Fundamentals Of ,/ MULTINATIONAL FINANCE
Fundamentals of:,/MULTINATIONALFINANCEEdition IIIMICHAEL H. MOFFETTThunderbird School of Global ManagementARTHUR I. STONEHILLOregon State University andUniversity of Hawaii at ManoaDAVID K. EITEMANUniversity of California, Los AngelesBoston San Francisco New YorkLondon Toronto Sydney Tokyo Singapore MadridMexico City Munich Paris Cape Town Hong Kong Montreal
ContentsPART 11CHAPTER 1Globalization and the Multinational Enterprise2Globalization and Creating Value in the Multinational Enterprise.The Theory of Comparative AdvantageCHAPTER 3The International Monetary System59History of the International Monetary System4Global Finance in Practice i.i ,.National Multinational or'A-National'?Summary of Learning Objectives53Questions 54 Problems 55 -Internet Exercises 5867Global Finance in Practice 3.1Hammering Out an Agreementat Bretton Woods. 60: ,63What Is Different about Global Financial Management? 12Contemporary Currency Regimes70Emerging Markets and Regime Choices . . . . . . 13The Birth of a European Currency: The Euro . . 76Global Finance in Practice 1.2Global Finance in Practice 3.2, ,The Mystery of Capital Deepens13Market Imperfections: A Rationale for the Existence of the Multinational Firm14New EU Members and Adoption of the Euro . . 80Exchange Rate Regimes: What Lies Ahead? . . .81The Globalization Process15Global Finance in Practice 3.3Calculating the Euro's SuccessMINI-CASEPorsche Changes Tack ;18MINI-CASEThe Revaluation of the Chinese Yuan . . . . . . . 82Summary of Learning Objectives24Questions 24 Problems 25 Internet Exercises 2681AAINI-CASE APPENDIXPublic Announcement of the People'sBank of China on Reforming the RMBExchange Rate Regime85CHAPTER 2Summary of Learning ObjectivesFinancial Goals and Corporate GovernanceQuestions 86 Problems 87 Internet Exercises 89Who Owns theBusiness?.'.27.28CHAPTER 4Global Finance in Practice 2.1Family Controlled Firms in FranceThe Balance of PaymentsOutperform the Public Sector30What Is the Goal of Management?30Global Finance in Practice 2.2What Drives Value?86;.35Corporate Governance36Global Finance in Practice 2.3When Scandals Go Global42Global Finance in Practice 2.4Corporate Governance Reform in China48MINI-CASEGovernance Failure at Enron4990Typical B a l a n c e o f P a y m e n t s Transactions . . . . 9 2Fundamentals of Balance ofPayments Accounting92T h e A c c o u n t s o f the B a l a n c e o f P a y m e n t s . . . . . 9 4T h e Capital a n d F i n a n c i a l A c c o u n t s . . . . . . . . . 9 7Global Finance in Practice 4.1Official Foreign Exchange Reserves:The Rise of China. 101The Balance of Payments in Total103The Balance of Payments Interaction with KeyMacroeconomic Variables105Trade Balances and Exchange Rates108XIII
xivContentsGlobal Finance in Practice 4.2The United States as the World'sLargest Debtor NationCapital MobilityGlobal Finance in Practice 4.3Thailand Fails to Stem Capital InflowsMINI-CASETurkey's Kriz (A): Deteriorating Balanceof Payments108.Ill115123Global Finance in Practice 5.1T h e Foreign Exchange Dealer's D a y . . . . . . . . 1 2 7Global Finance in Practice 5.2My First Day of Foreign Exchange Trading . . . 128Transactions in the Interbank Market129Global Finance in Practice 5.3A Hedge Against ForeignExchange Exposure?131Foreign Exchange Rates and Quotations134MINI-CASEThe Venezuelan Bolivar Black Market144Summary of Learning Objectives; . . . , . . . 147.Questions 148 Problems 148 -Internet Exercises 151PART 2F0KEKGIRS EXCINIAIMSE TIHIE@mfCHAPTER 6International Parity ConditionsPrices and Exchange RatesPurchasing Power Parity and theLaw of One PriceGlobal Finance in Practice 6.1Purchasing Power Parity:Burgers or Beans?Interest Rates and Exchange Rates165166Global Finance in Practice 6.4T h e Carry Trade a n d t h e Japanese Yen . . . . . . 173Geographical Extent of the ForeignExchange Market124Functions of the Foreign Exchange M a r k e t : . . 125Market Participants126;163Global Finance in Practice 6.3Currency Pass-Through at Porsche112Summary of Learning Objectives117Questions 117 Problems 119 Internet Exercises 122CHAPTER 5The Foreign Exchange MarketGlobal Finance in Practice 6.2Deviations from Purchasing PowerParity in the Twentieth CenturyForward Rate as an Unbiased Predictor . . "of the Future Spot Rate. . . . . . . . . . . . 175Prices, Interest Rates, and ExchangeRates in Equilibrium177 MINI-CASEIceland 2006—A Small Countryin a Global Capital Market178Summary of Learning Objectives182Questions 182 Problems 183 'Internet Exercises 188CHAPTER 7Foreign Exchange Rate Determinationand Forecasting189A Roadmap to Exchange RateDetermination190Exchange Rate Determination:The Theoretical Thread191The Asset Market Approach to Forecasting . . . 194Global Finance in Practice 7.1Uruguay Infected195Disequilibrium: Exchange Ratesin Emerging MarketsIllustrative Case: The Asian Crisis : . . . . . . . . .Illustrative Case: The Argentine Crisis 'of2002 . . : . .:.Forecasting in Practice200205Global Finance in Practice 7.2Technical versus FundamentalTrading Strategies?207197197MINI-CASEJPMorgan Chase's Forecasting Accuracy . . . . 211154155156159Summary of Learning Objectives .,-.213Questions 213 Problems 214 Internet Exercises 217CHAPTER 8Foreign Currency Derivatives218Foreign Currency FuturesCurrency Options220222
ContentsForeign Currency Speculation:226Global Finance in Practice 8.1Rogue Currency Trader a t Allied Irish Bank . . 2 2 7Global Finance in Practice 8.2Putting the Kiwi to Flight229Option Pricing and ValuationValuationPrudence in Practice234.236239Global Finance in Practice 8.3A Select List of Derivativeand Managerial DisastersAfllNI-CASERogue Trader, Nicholas LeesonGlobal Finance in Practice 10.1Volvo Car289Strategic Management ofOperating Exposure .-.293Global Finance in Practice 10.2Goodyear's Response to theMexican Peso's Devaluation294Global Finance in Practice 10.3Detroit Dreams of a Rising Yenin the Fall of 2007239Proactive Management ofOperating Exposure240Contractual Approaches: Hedgingthe UnhedgeableSummary of Learning Objectives244Questions 245 Problems 245 Internet Exercises 248xv'. 295 .-.':296304MINI-CASEToyota's European Operating Exposure . . . . . 305Summary of Learning Objectives308Questions 308 Problems 309 Internet Exercises 311PART 3EXCIHIMKOECHAPTER 9Transaction ExposureTypes of Foreign Exchange ExposureWhy Hedge?Global Finance in Practice 9.1Amazon.com's Quest for Profits:The Role of Currency Gains/Losses251CHAPTER 11Translation ExposureOverview of Translation313253255Translation MethodsTranslation Example: Trident EuropeComparing Translation Exposurewith Operating ExposureManaging Translation Exposure316321255Measurement of Transaction ExposureTrident's Transaction Exposure257260Management of an Account PayableRisk Management in Practice268270Global Finance in Practice 9.2Manipulation of Currency Gains and Losses . 2 7 1Global Finance in Practice 9.3Five Hedging Mistakes to Avoid272MINI-CASEXian-Janssen Pharmaceutical (China)and the EuroAttributes of Operating ExposureIllustrating Operating Exposure: Trident325325Global Finance in Practice 11.1Gyrus (UK): Translation Exposureor Transaction Exposure?326Global Finance in Practice 11.2Hedging the Euro Away329MINI-CASELaJolla Engineering Services . . . . . . . . . . . . . 3 3 0Summary of Learning Objectives332Questions 333 Problems 333 Internet Exercises 335272Summary of Learning Objectives275Questions 276 Problems 276 Internet Exercises 284CHAPTER 1 0Operating Exposure312252,. 285286288PART 4TIHii GH M FIRMCHAPTER 12The Global Cost and Availability of Capital338Global Cost and Availability of CapitalWeighted Average Cost of Capital339341
XVIContentsThe Demand for Foreign Securities: The Roleof International Portfolio Investors347Global Finance in Practice 12.1Market Liquidity348Illustrative Case: Novo Industri A/S (Novo) . . .352The Cost of Capital for MNEsCompared to Domestic Firms358Global Finance in Practice 12.2Bang & Olufsen and Philips N.V.359MINI-CASEPetrobras of Brazil and the Cost of Capital . . 363M I N I - C A S E APPENDIX366Summary of Learning Objectives367Questions 368 Problems 369 Internet Exercises 373CHAPTER 13Sourcing Equity Globally374400Optimal Financial Structure.401Optimal Financial Structure and the MNE . . . 402Financial Structure of Foreign Subsidiaries . . . 406Global Finance in Practice 14.1Equity Carve-OutsInternational Debt MarketsSolving a Riddle: Is the Weighted AverageCost of Capital for MNEs Really Higher.Than for Their Domestic Counterparts? . . . 361. . . . 407: . . . . 410,Global Finance in Practice 14.2Pricing and Structure of aSyndicated EurocreditProject Financing . . . . Global Finance in Practice 14.3Islamic Finance412416.-. :. 417Global Finance in Practice 14.4Project Finance Boom419MINI-CASETirstrup BioMechanics (Denmark):Raising Dollar Debt419Summary of Learning Objectives421Questions 422 Problems 423 Internet Exercises 425Designing a Strategy to SourceEquity Globally.376Global Finance in Practice 13.1How Big Is Your Share Price?379Foreign Equity Listing and IssuanceCHAPTER 14Financial Structure and International Debt. . . . . . . . 380Global Finance in Practice 13.2Demutualisation, Diversification,and Globalisation382Global Finance in Practice 13.3The Chicago Exchanges Merge384Defining Interest Rate RiskManagement of Interest Rate Risk385387388426427430Global Finance in Practice 15.1. Interest Rate Derivatives—Booming in 2007 Effect of Cross-Listing and Equity Issuanceon Share PriceBarriers to Cross-Listing and SellingEquity Abroad Alternative Instruments to Source Equityin Global MarketsCHAPTER 15Interest Rate and Currency SwapsGlobal Finance in Practice 15.2A Floating-Rate World of Debt432.433Trident Corporation: Swapping,to Fixed Rates440Currency Swaps- . . , . . . . . . . . : . . . . . 441Trident Corporation: SwappingFloating Dollars into Fixed RateSwiss Francs442Global Finance in Practice 13.4Equity Firms and Their Assets (billions)392Global Finance in Practice 13.5Private Equity in Argentina andthe Argentine CrisisCounterparty Risk444Illustrative Case: A Three-WayBack-to-Back Cross-Currency Swap . . . . . . 445393MINI-CASERosneft's Initial Public Offering393MINI-CASEMcDonald's Corporation's BritishPound ExposureSummary of Learning Objectives, . . . . 396Questions 397 Problems 397 ' I n t e r n e t Exercises 399Summary of Learning Objectives446.447Questions 448 Problems 448 Internet Exercises 450
ContentsAssessing Political RiskFirm-Specific RisksCountry-Specific Risks: Transfer RiskCountry-Specific Risks:. Culturaland Institutional RisksPART 5DECISIONSCHAPTER 16International Portfolio Theoryand Diversification454International Diversification and Risk . . . . . . . 455XVII503506509513Global Finance in Practice 18.1Zimbabwe's Disposable Currency515Global-Specific Risks518Global Finance in Practice 16.1Should Fund Managers Hedge Currency Risk? 459Global Finance in Practice 18.2 ,Enron International in India . . . . . '519Internationalizing the Domestic Portfolio . . . . 459National Markets and Asset Performance . . . . 464Global Finance in Practice 18.3Global Finance in Practice 16.2Equity Market Crises in theTwentieth CenturyMINI-CASEStrategic Currency HedgingSustaining and TransferringCompetitive AdvantageThe OLI Paradigm and InternalizationDeciding Where to InvestHow to Invest Abroad: Modes of ForeignInvolvementGlobal Finance in Practice 18.4Starbucks Coffee and CorporateSocial Responsibility470MINI-CASEMattel's Chinese Sourcing Crisis of 2007 . . . . 525477Summary of Learning ObjectivesQuestions 528 Internet Exercises 530CHAPTER 19Multinational Capital BudgetingGlobal Finance in Practice 19.1Prospecting for Riches in t h e Tax Code . . . . . 5 4 6486Global Finance in Practice 17.2Haier Builds Brands491Global Finance in Practice 17.3Embraer of Brazil491Real Option Analysis549MINI-CASETrident's Chinese Market Entry—An Application of Real Option Analysis550Summary of Learning Objectives552Questions 553 Problems 554 Internet Exercises 557PART 6MINI-CASECHAPTER 18Political Risk Assessment and M a n a g e m e n tDefining Political Risk531485489Summary of Learning ObjectivesQuestions 498 Internet Exercises 499528478481483Foreign Direct Investment Originating inDeveloping Countries!The GM-AvtoVAZ Joint Venture524Complexities of Budgeting for aForeign Project533Project versus Parent Valuation534Illustrative Case: Cemex Enters Indonesia . . . 535Global Finance in Practice 17.1Keeping It in the Family: American Exportsto and Imports from American-OwnedAffiliates Abroad (Billions of US )522466Summary of Learning Objectives472Questions 473 Problems 474 Internet Exercises 475*CHAPTER 17Foreign Direct Investment Theory and StrategyInternational Supply Chain Security:Time Is MoneySSS492498501502CHAPTER 20International Trade FinanceThe Trade RelationshipThe Trade DilemmaBenefits of the SystemLetter of Credit (L/C)560561563564566
XVIIIContentsDraftBill of Lading (B/L)Example: Documentation in aTypical Trade Transaction,Global Finance in Practice 20.1The Resurgence of Transaction Bankingand Letters of Credit . .568570MINI-CASEStanley Works and Corporate Inversion571Summary of Learning Objectives608Questions 608 Problems 609 Internet Exercises 611573Government Programs to HelpFinance ExportsTrade Financing Alternatives573574Global Finance in Practice 20.2Tunisian Private Equity a n d Factoring . . . . . . 5 7 7Forfaiting: Medium- andLong-Term Financing578MINI-CASECrosswell International's PreciousUltra-Thin Diapers580Summary of Learning Objectives583Questions 584 Problems 585 Internet Exercises 587CHAPTER 22Working Capital Management604612Trident Brazil's Operating CycleTrident's Repositioning DecisionsConstraints on Repositioning Funds614615617Global Finance in Practice 22.1P&G's Acquisition and FinancialManagement in India617Conduits for Moving Funds byUnbundling ThemInternational Dividend RemittancesNet Working CapitalInternational Cash ManagementFinancing Working Capital618619621. . : . ; . . 627: ' . . 633MINI-CASEHoneywell and PakistanInternational Airways . . . :". : . . 6 3 6sCHAPTER 21Multinational Tax Management588Tax Principles590S u m m a r y o f Learning Objectives . . . . . . . . . . . . 6 3 8Questions 639 Problems 641 Internet Exercises 6 4 4Global Finance in Practice 21.1Should the United States CutCorporate Taxes?Transfer Pricing ; . . . . . . . . . . :Tax Haven Subsidiaries and InternationalOffshore Financial CentersGlobal Finance in Practice 21.2 The Activities of OffshoreFinancial Centers.595598;602603Answers to SelectedEnd-bf-Chapter ProblemsA-iGlossaryG-iIndexl-i
Fundamentals of:,/ MULTINATIONAL FINANCE Edition III MICHAEL H. MOFFETT Thunderbird School of Global Management ARTHUR I. STONEHILL Oregon State University and University of Hawaii at Manoa DAVID K. EITEMAN University of California, Los Angeles Boston San Francisco New York London Toronto Sydney Tokyo Singapore Madrid
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