International Finance PDF
Preview International Finance
991.qxd 7/15/2006 11:41 AM Page 1 Batch number:1 CHECKLIST (must be completed before press) Fourth (Please cross through any items that are not applicable) edition Front board: Spine: Back board: ❑ Title ❑ Title ❑ ISBN ❑ Subtitle ❑ Subtitle ❑ Barcode ❑ Author/edited by ❑ Author/edited by ❑ Series title ❑ Extra logo if required M I International Finance N ❑ Extra logo if required a T u E General: r i R ❑ Book size ce N ❑ Type fit on spine D A T . I L O CIRCULATED Date: e N v A i SEEN BY DESK EDITOR:REVISE NEEDED Initial: L Date: F I N A APPROVED FOR PRESS BY DESK EDITOR Initial: N Date: C E Maurice D. Levi ,IS!BN 9778-I0-4A15-4308B99-1 www.routledge.com ï an informabusiness PC4 Royal Demy B-format Spine back edge International Finance Fourth edition Intoday’sglobaleconomy,theinternationalbusinesscommunityrequiresathoroughknowledgeandunderstanding ofthecomplexitiesofinternationalfinance. Inthisfourthedition,MauriceD.Levisuccessfullyintegratesboththemicroandmacroaspectsofinternational finance.Theauthorexploresmanagerialissuesandfocusesonproblemsthatarisefromfinancialtradingrelations betweennations,whilecoveringkeytopicssuchas: organizationofforeignexchangemarkets, “ determinationofexchangerates, “ thefundamentalprinciplesofinternationalfinance, “ foreignexchangeriskandexposure, “ fixedandflexibleexchangerates. “ Thisimpressiveneweditionbuildsandimprovesuponthepopularstyleandstructureoftheoriginal.Withnewdata, improvedpedagogy,andcoverageofallofthemaindevelopmentsininternationalfinanceoverthelastfewyears, thisbookwillproveessentialreadingforeconomicsandbusinessstudents. MauriceD.Levihas30yearsofteachingexperienceintheareaofinternationalfinance. International Finance Fourth edition Maurice D. Levi Firstpublished2005 byRoutledge 2ParkSquare,MiltonPark,Abingdon,OxonOX144RN SimultaneouslypublishedintheUSAandCanada byRoutledge 270MadisonAvenue,NewYork,NY10016 RoutledgeisanimprintoftheTaylor&FrancisGroup #2005MauriceD.Levi TypesetinPerpetuaandBellGothicbyNewgenImagingSystems(P)Ltd,Chennai,India PrintedandboundinGreatBritainbyBell&BainLtd,Glasgow Allrightsreserved.Nopartofthisbookmaybereprintedorreproducedorutilisedinanyformorbyany electronic,mechanical,orothermeans,nowknownorhereafterinvented,includingphotocopyingandrecording, orinanyinformationstorageorretrievalsystem,withoutpermissioninwritingfromthepublishers. BritishLibraryCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary LibraryofCongressCataloginginPublicationData Acatalogrecordforthisbookhasbeenrequested ISBN0–415–30899–2(hbk) ISBN0–415–30900–X(pbk) To Kate ‘‘Asforforeignexchange,itisalmostasromanticasyounglove,andquite as resistant to formulae.’’ H.L. Mencken (As you shall see, it is not entirely resistant to formulae!) About the author SincereceivinghisPhD from theUniversityofChicago,MauriceD.Levihastaughtandwrittenresearch papersinawidevarietyofareasoffinanceandeconomics.Thisbroadrangeofresearchandteachinginter- estsformthefoundationforthisbookininternationalfinance,asubjectthathebelievestobebesttreated asanapplicationoffinancialand economicprinciples,rather than asaseparateandisolatedsubject area. Professor Levi has published research papers on financial market anomalies, the effectiveness of monetary and fiscal policy, the relationship between inflation and interest rates, the effect of taxes on internationalcapitalflows,andthelinkbetweeninflationaryexpectationsandunemployment,aswellasin thenumerousareasofinternationalfinancethatarereflectedinthisbook.Hehasalsowrittenintheareasof econometricmethods,macroeconomics,laboreconomics,environmentaleconomics,moneyandbanking, and regional economics.His papers have appeared in just aboutevery leading research journal in finance and economics including: American Economic Review; Econometrica; Journal of Political Economy; Journal of Finance;JournalofMonetaryEconomics;JournalofMoney,CreditandBanking;JournalofInternationalMoneyand Finance;JournalofInternationalEconomics;ManagementScience;EcologicalEconomics,andJournalofEconometrics. HeisalsotheauthorofEconomicsandtheModernWorld(Heath,LexingtonMA,1994),EconomicsDeciphered: A Layman’s Survival Guide (Basic Books, New York, 1981), and Thinking Economically (Basic Books, New York, 1985) and the coauthor, with M. Kupferman, of Slowth (Wiley, New York, 1980). SincejoiningtheSauderSchoolofBusinessoftheUniversityofBritishColumbia,ProfessorLevihasheld visiting positions at the Hebrew University of Jerusalem, the University of California, Berkeley, MIT, theNationalBureauofEconomicResearch,theUniversityofExeter,UniversityofNewSouthWales,and theLondonBusinessSchool.HehasreceivednumerousacademicprizesandawardsincludingKillamand Nomura Fellowships and the Bronfman Award. Contents Listofillustrations xiii Preface xviii 1 THEWORLDOFINTERNATIONALFINANCE 1 Uniquedimensionsofinternationalfinance 1 Thebenefitsofstudyinginternationalfinance 1 Thegrowingimportanceofinternationalfinance 2 Topicscoveredinthisbook 13 Summary 17 Reviewquestions 17 Assignmentproblems 18 Bibliography 18 Parallelmaterialforcasecourses 19 AppendixA 19 AppendixB 22 PARTI THEMARKETSFORFOREIGNEXCHANGE 27 2 ANINTRODUCTIONTOEXCHANGERATES 29 Theforeignbanknotemarket 29 Thespotforeignexchangemarket 32 Organizationoftheinterbankspotmarket 32 Directversusindirectexchangeandcrossexchangerates 43 Summary 50 Reviewquestions 51 Assignmentproblems 51 Bibliography 52 3 FORWARDEXCHANGE 53 Whatisforwardforeignexchange? 53 Forwardexchangepremiumsanddiscounts 54 Forwardratesversusexpectedfuturespotrates 56 Payoffprofilesonforwardexchange 56 Outrightforwardexchangeandswaps 58 & vii CONTENTS Theflexibilityofforwardexchange 60 Forwardquotations 61 Summary 65 Reviewquestions 66 Assignmentproblems 66 Bibliography 67 4 CURRENCYFUTURESANDOPTIONSMARKETS 68 Currencyfutures 68 Currencyoptions 75 Forwards,futures,andoptionscompared:asummary 85 Summary 86 Reviewquestions 87 Assignmentproblems 88 Bibliography 89 AppendixA 89 PARTII THEDETERMINATIONOFEXCHANGERATES 95 5 THEBALANCEOFPAYMENTS 97 Influencesoncurrencysupplyanddemand 97 Principlesofbalance-of-paymentsaccounting 98 Balance-of-paymentsentriesandthefactorsthatinfluencethem 99 Implicationsofthebalance-of-paymentsaccountingidentity 108 Thenetinternationalinvestmentposition 111 Objectivesofeconomicpolicy 113 Summary 114 Reviewquestions 116 Assignmentproblems 116 Bibliography 117 6 SUPPLY-AND-DEMANDVIEWOFEXCHANGERATES 119 Imports,exports,andexchangerates 120 Thefactorsaffectingexchangerates 122 Thestabilityofexchangerates 130 Short-runversuslong-runtradeelasticitiesandtheJcurve 133 Summary 135 Reviewquestions 136 Assignmentproblems 136 Bibliography 137 AppendixA 137 PARTIII THEFUNDAMENTALINTERNATIONALPARITYCONDITIONS 141 7 THEPURCHASING-POWER-PARITYPRINCIPLE 143 Thelawofoneprice 143 Absolute(orstatic)formofthePPPcondition 144 Therelative(ordynamic)formofPPP 145 & viii CONTENTS Efficientmarkets(orspeculative)formofPPP 147 TheempiricalevidenceonPPP 148 ReasonsfordeparturesfromPPP 151 StatisticalproblemsofevaluatingPPP 152 ThepracticalimportanceofPPP 154 Summary 155 Reviewquestions 156 Assignmentproblems 156 Bibliography 157 8 INTERESTPARITY 159 Theinvestmentandborrowingcriteria 160 Thecoveredinterest-paritycondition 166 CombiningPPPandinterestparity 169 Whycoveredinterestdifferencespersist 171 Summary 184 Reviewquestions 185 Assignmentproblems 186 Bibliography 187 PARTIV MANAGINGFOREIGNEXCHANGERISKANDEXPOSURE 189 9 FOREIGNEXCHANGEEXPOSUREANDRISK 191 Theimportanceofunderstandingriskandexposureandmeasuringthem 191 Thenatureofexchange-rateriskandexposure 192 Examplesofforeignexchangeexposure 193 Exposureasaregressionslope 198 Definitionofforeignexchangerisk 204 Exposure,risk,andtheparityrelationships 205 Summary 211 Reviewquestions 213 Assignmentproblems 213 Bibliography 214 10 ACCOUNTINGEXPOSUREVERSUSREALEXPOSURE 216 Accountingprinciples 216 Realchangesinexchangerates 220 Summary 226 Reviewquestions 227 Assignmentproblems 227 Bibliography 228 11 OPERATINGEXPOSURE 230 Operationsaffectedbyexchangerates 230 Theexporter 231 Theimporter 240 Summaryofeffectsofexchangeratesonexportersandimporters 244 Effectofcurrencyofinvoicingandforwardhedging 244 Measuringexposure:analternativeapproach 249 Summary 251 & ix
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