International Corporate Finance

Laurent L. Jacque (Boston, MA) is the Walter B. Wriston Professor of International Finance & Banking at the Fletcher School of Law and Diplomacy (Tufts University) and Director of its International Business Studies Program. From 2004 to 2007 he was Fletcher’s Academic Dean and as such responsible for the design and the establishment of the new Master of International Business degree and the Center for Emerging Market Enterprises. Since 1990 he has also held a joint appointment at the HEC School of Management (France) as a Professor of Economics, Finance, and International Business.

• Preface xviiAcknowledgments xxvAbout the Author xxviiChapter 1 What is International Corporate Finance? 1The Uneven Reach of Globalization 2The Rise of the Multinational Corporation 3What is Different about International Corporate Finance? 6Risks in the Wonderland of International Finance 8Internationalization and the Locus of the Finance Function 12The International Control Conundrum 15Exploiting The Multinational Enterprise System 16Summary 19Questions for Discussion 19References 20Part One The International Monetary Environment 21Chapter 2 Exchange Rates Regimes 23Some First Principles about Exchange Rate Determination 24World Map of Exchange Rate Regimes: The Flexibility × Convertibility Space 29Floating Exchange Rates 31Stabilized or Pegged Exchange Rates 39Controlled Exchange Rates 46To Float or to Fix: The Trilemma of International Finance 49Summary 50Questions for Discussion 51Problems 52Internet Exercises 54References 54Chapter 3 Yesterday and Yesteryear 57Chronology of the International Monetary System 58The Gold Standard (1878–1914, 1925–1931) 61The Bretton Woods System (1944–1971) 63Managed Floating Exchange Rates (1973–Present) 67European Monetary System and the European Currency Unit (1979–1999) 68Emerging Markets Currency Regimes and Crises 72European Monetary Union and the Birth of the Euro (1999–Present) 76Today and Tomorrow: The Current Map of Exchange Rates 84Summary 86Questions for Discussion 87Problems 88Internet Exercises 90References 90Case Study 3.1: Will the Eurozone Shutter? Plant Location and Exchange Rates for Hyundai 91Chapter 4 The Balance of Payments 99Fundamentals of Balance of International Payments Accounting 100Current Account 105Financial Account 107Official Reserve Account 109Statistical Discrepancies: Errors and Omissions 111Balance of Payments and the Foreign Exchange Market 111Debtor Versus Creditor Nations 115Linking the Balance of Payments to National Income 118Summary 119Questions for Discussion 120Problems 121Internet Exercises 122References 124Case Study 4.1: When One of the BRIC(k)s Falls: Trials and Tribulations of the Indian Rupee 124Part Two The Foreign Exchange Market and Currency Derivatives 129Chapter 5 The Foreign Exchange Market 131How Forex is Traded: The Institutional Framework 132Foreign Exchange Products 140Exchange Rate Quotations 142Summary 155Questions for Discussion 156Problems 157Internet Exercises 160References 160Case Study 5.1: Banco Mercantil Internacional’s Forex Losses 160Chapter 6 Interest Rate Arbitrage and Parity 165Interest Rate Arbitrage Theorem 166Interest Rate Parity 174Uncovered Interest Rate Arbitrage and the Carry Trade 181Summary 184Appendix 6A: Transaction Costs: Interest Rate Arbitarge with Bid-Ask Spreads (Advanced) 185Appendix 6B: Interest Rate Parity and Asymmetric Taxation 187Questions for Discussion 188Problems 188Internet Exercises 195References 195Case Study 6.1: Brazil Rede Globo’s Short-Term Funding 195Chapter 7 Purchasing Power Parity and the International Parities Framework 199Purchasing Power Parity 200The Linkages Between Interest, Inflation, and Exchange Rates 213Questions for Discussion 220Problems 220Internet Exercises 221References 222Chapter 8 Currency Futures and Options 223A Brief History of Derivatives 223Currency Futures 228Currency Options 234Risk Profile of Currency Options 236Option Strategies 239Put-Call Parity Theorem 245The Valuation of Currency Options 248Derivatives and Zero-Premium Options 254Summary 258Appendix 8A: Pricing Currency Options 259Questions for Discussion 261Problems 261Internet Exercises 264References 264Case Study 8.1: Daewoo’s Unorthodox Funding Strategy 264Part Three International Financing 269Chapter 9 The International Financial Sector and the Dynamics of Global Capital Markets 271Financing as a Global Procurement Decision 272The Financial System and Financial (Dis)Intermediation 273Securitization and the (Lower) Cost of Consumer Financing 281Deregulation 287Mapping the Financial System/Capital Market Emergence Process 290Summary 297Questions for Discussion 298Problems 298Internet Exercises 300References 300Case Study 9.1: How Thai Airways FOILs Jet Fuel Price Risk 301Chapter 10 Sourcing Equity Globally 307A Grand Tour of Equity Markets 308Global Equity Financing as a Procurement Decision 317Internationalizing the Cost of Capital: The Landmark Case of Novo Industri 318Why do Firms Cross-List? 323How to Source Equity Globally 325Summary 331Questions for Discussion 332Problems 333Internet Exercises 334References 335Case Study 10.1: Jazztel’s Foreign IPO 335Chapter 11 Sourcing Debt from Global Bond Markets 345The International Debt Procurement Decision 346Grand Tour of the Global Debt Market 347Cost of Foreign Currency Debt Financing 356Debt Refinancing 361The International Debt Financing Conundrum 364Summary 366Questions for Discussion 366Problems 367Internet Exercises 372References 372Case Study 11.1: McDonald’s Dim Sum Bonds: “Lovin’ It” 372Chapter 12 Currency, Interest Rate, and Credit Default Swaps 377Currency Swaps 378Interest Rate Swaps 383Credit Default Swaps 391Summary 397Questions for Discussion 397Problems 398Internet Exercises 400References 400Case Study 12.1: The Demise of AIG 400Chapter 13 International Trade Financing 405A Brief History of International Trade 406The Trilogy of Risks in Exporting 407Managing Credit Risk 409Managing Currency Risk 410Managing Country Risk 411The Mechanics of Trade Financing with a Letter of Credit 412Financing Exports 415Pre-Export Financing 418Government-Sponsored Export Credit Agencies 422Summary 423Questions for Discussion 424Problems 424Internet Exercises 426Case Study 13.1: Warrick Pharmaceuticals Inc. 426Part Four Managing Foreign Exchange Risk 431Chapter 14 The Case for Foreign Exchange Risk Management 433Defining Foreign Exchange Risk Management and its Objectives 435Can Hedging Currency Risk Increase the Value of the Firm? 437When is Hedging Currency Risk Irrelevant? 440From Hedging to Managing Currency Risk 441The Building Blocks of Foreign Exchange Risk Management 443Summary 445Appendix 14A: Foreign Exchange Risk Management: What do Firms do? 446Questions for Discussion 446References 447Case Study 14.1: Bio-Oils Energy S.L. 447Chapter 15 Forecasting Exchange Rates 455Market-Based Forecasts 456Model-Based Forecasts: Technical Versus Econometric Modeling Approaches 461Composite Forecasts 468How to Use Currency Forecasts 469Summary 470Appendix 15A: Forecasting Pegged Yet Adjustable Exchange Rates 470Questions for Discussion 476Problems 477Internet Exercises 479References 479Case Study 15.1: Euclides Engineering, Ltd. 480Chapter 16 Managing Transaction Exposure 483Measuring Transaction Exposure 484The Mechanics of Hedging Transaction Exposure 488Hedging and Financing International Trade 500Eliminating Foreign Exchange Rate Risk in Long-Term Contracts 501Exchange Rate Risk in International Bidding 508How Much to Hedge Transaction Exposure 512Summary 513Questions for Discussion 514Problems 514References 520Case Study 16.1: Hedging Currency Risk at TT Textiles 521Chapter 17 Managing Translation Exposure 531What is Translation Exposure? 531Should Translation Exposure be Hedged? 532Alternative Translation Methods 533The Mechanics of Contractual Hedging 539The Mechanics of Financial Hedging 546Summary 550Appendix 17A: Accounting Valuation and the Concept of Translation Exposure 551Questions for Discussion 555Problems 555Internet Exercises 560References 560Case Study 17.1: Wilkinson Sword’s Trials and Tribulations in Turkey 560Chapter 18 Managing Economic Exposure 567A Taxonomy of Economic Exposures 568Toward an Operational Measure of Economic Exposure 575Managing Operating Exposure 578Summary 583Questions for Discussion 584Problems 584References 587Case Study 18.1: Peugeot Citroën SA’s Economic Exposure to the South Korean Won 588Part Five Cross-Border Valuation and Foreign Investment Analysis 591Chapter 19 Foreign Market Entry Strategies and Country Risk Management 593Contractual Modes of Foreign Market Entry 594Foreign Market Entry Through Foreign Direct Investments 599Country Risk 600Costs/Benefits of Foreign Direct Investment to Host Countries 608Summary 612Questions for Discussion 613Internet Exercises 613References 614Case Study 19.1: Carrefour’s Indian Entry Strategy 614Chapter 20 International Capital Budgeting 619The Foreign Direct Investment Decision-Making Process 619A Primer on Evaluating Investment Opportunities 622What is Different About Evaluating Foreign Investment Proposals? 624Case Study: Renault Invests in India 629Global Cost of Equity Capital 639Optimal Worldwide Capital Structure 643Summary 644Appendix 20A: Adjusted Present Value 645Appendix 20B: Real Options 648Questions for Discussion 656Problems 656Internet Exercises 660References 660Chapter 21 Cross-Border Mergers and Acquisitions 661A Brief History of Mergers and Acquisitions 662The Industrial Logic of Mergers and Acquisitions 662Are Cross-Border Acquisitions Different? 664Valuation of Foreign Acquisitions 671Ciments Lafarge Enters Vietnam 673Summary 680Questions for Discussion 681Problems 681Internet Exercises 683Case Study 21.1: Etihad’s Proposed Acquisition of Malaysia Airlines 684Chapter 22 Project Finance 689What is Project Finance? 690Anatomy of Project Finance: The Case of the Ras Laffan Liquefied Natural Gas Company 696Valuing Project Finance: The Esty Model 696Summary 704Questions for Discussion 705References 705Case Study 22.1: Clean Infra Ltd Project Finance 706Chapter 23 Global Investing 713The Basics of International Portfolio Management 714The Gains from International Diversification 722Trials and Tribulations in Foreign Equity Investing 729Currency Risk in Global Investing 730Alternative Modes of Investing in Foreign Equity 733The New Landscape of Global Investing 734Summary 741Appendix 23A: In Search of Alpha at Global Thematic Partner is found on the Book Website at www.wiley.com/go/intlcorpfinance2e 741Questions for Discussion 742Problems 742Internet Exercises 744References 744Part Six Managing the Multinational Financial System 747Chapter 24 Managing the Multinational Financial System 749A Primer on International Taxation 749The Multinational Financial System 753Exploiting the System’s Potential to Minimize Global Tax Liabilities 755Designing a Global Dividends Remittance Strategy 761Centralizing Cash Management 765Summary 774Questions for Discussion 775Problems 775Internet Exercises 777References 777Appendix: Answers to Selected Problems 779About the Companion Website 787Index 789Continued on the WebsiteChapter 25 International Control Conundrum (extension of Part 6) 805A Primer on Managerial Control 806The International Control Conundrum 809EVA-Based Contingent Budgeting and Performance Assessment 815Summary 821Appendix 25A: Applying The EVA-Based Control System 822Questions for Discussion 826References 826Chapter 26 Asian Finance and Banking (extension of Part 3) 827Asian Finance: Common Historical Roots, Diverse Paths 828Adaptive Responses: Crises and Institutional Change in Asian Finance 832Business Organization, Corporate Ownership, and Governance 836Corporate Governance 841Capital Market Development 846Capital Structure and the Cost of Capital 855Performance, Value, and the Practice of Corporate Finance 857Summary 860Questions for Discussion 860References 861Chapter 27 Islamic Banking and Finance (extension of Part 3) 863The Underlying Principles of Islamic Finance 864The Evolution of Islamic Finance 868Islamic Financing Products 872Shariah-Compliant Asset Management 879Islamic Banking 880Islamic Finance and the Global Financial Meltdown 885Summary 886Questions for Discussion 888References 888Case Study 27.1: When Emirates Airline Taps Islamic Finance 888Appendix 23A to Chapter 23: In Search of Alpha at Global Thematics Partners (GTP) 894Glossary 899