Applied International Finance: Managing Foreign Exchange Risk and International Capital Budgeting

272 Pages·2013·7.902 MB·English

by  Thomas J. O’Brien

THE BUSINESS Applied International Finance O The Finance and Financial
EXPERT PRESS Managing Foreign Exchange Risk and ’BR Management Collection
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DIGITAL LIBRARIES E
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International Capital Budgeting John A. Doukas, Editor
EBOOKS FOR
Thomas J. O’Brien
BUSINESS STUDENTS
Curriculum-oriented, born- Many books on the market today approach the subject of Applied
digital books for advanced international corporate fi nance like an encyclopedia—lots
business students, written of terms and defi nitions, but little else. This book focuses
by academic thought
on the two main issues of interest to managers who deal International
leaders who translate real-
with overseas operations: First, it details how uncertain
world business experience
foreign exchange (FX) rate changes affect a fi rm’s ongoing
into course readings and
reference materials for cash fl ows and equity value, and what can be done about Finance
students expecting to tackle this risk. Second, the author discusses the estimation of
management and leadership the cost of capital for international operations and the
challenges during their evaluation of overseas investment proposals.
professional careers. Managing Foreign
The book is divided into two parts based on the two
POLICIES BUILT main issues. In Part I, the case company has overseas op- A
BY LIBRARIANS erations and is faced with ongoing FX exposure in cor- PP Exchange Risk
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(cid:127) Unlimited simultaneous porate revenues. The decision maker estimates the FX I
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usage exposure and considers fi nancial hedging using foreign D
(cid:127) Unrestricted downloading I
currency debt and currency swaps. In Part II, the case N and International
and printing T
company evaluates a proposal to expand production for E
(cid:127) Perpetual access for a R
one-time fee a foreign market, with location alternatives being the N
A Capital Budgeting
(cid:127) No platform or home country, the foreign market country, or a “cheap- T
maintenance fees labor” emerging market country. (This book is the per- IO
(cid:127) Free MARC records N
fect companion to an introductory foundation in FX rates A
(cid:127) No license to execute L
and FX valuation, such as the author’s book, Introduction F
The Digital Libraries are a to Foreign Exchange Rates, BEP 2013.) IN
comprehensive, cost-eff ective A
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way to deliver practical Thomas J. O’Brien has been at the University of Connect-
C
treatments of important icut since 1986, mainly teaching an applied evening MBA E Thomas J. O’Brien
business issues to every course in International Corporate Finance. Dr. O’Brien’s
student and faculty member. PhD in Finance is from the University of Florida, 1980;
his MBA is from the University of Pennsylvania, 1972; his
B.A. is from Davidson College, 1969. Dr. O’Brien has pub-
lished numerous articles in fi nance journals on basic and
For further information, a
applied topics.
free trial, or to order, contact: 
[email protected]
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ISBN: 978-1-60649-734-0
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Applied International
Finance

Applied International
Finance
Managing Foreign Exchange Risk and
International Capital Budgeting
Thomas J. O’Brien
Applied International Finance: ManagingForeign ExchangeRisk and
International Capital Budgeting
Copyright (cid:1) Business Expert Press,LLC, 2014.
All rights reserved. Nopart ofthis publication may be reproduced,
storedin aretrieval system, ortransmitted in anyformorby any
means—electronic, mechanical, photocopy,recording, orany other
exceptfor brief quotations,nottoexceed 400words,withoutthe
priorpermission ofthepublisher.
Firstpublishedin 2014 by
Business Expert Press,LLC
222 East 46th Street, New York,NY 10017
www.businessexpertpress.com
ISBN-13: 978-1-60649-734-0(paperback)
ISBN-13: 978-1-60649-735-7(e-book)
Business Expert PressFinanceand Financial ManagementCollection
Coverand interiordesign by Exeter Premedia Services Private Ltd.,
Chennai, India
Firstedition:2014
10 9 8 76 5 4 32 1
Printedin theUnited States ofAmerica.
I thank Shmuel Baruch, Reid Click, Martin Glaum,
John Griffin, Alain Krapl, Steve Magee, Chris Malone, and
Dev Mishra for their helpful comments and discussions.

Abstract
Thistextis designed for usein a course in applied international corporate
finance for managers and executives. Instead of the “encyclopedic”
approach, the text focuses on the two main issues of interest to managers
who deal with overseas operations. The first main issue is how uncertain
foreign exchange (FX) rate changes affect a firm’s ongoing cash flows and
equity value, and what can be done about this risk. The second main
issue is the estimation of the cost of capital for international operations
and the evaluation of overseas investment proposals. Numerous examples
ofreal-worldcompanies areused.
The text is divided into two parts based on the two main issues.
Each part includes a case that unifies the ideas. In Part I, the case com-
pany has overseas operations and is faced with ongoing FX exposure in
corporate revenues. The decisionmaker estimates the FX exposure and
considers financial hedging using foreign currency debt and currency
swaps. The accounting implications are also considered. In Part II, the
case company evaluates a proposal to expand production for a foreign
market, with location alternatives being the home country, the foreign
market country, or a “cheap-labor” emerging market country. The text
presumes an introductory foundation in FX rates and FX valuation, as
in Thomas J. O’Brien, Introduction to Foreign Exchange Rates, BEP
Press, 2013.
Keywords
FX exposure, operational hedging, FX translation exposure, foreign cur-
rency debt, hedge accounting, currency swaps, cost of capital, hurdle
rate, political risk, international capital budgeting