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INTERNATIONAL FINANCIAL MANAGEMENT For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. INTERNATIONAL FINANCIAL MANAGEMENT JEFF MADURA Florida Atlantic University ROLAND FOX Salford University For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. International Financial Management © 2011 Cengage Learning EMEA Second edition ALL RIGHTS RESERVED. No part of this work covered by the Jeﬀ Madura and Roland Fox copyright herein may be reproduced, transmitted, stored or used in any form or by any means graphic, electronic, or mechanical, Publishing Director: Linden Harris including but not limited to photocopying, recording, scanning, Publisher: Brendan George digitizing, taping, Web distribution, information networks, or Editorial Assistant: Helen Green information storage and retrieval systems, except as permitted Content Project Editor: Lucy Arthy under Section 107 or 108 of the 1976 United States Copyright Act, or applicable copyright law of another jurisdiction, without the Production Controller: Eyvett Davis prior written permission of the publisher. 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British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: 978-1-4080-3229-9 Cengage Learning EMEA Cheriton House, North Way, Andover, Hampshire SP10 5BE United Kingdom Cengage Learning products are represented in Canada by Nelson Education Ltd. For your lifelong learning solutions, visit www.cengage.co.uk Purchase your next print book, e-book or e-chapter at www.cengagebrain.com Printed by R R Donnelley, China 1 2 3 4 5 6 7 8 9 10 – 13 12 11 For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. JeffMadura: ToMyParents RolandFox: ToMarlene,Anna andJoe For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. ABOUT THE AUTHORS JeffMaduraispresentlytheSunTrustBankProfessorofFinanceatFloridaAtlanticUniversity.Hehaswrit- tenseveraltextbooks,includingFinancialMarketsandInstitutions.Hisresearchoninternationfinancehas beenpublishedinnumerousjournals,includingJournalofFinancialandQuantitativeAnalysis,Journalof Money,CreditandBanking,JournalofBankingandFinance,JournalofInternationalMoneyandFinance, Journal of Financial Research, Financial Review, Journal of Multinational Financial Management, and GlobalFinanceJournal.Hehasreceivedawardsforexcellenceinteachingandresearch,andhasservedas a consultant for international banks, securities firms, and other multinational corporations. He has served asadirectorfortheSouthernFinanceAssociationandEasternFinanceAssociation,andalsoservedaspres- identoftheSouthernFinanceAssociation. RolandFoxgraduated fromManchesterUniversityandjoinedPriceWaterhouseCoopers. Hesubsequently worked in insurance and for a multinational company, Invensys, before taking up a lecturing post. He is currently a senior lecturer in finance at Salford University. He has published a number of papers on man- agementaccounting,financeandeducation. vi For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. BRIEF CONTENTS PART I THE INTERNATIONAL FINANCIAL ENVIRONMENT 1 1 MultinationalFinancialManagement:AnOverview 2 2 InternationalFlowofFunds 35 3 InternationalFinancialMarkets 65 4 ExchangeRateDetermination 113 5 CurrencyDerivatives 134 PART II EXCHANGE RATE BEHAVIOUR 193 6 ExchangeRateHistoryandtheRoleofGovernments 194 7 InternationalArbitrageandInterestRateParity 237 8 RelationshipsAmongInflation,InterestRatesandExchangeRates 266 PART III EXCHANGE RATE RISK MANAGEMENT 303 9 ForecastingExchangeRates 304 10 MeasuringExposuretoExchangeRateFluctuations 337 11 ManagingTransactionExposure 369 12 ManagingEconomicExposureandTranslationExposure 416 PART IV LONG-TERM ASSET AND LIABILITY MANAGEMENT 441 13 ForeignDirectInvestment 442 14 MultinationalCapitalBudgeting 462 15 CountryRiskAnalysis 503 16 Long-TermFinancing 537 vii For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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. viii BRIEFCONTENTS PART V SHORT-TERM ASSET AND LIABILITY MANAGEMENT 569 17 FinancingInternationalTrade 570 18 Short-TermFinancing 587 19 InternationalCashManagement 612 20 ConcludingComments 641 AppendixAAnswerstoself-testquestions 644 AppendixBMathsandstatisticssupport 655 Glossary 668 Index 676 ONLINE ADDITIONAL READING 1 MultinationalRestructuring 2 MultinationalCostofCapitalandCapitalStructure Goto:www.cengage.com/madura_fox2e For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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 AbouttheAuthors vi Exposuretoexchangeratemovements 19 Preface xviii Exposuretoforeigneconomies 20 Walkthroughtour xxi Exposuretopoliticalrisk 20 OverviewofanMNC’sCashFlows 21 ValuationModelforanMNC 23 Domesticmodel 23 PART I THE INTERNATIONAL ManagingforValue:Yahoo!’sdecisionto FINANCIAL ENVIRONMENT expandinternationally 24 1 Valuinginternationalcashflows 24 Impactoffinancialmanagementand 1 MultinationalFinancial internationalconditionsonvalue 27 Management: AnOverview OrganizationoftheText 27 2 Summary 28 GoaloftheMNC 3 CriticalDebate 29 ConflictswiththeMNCgoal 3 SelfTest 29 Impactofmanagementcontrol 4 QuestionsandApplications 29 Impactofcorporatecontrol 6 AdvancedQuestions 30 ConstraintsinterferingwiththeMNC’sgoal 7 ProjectWorkshop 32 TheoriesofInternationalBusiness 8 DiscussionintheBoardroom 32 Economictheories 9 Businesstheories 11 RunningYourOwnMNC 32 InternationalBusinessMethods 11 BladesPLCCaseStudy:Decisiontoexpand Internationaltrade 12 internationally 33 UsingtheWeb:Tradeconditionsforindustries 12 SmallBusinessDilemma:Developinga Licensing 12 multinationalsportinggoodsindustry 34 Franchising 13 Jointventures 13 2 International FlowofFunds 35 Acquisitionsofexistingoperations 13 Establishingnewforeignsubsidiaries 14 BalanceofPayments 36 Summaryofmethods 14 Currentaccount 37 InternationalOpportunities 15 Financialaccount 38 Investmentopportunities 15 Overallbalanceofpayments 38 Financingopportunities 15 InternationalTradeFlows 41 OpportunitiesinEurope 16 Distributionofexportsandimportsformajor http://Updatedeuroinformation 17 countries 41 OpportunitiesinNorthandSouthAmerica 18 Balanceoftradetrends 41 OpportunitiesinAsia 19 UpdatedTradeandInvestmentConditions 44 ExposuretoInternationalRisk 19 Tradeagreements 44 ix For more Cengage Learning textbooks, visit www.cengagebrain.co.uk Copyright 2011 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.