An in-depth treatment of the international financial arena

Multinational Finance, Fifth Edition assumes the viewpoint of the financial manager of a multinational corporation with investment or financial operations in more than one country. This book provides a framework for evaluating the many opportunities, costs, and risks of multinational operations in a manner that allows readers to see beyond the math and terminology surrounding this field to realize the general principles of multinational financial management.

Logically organized and written in a clear, non-technical style, this book includes information on international finance topics such as foreign exchange, currency and derivatives markets, currency risk (transaction, operating, and translation) management, country risk, international taxation, capital structure, cost of capital, and international portfolio diversification. It also offers unique chapters on multinational treasury management, the rationale for hedging currency risks, options on real assets, international corporate governance, asset pricing, and portfolio management.

• Emphasizes the managerial aspects of multinational finance with graphs, figures, and the use of numerous real-world examples
• Expands on the treatment of parity disequilibria to include exchange rate expectations that differ from parity and a project's operating exposure to currency risk
• Provides an overview and comparison of the various derivative instruments and their use in risk hedging
• Contains valuable insights on valuation and management of a multinational corporation's investments

If you're looking for the best way to gain a firm understanding of multinational finance, look no further than the fifth edition of this classic text.

New feature

A solid understanding of multinational finance is crucial to success in today's, and ultimately tomorrow's, marketplace. This is as true for firms competing directly with foreign companies as it is for domestic firms whose suppliers, customers, and competitors are increasingly likely to be from foreign countries.

The Fifth Edition of Multinational Finance presents a difficult subject in an accessible way. It provides a clear framework for evaluating the many opportunities, costs, and risks of multinational operations in a manner that allows readers to see beyond the algebra and terminology to the general principles of multinational financial management. And while this book assumes the viewpoint of the financial manager of a large multinational enterprise—with investment or financial operations in more than one country—the insights outlined here can work just as well for government entities, small businesses, and even individuals that operate in the global marketplace.

Divided into five comprehensive parts, this new edition of Multinational Finance retains the classic features that have made previous editions so popular, as well as a wealth of new material on current topics of interest to practitioners and students of multinational finance.

• Part I presents an in-depth treatment of the international financial environment, including international trade and the balance of payments, currency and Eurocurrency markets, and international parity conditions
• Part II contains detailed discussions of currency futures, options, and swaps, and examines the importance of these derivative instruments in financial risk management
• Part III explores the operation of the multinational treasury, the rationale for hedging currency risks, and the multinational corporation's management of transaction, operating, and translation exposures to currency risk
• Part IV develops the intricacies of valuing and structuring the corporation's international assets and liabilities
• Part V takes a market-oriented view of the multinational corporation, with separate chapters on international capital markets, portfolio diversification, and asset pricing

Designed to aid in the learning process, this reliable resource includes highlighted callouts of key terms and concepts, conceptual questions and numerical problems, suggested readings, and website recommendations that link chapter topics to the real world. And for instructors thinking about adopting the text for classroom use, it includes more than 600 PowerPoint slides that review the key elements of each chapter, a Solutions Manual with answers to the end-of-chapter questions and problems, and a comprehensive Test Bank with more than 1,000 test questions and solutions.

Dealing with financial operations or investments in more than one country can be difficult. To excel at this endeavor, it's essential to follow a simple and intuitive approach. The Fifth Edition of Multinational Finance will help you achieve this elusive goal and show you how to make the most of the opportunities available in today's international market.

Preface xv Acknowledgments xix PART ONE The International Financial Environment CHAPTER 1 An Introduction to Multinational Finance 3 Executive Summary 3 1.1 The Goals of the Multinational Corporation 3 1.2 The Challenges of Multinational Operations 6 1.3 The Opportunities of Multinational Operations 9 1.4 Financial Management of the Multinational Corporation 15 1.5 Summary 16 Key Terms 17 Conceptual Questions 17 CHAPTER 2 World Trade and the International Monetary System 19 Executive Summary 19 2.1 Integration of the World’s Markets 19 2.2 Balance-of-Payments Statistics 22 2.3 Exchange Rate Systems 25 2.4 A Brief History of the International Monetary System 28 2.5 The Global Financial Crisis of 2008 40 2.6 Summary 41 Key Terms 42 Conceptual Questions 42 Problems 43 Suggested Readings 43 CHAPTER 3 Foreign Exchange and Eurocurrency Markets 45 Executive Summary 45 3.1 Characteristics of Financial Markets 45 3.2 The Eurocurrency Market 46 3.3 The Foreign Exchange Market 51 3.4 Foreign Exchange Rates and Quotations 57 3.5 The Empirical Behavior of Exchange Rates 64 3.6 Summary 67 Key Terms 68 Conceptual Questions 69 Problems 69 Suggested Readings 71 CHAPTER 4 The International Parity Conditions and Their Consequences 73 Executive Summary 73 4.1 The Law of One Price 73 4.2 Exchange Rate Equilibrium 76 4.3 Interest Rate Parity and Covered Interest Arbitrage 80 4.4 Less Reliable International Parity Conditions 83 4.5 The Real Exchange Rate 88 4.6 Exchange Rate Forecasting 94 4.7 Summary 96 Key Terms 97 Conceptual Questions 98 Problems 98 Suggested Readings 102 Appendix 4A: Continuous Compounding 102 Problems 106 PART TWO Derivative Securities for Financial Risk Management CHAPTER 5 Currency Futures and Futures Markets 109 Executive Summary 109 5.1 Financial Futures Exchanges 109 5.2 The Operation of Futures Markets 111 5.3 Futures Contracts 112 5.4 Forward versus Futures Market Hedges 115 5.5 Futures Hedges Using Cross-Exchange Rates 119 5.6 Hedging with Currency Futures 120 5.7 Summary 129 Key Terms 131 Conceptual Questions 131 Problems 132 Suggested Readings 133 CHAPTER 6 Currency Options and Options Markets 135 Executive Summary 135 6.1 What Is an Option? 135 6.2 Option Payoff Profiles 138 6.3 Currency Option Values Prior to Expiration 143 6.4 Hedging with Currency Options 147 6.5 Exchange Rate Volatility Revisited (Advanced) 152 6.6 Summary 158 Key Terms 159 Conceptual Questions 159 Problems 159 Suggested Readings 161 Appendix 6A: Currency Option Valuation 161 Key Terms 168 Problems 168 Suggested Readings 170 CHAPTER 7 Currency Swaps and Swaps Markets 171 Executive Summary 171 7.1 The Growth of the Swaps Market 171 7.2 Swaps as Portfolios of Forward Contracts 172 7.3 Currency Swaps 176 7.4 Interest Rate Swaps 183 7.5 Other Types of Swaps 187 7.6 Hedging the Swap Bank’s Exposure to Financial Price Risk 189 7.7 Summary 190 Key Terms 190 Conceptual Questions 191 Problems 191 Suggested Readings 193 PART THREE Managing the Risks of Multinational Operations CHAPTER 8 Multinational Treasury Management 197 Executive Summary 197 8.1 Determining Financial Goals and Strategies 197 8.2 Managing the Corporation’s International Trade 199 8.3 Financing the Corporation’s International Trade 205 8.4 Managing the Multinational Corporation’s Cash Flows 209 8.5 Currency Risk Management in the Multinational Corporation 211 8.6 Summary 224 Key Terms 224 Conceptual Questions 225 Problems 225 Suggested Readings 226 Appendix 8A: The Rationale for Hedging Currency Risk 227 Key Terms 237 Conceptual Questions 237 Problems 237 Suggested Readings 238 CHAPTER 9 Managing Transaction Exposure to Currency Risk 239 Executive Summary 239 9.1 An Example of Transaction Exposure to Currency Risk 239 9.2 Managing Transaction Exposures Internally 240 9.3 Managing Transaction Exposure in Financial Markets 247 9.4 Treasury Management in Practice 255 9.5 Summary 260 Key Terms 261 Conceptual Questions 261 Problems 261 Suggested Readings 263 CHAPTER 10 Managing Operating Exposure to Currency Risk 265 Executive Summary 265 10.1 Operating Exposures to Currency Risk 265 10.2 The Exposure of Shareholders’ Equity 269 10.3 Managing Operating Exposure in the Financial Markets 274 10.4 Managing Operating Exposure through Operations 279 10.5 Pricing Strategy and the Firm’s Competitive Environment 281 10.6 Summary 285 Key Terms 286 Conceptual Questions 286 Problems 286 Suggested Readings 288 CHAPTER 11 Managing Translation Exposure and Accounting for Financial Transactions 291 Executive Summary 291 11.1 The Current Rate Method of Financial Accounting Standard No. 52 291 11.2 Corporate Hedging of Translation Exposure 294 11.3 Accounting for Financial Market Transactions 298 11.4 Accounting, Disclosure, and Corporate Hedging Activities 304 11.5 Summary 307 Key Terms 308 Conceptual Questions 308 Problems 309 Suggested Readings 311 PART FOUR Valuation and the Structure of Multinational Operations CHAPTER 12 Foreign Market Entry and Country Risk Management 315 Executive Summary 315 12.1 Strategic Entry into International Markets 316 12.2 Country Risk Assessment 322 12.3 Strategies for Managing Country Risk 331 12.4 Protecting the Multinational’s Competitive Advantages 338 12.5 Summary 342 Key Terms 343 Conceptual Questions 343 Problems 344 Suggested Readings 345 CHAPTER 13 Multinational Capital Budgeting 347 Executive Summary 347 13.1 The Algebra of Multinational Capital Budgeting 347 13.2 An Example: Wendy’s Restaurant in Neverland 350 13.3 International Parity Disequilibria 354 13.4 Special Circumstances in Cross-Border Investments 360 13.5 Summary 367 Key Terms 368 Conceptual Questions 368 Problems 368 Suggested Readings 373 CHAPTER 14 Multinational Capital Structure and Cost of Capital 375 Executive Summary 375 14.1 Capital Structure and the Cost of Capital 375 14.2 Project Valuation and the Cost of Capital 380 14.3 The Cost of Capital on Multinational Operations 390 14.4 Sources of Funds for Multinational Operations 394 14.5 The International Evidence on Capital Structure 401 14.6 Summary 402 Key Terms 403 Conceptual Questions 404 Problems 405 Suggested Readings 408 CHAPTER 15 Taxes and Multinational Corporate Strategy 411 Executive Summary 411 15.1 The Objectives of National Tax Policy 411 15.2 Types of Taxation 413 15.3 U.S. Taxation of Foreign-Source Income 417 15.4 Taxes and Organizational Form 423 15.5 Transfer Pricing and Tax Planning 425 15.6 Taxes and the Location of Foreign Assets and Liabilities 428 15.7 Summary 432 Key Terms 433 Conceptual Questions 433 Problems 434 Suggested Readings 435 CHAPTER 16 Real Options and Cross-Border Investment Strategy 437 Executive Summary 437 16.1 Real Options and the Theory and Practice of Investment 437 16.2 Market Entry as a Simple Real Option 439 16.3 Uncertainty and the Value of the Option to Invest 447 16.4 Market Entry as a Compound Real Option 451 16.5 The Real Option Approach as a Complement to Net Present Value 454 16.6 Summary 457 Key Terms 458 Conceptual Questions 458 Problems 458 Suggested Readings 462 CHAPTER 17 Corporate Governance and the International Market for Corporate Control 465 Executive Summary 465 17.1 Corporate Governance 466 17.2 The International Market for Corporate Control 478 17.3 The International Evidence on Mergers and Acquisitions 484 17.4 Summary 488 Key Terms 489 Conceptual Questions 489 Problems 490 Suggested Readings 491 PART FIVE International Portfolio Investment and Asset Pricing CHAPTER 18 International Capital Markets 495 Executive Summary 495 18.1 Domestic and International Bond Markets 495 18.2 Domestic and International Stock Markets 502 18.3 International Investment Vehicles 510 18.4 Share Prices in International Markets 515 18.5 Asset Allocation Policy and Investment Style 519 18.6 Cross-Border Financial Statement Analysis 521 18.7 Summary 524 Key Terms 526 Conceptual Questions 526 Problems 527 Suggested Readings 528 CHAPTER 19 International Portfolio Diversification 531 Executive Summary 531 19.1 The Algebra of Portfolio Diversification 531 19.2 Returns on Foreign Investments 541 19.3 The Benefits of International Portfolio Diversification 548 19.4 Home Bias 551 19.5 Summary 557 Key Terms 558 Conceptual Questions 558 Problems 559 Suggested Readings 560 CHAPTER 20 International Asset Pricing 563 Executive Summary 563 20.1 The International Capital Asset Pricing Model 563 20.2 Factor Models and Arbitrage Pricing Theory 568 20.3 Factor Models for International Assets 571 20.4 Momentum Strategies 580 20.5 Contemporary Asset Pricing Models 582 20.6 Summary 583 Key Terms 584 Conceptual Questions 584 Problems 585 Suggested Readings 588 Notes 591 Solutions to Even-Numbered Problems 607 Symbols and Acronyms 635 Useful Rules and Formulas 637 Useful Websites 641 Glossary 643 Index 663