of-Equity Comparison Using the CAPM, 537

17-5 Cost of Capital across Countries, 539
17-5a Country Differences in the Cost of Debt, 540
17-5b Country Differences in the Cost of Equity, 541

18: LONG-TERM DEBT FINANCING 551
18-1 Debt Denomination Decision of Foreign Subsidiaries, 551

18-1a Foreign Subsidiary Borrows Its Local Currency, 551
18-1b Foreign Subsidiary Borrows Dollars, 553

18-2 Debt Denomination Analysis: A Case Study, 553
18-2a Identifying Debt Denomination Alternatives, 553
18-2b Analyzing Debt Denomination Alternatives, 554

18-3 Loans Facilitate Financing, 555
18-3a Using Currency Swaps, 555
18-3b Using Parallel Loans, 556

18-4 Debt Maturity Decision, 559
18-4a Assessment of the Yield Curve, 559
18-4b Financing Costs of Loans with Different Maturities, 559

18-5 Fixed versus Floating Rate Debt Decision, 560
18-5a Financing Costs of Fixed versus Floating Rate Loans, 560
18-5b Hedging Interest Payments with Interest Rate Swaps, 561

Part 4 Integrative Problem: Long-Term Asset and Liability Management, 572

PART 5: Short-Term Asset and Liability Management 575

19: FINANCING INTERNATIONAL TRADE 577
19-1 Payment Methods for International Trade, 577

19-1a Prepayment, 577
19-1b Letters of Credit, 578
19-1c Drafts, 580
19-1d Consignment, 581
19-1e Open Account, 581
19-1f Impact of the Credit Crisis on Payment Methods, 581

19-2 Trade Finance Methods, 581
19-2a Accounts Receivable Financing, 582
19-2b Factoring, 582
19-2c Letters of Credit (L/Cs), 583
19-2d Bankers Acceptances, 583
19-2e Medium-Term Capital Goods Financing (Forfaiting), 586
19-2f Countertrade, 586

Contents xvii

19-3 Agencies That Facilitate International Trade, 587
19-3a Export-Import Bank of the United States, 587
19-3b Private Export Funding Corporation, 589
19-3c Overseas Private Investment Corporation, 589

20: SHORT-TERM FINANCING 595
20-1 Sources of Foreign Financing, 595

20-1a Internal Short-Term Financing, 595
20-1b External Short-Term Financing, 596
20-1c Access to Funding during a Credit Crisis, 596

20-2 Financing with a Foreign Currency, 596
20-2a Motive for Financing with a Foreign Currency, 597
20-2b Potential Cost Savings from Financing with a Foreign Currency, 597
20-2c Risk of Financing with a Foreign Currency, 598
20-2d Hedging the Foreign Currency Borrowed, 599
20-2e Reliance on the Forward Rate for Forecasting, 600
20-2f Use of Probability Distributions to Enhance the Financing Decision, 601

20-3 Financing with a Portfolio of Currencies, 602

21: INTERNATIONAL CASH MANAGEMENT 611
21-1 Multinational Working Capital Management, 611

21-1a Subsidiary Expenses, 611
21-1b Subsidiary Revenue, 612
21-1c Subsidiary Dividend Payments, 612
21-1d Subsidiary Liquidity Management, 612

21-2 Centralized Cash Management, 613
21-2a Accommodating Cash Shortages, 614

21-3 Optimizing Cash Flows, 614
21-3a Accelerating Cash Inflows, 614
21-3b Minimizing Currency Conversion Costs, 615
21-3c Managing Blocked Funds, 617
21-3d Managing Intersubsidiary Cash Transfers, 617
21-3e Complications in Optimizing Cash Flow, 617

21-4 Investing Excess Cash, 618
21-4a Benefits of Investing in a Foreign Currency, 618
21-4b Risk of Investing in a Foreign Currency, 619
21-4c Hedging the Investment in a Foreign Currency, 620
21-4d Break-Even Point from Investing in a Foreign Currency, 621
21-4e Using a Probability Distribution to Enhance the Investment Decision, 622
21-4f Investing in a Portfolio of Currencies, 623
21-4g Dynamic Hedging, 625

Part 5 Integrative Problem: Short-Term Asset and Liability Management, 631
Final Self-Exam, 633

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, 697

Index, 705

xviii Contents

Preface

Businesses evolve into multinational corporations (MNCs) so that they can capitalize on
international opportunities. Their financial managers must be able to assess the interna-
tional environment, recognize opportunities, implement strategies, assess exposure to
risk, and manage that risk. The MNCs most capable of responding to changes in the in-
ternational financial environment will be rewarded. The same can be said for the stu-
dents today who may become the future managers of MNCs.

Intended Market
International Financial Management, 13th Edition, presumes an understanding of basic
corporate finance. It is suitable for both undergraduate and masters level courses in in-
ternational financial management. For masters courses, the more challenging questions,
problems, and cases in each chapter are recommended, along with special projects.

Organization of the Text
International Financial Management, 13th Edition, is organized to provide a background
on the international environment and then to focus on the managerial aspects from a
corporate perspective. Managers of MNCs will need to understand the environment be-
fore they can manage within it.

The first two parts of the text establish the necessary m

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