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7.5

Currency spreads

201

7.6

The value of a call option before maturity

202

7-B.1 Illustration of put-call option interest rate parity

214

8.1

Classic interest rate swap structure

220

8.2

Diagram of a fixed-for-fixed currency swap

221

8.3

Example of a fixed-for-fixed euro-U.S. dollar currency swap

223

8.4

Example of a fixed-for-floating currency swap

224

8.5

Kodak’s A$200 million zero-coupon eurobond and currency swap

226

8.6

Illustration of the commitments between a CDS buyer and CDS seller

235

8.7

CDS spreads on the Republic of Turkey: December 2017–November 2018

236

9.1

Currency risk sharing: GE and Lufthansa

271

9.2

Currency range forward: GE and Lufthansa

272

9.3

Use of a currency cylinder to hedge GE’s receivable

273

11.1

Securitization versus intermediation

332

11.2

The role and consequences of well-functioning financial markets

333

11.3

Number of Foreign Listings in New York, London, and Tokyo: 2006–2018

340

11.4 Investment in infrastructure projects with private participation in developing countries: 1990–2017

344

12.1

Interest rate relationships between domestic and eurocurrency credit markets

353

13.1

Annualized monthly returns and standard deviation of returns: January 2000– April 2018

371

13.2 Growth of $1 invested in the U.S. market, MSCI World Index, and EAFE Index: January 1990–April 2018

374

13.3 International diversification pushes out the efficient frontier

375

13.4 Correlations of U.S. and EAFE Index returns (rolling five-year periods using monthly returns from January 1990–April 2018)

376

13.5 Risk and return for various mixes of U.S. and Denmark indices

377

13.6 Cumulative returns for the MSCI World and MSCI Emerging Market indices: 1990–2018

379

13.7 Risk and return for various mixes of MSCI World and MSCI Emerging Market indices

380

13.8 Efficient frontiers, December 1970–December 1980

384

14.1 Map of world risk—2016

398

14.2 Government debt to GDP for the G7 countries: 1990, 2010, and 2018

407

14.3 Real GDP growth for the G7 countries

407

14.4 Economic freedom and income per capita: 2016

411

15.1

Sovereign bond spreads for developing and emerging countries: January 2018

442

15.2 Subsidiary capital structure depends on what its funds are called

444

15.3 Novo’s B share prices compared with stock market indices, 1977–1982

452

17.1

498

The gold mine operating decision

17.2 Valuing a growth option to undertake a follow-up project

499

18.1 The multinational corporate financial system

511

18.2 Corporate taxation rates in selected OECD countries: 2018

514

18.3 Structure of a back-to-back loan

524

18.4 Structure of a parallel loan

526

LIST OF TABLES 1.1

Proportion of foreign sales for selected large U.S. multinationals

8

1.2

Differences between offshoring and outsourcing

13

2.1

Advantages and disadvantages of a strong or weak U.S. dollar

51

3.1

Typical currency control measures

66

3.2

Wholesale price indices: pre-World War I

71

3.3

Consumer price indices (CPI): post-World War II

71

3.4

Irrevocable conversion rates for the euro

84

3.5

Statistics for the European Union, Eurozone, and other major economies

87

4.1

The Big Mac Index as of July 1, 2018

106

4.2

The Apple Iphone X in select country on November 3, 2017

111

5.1

The United States Balance of Payments for 2017 (USD billions)

142

5.2

Examples of U.S. Balance-of-payments accounts

143

5.3

Global Current Account Balances: 1996, 2003, and 2017

152

6.1

Foreign Exchange Rates, Friday, November 30, 2018

175

6.2

Key currency cross rates, Friday, November 30, 2018

178

7.1

Contract specification for selected major currency futures

191

7.2

An example of daily settlement with a futures contract

193

7.3

Basic differences between forward and futures contracts

193

7.4

Contract specification for PHLX standardized currency options contract

195

7.5

Currency option pricing and valuation

203

7.6

Declining exchange rate scenario

204

7.7

Hedging alternatives: offsetting a $4,750 loss due to a declining euro

204

7.8

Declining exchange rate scenario

204

7.9

Hedging alternatives: offsetting a $5,200 gain due to a rising euro

205

7.10

Currency futures quoted in the Wall Street Journal on December 7, 2018

207

7.11

Selected currency options quoted on Eurex on December 7, 2018

208

8.1

Merrill Lynch cash flows-Eastman Kodak transaction

227

8.2

Cash flows associated with yen debenture currency swap

228

9.1

Comparison of translation, transaction, and operating exposures

247

9.2

Financial statement impact of translation alternatives for a 20% devaluation (USD thousands)

249

9.3

Financial statement impact of translation alternatives for a 60% revaluation (USD thousands)

250

9.4

Basic hedging techniques

255

9.5

Costs of the basic hedging techniques

256

9.6

Basic strategy for hedging translation exposure

261

9.7

Possible outcomes of forward market hedge as of December 31

264

9.8

Possible outcomes of money market hedge as of December 31

265

9-A.1 Factors indicating the appropriate functional currency

284

9-A.2 Translation of Sterling Ltd. income statement under FASB-52 (in millions)

285

9-A.3 Translation of Sterling Ltd. balance sheet under FASB-52 (in millions)

286

10.1

The time pattern of economic exposure

288

10.2

The effects of nominal exchange rate changes and inflation on Apex Philippines

292

10.3

The effects of real exchange rate changes on the Brazilian Shoe Manufacturer

293

10.4

Nominal and real exchange rates for Chile: 1979–1982

295

10.5

Characteristic economic effects of exchange rate changes on multinational corporations

297

10.6

Key questions to ask that help identify exchange risk

300

10.7

Summary of projected operations for Spectrum AB: base case

301

10.8 Impact of Krona devaluation on Spectrum AB’s balance sheet under FASB-52

302

10.9

Summary of projected operations for Spectrum AB: scenario 2

303

10.10 Summary of projected operations for Spectrum AB: scenario 3

304

10.11 Summary of economic exposure impact of krona devaluation on Spectrum AB

305

10.12 Statement of cash flows

315

10.13 Effect of financial structure on net cash flow

316

11.1

10 most developed financial centers: 2014

334

11.2

25 largest banks by asset: 2018

337

12.1

Comparison of all-in costs of a eurobond issue and a U.S. dollar bond issue

357

13.1

How foreign markets were correlated with the U.S. market and the MSCI World Index, 2000–2018

373

13.2

Correlation of monthly returns of selected emerging markets with the U.S. market for different time periods

378

14.1

Business Environment Rankings (BER) from the Economist’s Intelligence Unit—2018

401

15.1

Subsidiary capital structure: debt-to-equity ratios

443

15.2

Consolidated parent capital structure: debt-to-equity ratios

443

15.3

Calculating the value of Sonat’s low-cost loan arrangement (U.S. $ millions)

448

16.1

Largest national markets for Coca-Cola and McDonald’s: 2018

461

17.1

Initial investment outlay in IDC-U.K. (£1=$2)

488

17.2

Initial balance sheet of IDC-U.K. (£1=$2)

489

17.3

Present value of IDC-U.K.: project viewpoint

491

17.4

Dividends and fees royalties received by IDC-U.S. ($ millions)

493

17.5

Net cash flows from exports to IDC-U.K. ($ millions)

493

17.6

Present value of IDC-U.K.: parent viewpoint ($ millions)

494

17.7

Value of lost export sales ($ millions)

495

18.1

Market imperfections that enhance the value of internal financial transactions

512

18.2

Tax effect of high versus low transfer price ($ thousands)

517

18.3

Tax effect of high versus low transfer price with ad valorem tariffs ($ thousands) 518

18.4

Tax effects of dividend remittances from abroad pre- and post-TCJA

528

18.5

Dollar cash flows to Kraft-Heinz under debt and equity financing

530

Table of Contents COVER Half Title Title PageS Copyright LIST OF FIGURES LIST OF TABLES PREFACE WORLD CURRENCIES AND SYMBOLS ACRONYMS AND SYMBOLS Contents PART I: THE INTERNATIONAL FINANCIAL MANAGEMENT ENVIRONMENT CHAPTER 1: INTRODUCTION: MULTINATIONAL CORPORATIONS AND FINANCIAL MANAGEMENT 1.1 THE RISE OF THE MULTINATIONAL CORPORATION 1.2 THE INTERNATIONALIZATION OF BUSINESS AND FINANCE 1.3 MULTINATIONAL FINANCIAL MANAGEMENT: THEORY AND PRACTICE 1.4 OUTLINE OF THE BOOK QUESTIONS APPENDIX: THE ORIGINS AND CONSEQUENCES OF INTERNATIONAL TRADE QUESTIONS NOTES CHAPTER 2: THE DETERMINATION OF EXCHANGE RATES 2.1 SETTING THE EQUILIBRIUM SPOT EXCHANGE RATE 2.2 EXPECTATIONS AND THE ASSET MARKET MODEL OF EXCHANGE RATES 2.3 THE FUNDAMENTALS OF CENTRAL BANK INTERVENTION 2.4 THE EQUILIBRIUM APPROACH TO EXCHANGE RATES 2.5 DISEQUILIBRIUM THEORY AND EXCHANGE RATE OVERSHOOTING 2.6 CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 3: THE INTERNATIONAL MONETARY SYSTEM

3.1 ALTERNATIVE EXCHANGE RATE SYSTEMS 3.2 A BRIEF HISTORY OF THE INTERNATIONAL MONETARY SYSTEM 3.3 THE EUROPEAN MONETARY SYSTEM AND MONETARY UNION 3.4 EMERGING MARKET CURRENCY CRISES 3.5 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 4: PARITY CONDITIONS IN INTERNATIONAL FINANCE AND CURRENCY FORECASTING 4.1 ARBITRAGE AND THE LAW OF ONE PRICE 4.2 PURCHASING POWER PARITY 4.3 THE FISHER EFFECT 4.4 THE INTERNATIONAL FISHER EFFECT 4.5 INTEREST RATE PARITY THEORY 4.6 THE RELATIONSHIP BETWEEN THE FORWARD RATE AND THE FUTURE SPOT RATE 4.7 CURRENCY FORECASTING 4.8 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 5: THE BALANCE OF PAYMENTS AND INTERNATIONAL ECONOMIC LINKAGES 5.1 BALANCE-OF-PAYMENTS CATEGORIES 5.2 THE INTERNATIONAL FLOW OF GOODS, SERVICES, AND CAPITAL 5.3 COPING WITH THE CURRENT-ACCOUNT DEFICIT 5.4 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES PART II: THE FOREIGN EXCHANGE AND DERIVATIVE MARKETS CHAPTER 6: THE FOREIGN EXCHANGE MARKET 6.1 ORGANIZATION OF THE FOREIGN EXCHANGE MARKET 6.2 THE SPOT MARKET 6.3 THE FORWARD MARKET

6.4 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 7: CURRENCY FUTURES AND OPTIONS MARKETS 7.1 FUTURES CONTRACTS 7.2 CURRENCY OPTIONS 7.3 READING CURRENCY FUTURES AND OPTIONS PRICES 7.4 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS APPENDIX: OPTION PRICING USING BLACK-SCHOLES PROBLEMS APPENDIX: PUT-CALL OPTION INTEREST RATE PARITY PROBLEMS REFERENCES NOTES CHAPTER 8: CURRENCY, INTEREST RATE, AND CREDIT DERIVATIVES AND SWAPS 8.1 INTEREST RATE AND CURRENCY SWAPS 8.2 INTEREST RATE FORWARDS AND FUTURES 8.3 STRUCTURED NOTES 8.4 CREDIT DEFAULT SWAPS 8.5 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCE NOTES PART III: THE INTERNATIONAL FINANCIAL MANAGEMENT ENVIRONMENT CHAPTER 9: MEASURING AND MANAGING TRANSLATION AND TRANSACTION EXPOSURE 9.1 ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE 9.2 ALTERNATIVE CURRENCY TRANSLATION METHODS 9.3 TRANSACTION EXPOSURE 9.4 DESIGNING A HEDGING STRATEGY 9.5 MANAGING TRANSLATION EXPOSURE 9.6 MANAGING TRANSACTION EXPOSURE 9.7 SUMMARY AND CONCLUSIONS

QUESTIONS PROBLEMS REFERENCES APPENDIX: STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 52 NOTES CHAPTER 10: MEASURING AND MANAGING ECONOMIC EXPOSURE 10.1 FOREIGN EXCHANGE RISK AND ECONOMIC EXPOSURE 10.2 THE ECONOMIC CONSEQUENCES OF EXCHANGE RATE CHANGES 10.3 IDENTIFYING ECONOMIC EXPOSURE 10.4 CALCULATING ECONOMIC EXPOSURE 10.5 AN OPERATIONAL MEASURE OF EXCHANGE RISK 10.6 MANAGING OPERATING EXPOSURE 10.7 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES PART IV: THE INTERNATIONAL CAPITAL MARKETS AND PORTFOLIO MANAGEMENT CHAPTER 11: INTERNATIONAL FINANCING AND NATIONAL CAPITAL MARKETS 11.1 CORPORATE SOURCES AND USES OF FUNDS 11.2 NATIONAL CAPITAL MARKETS AS INTERNATIONAL FINANCIAL CENTERS 11.3 DEVELOPMENT BANKS 11.4 PROJECT FINANCE 11.5 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 12: THE EUROMARKETS 12.1 THE EUROCURRENCY MARKET 12.2 EUROBONDS 12.3 NOTE ISSUANCE FACILITIES AND EURONOTES 12.4 EURO-COMMERCIAL PAPER 12.5 THE ASIACURRENCY MARKET 12.6 SUMMARY AND CONCLUSIONS

QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 13: INTERNATIONAL PORTFOLIO MANAGEMENT 13.1 THE RISKS AND BENEFITS OF INTERNATIONAL EQUITY INVESTING 13.2 INTERNATIONAL BOND INVESTING 13.3 OPTIMAL INTERNATIONAL ASSET ALLOCATION 13.4 MEASURING THE TOTAL RETURN FROM FOREIGN PORTFOLIO INVESTING 13.5 MEASURING EXCHANGE RISK ON FOREIGN SECURITIES 13.6 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES PART V: INTERNATIONAL CAPITAL BUDGETING CHAPTER 14: COUNTRY RISK ANALYSIS 14.1 LEARNING OBJECTIVES 14.2 MEASURING POLITICAL RISK 14.3 ECONOMIC AND POLITICAL FACTORS UNDERLYING COUNTRY RISK 14.4 COUNTRY RISK ANALYSIS IN INTERNATIONAL LENDING 14.5 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 15: THE COST OF CAPITAL FOR FOREIGN INVESTMENTS 15.1 THE COST OF EQUITY CAPITAL 15.2 THE WEIGHTED AVERAGE COST OF CAPITAL FOR FOREIGN PROJECTS 15.3 DISCOUNT RATES FOR FOREIGN INVESTMENTS 15.4 THE COST OF DEBT CAPITAL 15.5 ESTABLISHING A WORLDWIDE CAPITAL STRUCTURE 15.6 VALUING LOW-COST FINANCING OPPORTUNITIES 15.7 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES

NOTES CHAPTER 16: CORPORATE STRATEGY AND FOREIGN DIRECT INVESTMENT 16.1 THEORY OF THE MULTINATIONAL CORPORATION 16.2 DESIGNING A GLOBAL EXPANSION STRATEGY 16.3 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES CHAPTER 17: CAPITAL BUDGETING FOR THE MULTINATIONAL CORPORATION 17.1 BASICS OF CAPITAL BUDGETING 17.2 ISSUES IN FOREIGN INVESTMENT ANALYSIS 17.3 FOREIGN PROJECT APPRAISAL: THE CASE OF INTERNATIONAL DIESEL CORPORATION 17.4 POLITICAL RISK ANALYSIS 17.5 GROWTH OPTIONS AND PROJECT EVALUATION 17.6 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES APPENDIX: MANAGING POLITICAL RISKS NOTES CHAPTER 18: MANAGING THE INTERNAL CAPITAL MARKETS OF MULTINATIONAL CORPORATIONS 18.1 THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM 18.2 INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS 18.3 DESIGNING A GLOBAL REMITTANCE POLICY 18.4 SUMMARY AND CONCLUSIONS QUESTIONS PROBLEMS REFERENCES NOTES GLOSSARY INDEX END USER LICENSE AGREEMENT

List of Illustrations Chapter 1

Figure 1.1 Where the parts for Boeing’s 787 Dreamliner come from Figure 1.2 Annual U.S. foreign direct investment inflows and outflows: 1980–20...

Figure 1.3 The stock of worldwide foreign direct investment: 1980–2017 Figure 1.4 Annual foreign direct investment inflows to developing countries: 1980–20...

Figure 1.5 A representative foreign expansion sequence Figure 1.6 U.S. unemployment rates and new job creation: 1980–2017 Figure 1.7 Real compensation per hour versus output per hour for American nonfarm workers: 1960–20...

Chapter 2 Figure 2.1 Equilibrium exchange rates Figure 2.2 Impact of U.S. inflation on the equilibrium exchange rate Figure 2.3 Central Bank Independence and Inflation Figure 2.4 Dollarization stabilizes the Ecuadorian sucre Figure 2.5 Tracking the value of the dollar: 1970–2018 Figure 2.6 Mexico and Argentina follow different monetary policies Figure 2.7 Currency intervention by the Swiss National Bank Figure 2.8 Exchange rate overshooting according to the disequilibrium theory of ex...

Chapter 3 Figure 3.1 The trilemma and exchange rate regime choice Figure 3.2 Supply and demand curve shifts Figure 3.3 Fluctuating exchange rates Figure 3.4 Actual dollar/euro exchange rate: April 22–26, 2019 Figure 3.5 The price-specie-flow mechanism Figure 3.6 Value of the U.S. Dollar in Terms of Yen: 1971–2019 Figure 3.7 Defending the ERM required high interest rates in Europe: 1980–1992 Figure 3.8 The EMS forces convergence toward Germany’s inflation rate: 19...

Figure 3.9 The European Union and Eurozone (2019) Figure 3.10 Two decades of the euro: 1999–2019 Figure 3.11 Unit Labor Costs for the PIGS and Germany: 1998–2018 Figure 3.12 Debt to GDP ratio for Germany and the PIIGS: 2010–2017 Chapter 4 Figure 4.1 Five key theoretical relationships among spot rates, forward rates, infl...

Figure 4.2 Purchasing power parity

Figure 4.3 Relation of changes in exchange rates and relative purchasing power parity: 19...

Figure 4.4 Changes in actual exchange rates and relative purchasing power parity f...

Figure 4.5 The Fisher effect Figure 4.6 Fisher effect: Nominal interest rate versus inflation rate for 25 dev...

Figure 4.7 Capital market segmentation versus capital market integration Figure 4.8 Real interest rates versus nominal interest rates for 25 developed and devel...

Figure 4.9 International Fisher effect Figure 4.10 An example of covered interest rate parity Figure 4.11 Interest Rate Parity Figure 4.12 Short-term foreign interbank offered rate based deviations from covered...

Figure 4.13 Relationship between the forward rate and the future spot rate Figure 4.14 Forecasting in a fixed-rate system Chapter 5 Figure 5.1 Current-account balances for selected countries: 2017 Figure 5.2 National origin of the value added of an Apple iPhone 7: 2017 Figure 5.3 The trade balance falls as spending rises relative to GDP: 1960–2017 Figure 5.4 International Investment Position of the United States: 1980–2017 Figure 5.5 United States Balance on Current Account: 1950–2017 Figure 5.6 The dollar and the trade deficit: 1984–1987 Figure 5.7 United States current-account balance versus the dollar: 1973–2017 Figure 5.8 The theoretical J-curve Chapter 6 Figure 6.1 Top 10 foreign exchange traders by market share: 2017 Figure 6.2 An example of triangular currency arbitrage Figure 6.3 Share of foreign exchange trading volume by financial center: April...

Figure 6.4 Daily global foreign exchange trading volume: 1973–2016 Figure 6.5 Share of foreign exchange trading volume by currency pairs: April 2...

Figure 6.6 An example of triangular currency arbitrage Figure 6.7 Hedging a future payment with a forward contract Chapter 7 Figure 7.1 Profit from buying a call option for various spot prices at expirat...

Figure 7.2 Profit from selling a call option for various spot prices at expira...

Figure 7.3 Profit from buying a put option for various spot prices at expirati...

Figure 7.4 Profit from selling a put option for various spot prices at expirat...

Figure 7.5 Currency spreads Figure 7.6 The value of a call option before maturity Figure 7-B.1 Illustration of put-call option interest rate parity Chapter 8 Figure 8.1 Classic interest rate swap structure Figure 8.2 Diagram of a fixed-for-fixed currency swap Figure 8.3 Example of a fixed-for-fixed euro-U.S. dollar currency swap Figure 8.4 Example of a fixed-for-floating currency swap Figure 8.5 Kodak’s A$200 million zero-coupon eurobond and currency swap...

Figure 8.6 Illustration of the commitments between a CDS buyer and CDS seller....

Figure 8.7 CDS spreads on the Republic of Turkey: December 2017–November 2018...

Chapter 9 Figure 9.1 Currency risk sharing: GE and Lufthansa Figure 9.2 Currency range forward: GE and Lufthansa Figure 9.3 Use of a currency cylinder to hedge GE’s receivable Chapter 11 Figure 11.1 Securitization versus intermediation Figure 11.2 The role and consequences of well-functioning financial markets Figure 11.3 Number of Foreign Listings in New York, London, and Tokyo: 2006–20...

Figure 11.4 Investment in infrastructure projects with private participation i...

Chapter 12 Figure 12.1 Interest rate relationships between domestic and eurocurrency cred...

Chapter 13 Figure 13.1 Annualized monthly returns and standard deviation of returns: Janu...

Figure 13.2 Growth of $1 invested in the U.S. market, MSCI World Index, and EA...

Figure 13.3 International diversification pushes out the efficient frontier Figure 13.4 Correlations of U.S. and EAFE Index returns (rolling five-year per...

Figure 13.5 Risk and return for various mixes of U.S. and Denmark indices...

Figure 13.6 Cumulative returns for the MSCI World and MSCI Emerging Market ind...

Figure 13.7 Risk and return for various mixes of MSCI World and MSCI Emerging ...

Figure 13.8 Efficient frontiers, December 1970–December 1980 Chapter 14 Figure 14.1 Map of world risk—2016 Figure 14.2 Government debt to GDP for the G7 countries: 1990, 2010, and 2018...

Figure 14.3 Real GDP growth for the G7 countries Figure 14.4 Economic freedom and income per capita: 2016 Chapter 15 Figure 15.1 Sovereign bond spreads for developing and emerging countries: Janu...

Figure 15.2 Subsidiary capital structure depends on what its funds are called...

Figure 15.3 Novo’s B share prices compared with stock market indices, 1977–198...

Chapter 17 Figure 17.1 The gold mine operating decision Figure 17.2 Valuing a growth option to undertake a follow-up project Chapter 18 Figure 18.1 The multinational corporate financial system Figure 18.2 Corporate taxation rates in selected OECD countries: 2018 Figure 18.3 Structure of a back-to-back loan Figure 18.4 Structure of a parallel loan

List of Tables Chapter 1 Table 1.1 Proportion of foreign sales for selected large U.S. multinationals Table 1.2 Differences between offshoring and outsourcing Chapter 2 Table 2.1 Advantages and disadvantages of a strong or weak U.S. dollar Chapter 3 Table 3.1 Typical currency control measures Table 3.2 Wholesale price indices: pre-World War I Table 3.3 Consumer price indices (CPI): post-World War II Table 3.4 Irrevocable conversion rates for the euro Table 3.5 Statistics for the European Union, Eurozone, and other major economies Chapter 4 Table 4.1 The Big Mac Index as of July 1, 2018 Table 4.2 The Apple Iphone X in Select Country on November 3, 2017

Chapter 5 Table 5.1 The United States Balance of Payments for 2017 (USD billions) Table 5.2 Examples of U.S. Balance-of-Payments Accounts Table 5.3 Global Current Account Balances: 1996, 2003, and 2017 Chapter 6 Table 6.1 Foreign Exchange Rates, Friday, November 30, 2018 Table 6.2 Table 6.2 Key currency cross rates, Friday, November 30, 2018 Chapter 7 Table 7.1 Contract specification for selected major currency futures Table 7.2 An example of daily settlement with a futures contract Table 7.3 Basic differences between forward and futures contracts Table 7.4 Contract specification for PHLX standardized currency options contract Table 7.5 Currency option pricing and valuation Table 7.6 Declining exchange rate scenario Table 7.7 Hedging alternatives: offsetting a $4,750 loss due to a declining euro Table 7.8 Declining exchange rate scenario Table 7.9 Hedging alternatives: offsetting a $5,200 gain due to a rising euro Table 7.10 Currency futures quoted in the Wall Street Journal on December 7, 201...

Table 7.11 Selected currency options quoted on Eurex on December 7, 2018 Chapter 8 Table 8.1 Merrill Lynch cash flows-Eastman Kodak transaction Table 8.2 Cash flows associated with yen debenture currency swap Chapter 9 Table 9.1 Comparison of translation, transaction, and operating exposures Table 9.2 Financial statement impact of translation alternatives for a 20% deval...

Table 9.3 Financial statement impact of translation alternatives for a 60% reval...

Table 9.4 Basic hedging techniques Table 9.5 Costs of the basic hedging techniques Table 9.6 Basic strategy for hedging translation exposure Table 9.7 Possible outcomes of forward market hedge as of December 31 Table 9.8 Possible outcomes of money market hedge as of December 31 Table 9-A.1 Factors indicating the appropriate functional currency Table 9-A.2 Translation of Sterling Ltd. income statement under FASB-52 (in mill...

Table 9-A.3 Translation of Sterling Ltd. balance sheet under FASB-52 (in million...

Chapter 10 Table 10.1 The time pattern of economic exposure Table 10.2 The effects of nominal exchange rate changes and inflation on Apex Ph...

Table 10.3 The effects of real exchange rate changes on the Brazilian Shoe Manuf...

Table 10.4 Nominal and real exchange rates for Chile: 1979–1982 Table 10.5 Characteristic economic effects of exchange rate changes on multin...

Table 10.6 Key questions to ask that help identify exchange risk Table 10.7 Summary of projected operations for Spectrum AB: base case Table 10.8 Impact of Krona devaluation on Spectrum AB’s balance sheet under FASB...

Table 10.9 Summary of projected operations for Spectrum AB: scenario 2 Table 10.10 Summary of projected operations for Spectrum AB: scenario 3 Table 10.11 Summary of economic exposure impact of krona devaluation on Spectrum...

Table 10.12 Statement of cash flows Table 10.13 Effect of financial structure on net cash flow Chapter 11 Table 11.1 10 most developed financial centers: 2014 Table 11.2 25 largest banks by asset: 2018 Chapter 12 Table 12.1 Comparison of all-in costs of a eurobond issue and a U.S. dollar bond...

Chapter 13 Table 13.1 How foreign markets were correlated with the U.S. market and the MSCI...

Table 13.2 Correlation of monthly returns of selected emerging markets with the ...

Chapter 14 Table 14.1 Business Environment Rankings (BER) from the Economist’s Intelligence...

Chapter 15 Table 15.1 Subsidiary capital structure: debt-to-equity ratios Table 15.2 Consolidated parent capital structure: debt-to-equity ratios Table 15.3 Calculating the value of Sonat’s low-cost loan arrangement (U.S. $ mi...

Chapter 16 Table 16.1 Largest national markets for Coca-Cola and McDonald’s: 2018 Chapter 17

Table 17.1 Initial investment outlay in IDC-U.K. (£1=$2) Table 17.2 Initial balance sheet of IDC-U.K. (£1=$2) Table 17.3 Present value of IDC-U.K.: project viewpoint Table 17.4 Dividends and fees royalties received by IDC-U.S. ($ millions) Table 17.5 Net cash flows from exports to IDC-U.K. ($ millions) Table 17.6 Present value of IDC-U.K.: parent viewpoint ($ millions) Table 17.7 Value of lost export sales ($ millions) Chapter 18 Table 18.1 Market imperfections that enhance the value of internal financial tra...

Table 18.2 Tax effect of high versus low transfer price ($ thousands) Table 18.3 Tax effect of high versus low transfer price with ad valorem tarif...

Table 18.4 Tax effects of dividend remittances from abroad pre- and post-TCJA Table 18.5 Dollar cash flows to Kraft-Heinz under debt and equity financing

PREFACE APPROACH The basic thrust of this eleventh edition of Multinational Financial Management (MFM) is to provide a conceptual framework within which the key financial decisions of the multinational firm can be analyzed. The approach is to treat international financial management as a natural and logical extension of the principles learned in the foundations course in financial management. Thus, it builds on and extends the valuation framework provided by domestic corporate finance to account for dimensions unique to international finance. Multinational Financial Management presumes a knowledge of basic corporate finance, economics, and algebra. However, it does not assume prior knowledge of international economics or international finance and is therefore self-contained in that respect.

MFM focuses on decision making in an international context. Analytical techniques help translate the often vague guidelines used by international financial executives into specific decision criteria. The book offers a variety of real-life examples, both numerical and institutional, that demonstrate the use of financial analysis and reasoning in solving international financial problems. These examples have been culled from the thousands of applications of corporate practice that we have collected over the years from business periodicals and consulting practice. Judiciously placing the best of these examples throughout the text allows students to see the value of examining decision problems with the aid of a solid theoretical foundation. Seemingly disparate facts and events can then be interpreted as specific manifestations of more general financial principles.

All the traditional areas of corporate finance are explored, including capital budgeting, estimating the cost of capital, and capital structure decisions. However, this is done from the perspective of a multinational corporation, concentrating on those decision elements that are rarely, if ever, encountered by purely domestic firms. These elements include multiple currencies with frequent exchange rate changes and varying rates of inflation, differing tax systems, multiple money markets, exchange controls, segmented capital markets, and political risks such as nationalization or expropriation. Throughout the book, we have tried to demystify and simplify multinational financial management by showing that its basic principles rest on the same foundation as does corporate finance.

The emphasis throughout this book is on taking advantage of being multinational. Too often companies focus on the threats and risks inherent in venturing abroad rather than on the opportunities that are available to multinational firms. These opportunities include the ability to obtain a greater degree of international diversification than security purchases alone can provide as well as the ability to arbitrage between imperfect capital markets, thereby obtaining funds at a lower cost than could a purely domestic firm.

CHANGES IN THE ELEVENTH EDITION The eleventh edition of Multinational Financial Management has been extensively updated to incorporate the evolving technological, economic, and political landscape of the world’s

financial system. For instance, technological advances in communication have greatly changed how forex trading and payment systems are conducted; the development and growth in Exchange-Traded Funds (ETFs) makes it possible, with unprecedented ease, for investors to gain international equity and bond exposures; the advent of Credit Default Swaps (CDSs) now allow businesses to hedge sovereign debt risk. All these technological and financial innovations are occurring with the continuing development of China and India as a major economic and political backdrop. China is now the world’s second largest economy in nominal terms and the first on a purchasing power parity basis. India is now the world’s seventh largest economy in nominal terms—on the verge of displacing both the United Kingdom and France within a couple years—and the third on a purchasing power parity basis. The rise of China in particular has given wind to the sails of those that believe protectionism is the answer to maintaining America’s relative position. It remains to be seen what will result of the additional tariffs the US and China (and the European Union) have been imposing on each other: negotiations that will lead to more trade, or permanently impairing global trade. However, while it still to early to properly assess their full significance, they are too important to ignore. Likewise, the United Kingdom’s plans to leave the European Union—the so-called Brexit—if it finally occurs, will undoubtedly have far reaching consequences in reshaping Europe—an economic area on par with the United States. Meanwhile, in the United States, the Tax Cuts and Job Act by slashing the corporate tax rate to 21% and moving the country to a territorial taxation system will significantly affect how multinational corporations decide to invest and distribute their profits around the globe.

To reflect these changes, we have considerably reworked our examples and illustrations. We have also reshuffled the content, added new sections, new applications, and whenever possible updated every chart and every table with the latest data. Sadly, to stay focused and make room for the new, we have chosen to remove numerous older applications and two chapters—Financing Foreign Trade, and Current Asset Management and Short Term Financing. However, we will continue to make these available on the instructor’s online resources.

Some of the new material that has been added is highlighted below: Discussion of the 2009–2010 currency interventions by the Swiss National Bank (Chapter 2) Discussion of the European Union and Brexit (Chapter 3) Discussion on the deviations of covered interest rate parity after the financial crisis (Chapter 4) Updates to the Balance-of-Payment categories to reflect new practices (Chapter 5) Discussion on electronic trading and Payment-versus-Payment (PvP) settlement (Chapter 6) Discussion of new institutional changes for currency options and futures on the CME and ICE exchanges (Chapter 7) Section on Credit Default Swap Indexes (Chapter 8) Discussion of the governance implications of different legal regimes (Chapter 11) Section on Exchange-Traded Funds (Chapter 13) Discussion of Corporate Inversions (Chapter 18)

Section on the Tax Cuts and Jobs Act of 2017 (Chapter 15 and 18)

PEDAGOGY The pedagogical thrust of the book is greatly enhanced by including the following learning and teaching aids: Focus on Corporate Practice: Throughout the text, numerous real-world examples and vignettes provide actual applications of financial concepts and theories. They show students that the issues, tools, and techniques discussed in the book are being applied to day-to-day financial decision making.

Extensive Use of Examples and Applications: Numerous short applications and examples of specific concepts and techniques are placed throughout the body of most chapters.

Learning Objectives: Each chapter opens with a statement of its action-oriented learning objectives. These statements enhance learning by previewing and guiding the reader’s understanding of the materials that will be encountered in the chapter.

Mini-Cases: Mini-cases are provided at the end of most chapters. They succinctly present a situation that illustrates an important concept in a chapter and then has a series of questions to test student understanding of that concept.

Problems and Discussion Questions: There are many realistic end-of-chapter questions and problems that offer practice in applying the concepts and theories being taught. Many of these questions and problems relate to actual situations and companies.

Glossary: The back of the book contains a glossary defining the key terms which appear in bold in the main text.

ADDITIONAL RESOURCES A complete set of ancillary materials is available for adopters of Multinational Financial Management. The following resources can be found on the book’s companion site: An Instructor’s Manual containing tips for teaching each chapter, detailed solutions to the end-of-chapter questions and problems.

A Test Bank containing additional questions and problems suitable for use in multiple choice exams.

PowerPoint Presentations for course lectures. In addition, electronic files for all the figures in the text are available in an Image Gallery.

Two Additional Chapters. One on Financing Foreign Trade, and the Other on Current Asset Management and Short Term Financing.

Additional applications and mini-cases.

THANKS The current and previous editions have greatly benefited from discussions with Peter Feldhütter at Copenhagen Business School, Marcel Fisher at the University of Constance and

Copenhagen Business School, Richard Roll at UCLA, and Renée Stulz at Ohio State.

Also, over the many years, we have been greatly aided in developing Multinational Financial Management by the helpful suggestions of the following reviewers: Robert Aubey, University of Wisconsin, Madison; the late James Baker, Kent State University; Donald T. Buck, Southern Connecticut State University; C. Edward Chang, Missouri State University; Jay Choi, Temple University; Robert C. Duvic, University of Texas, Austin; the late Janice Wickstead Jadlow, Oklahoma State University; Steve Johnson, University of Texas at El Paso; Boyden C. Lee, New Mexico State University; Marc Lars Lipson, University of Virginia (Darden); Richard K. Lyons, University of California, Berkeley; Dileep Mehta, Georgia State University; the late Margaret Moore, Franklin University; William Pugh, Auburn University; Bruce Seifert, Old Dominion University; Jay Sultan, Bentley College; Paul J. Swanson, Jr., University of Cincinnati; and Steve Wyatt, University of Cincinnati. We are particularly grateful to Jack K. Strauss, St. Louis University, whose work in rewriting Chapter 3 in the tenth edition is still present in the current edition. We also wish to thank our families without whose aid and tolerance this book would not have been possible.

A.C.S. Pacific Palisades, California P.H. Philadelphia, Pennsylvania

ACRONYMS AND SYMBOLS Acronyms ADB

Asian Development Bank

ADR

American Depositary Receipt

ADS

American Depositary Share

AFDB

African Development Bank

AFESD

Arab Fund for Economic and Social Development

AIIB

Asian Infrastructure Investment Bank

APA

Advance pricing agreement

APT

Arbitrage Pricing Theory

APV

Adjusted Present Value

BIS

Bank for International Settlements

CAPM

Capital Asset Pricing Model

CDS

Credit Default Swap

CHIPS

Clearing House Interbank Payments System

CME

Chicago Mercantile Exchange

DR

Depositary receipt

DS

Depositary share

EAFE

Morgan Stanley Capital International Europe, Australia, Far East

EBRD

European Bank for Reconstruction and Development

EC

European Community

ECU

European Currency Unit

EDRs

European Depositary Receipts

EIB

European Investment Bank

EMS

European Monetary System

EMU

European Monetary Union

ERM

Exchange-rate mechanism

ETFs

Exchange Traded Funds

EU

European Union

Euro-CP

Euro-commercial paper

Euro-MTN Euro-medium-term note FASB

Financial Accounting Standards Board

FDI

Foreign direct investment

FE

Fisher effect

FRA

Forward rate agreement

FRN

Floating-rate note

FTC

Foreign tax credit

GDP

Gross Domestic Product

GDR

Global depositary receipt

GILTI

Global Intangible Low-Taxed Income

GNP

Gross National Product

GRS

Global registered share

HC

Home currency

IBRD

International Bank for Reconstruction and Development

ICE

Intercontinental Exchange

IDA

International Development Association

IDB

Inter-American Development Bank

IFC

International Finance Corporation

IFE

International Fisher effect

IMF

International Monetary Fund

IMM

International Monetary Market

IO

Industrial organization

IRP

Interest rate parity

LC

Local currency

LIBID

London Interbank Bid Rate

LIBOR

London Interbank Offered Rate

LICs

Low Income Countries

MICs

Medium Income Countries

MNC

Multinational Corporation

MSCI

Morgan Stanley Capital International

NAV

Net Asset Value

NIF

Note issuance facility

NPV

Net Present Value

OECD

Organization for Economic Cooperation and Development

OFDI

Office of Foreign Direct Investment

OPIC

Overseas Private Investment Corporation

OTC

Over-the-counter market

PHLX

Philadelphia Stock Exchange

PPP

Purchasing Power Parity

PvP

Payment versus payment

RUF

Revolving underwriting facility

SDR

Special Drawing Right

SWIFT

Society for Worldwide Interbank Financial Telecommunications

TCJA

Tax Cuts and Jobs Act of 2017

WACC

Weighted average cost of capital

Symbols ah

Expected real return on home currency loan

af

Expected real return on a foreign currency loan

β

Beta coefficient, a measure of an asset’s riskiness

β⋆

All-equity beta

βe

Levered beta

Ct

Local currency cash flow in period t

C

Cost

C(E) Price of a foreign currency call option d

Amount of currency devaluation

D

Forward discount

Df

Amount of foreign currency debt

et

Nominal exchange rate at time t

e′t

Real exchange rate at time t

E

(a) Exercise price on a call option or (b) Amount of equity

Ef

Foreign subsidiary retained earnings

ft

t-period forward exchange rate

g

(a) Expected dividend growth rate or (b) Expected rate of foreign currency appreciation against home currency

if

(a) Expected rate of foreign inflation per period or (b) Before-tax cost of foreign debt

ih

Expected rate of home country inflation per period

id

Before-tax cost of domestic debt

I0

Initial investment

k

Cost of capital

k0

Weighted cost of capital

ke

Cost of equity capital given the firm’s leverage

k1

Weighted cost of capital for a project

k⋆

Cost of equity capital if all equity financed

L

Parent’s target debt ratio

P

(a) Put option premium or (b) Principal amount of foreign currency loan

r

Effective yield on a bond

rh

Home currency interest rate

rf

Foreign currency interest rate

rus

U.S. interest rate

rL

Local currency interest rate

Rf

Risk-free rate of return

Rm

Required return on the market

s

Floatation cost, in percent, on long-term debt

S

Current spot rate

St

Interest subsidy in period t

t

(a) Tax rate or (b) Time, when used as a subscript

ta

Foreign affiliate tax rate

Tt

Tax savings in period t association with using debt financing

Xt

Home currency cash flow in period t

WORLD CURRENCIES AND SYMBOLS Countries Country

Code Symbol Currency

Afghanistan

AFN

Af

afghani

Albania

ALL

Lek

lek

Algeria

DZD DA

dinar

Angola

AOA Kz

kwanza

Argentina

ARS

peso

Armenia

AMD

dram

Aruba

AWG f

florin

Australia

AUD $A

dollar

Azerbaijan

AZN

manat

Bahamas

BSD

BS

dollar

Bahrain

BHD BD

dinar

Bangladesh

BDT

Tk

taka

Barbados

BBD

$

dollar

Belarus

BYR

p.

ruble

Belize

BZD

BZ$

dollar

Bermuda

BMD $

dollar

Bhutan

BTN

Nu.

ngultrum

Bolivia

BOB

$b

boliviano

Bosnia-Herzegovina

BAM KM

Arg$

convertible mark

Botswana

BWP P

pula

Brazil

BRL

real

Brunei

BND B$

dollar

Bulgaria

BGN

lev

Burundi

BIF

Cambodia

KHR CR

riel

Canada

CAD $

dollar

Cape Verde

CVE

escudo

Cayman Islands

KYD CI$

R$

FBu

$

franc

dollar

Country

Code Symbol Currency

Chile

CLP

Ch$

peso

China

CNY

¥

yuan renminbi

Colombia

COP

$

peso

Comoros

KMF CF

franc

Congo (Dem. Rep.)

CDF

franc

Costa Rica

CRC

cólon

Croatia

HRK kn

kuna

Cuba

CUP

$MN

peso

Czech Rep.

CZK

Kč

koruna

Denmark

DKK kr.

krone

Djibouti

DJF

Fdj

franc

Dominican Rep.

DOP RD$

peso

Egypt

EGP

pound

El Salvador

SVC

colón

Eritrea

ERN Nfk

nakfa

Ethiopia

ETB

Br

birr

Fiji

FJD

FJ$

dollar

Gambia

GMD D

dalasi

Georgia

GEL

iari

Ghana

GHS ¢

cedi

Guatemala

GTQ Q

quetzal

Guinea

GNF FG

franc

Guyana

GYD GY$

dollar

Haiti

HTG G

gourde

Honduras

HNL L

lempira

Hong Kong

HKD HK$

dollar

Hungary

HUF Ft

forint

Iceland

ISK

kr

króna

India

INR

Rs

rupee

Indonesia

IDR

Rp

rupiah

Iran

IRR

Rl.

rial

Iraq

IQD

ID

dinar

FC

E£

GEL

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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI

Newala, too, suffers from the distance of its water-supply—at least the Newala of to-day does; there was once another Newala in a lovely valley at the foot of the plateau. I visited it and found scarcely a trace of houses, only a Christian cemetery, with the graves of several missionaries and their converts, remaining as a monument of its former glories. But the surroundings are wonderfully beautiful. A thick grove of splendid mango-trees closes in the weather-worn crosses and headstones; behind them, combining the useful and the agreeable, is a whole plantation of lemon-trees covered with ripe fruit; not the small African kind, but a much larger and also juicier imported variety, which drops into the hands of the passing traveller, without calling for any exertion on his part. Old Newala is now under the jurisdiction of the native pastor, Daudi, at Chingulungulu, who, as I am on very friendly terms with him, allows me, as a matter of course, the use of this lemon-grove during my stay at Newala.

FEET MUTILATED BY THE RAVAGES OF THE “JIGGER” (Sarcopsylla penetrans)

The water-supply of New Newala is in the bottom of the valley, some 1,600 feet lower down. The way is not only long and fatiguing, but the water, when we get it, is thoroughly bad. We are suffering not only from this, but from the fact that the arrangements at Newala are nothing short of luxurious. We have a separate kitchen—a hut built against the boma palisade on the right of the baraza, the interior of which is not visible from our usual position. Our two cooks were not long in finding this out, and they consequently do—or rather neglect to do—what they please. In any case they do not seem to be very particular about the boiling of our drinking-water—at least I can attribute to no other cause certain attacks of a dysenteric nature, from which both Knudsen and I have suffered for some time. If a man like Omari has to be left unwatched for a moment, he is capable of anything. Besides this complaint, we are inconvenienced by the state of our nails, which have become as hard as glass, and crack on the slightest provocation, and I have the additional infliction of pimples all over me. As if all this were not enough, we have also, for the last week been waging war against the jigger, who has found his Eldorado in the hot sand of the Makonde plateau. Our men are seen all day long—whenever their chronic colds and the dysentery likewise raging among them permit—occupied in removing this scourge of Africa from their feet and trying to prevent the disastrous consequences of its presence. It is quite common to see natives of this place with one or two toes missing; many have lost all their toes,

or even the whole front part of the foot, so that a well-formed leg ends in a shapeless stump. These ravages are caused by the female of Sarcopsylla penetrans, which bores its way under the skin and there develops an egg-sac the size of a pea. In all books on the subject, it is stated that one’s attention is called to the presence of this parasite by an intolerable itching. This agrees very well with my experience, so far as the softer parts of the sole, the spaces between and under the toes, and the side of the foot are concerned, but if the creature penetrates through the harder parts of the heel or ball of the foot, it may escape even the most careful search till it has reached maturity.

Then there is no time to be lost, if the horrible ulceration, of which we see cases by the dozen every day, is to be prevented. It is much easier, by the way, to discover the insect on the white skin of a European than on that of a native, on which the dark speck scarcely shows. The four or five jiggers which, in spite of the fact that I constantly wore high laced boots, chose my feet to settle in, were taken out for me by the all-accomplished Knudsen, after which I thought it advisable to wash out the cavities with corrosive sublimate. The natives have a different sort of disinfectant—they fill the hole with scraped roots. In a tiny Makua village on the slope of the plateau south of Newala, we saw an old woman who had filled all the spaces under her toe-nails with powdered roots by way of prophylactic treatment. What will be the result, if any, who can say?

The rest of the many trifling ills which trouble our existence are really more comic than serious. In the absence of anything else to smoke, Knudsen and I at last opened a box of cigars procured from the Indian store-keeper at Lindi, and tried them, with the most distressing results. Whether they contain opium or some other narcotic, neither of us can say, but after the tenth puff we were both “off,” three-quarters stupefied and unspeakably wretched. Slowly we recovered—and what happened next? Half-an-hour later we were once more smoking these poisonous concoctions—so insatiable is the craving for tobacco in the tropics.

Even my present attacks of fever scarcely deserve to be taken seriously. I have had no less than three here at Newala, all of which have run their course in an incredibly short time. In the early afternoon, I am busy with my old natives, asking questions and making notes. The strong midday coffee has stimulated my spirits to

an extraordinary degree, the brain is active and vigorous, and work progresses rapidly, while a pleasant warmth pervades the whole body. Suddenly this gives place to a violent chill, forcing me to put on my overcoat, though it is only half-past three and the afternoon sun is at its hottest. Now the brain no longer works with such acuteness and logical precision; more especially does it fail me in trying to establish the syntax of the difficult Makua language on which I have ventured, as if I had not enough to do without it. Under the circumstances it seems advisable to take my temperature, and I do so, to save trouble, without leaving my seat, and while going on with my work. On examination, I find it to be 101·48°. My tutors are abruptly dismissed and my bed set up in the baraza; a few minutes later I am in it and treating myself internally with hot water and lemon-juice.

Three hours later, the thermometer marks nearly 104°, and I make them carry me back into the tent, bed and all, as I am now perspiring heavily, and exposure to the cold wind just beginning to blow might mean a fatal chill. I lie still for a little while, and then find, to my great relief, that the temperature is not rising, but rather falling. This is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment, that it has fallen below 98·6°, and I feel perfectly well. I read for an hour or two, and could very well enjoy a smoke, if I had the wherewithal—Indian cigars being out of the question.

Having no medical training, I am at a loss to account for this state of things. It is impossible that these transitory attacks of high fever should be malarial; it seems more probable that they are due to a kind of sunstroke. On consulting my note-book, I become more and more inclined to think this is the case, for these attacks regularly follow extreme fatigue and long exposure to strong sunshine. They at least have the advantage of being only short interruptions to my work, as on the following morning I am always quite fresh and fit.

My treasure of a cook is suffering from an enormous hydrocele which makes it difficult for him to get up, and Moritz is obliged to keep in the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy from somewhere in the bush, knows still less of cooking than Omari; consequently Nils Knudsen himself has been promoted to the vacant post. Finding that we had come to the end of our supplies, he began by sending to Chingulungulu for the four sucking-pigs which we had

bought from Matola and temporarily left in his charge; and when they came up, neatly packed in a large crate, he callously slaughtered the biggest of them. The first joint we were thoughtless enough to entrust for roasting to Knudsen’s mshenzi cook, and it was consequently uneatable; but we made the rest of the animal into a jelly which we ate with great relish after weeks of underfeeding, consuming incredible helpings of it at both midday and evening meals. The only drawback is a certain want of variety in the tinned vegetables. Dr. Jäger, to whom the Geographical Commission entrusted the provisioning of the expeditions—mine as well as his own—because he had more time on his hands than the rest of us, seems to have laid in a huge stock of Teltow turnips,[46] an article of food which is all very well for occasional use, but which quickly palls when set before one every day; and we seem to have no other tins left. There is no help for it—we must put up with the turnips; but I am certain that, once I am home again, I shall not touch them for ten years to come.

Amid all these minor evils, which, after all, go to make up the genuine flavour of Africa, there is at least one cheering touch: Knudsen has, with the dexterity of a skilled mechanic, repaired my 9 × 12 cm. camera, at least so far that I can use it with a little care.

How, in the absence of finger-nails, he was able to accomplish such a ticklish piece of work, having no tool but a clumsy screw-driver for taking to pieces and putting together again the complicated mechanism of the instantaneous shutter, is still a mystery to me; but he did it successfully. The loss of his finger-nails shows him in a light contrasting curiously enough with the intelligence evinced by the above operation; though, after all, it is scarcely surprising after his ten years’ residence in the bush. One day, at Lindi, he had occasion to wash a dog, which must have been in need of very thorough cleansing, for the bottle handed to our friend for the purpose had an extremely strong smell. Having performed his task in the most conscientious manner, he perceived with some surprise that the dog did not appear much the better for it, and was further surprised by finding his own nails ulcerating away in the course of the next few days. “How was I to know that carbolic acid has to be diluted?” he mutters indignantly, from time to time, with a troubled gaze at his mutilated finger-tips.

Since we came to Newala we have been making excursions in all directions through the surrounding country, in accordance with old habit, and also because the akida Sefu did not get together the tribal elders from whom I wanted information so speedily as he had promised. There is, however, no harm done, as, even if seen only from the outside, the country and people are interesting enough.

The Makonde plateau is like a large rectangular table rounded off at the corners. Measured from the Indian Ocean to Newala, it is about seventy-five miles long, and between the Rovuma and the Lukuledi it averages fifty miles in breadth, so that its superficial area is about two-thirds of that of the kingdom of Saxony. The surface, however, is not level, but uniformly inclined from its south-western edge to the ocean. From the upper edge, on which Newala lies, the eye ranges for many miles east and north-east, without encountering any obstacle, over the Makonde bush. It is a green sea, from which here and there thick clouds of smoke rise, to show that it, too, is inhabited by men who carry on their tillage like so many other primitive peoples, by cutting down and burning the bush, and manuring with the ashes. Even in the radiant light of a tropical day such a fire is a grand sight.

Much less effective is the impression produced just now by the great western plain as seen from the edge of the plateau. As often as time permits, I stroll along this edge, sometimes in one direction, sometimes in another, in the hope of finding the air clear enough to let me enjoy the view; but I have always been disappointed.

Wherever one looks, clouds of smoke rise from the burning bush, and the air is full of smoke and vapour. It is a pity, for under more favourable circumstances the panorama of the whole country up to the distant Majeje hills must be truly magnificent. It is of little use taking photographs now, and an outline sketch gives a very poor idea of the scenery. In one of these excursions I went out of my way to make a personal attempt on the Makonde bush. The present edge of the plateau is the result of a far-reaching process of destruction through erosion and denudation. The Makonde strata are everywhere cut into by ravines, which, though short, are hundreds of yards in depth. In consequence of the loose stratification of these beds, not only are the walls of these ravines nearly vertical, but their upper end is closed by an equally steep escarpment, so that the

western edge of the Makonde plateau is hemmed in by a series of deep, basin-like valleys. In order to get from one side of such a ravine to the other, I cut my way through the bush with a dozen of my men.

It was a very open part, with more grass than scrub, but even so the short stretch of less than two hundred yards was very hard work; at the end of it the men’s calicoes were in rags and they themselves bleeding from hundreds of scratches, while even our strong khaki suits had not escaped scatheless.

NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR MAHUTA

I see increasing reason to believe that the view formed some time back as to the origin of the Makonde bush is the correct one. I have no doubt that it is not a natural product, but the result of human occupation. Those parts of the high country where man—as a very slight amount of practice enables the eye to perceive at once—has not yet penetrated with axe and hoe, are still occupied by a splendid timber forest quite able to sustain a comparison with our mixed forests in Germany. But wherever man has once built his hut or tilled his field, this horrible bush springs up. Every phase of this process

may be seen in the course of a couple of hours’ walk along the main road. From the bush to right or left, one hears the sound of the axe— not from one spot only, but from several directions at once. A few steps further on, we can see what is taking place. The brush has been cut down and piled up in heaps to the height of a yard or more, between which the trunks of the large trees stand up like the last pillars of a magnificent ruined building. These, too, present a melancholy spectacle: the destructive Makonde have ringed them— cut a broad strip of bark all round to ensure their dying off—and also piled up pyramids of brush round them. Father and son, mother and son-in-law, are chopping away perseveringly in the background—too busy, almost, to look round at the white stranger, who usually excites so much interest. If you pass by the same place a week later, the piles of brushwood have disappeared and a thick layer of ashes has taken the place of the green forest. The large trees stretch their smouldering trunks and branches in dumb accusation to heaven—if they have not already fallen and been more or less reduced to ashes, perhaps only showing as a white stripe on the dark ground.

This work of destruction is carried out by the Makonde alike on the virgin forest and on the bush which has sprung up on sites already cultivated and deserted. In the second case they are saved the trouble of burning the large trees, these being entirely absent in the secondary bush.

After burning this piece of forest ground and loosening it with the hoe, the native sows his corn and plants his vegetables. All over the country, he goes in for bed-culture, which requires, and, in fact, receives, the most careful attention. Weeds are nowhere tolerated in the south of German East Africa. The crops may fail on the plains, where droughts are frequent, but never on the plateau with its abundant rains and heavy dews. Its fortunate inhabitants even have the satisfaction of seeing the proud Wayao and Wamakua working for them as labourers, driven by hunger to serve where they were accustomed to rule.

But the light, sandy soil is soon exhausted, and would yield no harvest the second year if cultivated twice running. This fact has been familiar to the native for ages; consequently he provides in time, and, while his crop is growing, prepares the next plot with axe and firebrand. Next year he plants this with his various crops and

lets the first piece lie fallow. For a short time it remains waste and desolate; then nature steps in to repair the destruction wrought by man; a thousand new growths spring out of the exhausted soil, and even the old stumps put forth fresh shoots. Next year the new growth is up to one’s knees, and in a few years more it is that terrible, impenetrable bush, which maintains its position till the black occupier of the land has made the round of all the available sites and come back to his starting point.

The Makonde are, body and soul, so to speak, one with this bush.

According to my Yao informants, indeed, their name means nothing else but “bush people.” Their own tradition says that they have been settled up here for a very long time, but to my surprise they laid great stress on an original immigration. Their old homes were in the south-east, near Mikindani and the mouth of the Rovuma, whence their peaceful forefathers were driven by the continual raids of the Sakalavas from Madagascar and the warlike Shirazis[47] of the coast, to take refuge on the almost inaccessible plateau. I have studied African ethnology for twenty years, but the fact that changes of population in this apparently quiet and peaceable corner of the earth could have been occasioned by outside enterprises taking place on the high seas, was completely new to me. It is, no doubt, however, correct.

The charming tribal legend of the Makonde—besides informing us of other interesting matters—explains why they have to live in the thickest of the bush and a long way from the edge of the plateau, instead of making their permanent homes beside the purling brooks and springs of the low country.

“The place where the tribe originated is Mahuta, on the southern side of the plateau towards the Rovuma, where of old time there was nothing but thick bush. Out of this bush came a man who never washed himself or shaved his head, and who ate and drank but little.

He went out and made a human figure from the wood of a tree growing in the open country, which he took home to his abode in the bush and there set it upright. In the night this image came to life and was a woman. The man and woman went down together to the Rovuma to wash themselves. Here the woman gave birth to a stillborn child. They left that place and passed over the high land into the valley of the Mbemkuru, where the woman had another child, which

was also born dead. Then they returned to the high bush country of Mahuta, where the third child was born, which lived and grew up. In course of time, the couple had many more children, and called themselves Wamatanda. These were the ancestral stock of the Makonde, also called Wamakonde,[48] i.e., aborigines. Their forefather, the man from the bush, gave his children the command to bury their dead upright, in memory of the mother of their race who was cut out of wood and awoke to life when standing upright. He also warned them against settling in the valleys and near large streams, for sickness and death dwelt there. They were to make it a rule to have their huts at least an hour’s walk from the nearest wateringplace; then their children would thrive and escape illness.”

The explanation of the name Makonde given by my informants is somewhat different from that contained in the above legend, which I extract from a little book (small, but packed with information), by Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my results agree exactly with the statements of the legend. Washing?

Hapana—there is no such thing. Why should they do so? As it is, the supply of water scarcely suffices for cooking and drinking; other people do not wash, so why should the Makonde distinguish himself by such needless eccentricity? As for shaving the head, the short, woolly crop scarcely needs it,[49] so the second ancestral precept is likewise easy enough to follow. Beyond this, however, there is nothing ridiculous in the ancestor’s advice. I have obtained from various local artists a fairly large number of figures carved in wood, ranging from fifteen to twenty-three inches in height, and representing women belonging to the great group of the Mavia, Makonde, and Matambwe tribes. The carving is remarkably well done and renders the female type with great accuracy, especially the keloid ornamentation, to be described later on. As to the object and meaning of their works the sculptors either could or (more probably) would tell me nothing, and I was forced to content myself with the scanty information vouchsafed by one man, who said that the figures were merely intended to represent the nembo—the artificial deformations of pelele, ear-discs, and keloids. The legend recorded

by Pater Adams places these figures in a new light. They must surely be more than mere dolls; and we may even venture to assume that they are—though the majority of present-day Makonde are probably unaware of the fact—representations of the tribal ancestress.

The references in the legend to the descent from Mahuta to the Rovuma, and to a journey across the highlands into the Mbekuru valley, undoubtedly indicate the previous history of the tribe, the travels of the ancestral pair typifying the migrations of their descendants. The descent to the neighbouring Rovuma valley, with its extraordinary fertility and great abundance of game, is intelligible at a glance—but the crossing of the Lukuledi depression, the ascent to the Rondo Plateau and the descent to the Mbemkuru, also lie within the bounds of probability, for all these districts have exactly the same character as the extreme south. Now, however, comes a point of especial interest for our bacteriological age. The primitive Makonde did not enjoy their lives in the marshy river-valleys.

Disease raged among them, and many died. It was only after they had returned to their original home near Mahuta, that the health conditions of these people improved. We are very apt to think of the African as a stupid person whose ignorance of nature is only equalled by his fear of it, and who looks on all mishaps as caused by evil spirits and malignant natural powers. It is much more correct to assume in this case that the people very early learnt to distinguish districts infested with malaria from those where it is absent.

This knowledge is crystallized in the ancestral warning against settling in the valleys and near the great waters, the dwelling-places of disease and death. At the same time, for security against the hostile Mavia south of the Rovuma, it was enacted that every settlement must be not less than a certain distance from the southern edge of the plateau. Such in fact is their mode of life at the present day. It is not such a bad one, and certainly they are both safer and more comfortable than the Makua, the recent intruders from the south, who have made USUAL METHOD OF good their footing on the western edge of the CLOSING HUT-DOOR plateau, extending over a fairly wide belt of country. Neither Makua nor Makonde show in their dwellings anything of the size and comeliness of the Yao houses in the plain, especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a Makonde hamlet not far from Newala, on the road to Mahuta, is the

most important settlement of the tribe I have yet seen, and has fairly spacious huts. But how slovenly is their construction compared with the palatial residences of the elephant-hunters living in the plain.

The roofs are still more untidy than in the general run of huts during the dry season, the walls show here and there the scanty beginnings or the lamentable remains of the mud plastering, and the interior is a veritable dog-kennel; dirt, dust and disorder everywhere. A few huts only show any attempt at division into rooms, and this consists merely of very roughly-made bamboo partitions. In one point alone have I noticed any indication of progress—in the method of fastening the door. Houses all over the south are secured in a simple but ingenious manner. The door consists of a set of stout pieces of wood or bamboo, tied with bark-string to two cross-pieces, and moving in two grooves round one of the door-posts, so as to open inwards. If the owner wishes to leave home, he takes two logs as thick as a man’s upper arm and about a yard long. One of these is placed obliquely against the middle of the door from the inside, so as to form an angle of from 60° to 75° with the ground. He then places the second piece horizontally across the first, pressing it downward with all his might.

It is kept in place by two strong posts planted in the ground a few inches inside the door. This fastening is absolutely safe, but of course cannot be applied to both doors at once, otherwise how could the owner leave or enter his house? I have not yet succeeded in finding out how the back door is fastened.

MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe Chauro, however, have a much more complicated, solid and original one. Here, too, the door is as already described, except that there is only one post on the inside, standing by itself about six inches from one side of the doorway. Opposite this post is a hole in the wall just large enough to admit a man’s arm. The door is closed inside by a large wooden bolt passing through a hole in this post and pressing with its free end against the door. The other end has three holes into which fit three pegs running in vertical grooves inside the post. The door is opened with a wooden key about a foot long, somewhat curved and sloped off at the butt; the other end has three pegs corresponding to the holes, in the bolt, so that, when it is thrust through the hole in the wall and inserted into the rectangular opening in the post, the pegs can be lifted and the bolt drawn out.[50]

MODE OF INSERTING THE KEY

With no small pride first one householder and then a second showed me on the spot the action of this greatest invention of the Makonde Highlands. To both with an admiring exclamation of “Vizuri sana!” (“Very fine!”). I expressed the wish to take back these marvels with me to Ulaya, to show the Wazungu what clever fellows the Makonde are. Scarcely five minutes after my return to camp at Newala, the two men came up sweating under the weight of two heavy logs which they laid down at my feet, handing over at the same time the keys of the fallen fortress. Arguing, logically enough, that if the key was wanted, the lock would be wanted with it, they had taken their axes and chopped down the posts—as it never occurred to them to dig them out of the ground and so bring them intact. Thus I have

two badly damaged specimens, and the owners, instead of praise, come in for a blowing-up.

The Makua huts in the environs of Newala are especially miserable; their more than slovenly construction reminds one of the temporary erections of the Makua at Hatia’s, though the people here have not been concerned in a war. It must therefore be due to congenital idleness, or else to the absence of a powerful chief. Even the baraza at Mlipa’s, a short hour’s walk south-east of Newala, shares in this general neglect. While public buildings in this country are usually looked after more or less carefully, this is in evident danger of being blown over by the first strong easterly gale. The only attractive object in this whole district is the grave of the late chief Mlipa. I visited it in the morning, while the sun was still trying with partial success to break through the rolling mists, and the circular grove of tall euphorbias, which, with a broken pot, is all that marks the old king’s resting-place, impressed one with a touch of pathos.

Even my very materially-minded carriers seemed to feel something of the sort, for instead of their usual ribald songs, they chanted solemnly, as we marched on through the dense green of the Makonde bush:—