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MULTINATIONAL FINANCIAL MANAGEMENT: AN OVERVIEW 3 1-1 Managing the MNC, 3
2-4a Factors Affecting Foreign Direct Investment, 51 2-4b Factors Affecting International Portfolio Investment, 52 2-4c Influence of International Capital Flows, 52. 5-5d Contingency Graph for the Call Option Buyer, 154 5- 5e Contingency graph for a call option seller, 154 5-5f Contingency graph for a put option buyer, 154 5-5g Contingency graph for a put option seller, 155.
GOVERNMENT INFLUENCE ON EXCHANGE RATES 189 6-1 Exchange Rate Systems, 189
INTERNATIONAL ARBITRAGE AND INTEREST RATE PARITY 225 7-1 International Arbitrage, 225
RELATIONSHIPS AMONG INFLATION, INTEREST RATES,
MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS 323 10-1 Relevance of Exchange Rate Risk, 323
11-4a Restrictions on Uncertain Payment Hedging, 371 11-4b Restrictions on Repeated Short Term Hedging, 371 11-5 Alternative Hedging Techniques, 373.
MANAGING ECONOMIC EXPOSURE AND TRANSLATION EXPOSURE 393 12-1 Managing Economic Exposure, 393
INTERNATIONAL CORPORATE GOVERNANCE AND CONTROL 471 15-1 International Corporate Governance, 471
15-2 International Corporate Control, 473 15-2a Motiver for International Acquisitions, 473 15-2b Trends in International Acquisitions, 474 15-2c Barriers to International Corporate Control, 474 15-2d Model for Valuing a Foreign Target, 475.
MULTINATIONAL CAPITAL STRUCTURE AND COST OF CAPITAL 521 17-1 Components of Capital, 521
Appendix C: Using Excel to Perform Analysis, 684 Appendix D: International Investment Project, 692 Appendix E: Boardroom Discussion, 695 Glossary, 702. Multinational companies that are most able to respond to changes in the international financial environment will be rewarded.
I NTENDED M ARKET
O RGANIZATION OF THE T EXT
If professors are focusing on the main principles, they may limit their coverage to Chapters 18 and 18. Additionally, they may give less attention to Chapters 19-21 if they feel that the description of the text does not require further elaboration.
A PPROACH OF THE T EXT
A final self-test is provided at the end of Chapter 21, which focuses on the leadership chapters (Chapters 9 through 21). This project is also available on the textbook's companion site (see the "Online Resources" section).
O NLINE R ESOURCES
Integrative problem. An integrative problem at the end of each section integrates key concepts from chapters within that section. An intermediate self-exam is provided at the end of Chapter 8, which focuses on international macro and market conditions (Chapters 1 through 8).
I NSTRUCTOR S UPPLEMENTS
The project is also available on the textbook companion website (see the "Online Resources" section). The variety of exercises and cases at the end of the chapter and at the end of the part provide many opportunities for students to engage in teamwork, decision-making and communication.
A DDITIONAL C OURSE T OOLS
PowerPoint slides. The PowerPoint slides explain the content and provide a good guide for students to take notes.
A CKNOWLEDGMENTS
Dara Khambata, American University Chong-Uk Kim, Sonoma State University Doseong Kim, University of Akron Elinda F. Johns University Leslie Mathis, University of Memphis Ike Mathur, Southern Illinois University Wendell McCulloch Jr., Cal State.
1-1 M ANAGING THE MNC
The parent company can monitor decisions made by subsidiaries to verify that the managers of each subsidiary are meeting the objectives of the multinational corporation. The parent can also implement compensation plans that reward managers who meet the MNC's objectives.
Competition in these foreign markets may increase as other manufacturers become more familiar with the company's product. One commonly used approach is to differentiate a product so that competitors cannot duplicate it exactly.
As in the case of licenses, franchising allows companies to penetrate foreign markets without major investments abroad. At the same time, an MNC receives cash flows in the form of payment for its exports, fees for the services it provides within international arrangements, and paid-in funds from the foreign subsidiaries.
1-4 V ALUATION M ODEL FOR AN MNC
In this case, the MNC's cash flow is reduced due to its exposure to international economic conditions. This dynamic reduces the MNC's dollar cash flow (on a net basis) overall and thus reduces its value.
1-5 O RGANIZATION OF THE T EXT
In addition, investment decisions by the MNC that change the firm's weighted average cost of capital can also affect the denominator of the valuation model. Long-term financing decisions by an MNC tend to affect the denominator of the valuation model because they affect its cost of capital.
S UMMARY
Financial decisions made by multinational corporations are commonly classified as either investment decisions or financing decisions. In general, investment decisions by an MNC tend to affect the numerator of the valuation model because such decisions affect expected cash flows.
P OINT C OUNTER -P OINT
Although financial managers cannot control such forces, they can control the extent of their firm's exposure to them. If profits are greater in some foreign country, the MNC can only compete by matching the profits offered by its competitors.
S ELF -T EST
Q UESTIONS AND A PPLICATIONS
What barrier in the United States did Kirin bypass as a result of the joint venture. What are the expected dollar cash flows of the parent company of Biloxi Co. 34. Uncertainty about the cash flows of an MNC.
The costs for this project would be approximately the same as the costs of the project described above for American students. Assume that this project is roughly the same as the project for American students.
S MALL B USINESS D ILEMMA
Does Sports Exports Company have any comparative advantage over potential competitors abroad who can manufacture and sell soccer balls there? What methods can the Sports Export Company use to increase its presence in foreign markets by working with one or more foreign companies.
I NTERNET /E XCEL E XERCISES
However, it may consider other less expensive methods of establishing its business in foreign markets.
O NLINE A RTICLES WITH R EAL -W ORLD E XAMPLES
Was the country negatively affected due to how the international credit crisis affected the value of the currency. Was the MNC adversely affected due to how the international credit crunch affected exchange rates.
2-1 B ALANCE OF P AYMENTS
Factor income payments Another component of the current account is factor income, which represents income (interest and dividend payments) that investors receive on foreign investments in financial assets (securities). Overall, the balance of payments balance was -$471 billion, primarily attributable to the difference between the U.S.
2-2 G ROWTH IN I NTERNATIONAL T RADE
But outsourcing by US-based multinationals is sometimes criticized because it can reduce US jobs. Over the past decade, the United States has experienced trade deficits due to strong U.S.
2-3 F ACTORS A FFECTING I NTERNATIONAL T RADE F LOWS
Although the country's trade balance improved thereafter, Argentina experienced shortages of many types of products, including some medical products. Finally, a weak currency is less likely to improve the country's trade balance to such an extent that international trade involves importers and exporters of the same ownership.
2-4 I NTERNATIONAL C APITAL F LOWS
Given the low interest rates in Japan, many Japanese investors invest their funds in the United States to earn a higher interest rate. The long-term interest rate in the United States is determined at any given time by the interaction between the supply of funds available in the US.
2-5 A GENCIES T HAT F ACILITATE I NTERNATIONAL F LOWS
The International Development Association (IDA) was established in 1960 with country development goals similar to those of the World Bank. If the United States imposes large tariffs on the French wine, explain the likely effect on U.S. values.
3-1 F OREIGN E XCHANGE M ARKET
During such periods, the indirect exchange rate of the euro falls, representing a decrease over time in the quantity of euros equivalent to $1. During such periods, the indirect exchange rate for the euro rises, representing an increase over time in the quantity of euros equivalent to $1.
3-2 I NTERNATIONAL M ONEY M ARKET
In general, a country that has both a large demand for short-term funds and a small supply will have relatively high money market interest rates. Subsequently, the aggregate demand for short-term funds and money market interest rates will also decrease in many countries.
3-3 I NTERNATIONAL C REDIT M ARKET
Borrowers usually prefer loans to be denominated in their primary currency in which they receive most of their cash flows, which eliminates the borrower's exchange rate risk. A loan denominated in the currency of a country with very low inflation (such as Japan or the United States) normally has a relatively low interest rate; loans denominated in the currency of a country with high inflation rates (such as some Latin American and Asian countries) tend to have correspondingly higher interest rates.
3-4 I NTERNATIONAL B OND M ARKET
A multinational may choose to issue bonds on the international bond markets for three reasons. Investors in some countries use international bond markets because they expect and prefer to see their local currencies weaken in the future.
3-5 I NTERNATIONAL S TOCK M ARKETS
Investment banks and other financial institutions in the United States often act as underwriters of stocks targeting the United States. This allows for more confidence in the stock market and greater pricing efficiency (since there is a large pool of investors monitoring each company).
Click on the euro in the first column to generate a historical trend for the euro live exchange rate. Click on the euro in the column header to generate a historical trend for the euro's indirect exchange rate.
B ACKGROUND ON I NTERNATIONAL S TOCK E XCHANGES
As a result, the price is adjusted in response to the demand (buy orders) for the stock and the offer (sell orders) of the stock for sale recorded by the computer system. The reason is that the exchange rate movement of -30 percent wiped out not only 30 percent of his initial investment, but also 30 percent of the stock's return.l.
V ALUATION OF F OREIGN S TOCKS
Exchange rate risk Investors' exposure to exchange rate risk by investing in foreign equities depends on their country of origin. An alternative method of investing directly in foreign stocks is to buy stocks of foreign companies that are sold on the local stock exchange.
4-1 M EASURING E XCHANGE R ATE M OVEMENTS
Thus, if annual exchange rate data were to be evaluated, then the movements would be more volatile for each currency than what is shown here, but the euro's movements would still be more volatile than the Canadian dollar's movements. If the daily movements of the exchange rate were evaluated, then the movements would be less volatile for each currency than shown here, but the movements of the euro would still be more volatile than the movements of the Canadian dollar.
4-2 E XCHANGE R ATE E QUILIBRIUM
The banks will lower the exchange rate to the level at which the amount of British pounds demanded is equal to the amount supplied in the foreign exchange market. As they reduce the exchange rate, there will be an increase in the amount of British pounds demanded in the foreign exchange market.
4-3 F ACTORS T HAT I NFLUENCE E XCHANGE R ATES
Banks will lower the exchange rate to a level where the quantity of British pounds demanded equals the quantity of British pounds supplied (sold) in the foreign exchange market. Banks that act as intermediaries in the foreign exchange market will respond by increasing the price (exchange rate) of the pound.
4-4 M OVEMENTS IN C ROSS E XCHANGE R ATES
The value of the British pound against the dollar and the value of the Swiss franc against the dollar; the lower graph shows the cross rate (pound value against the Swiss franc). If the British pound and Swiss franc move by the same percentage against the dollar, there is no change in the cross rate.
4-5 C APITALIZING ON E XPECTED E XCHANGE R ATE M OVEMENTS
Factors affecting exchange rates What factors affect future movements in the value of the euro against the dollar. Calculate the percentage change in the value of the Canadian dollar and the euro each month.
5-1 F ORWARD M ARKET
Here p denotes the forward premium, or the percentage by which the forward rate exceeds the spot rate. If the forward rate were the same as the spot rate and if interest rates were different in the two countries, then some investors could (under certain assumptions) use arbitrage to earn higher returns than would be possible domestically and without incurring additional risk (as explained in Chapter 7).
5-2 C URRENCY F UTURES M ARKET
Currency futures usually specify the third Wednesday in March, June, September or December as the settlement date. Conversely, a significant drop in the spot rate should lead to a drop in the currency futures price, meaning that the purchase and subsequent sale of a futures contract will result in a loss.
5-3 C URRENCY O PTIONS M ARKET
Because these unexpected patterns are rarely observable until they occur, it is virtually impossible to consistently generate abnormal profits from speculation in currency futures.
5-4 C URRENCY C ALL O PTIONS
Even if Kelly's offer is rejected, he will exercise the currency call option (selling C$ in the spot market) if the Canadian dollar spot rate exceeds the exercise price before the option expires. The only way a currency call option will be exercised is if the spot rate is higher than the strike price.
5-5 C URRENCY P UT O PTIONS
Determine your profit or loss per unit on your option position if the spot rate of the euro today is $1.55. 41. Speculating with Currency Futures Suppose that 1 year ago, the spot rate of the British pound was
B OUNDARY C ONDITIONS
Arbitrage would occur until the call option premium was less than or equal to the spot rate. If the put option premium ever exceeds the exercise price, one can engage in arbitrage by selling put options.
A PPLICATION OF P RICING M ODELS
2James Bodurtha and Georges Courtadon, "Tests of a US option pricing model on the foreign exchange options market," Journal of Financial and Quantitative Analysis (June. The arbitrage that can be applied when there is a violation of put-call parity on US currency options differs slightly from the arbitrage applicable to European currency options.
C URRENCY S TRADDLES
