International Financial Management

778 Pages·2022·27.33 MB·English

by  Dr Jeff Madura, Prof Ariful Hoque, Prof Chandrasekhar Krishnamurti

Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300
INTERNATIONAL
financial
management
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300
International Financial Management © 2022 Cengage Learning Australia Pty Limited
2nd Edition
Jeff Madura Copyright Notice
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Adapted from International Financial Management, 13th edition
by Jeff Madura [9781337099738], published by Cengage © 2018 National Library of Australia Cataloguing-in-Publication Data
ISBN: 9780170449014
This 2nd edition published in 2022 A catalogue record for this book is available from the National Library of
Australia.
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BRIEF CONTENTS
PART 1 THE INTERNATIONAL FINANCIAL ENVIRONMENT 1
1 Multinational financial management: An overview 2
2 International flow of funds 40
3 International financial markets 81
4 Exchange rate systems and central bank intervention 112
PART 2 EXCHANGE RATE BEHAVIOUR 158
5 Exchange rate determination 159
6 Relationships among inflation, interest rates and exchange rates 193
7 International arbitrage and interest rate parity 222
8 Forecasting exchange rates 260
MIDTERM SELF-EXAM 294
PART 3 EXCHANGE RATE RISK MANAGEMENT 302
9 Currency derivatives 303
10 Currency and interest rate swaps 358
11 Measuring exposure to exchange rate fluctuations 378
12 Managing transaction exposure 412
13 Managing economic exposure and translation exposure 456
PART 4 MANAGEMENT OF LONG-TERM INTERNATIONAL
INVESTMENTS AND FINANCING 480
14 Foreign direct investment 481
15 Multinational capital budgeting 525
16 Country risk analysis and international corporate governance 568
17 International equity markets 606
18 International debt markets 637
PART 5 INTERNATIONAL BANKING AND TRADE FINANCING 662
19 International banking 663
20 Trade financing and facilitation 700
FINAL SELF-EXAM 726
v
Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-300
CONTENTS
Guidetothetext xiv 1.4e HowuncertaintyaffectstheMNC’s
Guidetotheonlineresources xvii costofcapital 22
Preface xviii LO1.5 Theglobalfinancialcrisis 23
Abouttheauthors xxi 1.5a FundamentalcauseoftheGFC 23
Acknowledgements xxii 1.5b Foreignexchangemarkets 24
1.5c MNCcurrencyriskmanagement 24
PART 1 LO1.6 TheimpactofCOVID-19onmultinational
companies 25
THE INTERNATIONAL FINANCIAL
ENVIRONMENT 1 LO1.7 Organisationofthetext 27
Termpaperontheinternationalcreditcrisis 39
1 MULTINATIONAL FINANCIAL
2 INTERNATIONAL FLOW OF FUNDS 40
MANAGEMENT: AN OVERVIEW 2
LO2.1 Balanceofpayments 41
LO1.1 ManagingtheMNC 3
2.1a Australia’sbalanceofpayments 41
1.1a Howbusinessdisciplinesareusedto
2.1b Currentaccount 43
managetheMNC 3
2.1c Capitalaccount 45
1.1b Agencyproblems 4
2.1d Financialaccount 46
1.1c ManagementstructureofanMNC 6
LO2.2 Growthininternationaltrade 47
LO1.2 Whycompaniespursueinternational
2.2a Eventsthatincreasedtradevolume 47
business 7
2.2b Impactofoutsourcingontrade 49
1.2a Theoryofcomparativeadvantage 7
2.2c Tradevolumeamongcountries 51
1.2b Imperfectmarketstheory 8
2.2d TrendinAustralianbalanceoftrade 52
1.2c Productcycletheory 8
LO2.3 Factorsaffectinginternational
LO1.3 Howcompaniesengageininternational
tradeflows 57
business 9
2.3a Costoflabour 58
1.3a Internationaltrade 9
2.3b Inflation 59
1.3b Licensing 10
2.3c Nationalincome 59
1.3c Franchising 10
2.3d Creditconditions 59
1.3d Jointventures 10
2.3e Governmentpolicies 60
1.3e Acquisitionsofexistingoperations 11
2.3f Exchangerates 66
1.3f Establishmentofnewforeignsubsidiaries 11
1.3g Summaryofmethods 11 LO2.4 Internationalcapitalflows 70
2.4a Factorsaffectingforeigndirectinvestment 71
LO1.4 ValuationmodelforanMNC 13
2.4b Factorsaffectinginternationalportfolio
1.4a Domesticmodel 13
investment 72
1.4b Multinationalmodel 14
1.4c UncertaintysurroundinganMNC’s LO2.5 Agenciesthatfacilitateinternationalflows 72
cashflows 17 2.5a InternationalMonetaryFund 73
1.4d Summaryofinternationaleffects 21 2.5b WorldBank 74
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CONTENTS
2.5c WorldTradeOrganization 74 4.2f Impactonacountrythatabandons
2.5d InternationalFinancialCorporation 75 theeuro 131
2.5e InternationalDevelopmentAssociation 75 4.2g Impactofabandoningtheeuroon
2.5f BankforInternationalSettlements 75 eurozoneconditions 131
2.5g OECD 75
LO4.3 ReserveBankofAustraliaintervention 133
2.5h Regionaldevelopmentagencies 75
4.3a ReasonsforRBAintervention 133
4.3b Directintervention 135
3 INTERNATIONAL FINANCIAL
4.3c Indirectintervention 138
MARKETS 81
LO4.4 Interventionasapolicytool 140
LO3.1 Foreignexchangemarket 82 4.4a Influenceofaweakhomecurrency 140
3.1a Historyofforeignexchange 82 4.4b Influenceofastronghomecurrency 141
3.1b Foreignexchangetransactions 83
APPENDIX 4: GOVERNMENT
3.1c Foreignexchangequotations 86
INTERVENTION DURING THE
3.1d Interpretingforeignexchangequotations 89
ASIAN CRISIS 148
LO3.2 Forwardmarket 95
PART1INTEGRATIVEPROBLEM:THE
3.2a HowMNCsuseforwardcontracts 96 INTERNATIONALFINANCIALENVIRONMENT 157
3.2b Bankquotationsonforwardrates 97
3.2c Premiumordiscountontheforwardrate 97
PART 2
3.2d Movementsintheforwardrateovertime 99
3.2e Offsettingaforwardcontract 99 EXCHANGE RATE BEHAVIOUR 158
3.2f Usingforwardcontractsforswap
transactions 100 5 EXCHANGE RATE DETERMINATION 159
3.2g Non-deliverableforwardcontracts 100
LO5.1 Measuringexchangeratemovements 160
LO3.3 Internationalmoneymarket 102
3.3a Originsanddevelopment 102 LO5.2 Exchangerateequilibrium 161
3.3b Moneymarketinterestratesamong 5.2a Demandforacurrency 162
currencies 104 5.2b Supplyofacurrencyforsale 163
5.2c Equilibrium 163
4 EXCHANGE RATE SYSTEMS AND 5.2d Changeintheequilibriumexchangerate 164
CENTRAL BANK INTERVENTION 112
LO5.3 Factorsthatinfluenceexchangerates 166
5.3a Relativeinflationrates 166
LO4.1 Exchangeratesystems 113
5.3b Relativeinterestrates 167
4.1a Fixedexchangeratesystem 113
5.3c Relativeincomelevels 169
4.1b Freelyfloatingexchangeratesystem 115
5.3d Governmentcontrols 170
4.1c Managedfloatexchangeratesystem 116
5.3e Expectations 170
4.1d Peggedexchangeratesystem 118
5.3f Interactionoffactors 172
4.1e Dollarisation 123
5.3g Influenceoffactorsacrossmultiple
4.1f Australia’sexchangeratesystem 124
currencymarkets 173
LO4.2 AsingleEuropeancurrency 127
5.3h Impactofliquidityonexchangerate
4.2a Monetarypolicyintheeurozone 127 adjustment 174
4.2b Impactoncompaniesintheeurozone 127
LO5.4 Movementsincrossexchangerates 175
4.2c Impactonfinancialflowsintheeurozone 128
5.4a Explainingmovementsincross
4.2d Exposureofcountrieswithintheeurozone 128
exchangerates 176
4.2e Impactofcriseswithintheeurozone 128
vii
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CONTENTS
LO5.5 Capitalisingonexpectedexchangerate 7.1c ArbitragestrategyforfiveAsian
movements 176 tiger-denominatedcurrencies 229
5.5a Institutionalspeculationbasedon 7.1d Coveredinterestarbitrage 230
expectedappreciation 176 7.1e Comparisonofarbitrageeffects 234
5.5b Institutionalspeculationbasedon
LO7.2 Interestrateparity(IRP) 236
expecteddepreciation 178
7.2a Derivationofinterestrateparity 236
5.5c Speculationbyindividuals 179
7.2b Determiningtheforwardpremium 237
5.5d The‘carrytrade’ 180
7.2c Graphicanalysisofinterestrateparity 239
LO5.6 WhywastheAustraliandollarfloated? 183 7.2d Howtotestwhetherinterestrate
parityholds 241
6 RELATIONSHIPS AMONG 7.2e Interpretationofinterestrateparity 241
INFLATION, INTEREST RATES 7.2f Doesinterestrateparityhold? 242
AND EXCHANGE RATES 193 7.2g Considerationswhenassessinginterest
rateparity 242
LO6.1 Purchasingpowerparity(PPP) 194
LO7.3 Variationinforwardpremiums 243
6.1a Interpretationsofpurchasingpowerparity 194
7.3a Forwardpremiumsacrossmaturities 244
6.1b RationalebehindrelativePPPtheory 195
7.3b Changesinforwardpremiumsovertime 244
6.1c Derivationofpurchasingpowerparity 195
6.1d UsingPPPtoestimateexchangerate LO7.4 ComparisonoftheIRP,PPPandIFE 247
effects 196
8 FORECASTING EXCHANGE RATES 260
6.1e Graphicanalysisofpurchasingpower
parity 198
LO8.1 Whycompaniesforecastexchangerates 261
6.1f Testingthepurchasingpowerparity
theory 200 LO8.2 Forecastingtechniques 263
6.1g Whypurchasingpowerparitydoes 8.2a Technicalforecasting 263
nothold 202 8.2b Fundamentalforecasting 264
LO6.2 InternationalFishereffect(IFE) 204 8.2c Market-basedforecasting 269
8.2d Mixedforecasting 272
6.2a Fishereffect 204
6.2b UsingtheIFEtopredictexchangerate 8.2e Guidelinesforimplementingaforecast 273
movements 205 LO8.3 Forecasterror 274
6.2c ImplicationsoftheinternationalFisher 8.3a Measurementofforecasterror 274
effect 206 8.3b Forecasterrorsamongtimehorizons 275
6.2d DerivationoftheinternationalFisher 8.3c Forecasterrorsovertimeperiods 275
effect 208
8.3d Forecasterrorsamongcurrencies 275
6.2e Graphicalanalysisoftheinternational 8.3e Forecastbias 276
Fishereffect 210
8.3f Comparisonofforecastingmethods 279
LO6.3 TestsoftheinternationalFishereffect 212 8.3g Forecastingundermarketefficiency 280
6.3a LimitationsoftheIFE 213
LO8.4 Usingintervalforecasts 281
6.3b IFEtheoryversusreality 214
8.4a Methodsofforecastingexchangerate
volatility 281
7 INTERNATIONAL ARBITRAGE AND
PART2INTEGRATIVEPROBLEM:EXCHANGERATE
INTEREST RATE PARITY 222
BEHAVIOUR 293
LO7.1 Internationalarbitrage 223
MIDTERM SELF-EXAM 294
7.1a Locationalarbitrage 223
7.1b Triangulararbitrage 226
viii
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CONTENTS
PART 3 10 CURRENCY AND INTEREST
EXCHANGE RATE RISK RATE SWAPS 358
MANAGEMENT 302
LO10.1 Currencyswaps 359
LO10.2 Financingtomatchtheinflowcurrency 359
9 CURRENCY DERIVATIVES 303
10.2a Usingcurrencyswapstoexecutethe
LO9.1 Currencyfuturesmarket 304 matchingstrategy 361
9.1a Contractspecifications 304 10.2b Usingparallelloanstoexecutethe
matchingstrategy 362
9.1b Tradingcurrencyfutures 305
9.1c Comparingfuturestoforwardcontracts 306 LO10.3 Interestrateswaps 365
9.1d Creditriskofcurrencyfuturescontracts 307
LO10.4 Fixed-versus-floating-ratedebt
9.1e Howcompaniesusecurrencyfutures 308
decision 366
9.1f Speculationwithcurrencyfutures 310
10.4a Financingcostsof
LO9.2 Currencyoptionsmarket 311 fixed-versus-floating-rateloans 367
9.2a Optionexchanges 311
LO10.5 Hedginginterestpaymentswith
9.2b Over-the-countermarket 312
interestrateswaps 367
LO9.3 Currencycalloptions 312 10.5a Limitationsofinterestrateswaps 370
9.3a Factorsaffectingcurrencycalloption 10.5b Othertypesofinterestrateswaps 370
premiums 313 10.5c Standardisationoftheswapmarket 370
9.3b Howcompaniesusecurrencycall
options 313 11 MEASURING EXPOSURE TO
9.3c Speculatingwithcurrencycalloptions 315 EXCHANGE RATE FLUCTUATIONS 378
LO9.4 Currencyputoptions 318
LO11.1 Relevanceofexchangeraterisk 379
9.4a Factorsaffectingcurrencyputoption
11.1a Theinvestorhedgeargument 379
premiums 318
11.1b Currencydiversificationargument 379
9.4b Hedgingwithcurrencyputoptions 318
11.1c Stakeholderdiversificationargument 379
9.4c Speculatingwithcurrencyputoptions 319
11.1d ResponsefromMNCs 380
9.4d Contingencygraphforthepurchaser
ofacalloption 321 LO11.2 Transactionexposure 380
9.4e Contingencygraphforthesellerofacall 11.2a Estimating‘net’cashflowsineach
option 322 currency 381
9.4f Contingencygraphforthebuyerofaput 11.2b ExposureofanMNC’sportfolio 382
option 323 11.2c Transactionexposurebasedon
9.4g Contingencygraphforthesellerofaput value-at-risk 386
option 323
LO11.3 Economicexposure 391
9.4h Conditionalcurrencyoptions 323
11.3a Exposuretolocalcurrencyappreciation 392
9.4i Asia-Pacificexample:Usingcurrency
11.3b Exposuretolocalcurrencydepreciation 393
optionstohedgeagainstcurrencyprice
11.3c Economicexposureofdomestic
movements 325
companies 393
APPENDIX 9A: CURRENCY OPTION 11.3d Measuringeconomicexposure 394
PRICING 338
LO11.4 Translationexposure 397
APPENDIX 9B: CURRENCY OPTION 11.4a Determinantsoftranslationexposure 397
COMBINATIONS 342 11.4b ExposureofanMNC’sstockpriceto
translationeffects 399
ix
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