Multinational Finance Evaluating the Opportunities, Costs, and Risks of Multinational Operations

Multinational Finance offers an advanced exploration of international corporate finance concepts and operations. Despite its status as one of the most rigorous texts on the topic, this book remains accessible and readable without sacrificing depth of coverage. Sidebars, key terms, essays, conceptual questions, and problems with solutions help aid in the learning process, while suggested readings and PowerPoint handouts reinforce the material and offer avenues for further exploration. This new sixth edition includes Excel templates that allow students to use real-world tools in a learning environment, and the modular structure facilitates course customization to individual objectives, interests, and preparatory level. The emphasis is on the basics of financial management, but coverage includes unique chapters on treasury management, asset pricing, hedging, options, and portfolio management in addition to traditional finance topics.

International finance is a diverse field with myriad specialties and a vast array of possible interests. This book allows students to view the field through the lens of a financial manager with investment or financial options in more than one country to give them a practical feel for real-world application.

• Understand the nature and operations of international corporate finance
• Evaluate opportunities, costs, and risks of multinational operations
• See beyond the numbers and terminology to the general principles at work
• Learn the markets, currencies, taxation, capital structure, governance, and more

Comprehensive, adaptable, and rigorously focused, this book gives students a solid foundation in international corporate finance, as well as a sound understanding of the tools and mechanics of the field. Designed for MBA and advanced undergraduate courses, Multinational Finance provides the deep coverage so essential to a solid education in finance.

KIRT C. BUTLER is an associate professor in the Department of Finance and Director of Study Abroad for the Eli Broad College of Business at Michigan State University, where he teaches multinational finance and global strategy.

Preface xi

Acknowledgments xv

About the Author xvii

Part One The International Financial Environment 1

Chapter 1 An Introduction to Multinational Finance 3

1.1 The Goals of the Multinational Corporation 3

1.2 The Challenges of Multinational Operations 5

1.3 The Opportunities of Multinational Operations 6

1.4 Financial Management of the Multinational Corporation 11

1.5 Summary 12

Chapter 2 World Trade and the International Monetary System 15

2.1 Integration of the World’s Markets 15

2.2 Balance-of-Payments Statistics 16

2.3 Exchange Rate Systems 18

2.4 A Brief History of the International Monetary System 22

2.5 Summary 31

Chapter 3 Foreign Exchange and Eurocurrency Markets 35

3.1 Characteristics of Financial Markets 35

3.2 The Eurocurrency Market 36

3.3 The Foreign Exchange Market 41

3.4 Foreign Exchange Rates and Quotations 44

3.5 Hedging with Currency Forwards 51

3.6 The Empirical Behavior of Exchange Rates 54

3.7 Summary 56

Chapter 4 The International Parity Conditions and Their Consequences 61

4.1 The Law of One Price 61

4.2 Exchange Rate Equilibrium 63

4.3 Covered Interest Arbitrage and Interest Rate Parity 66

4.4 Less Reliable International Parity Conditions 69

4.5 The Real Exchange Rate 74

4.6 Exchange Rate Forecasting 78

4.7 Summary 81

Appendix 4A: Continuous Compounding 88

Part Two Derivative Securities for Financial Risk Management 93

Chapter 5 Currency Futures and Futures Markets 95

5.1 The Evolution of Futures Markets 95

5.2 Futures Contracts 97

5.3 Forward versus Futures Market Hedges 100

5.4 Hedging with Currency Futures 104

5.5 Summary 113

Chapter 6 Currency Options and Options Markets 117

6.1 What Is an Option? 117

6.2 Option Payoff Profiles 119

6.3 Currency Option Values Prior to Expiration 126

6.4 Hedging with Currency Options 129

6.5 Exchange Rate Volatility Revisited 134

6.6 Summary 139

Appendix 6A: Currency Option Valuation 143

Chapter 7 Currency Swaps and Swaps Markets 149

7.1 The Growth of the Swaps Market 149

7.2 Swaps as Portfolios of Forward Contracts 151

7.3 Currency Swaps 153

7.4 Interest Rate Swaps 161

7.5 Other Types of Swaps 163

7.6 Hedging the Swap Bank’s Exposure to Financial Price Risk 165

7.7 Summary 166

Part Three Managing the Risks of Multinational Operations 171

Chapter 8 Multinational Treasury Management 173

8.1 Determining Financial Goals and Strategies 173

8.2 Managing International Trade 174

8.4 Managing Cash Flows 181

8.5 Managing Exposures to Currency Risk 183

8.6 Summary 190

Appendix 8A: The Rationale for Hedging Currency Risk 194

Chapter 9 Managing Transaction Exposure to Currency Risk 207

9.1 Transaction Exposure to Currency Risk 207

9.2 Managing Transaction Exposures Internally 208

9.3 Managing Transaction Exposures in the Financial Markets 214

9.4 Treasury Management in Practice 221

9.5 Summary 227

Chapter 10 Managing Operating Exposure to Currency Risk 231

10.1 Operating Exposures to Currency Risk 231

10.2 The Exposure of Shareholders’ Equity 234

10.3 Managing Operating Exposures in the Financial Markets 239

10.4 Managing Operating Exposures Through Operations 243

10.5 Pricing Strategy and the Competitive Environment 245

10.6 Summary 247

Chapter 11 Managing Translation Exposure and Accounting for Financial Transactions 253

11.1 Financial Accounting and Reporting Standards 253

11.2 The Current Rate Method of IAS 21 and ASC 830–30 255

11.3 Corporate Hedging of Translation Exposure 257

11.4 Accounting for Financial Market Instruments 260

11.5 Accounting, Disclosure, and Corporate Hedging Activities 265

11.6 Summary 266

Part Four Valuation and the Structure of Multinational Operations 273

Chapter 12 Foreign Market Entry and Country Risk Management 275

12.1 Strategic Entry into International Markets 276

12.2 Country Risk Assessment 281

12.3 Strategies for Managing Country Risk 287

12.4 Protecting the Multinational’s Competitive Advantages 293

12.5 Summary 296

Chapter 13 Multinational Capital Budgeting 299

13.1 The Algebra of Multinational Capital Budgeting 300

13.2 An Example: Wendy’s Restaurant in Neverland 303

13.3 International Parity Disequilibria 307

13.4 Special Circumstances in Cross-Border Investments 313

13.5 Summary 320

Chapter 14 Multinational Capital Structure and Cost of Capital 327

14.1 Capital Structure and the Cost of Capital 328

14.2 Valuation of a Foreign Project with the WACC 332

14.3 The Cost of Capital on Multinational Operations 337

14.4 Sources of Funds for Multinational Operations 341

14.5 The International Evidence of Capital Structure 346

14.6 Summary 348

Chapter 15 Taxes and Multinational Corporate Strategy 355

15.1 The Objectives of National Tax Policy 355

15.2 Types of Taxation 357

15.3 Taxes and Organization Form 360

15.4 U.S. Taxation of Foreign-Source Income 362

15.5 Transfer Pricing and Tax Planning 367

15.6 Taxes and the Location of Foreign Assets and Liabilities 370

15.7 Summary 374

Chapter 16 Real Options and Cross-Border Investment Strategy 379

16.1 Real Options and the Theory and Practice of Investment 379

16.2 Market Entry as a Simple Real Option 381

16.3 Uncertainty and the Value of the Option to Invest 389

16.4 Market Entry as a Compound Real Option 392

16.5 The Real Option Approach as Complement to NPV 395

16.6 Summary 398

Chapter 17 Corporate Governance and the International Market for Corporate Control 405

17.1 Corporate Governance 406

17.2 The International Market for Corporate Control 418

17.3 The International Evidence on Mergers and Acquisitions 424

17.4 Summary 428

Part Five International Portfolio Investment and Asset Pricing 433

Chapter 18 International Capital Markets 435

18.1 Domestic and International Capital Markets 435

18.2 International Investment Vehicles 444

18.3 Cross-Border Financial Statement Analysis 449

18.4 Summary 452

Chapter 19 International Portfolio Diversification 457

19.1 The Algebra of Portfolio Diversification 457

19.2 Returns on Foreign Investments 466

19.3 The Benefits of International Portfolio Diversification 473

19.4 Home Bias 475

19.5 Summary 480

Chapter 20 International Asset Pricing 485

20.1 The International Capital Asset Pricing Model (IAPM) 485

20.2 Factor Models of Expected and Required Return 490

20.3 Contemporary Asset Pricing Models 499

20.4 Summary 501

Appendix: Useful Rules and Formulas 509

Glossary 515

Index 533

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