LAURENTL.JACQUE
Copyright©2020byLaurentL.Jacque.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Names:Jacque,LaurentL.,author.
Title:Internationalcorporatefinance:valuecreationwithcurrency derivativesinglobalcapitalmarkets/LaurentL.Jacque.
Description:Secondedition. | Hoboken,NewJersey:Wiley,[2020] | Series:Wileyfinance | Includesbibliographicalreferencesandindex.
Identifiers:LCCN2019026508(print) | LCCN2019026509(ebook) | ISBN 9781119550464(Hardback) | ISBN9781119550488(ePDF) | ISBN 9781119550433(ePub)
Subjects:LCSH:Internationalbusinessenterprises—Finance. | Risk management. | Foreignexchangefutures.
Classification:LCCHG4027.5.J31932020(print) | LCCHG4027.5(ebook) | DDC658.15/99—dc23
LCrecordavailableathttps://lccn.loc.gov/2019026508
LCebookrecordavailableathttps://lccn.loc.gov/2019026509
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PrintedintheUnitedStatesofAmerica.
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TheUnevenReachofGlobalization2 TheRiseoftheMultinationalCorporation3 WhatisDifferentaboutInternationalCorporateFinance?6 RisksintheWonderlandofInternationalFinance8 InternationalizationandtheLocusoftheFinanceFunction12 TheInternationalControlConundrum15 ExploitingTheMultinationalEnterpriseSystem16 Summary19 QuestionsforDiscussion19 References20
SomeFirstPrinciplesaboutExchangeRateDetermination24 WorldMapofExchangeRateRegimes:TheFlexibility × ConvertibilitySpace29 FloatingExchangeRates31 StabilizedorPeggedExchangeRates39 ControlledExchangeRates46 ToFloatortoFix:TheTrilemmaofInternationalFinance49 Summary50 QuestionsforDiscussion51 Problems52 InternetExercises54 References54
CHAPTER3
YesterdayandYesteryear57
ChronologyoftheInternationalMonetarySystem58
TheGoldStandard(1878–1914,1925–1931)61 TheBrettonWoodsSystem(1944–1971)63 ManagedFloatingExchangeRates(1973–Present)67 EuropeanMonetarySystemandtheEuropeanCurrencyUnit (1979–1999)68 EmergingMarketsCurrencyRegimesandCrises72 EuropeanMonetaryUnionandtheBirthoftheEuro(1999–Present)76 TodayandTomorrow:TheCurrentMapofExchangeRates84 Summary86 QuestionsforDiscussion87 Problems88 InternetExercises90 References90
CaseStudy3.1:WilltheEurozoneShutter?PlantLocation andExchangeRatesforHyundai 91
CHAPTER4 TheBalanceofPayments99 FundamentalsofBalanceofInternationalPaymentsAccounting100 CurrentAccount105 FinancialAccount107 OfficialReserveAccount109 StatisticalDiscrepancies:ErrorsandOmissions111 BalanceofPaymentsandtheForeignExchangeMarket111 DebtorVersusCreditorNations115 LinkingtheBalanceofPaymentstoNationalIncome118 Summary119 QuestionsforDiscussion120 Problems121 InternetExercises122 References124
CaseStudy4.1:WhenOneoftheBRIC(k)sFalls:Trials andTribulationsoftheIndianRupee 124
Problems157
InternetExercises160 References160
CaseStudy5.1:BancoMercantilInternacional’sForexLosses 160
CHAPTER6
InterestRateArbitrageandParity165 InterestRateArbitrageTheorem166 InterestRateParity174 UncoveredInterestRateArbitrageandtheCarryTrade181 Summary184
Appendix6A:TransactionCosts:InterestRateArbitarge withBid-AskSpreads(Advanced)185
Appendix6B:InterestRateParityandAsymmetricTaxation187 QuestionsforDiscussion188 Problems188
InternetExercises195 References195
CaseStudy6.1:BrazilRedeGlobo’sShort-TermFunding 195
CHAPTER7 PurchasingPowerParityandtheInternationalParitiesFramework199 PurchasingPowerParity200 TheLinkagesBetweenInterest,Inflation,andExchangeRates213 QuestionsforDiscussion220 Problems220
InternetExercises221 References222
CHAPTER8 CurrencyFuturesandOptions223 ABriefHistoryofDerivatives223 CurrencyFutures228 CurrencyOptions234 RiskProfileofCurrencyOptions236 OptionStrategies239 Put-CallParityTheorem245 TheValuationofCurrencyOptions248 DerivativesandZero-PremiumOptions254 Summary258
Appendix8A:PricingCurrencyOptions259 QuestionsforDiscussion261 Problems261
InternetExercises264 References264
CaseStudy8.1:Daewoo’sUnorthodoxFundingStrategy 264
CHAPTER9
TheInternationalFinancialSectorandtheDynamicsofGlobal
CHAPTER10
CHAPTER11
CHAPTER12 Currency,InterestRate,andCreditDefaultSwaps377 CurrencySwaps378 InterestRateSwaps383 CreditDefaultSwaps391 Summary397 QuestionsforDiscussion397 Problems398 InternetExercises400 References400
CHAPTER13 InternationalTradeFinancing405 ABriefHistoryofInternationalTrade406 TheTrilogyofRisksinExporting407 ManagingCreditRisk409 ManagingCurrencyRisk410 ManagingCountryRisk411 TheMechanicsofTradeFinancingwithaLetterofCredit412 FinancingExports415 Pre-ExportFinancing418 Government-SponsoredExportCreditAgencies422 Summary423 QuestionsforDiscussion424 Problems424
CHAPTER14 TheCaseforForeignExchangeRiskManagement433 DefiningForeignExchangeRiskManagementanditsObjectives435 CanHedgingCurrencyRiskIncreasetheValueoftheFirm?437 WhenisHedgingCurrencyRiskIrrelevant?440 FromHedgingtoManagingCurrencyRisk441 TheBuildingBlocksofForeignExchangeRiskManagement443 Summary445 Appendix14A:ForeignExchangeRiskManagement:Whatdo Firmsdo?446 QuestionsforDiscussion446 References447
CHAPTER15
ForecastingExchangeRates455 Market-BasedForecasts456 Model-BasedForecasts:TechnicalVersusEconometricModeling Approaches461 CompositeForecasts468 HowtoUseCurrencyForecasts469 Summary470
Appendix15A:ForecastingPeggedYetAdjustable ExchangeRates470 QuestionsforDiscussion476 Problems477 InternetExercises479 References479
CaseStudy15.1:EuclidesEngineering,Ltd. 480
CHAPTER16
ManagingTransactionExposure483
MeasuringTransactionExposure484
TheMechanicsofHedgingTransactionExposure488 HedgingandFinancingInternationalTrade500 EliminatingForeignExchangeRateRiskinLong-TermContracts501 ExchangeRateRiskinInternationalBidding508 HowMuchtoHedgeTransactionExposure512 Summary513 QuestionsforDiscussion514 Problems514 References520
CaseStudy16.1:HedgingCurrencyRiskatTTTextiles 521
CHAPTER17
ManagingTranslationExposure531 WhatisTranslationExposure?531 ShouldTranslationExposurebeHedged?532 AlternativeTranslationMethods533 TheMechanicsofContractualHedging539 TheMechanicsofFinancialHedging546 Summary550
Appendix17A:AccountingValuationandtheConcept ofTranslationExposure551 QuestionsforDiscussion555 Problems555 InternetExercises560 References560
CaseStudy17.1:WilkinsonSword’sTrialsandTribulationsin Turkey 560
CHAPTER18
ManagingEconomicExposure567 ATaxonomyofEconomicExposures568 TowardanOperationalMeasureofEconomicExposure575 ManagingOperatingExposure578 Summary583 QuestionsforDiscussion584 Problems584 References587
CaseStudy18.1:PeugeotCitroënSA’sEconomicExposure totheSouthKoreanWon 588 PARTFIVE
CHAPTER19
ForeignMarketEntryStrategiesandCountryRiskManagement593 ContractualModesofForeignMarketEntry594 ForeignMarketEntryThroughForeignDirectInvestments599 CountryRisk600 Costs/BenefitsofForeignDirectInvestmenttoHostCountries608 Summary612 QuestionsforDiscussion613 InternetExercises613 References614
CaseStudy19.1:Carrefour’sIndianEntryStrategy 614
CHAPTER20 InternationalCapitalBudgeting619 TheForeignDirectInvestmentDecision-MakingProcess619 APrimeronEvaluatingInvestmentOpportunities622 WhatisDifferentAboutEvaluatingForeignInvestmentProposals?624 CaseStudy:RenaultInvestsinIndia 629 GlobalCostofEquityCapital639 OptimalWorldwideCapitalStructure643 Summary644 Appendix20A:AdjustedPresentValue645 Appendix20B:RealOptions648 QuestionsforDiscussion656 Problems656 InternetExercises660 References660
CHAPTER21 Cross-BorderMergersandAcquisitions661 ABriefHistoryofMergersandAcquisitions662 TheIndustrialLogicofMergersandAcquisitions662
AreCross-BorderAcquisitionsDifferent?664 ValuationofForeignAcquisitions671 CimentsLafargeEntersVietnam673 Summary680 QuestionsforDiscussion681 Problems681 InternetExercises683
CaseStudy21.1:Etihad’sProposedAcquisition ofMalaysiaAirlines 684
CHAPTER22
ProjectFinance689 WhatisProjectFinance?690
AnatomyofProjectFinance:TheCaseoftheRasLaffanLiquefied NaturalGasCompany696 ValuingProjectFinance:TheEstyModel696 Summary704
QuestionsforDiscussion705 References705 CaseStudy22.1:CleanInfraLtdProjectFinance 706
CHAPTER23 GlobalInvesting713
TheBasicsofInternationalPortfolioManagement714 TheGainsfromInternationalDiversification722 TrialsandTribulationsinForeignEquityInvesting729 CurrencyRiskinGlobalInvesting730 AlternativeModesofInvestinginForeignEquity733 TheNewLandscapeofGlobalInvesting734 Summary741
Appendix23A:InSearchofAlphaatGlobalThematicPartneris foundontheBookWebsiteatwww.wiley.com/go/intlcorpfinance2e741 QuestionsforDiscussion742 Problems742
InternetExercises744 References744
ManagingtheMultinationalFinancialSystem749 APrimeronInternationalTaxation749 TheMultinationalFinancialSystem753 ExploitingtheSystem’sPotentialtoMinimizeGlobalTaxLiabilities755 DesigningaGlobalDividendsRemittanceStrategy761
CentralizingCashManagement765 Summary774 QuestionsforDiscussion775 Problems775 InternetExercises777 References777 Appendix:AnswerstoSelectedProblems779 AbouttheCompanionWebsite787
CHAPTER25 InternationalControlConundrum(extensionofPart6)805 APrimeronManagerialControl806 TheInternationalControlConundrum809 EVA-BasedContingentBudgetingandPerformanceAssessment815 Summary821 Appendix25A:ApplyingTheEVA-BasedControlSystem822 QuestionsforDiscussion826 References826
CHAPTER26
AsianFinanceandBanking(extensionofPart3)827 AsianFinance:CommonHistoricalRoots,DiversePaths828 AdaptiveResponses:CrisesandInstitutionalChangeinAsian Finance832 BusinessOrganization,CorporateOwnership,andGovernance836 CorporateGovernance841 CapitalMarketDevelopment846 CapitalStructureandtheCostofCapital855 Performance,Value,andthePracticeofCorporateFinance857 Summary860 QuestionsforDiscussion860 References861
CHAPTER27
IslamicBankingandFinance(extensionofPart3)863 TheUnderlyingPrinciplesofIslamicFinance864 TheEvolutionofIslamicFinance868
Preface
Asglobalizationisredefiningthefieldofcorporatefinance,internationalfinance isincreasinglypermeatingmostfinancialtransactions,whichinyesteryearswere deemedtobestrictlydomestictransactions.Infact,itisverydifficulttounderstand whatishappeningincapitalmarketswithoutafirmgraspofcurrencymarkets, theinvestmentstrategiesofsovereignwealthfunds,carrytrades,foreignexchange derivativeproducts,andsoforth.Similarly,projectfinancecannotbeunderstood withoutafirmgraspofvaluationconceptsinacross-bordercontext.Indeed,internationalfinanceisnowpartandparcelofthebasicliteracyofanyfinancialexecutive whethersheorheisaninvestmentbanker,atreasurer,aCFO,aportfoliomanager, oraloanofficer.Thereisnohidingfrominternationalfinance.
Andyetthefieldofinternationalfinancetextbooksisnotterriblycrowded,with thethreeorfourleadingtitlesshowingsignsofmultiple-editionsfatigue.Whatis neededisabookofferingafreshperspectiveoninternationalfinancethattranscends theboundariesof ethnocentric thinkingandanoverlyU.S.-centricapproach—a bookthatbringsthefascinatingandrapidlyunfoldingstoryofemergingcapital marketsandtheirdaringmultinationalsinthemainstreamofinternationalfinance. InternationalCorporateFinance ispurportingtobesuchabook.
WHATMAKESTHISBOOKUNIQUE
Thereareseveralfeaturesthatwillset InternationalCorporateFinance apartfrom rivalbooks:
1. Mostchaptersaredevelopedaroundareal-lifebutsimplifiedmini-casetoanchor theoreticalconceptstomanagerialsituations.Thisallowsthereadertograsp thepracticalrelevanceofthetopicaddressedbeforebeingintroducedtothe necessarytheoreticalframeworks.
2. Eachchapterprovidesreal-lifeillustrations.Thepurposeistomakeinternational financeasaliveaspossible.Typically,thisisdoneasfeatureinsertscalled“InternationalCorporateFinanceinPractice,”writteninalighterstylemeanttowake upthereaderbybeingreasonablyprovocative.
3. Mostchaptersprovidesimpledecisionrulesandpragmatic“how-to”answers tokeymanagerialissues—atleastoneineachchapter.Manytextsoftenprovide anarrativesolutiontomanagerialquestionsraisedbutfailtoprovidesimpleyet rigorousclosuretothereader.
4. Severalchapters,suchasIslamicBankingandFinance,AsianFinanceand Banking,Cross-BorderMergersandAcquisitions,andProjectFinance,are completelynewmaterialthatnoothertextbookcurrentlycovers.Thisbook systematicallyincorporatesthestoryoftheBRICcountries(Brazil,Russia, India,andChina)andtheirdaringmultinationals,therebybalancingout anoverlyU.S.-centricandWallStreet–anchoredapproachtointernational corporatefinance.
5. Mostchaptersincludeseparatecasestudies(alsofoundonthewebsite)thatare real-lifedecision-makingsituations.AlthoughmuchshorterthantypicalHarvardBusinessSchoolcasestudies(theindustrystandard),theycapturemultifacetedfinancialmanagementinanengagingmannerandtypicallyresultin30 to45minutesoflivelyclassdiscussion.
6. Whenappropriate,historicalperspectiveandlandmarktransactionsarepresentedtoputconceptsincontext.In-depthcoverageofthesubprimecrisis(2008) andtheeurocrisis(2010–)isdevelopedinthecontextofill-functioningfinancial markets.
7. Whileprimarilyfocusedoninternationalcorporatefinance,thebookisstructuredinsuchawaythatitcouldalsobeusedforacourseonglobalcapital markets,asPartsOne,Two,andThreeprovidecomprehensivecoverageofcapitalmarkets.
AUDIENCEFORTHISBOOK
InternationalCorporateFinance targetsnotonlythebusinessschoolmarket— primarilyMBAs,undergraduateseniors,andexecutiveMBAs—butalsoschools ofinternationalaffairsandpublicadministration.Thefirsteditionhasalso beenwidelyusedinexecutivetrainingprogramsatbanks,multinationals,and increasinglygovernmentandregulatoryagencies.
Thebookisintendedforstudentstakinganelectiveininternationalcorporate financethatmaybepartofafinancemajor(butnotnecessarily).Althoughprior exposuretoeconomicsandcorporatefinancewouldbehelpful,thebookisselfcontainedandhasnoprerequisites.
InternationalCorporateFinance shouldalsoappealtoagrowinginternational/ exportmarketbeyondthedomesticuniversity/collegemarket.Moregenerally, thereisanexplosioninthenumberofMBAprogramsofferedinemerging marketcountriessuchasChina,India,Brazil,Russia,andMexico,whereinternationalfinanceisatthecenterinthecurriculumsimplybecauseoftheglobal orientationoftheseeconomies.Forthisrapidlygrowingmarket,itisimperativetoapproachinternationalfinancialmanagementfromanemergingmarket perspectiveaswellasaU.S.orEuropeanperspective.SpecificchaptersonAsian andIslamicfinanceandbankingaswellasBRICcountries,alongwithillustrationsandproblems/exercises,shouldbestrongelementsofdifferentiationvis-à-vis existingtexts.
THECHALLENGETHISTOPICPRESENTS
Internationalfinanceisoneofthemosttopicalandlivelybusinesstopicsmakingthe frontpageofanybusinessdaily,but,perhapsbecauseoftheuniqueroleplayedby financialderivatives,itisalsoahighlycomplex,arcane,technical,andmystifying subjectfortheaveragebusinessstudent.Hereinliesthechallengefortheinstructor andthestudent:howtocapitalizeonthestarpowerandcaptivatingnatureof internationalfinancewithoutsacrificingtherigoroftheexplanation.Textbooks alltoooftenerronthesideofacademiccorrectnessandreadliketreatiseswritten forotherknowledgeableacademicsratherthanfresh-facedstudents.Myapproach istostart(most)chapterswithreal-lifedecision—situationstohookthereader whopresumablywantstoknowwhatpossibleanswersstrugglingmanagerscould implement—andthenderivetheory,ratherthanstartingfromatheoreticalconstruct attheriskoflosingthereaderbeforeturningtoapplications.Forexample,the chapterontradefinancingstartswith:
TataMotorsofIndia’sexportmanager,RajuAneja,hasjustsignedanexport orderfor1,000Nanos–itsnewrevolutionaryminicar–withAtlasDistributors,aVespascooterdealershipbasedinCasablanca,Morocco.Theexport saleisdenominatedineuros(€)andcallsforpaymentof€20millionon delivery,scheduledforapproximatelythreemonthsfromtimeofshipment. TataMotorshasneverhadanycommercialdealingswithAtlasbutwasenvisioningalong-termrelationshipwiththeMoroccanfirm.However,itwas concernedabouttheimporter’ssolvency.TheMoroccandirhamwaspegged totheeuroandpartiallyconvertible.HowshouldTataMotorsfinanceits exporttrade?Rajuknewthatthiswouldbethefirstofmanysimilardeals thatTataMotorswashopingtoforgewithotheremergingmarketcountries wheretheNanowasexpectedtomeetwithmuchcommercialsuccess.
Similarly,thechapterondebtfinancingstartswith:
JetBlueAirlineswasseekingtoraise$250millioninaseven-yearnoteto upgradeitsagingfleet.Ms.Rousse–JetBlue’snewlyappointedCFO–was reviewingthedifferentfundingoptionsofferedbyitsinvestmentbankers, whichincludedadomesticdollar-denominatedzero-couponbondpriced at61percent,adollar-denominatedEurobondwitha7.25percentannual coupon,andasamuraibonddenominatedinyenwithasemiannualcoupon of4.00percent.Last,afloating-ratenotedenominatedineurospayingeuroLIBOR + 165basispointswasalsobeingconsidered.Ms.Roussewasperplexedbythearrayofcurrencydenominationsandthesignificantdifferences innominalinterestrates,bothofwhichcomplicateddirectcomparisons amongthedifferentfundingoptions.
Bothchaptersprogressivelybuildamorerigorousframeworkastheyprogress. Inthesamevein,aricharrayofexercisesandproblemsaccompanyeachchapter; theyaremorethanmechanicalnumericalapplicationsofwhatisdiscussedinthe chapteritself.Lastbutnotleast,mostchaptersofferaseparateshortcasestudyfor fruitfuldiscussion.
WHATISINTHEBOOK?
Thisbookisdividedintosixparts:
Part1:TheInternationalMonetaryEnvironment
Part2:TheForeignExchangeMarketandCurrencyDerivatives
Part3:InternationalFinancing
Part4:ManagingForeignExchangeRisk
Part5:Cross-BorderValuationandForeignInvestmentAnalysis
Part6:ManagingtheMultinationalFinancialSystem
Part1:TheInternationalMonetaryEnvironment.Part1examinesthemonetaryenvironmentwithinwhichinternationalfinancingdecisionsaremade.How exchangeratesaredeterminedandtheuniqueroleplayedbycentralbanks’interventioninsettingcurrencyvaluesisthefocusofChapter2,whereasChapter3presents abriefhistoryoftheinternationalmonetarysystem.Thearchitectureoftheworld economyisoutlinedinChapter4throughthelensofnationalbalanceofpayments accounting,whichrecordsthekeyflowslinkingnationaleconomies.
Part2:TheForeignExchangeMarketandCurrencyDerivatives.Afterintroducingtheforeignexchangemarketanditsinnerworkings(Chapter5),Part2discusses thevaluationofthemotherofallcurrencyderivatives—theforwardcontract—in thecontextofthetheoryofinterestrateparity(Chapter6).Theinternationalparityframeworkwith PurchasingPowerParity andtheFisherParityiscompletedin Chapter7.CurrencyfuturesandoptionsaredetailedinChapter8,whichshowshow theycanbeharnessedforthepurposeofriskmanagement.
Part3:InternationalFinancing.Ifglobalizationoffinancialmarketshasgonea longwaytowarderadicatingdifferencesinnationalcostofcapital,theyhavenot beenentirelyerased.Thisiswhyglobalfinancialmarketsareoftencharacterized asmildlysegmentedratherthanfullyintegrated(Chapter9).Part3outlinesfundingasaglobalprocurementdecisionfrombothequitymarkets(Chapter10)and debtmarkets(Chapter11).Risk(s)arisingfrominvestinginorfinancingviafixedincomesecuritiescanbemanagedwith currency,interestrate,andcreditdefault swaps (Chapter12).Theidiosyncrasiesof InternationalTradeFinancing arepresentedinChapter13.
Theuniquenessoffinancingstrategiesandcapitalmarketsintworegionsof theworldthatloomespeciallylargeontheglobaleconomy—namelyEastAsiaand theMiddleEast—isaddressedinseparatechaptersfoundonthebookwebsite. Chapter25profilestheidiosyncrasiesofAsianfinanceandbankinginthecontext ofJapan,SouthKorea,andChina,whereasChapter26exploresthemysteriesof Islamicfinance.
Part4:ManagingForeignExchangeRisk.Theexchangeratevariablepermeates allkeyfinancialmanagementdecisionsandinjectsaconsiderabledegreeofvariabilityinafirm’soverallriskprofile.Part4startsbyaskingwhetherhedgingpartorall ofafirm’sexposuretocurrencyriskisindeedvaluecreatingforthefirm’sowners andthereforewarranted(Chapter14).Totheextentthatexchangerateforecasting(Chapter15)isatreacherousactivityinthecontextofcleanfloatingexchange rates,wetakea“totalrisk”viewofriskmanagement.Exportersandimportersas
wellasmultinationalcorporationsandgloballyreachingfinancialinstitutionsgenerallyhedgebothtransactionandtranslationexposuresbyusingforwards,futures, options,orswaps.Measuringandmanagingtransaction,translation,andeconomic exposuresarediscussedinChapters16,17,and18,respectively.
Part5:Cross-BorderValuationandForeignInvestmentAnalysis.Aftercontrastingalternativemodesofforeignmarketentryandassociatedpoliticalrisks (Chapter19).Part5developsavaluationframeworkforcross-borderinvestments thatuniquelyincorporatesthedifferentvariablessuchasforeignexchangerisk, countryrisk,asymmetrictaxtreatment,anddifferentinflationrates.Chapter20 contrastsdifferentmetricssuchasnetpresentvalueofasset-basedcashflowsor equity-basedcashflowsversusadjustedpresentvaluemetrics,andreviewsthe necessaryadjustmentstobemadetothecostofcapitalusedasthediscountrate ininternationalvaluation.Theframeworkisappliedtocross-bordermergersand acquisitionsinChapter21andlarge-scaleinfrastructuralprojectfinanceinChapter 22.Takingtheperspectiveofassetmanagersmanningthedesksofmutualfunds, pensionfunds,hedgefunds,orsovereignwealthfunds,globalinvestinginstocks andbondsisaddressedinChapter23,whichgaugesthelimitofgeographical diversificationinthecontextofever-increasinglyintegratedcapitalmarkets.
Part6:ManagingtheMultinationalFinancialSystem.Chapter24showshow financialdecisionsshouldleveragethemultinationalenterprisesystembydeftly exploitingarbitrageopportunitiesarisingfromcapitalmarketssegmentationand heterogenousnationaltaxsystems.Finally,centraltothesuccessfulimplementation ofaglobalstrategy,multinationalcorporationsneedfinancialplanning,budgeting, andcontrolsystemsthatincorporatetheuniqueoperatingcircumstancesofeach andeveryforeignsubsidiarywhileensuringthatstrategicgoalsaredulyachieved (seeChapter25onthebook website).
WhatIsNewintheSecondEditionof InternationalCorporateFinance
Thesecondeditionwillcontinuetoemphasizeevenmoreprominentlytheimportanceofemergingmarketsastheso-calledBRICsareloomingincreasinglylarger ontheworldeconomy,globaltrade,andfinancialmarkets.Morechapters(ascomparedtothefirstedition)aredevelopedaroundareal-lifebutsimplifiedmini-caseto anchortheoreticalconceptstomanagerialsituations.Thisallowsstudentstograsp thepracticalrelevanceofthetopicaddressed.
■ Alldataprovidedintableandgraphswereupdatedtoreflectmostrecent information.
■ Catchy,shortcasestudiesarenowincludedinmostchapters.
RevisionsofSpecificChapters
■ Chapter2includesanewdiscussionoftheInternationalFinancetrilemmaand howitshapesthechoiceofcurrencyregimes;itfeaturesacaseillustrationof howSwitzerlandresisteditscurrencyappreciationbydefendinganofficialpeg againsttheeuroandaccumulatingmammothreserves.
■ Chapter3givesathoroughupdateoftheEurocrisisandhow“internal”devaluationisallowingtheeuro-zonetolimpalong.IMF’slargesteverbailoutto Argentina(2018).
■ Chapter4explainshowBrexitimpactstheUKbalanceofpaymentsanditsfinancialservicesindustry.
■ Chapter7(formerlytheappendixtoChapter2)isanewchapteronInternational Parityconditions.PurchasingPowerParity,theFisherParity,andforwardsas unbiasedpredictorsoffuturespotexchangeratesareintegratedwithinterest rateparity.Howinflationandinterestratesdrivetherelationshipsbetweenspot, forward,andfuturespotexchangerates.
■ Chapter8wassplitbetweenfuturesandoptionsversusswapswhicharenow expandedinanewChapter12.NewmaterialisintroducedonexoticKIKO optionsandhowtheytorpedoedKoreanexporters.Anewappendixoncurrencyoptionpricingincludesnumericalillustrationsofhowtopriceputandcall currencyoptionswiththeGarman-Kohlhagenmodel.
■ Chapter9revisesthediscussionofdisintermediationwiththeintroductionof capitaladequacyratiosasmandatedbytheBaselAccord2.5toexplainthecost offinancialintermediation.Itexplainstheroleplayedbycreditratingagencies infacilitatingdisintermediationandtheemergingroleplayedbythecommercial papermarket.Finally,itillustrateshowtheemergenceofmoneymarketfunds fuelsdisintermediationinChina.
■ Chapter10exploreshowgovernments–mostlyofEastAsiancountriesand morerecentlySaudiArabia–intervenesintheirdomesticstockmarkettoprop upmarketindices,therebyunderminingmarketefficiency.
■ Chapter11hastwoadditionalsections:1)onsovereigndebtwithacaseillustrationofArgentineCenturybondtomaturein2117(yesin100years!)and2) onstructurednotes.
■ Chapter12isanewchapteronswapsincludingcurrency,interestrate,andcredit defaultswaps,withacaseillustrationoftheProctor&Gambleinterestrateswap debacleandtheJPMorganLondonWhalemammothgambitoncreditdefault swapsgoingsour.
■ Chapter16introducesexoticoptionsandtheiruseinhedgingcurrencyriskin internationaltradeandfinancing.
■ Chapter19illustratespoliticalriskintheformofexpropriationwiththe recentexampleofVenezuela.Itintroduceseconomicsanctionsandtheir extra-territorialreachonfirmsasaformofpunishingpoliticalrisk;itusesthe exampleofPeugeotCitroënexitingIranforasecondtimebecauseofreenacted U.S.sanctions.
■ Chapter20includesanewsectiononhowtodevelopanoptimalworldwide capitalstructuretominimizethefirmcostofequitycapital.
■ Chapter21givesanupdateontheglobalreachofanti-trustandM&Areview processandhowitimpactsM&Across-bordervaluation.ItincludesacaseillustrationofhowChinawasabletoacquireLasBambascopperminebyblocking aproposedmergerbetweenGlencoreandXstrata.
■ Chapter23expandsdiscussionofhedgefundsandprivateequityfirmsasglobal investors.Itfeaturesacasestudyofhowholdouts“vulture”hedgefundswere abletoforceArgentinatorepayfullvalueofdistresseddebtthroughlitigation.
■ Chapter24providesanupdateoncross-border,intra-corporatetransferpricing andthecurrentfeudbetweentheEuropeanUnion,Ireland,andMNCsabout taxavoidance.
WEBSITEANDONLINERESOURCES
For readers thisbookcomeswithacompanionwebsitewhereChapters25,26and27 aswellasappendix23.A1canbefoundat: www.wiley.com/go/intlcorpfinance2e (seebackofbookfordetails).
Professors canreadilydownloadat www.wiley.com/go/intlcorpfinance2e thefollowingmaterials:
■ Instructor’sManual. TheOnlineInstructor’sManualoffersdetailedsolutions forend-of-chapterdiscussionquestionsandproblems.Elaboratesolutionsare alsopresentedforeachcasewithguidelinesforfacilitatingasuccessfulclass discussion.
■ MultipleChoiceQuestions tohelpstudents/readerstogaugetheirunderstanding ofeachchaptermaterials
■ PowerPointPresentation. Professionallypreparedslidesprovidedetailedlecture outlinesincludingselectedgraphsfromthetextofeachchapters.
■ Inaddition,thereareresourcesspecificallyforprofessors’use,andthoseare availableat JohnWiley&Sons’HigherEducationwebsite.
Iwouldbegratefulfor readers’ and instructors’ constructivecomments andsuggestionsforimprovementsandrevisions.Pleasewritedirectlytomeat laurent.jacque@tufts.edu.
Overtheyears,researchprojects,consultingassignments,anddiscussionswith manysavvyexecutivesandacademicshavehelpedmechallengereceivedwisdom intheareaofcorporatefinance,financialengineering,riskmanagement,andderivatives;fortheirinsightthisbookisabetterone.MostnotablyIwishtothankDaniel Ades(KawaFund),Y.D.Ahn(Daewoo),BruceBenson(Barings),JoelBessis(HEC), AmarBhide(TuftsUniversity),AlexBongrain(BongrainS.A.),CharlesN.Bralver (OliverWyman),JamesBreech(CougarInvestments),EricBriys(Cyberlibris), GaylenByker(InterOil),BrianCasabianca(InternationalFinanceCorporation),AsavinChintakananda(StockExchangeofThailand),GeorgEhrensperger (Garantia),MyronGlucksman(Citicorp),AnthonyGribe(J.P.Hottinguer& Cie),GabrielHawawini(INSEAD),CharampornJotishkatira(StockExchangeof Thailand),RobertE.Kiernan(AdvancedPortfolioManagement),OliverKratz (GlobalThematicPartners),MargaretLoebl(ADM),RodneyMcLauchlan(Bankers Trust),JacquesOlivier(HEC),CraigOwens(CampbellSoup),AvinashPersaud (StateStreet),GuadalupePhilips(Televisa),RolandPortait(ESSEC),JorgeRamirez (AonRiskSolutions),PatrickJ.Schena(TuftsUniversity),ChristophSchmid (Bio-Oil),JohnSchwarz(Citicorp),ManojShahi(ShinseiBank,Japan),Sung ChengChih(GIC,Singapore),CharlesTapiero(PolytechnicInstituteatNYU), AdrianTschoegl(Wharton),SeckWaiKwong(StateStreet),andLawrenceWeiss (TuftsUniversity).
Iamindebtedtoseveralindividualswhoselflesslyreadandediteddifferent versionsofthemanuscript,andIwishtoexpressmyappreciationto:
BlaiseAllaz(HEC–Paris)
RajeshChakravarti(IndianSchoolofBusiness)
GunterDufey(UniversityofMichigan)
ShuvamDutta(InternationalFinanceCorporation)
GabrielHawawini(INSEAD)
OlivierJacque(MorganStanley)
LawrenceKrohn(TuftsUniversity)
KenichiNozaki(GreenLightFund)
RishadSadikot(CambridgeAssociates)
RajeevSawant(BaruchCollege)
PatrickSchena(TuftsUniversity)
CharlesS.Tapiero(PolytechnicInstitute-NYU)
PhilipUllmann(BentleyCollegeandTuftsUniversity)
LawrenceWeiss(TuftsUniversity)
