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Th i rd Ed it ion
.
About the authors IV Opportunities in North and South America 18
Preface XVI
•
Opportunities in Asia 19
Walk-through tour xx Using the Web 20
Exposure to International Risk 20
Exposure to exchange rate movements 21
Exposure to foreign economies 21
PART I: THE INTERNATIONAL Exposure to political risk 22
Overview of an MNC's Cash Flows 22
FINANCIAL ENVIRONMENT 1
Valuation Model for an MNC 24
Domestic model 24
1 Multinational Financial Managing for Value: Yahoo!'s decision to
Management: An Overview 2
expand internationally 25
Valuing international cash flows 26
Goal of the MNC 3 Impact of financial management and international
Conflicts with the MNC goal 3 conditions on value 28
Impact of management control 4 Organization of the Text 28
How the Internet facilitates management control 6
Summary 29
Impact of corporate control 6
Critical Debate 30
Constraints interfering with the MNC's goal 7
Self Test 30
Theories of International Business 8
Questions and Applications 30
Economic theories 9
Business theories 11 Advanced Questions 31
International Business Methods 11 Project Workshop 33

International trade 12 Discussion in the Boardroom 33
Using the Web: Trade conditions for industries 12 Running Your Own MNC 33
Using the Web: Internet millionaires 12 Blades PLC Case Study: Decision to expand
Licensing 13 internationally 34
Franchising 13 Small Business Dilemma: Developing a
Joint ventures 13 multinational sporting goods industry 35
Acquisitions of existing operations 14
Establishing new foreign subsidiaries 14
Special Purpose Vehicles (SPV) 14 2 International Flow of Funds 36
Summary of methods 15 Balance of Payments 37
International Opportunities 15 Current account 37
Investment opportunities 15 Financial account 39
Using the Web 15 Overall balance of payments 39
Financing opportunities 16 Current account in surplus, financial account
Opportunities in Europe 16 in deficit (Type 1, Exhibit 2.4) 41
••
VII
• ••
VIII CONTENTS
Current account in deficit, financial account Motives for providing credit in foreign markets 68
in surplus (Type 2, Exhibit 2.4) 41 Motives for borrowing in foreign markets 69
Current account and financial account in Foreign Exchange Market 69
balance (see Type 3, Exhibit 2.4) 42 Foreign exchange transactions 70
International Trade Flows 42 Using the Web: Historical exchange rates 70
Distribution of exports and imports for major Interpreting foreign exchange quotations 73
countries 42 Managing for Value: Intel's currency trading 73
Balance of trade trends 42 Direct and indirect quotations 73
Updated Trade and Investment Conditions 44 Using the Web: Cross exchange rates 78
Using the Web 44 Currency futures and options markets 79
Trade agreements 45 International Money Market 79
Using the Web 47 Market efficiency 80
Trade disagreements 47 Origins and development 81
Factors Affecting International Trade Flows 50 Standardizing global bank regulations 83
Impact of inflation 50 International Credit Market 84
Impact of national income 50 Syndicated loans 85
Impact of government restrictions 50 International Bond Market 85
Using the Web 51 Eurobond market 86
Impact of exchange rates 51 Development of other bond markets 87
Interaction of factors 53 Comparing Interest Rates Among Currencies 87
Correcting a Balance of Trade Deficit 53 International Stock Markets 89
Why a weak home currency is not a Issuance of foreign shares in the USA 90
perfect solution 54 Issuance of shares in foreign markets 91
International Capital Flows 55 Using the Web: Stock market trading
Using the Web 56 information 92
Factors affecting foreign direct investment 56 International Financial Markets and the MNC 92
Using the Web: Foreign direct investment How Financial Markers Affect an MNC's Value 93
information 57 Summary 94
Factors affecting international portfolio investment 57
Critical Debate 94
Using the Web 57 Self Test 95
Agencies that Facilitate International Flows 58 Questions and Applications 95
International Monetary Fund 58
Advanced Questions 96
World Bank 59
Project Workshop 97
World Trade Organization 60
International Financial Corporation 60
Discussion in the Boardroom 98
International Development Association 60 Running Your Own MNC 98
Bank for International Settlements 60 Blades PLC Case Study: Decisions to use
Regional development agencies 60 international financial markets 99
BRIGS 61 Small Business Dilemma: Developing a
How International Trade Affects an MNC's Value 61 multinational sporting goods industry 100
Summary 61 Appendix 3: Investing in International
Critical Debate 61 Financial Markets 101
Self Test 62
4 Exchange Rate Determination 116
Project Workshop 63 Measuring Exchange Rate Movements 117

Discussion in the Boardroom 64 Exchange Rate Equilibrium 118
Running Your Own MNC Demand for a currency 118
64
Supply of a currency for sale 119
Blades PLC Case Study: Exposure to
Equilibrium 119
international flow of funds 65
Factors that Influence Exchange Rates 121
Small Business Dilemma: Developing a
Relative inflation rates 121
multinational sporting goods industry 66 Relative interest rates 122
Relative income levels 124
3 International Financial Markets 67 Government controls 125
Expectations 126
Motives for Using International Financial Markets 68
Interaction of factors 126
Motives for investing in foreign markets 68
•
CONTENTS IX
Managing for Value: Impact of exchange rate Contingency graph for a seller of a put option 167
changes on cash flows for Renault, Conditional Currency Options 167
Nestle and Philips 128 European and American currency options 169
Speculating on anticipated exchange rates 128 Asian options 169
Summary 130 Options in Emerging Market Economies 169
Critical Debate 131 Summary 169
Self Test 131 Critical Debate 170
Questions and Applications 131 Self Test 170

Advanced Questions 132 Questions and Applications 171
Project Workshop 134 Advanced Questions 173
Discussion in the Boardroom 134 Project Workshop 176
Running Your Own MNC 134 Discussion in the Boardroom 176

Blades PLC Case Study: Assessment of future Running Your Own MNC 176
exchange rate movements 135 Blades PLC Case Study: Use of currency
Small Business Dilemma: Assessment by derivative instruments 177
the Sports Exports Company of factors that Small Business Dilemma: Use of currency
affect the British pound's value 136 futures and options by the Sports Exports
Company 178
Appendix 5A: Currency Option Pricing 179
5 Currency Derivatives 137 Appendix 58: Currency Option Combinations 183
Part 1: Integrative problem 195
Forward Market 138
How MNCs use forward contracts
Part 1: Essays/discussion and academic articles 196
138
Using the Web: Forward rates 141
Non-deliverable forward contracts 143
Currency Futures Market 144 PART II: EXCHANGE RATE
Using the Web
Contract specifications
145
145
BEHAVIOUR 197
Trading futures 146

Comparison of currency futures and forward 6 Exchange Rate History and the
contracts 146
Role of Governments 198
Pricing currency futures 147
Credit risk of currency futures contracts 147 Exchange Rate Systems 199
Speculation with currency futures 149 Fixed exchange rate system 199
How firms use currency futures 150 Using the Web 199
Closing out a futures position 151 Managed float exchange rate system 201
Transaction costs of currency futures 152 Pegged exchange rate system 201
Currency Options Market 152 Currency boards 201
Option exchanges 153 Dollarization 204
Over-the-counter market 153 Freely floating exchange rate system 204
Currency Call Options 153 Classification of exchange rate arrangements 206
Factors affecting currency call option premiums 154 Government Intervention - the Process 208
How firms use currency call options 155 Using the Web: Central bank website links 208
Speculating with Currency Call Options 157 Reasons for government intervention 208
Further points 159 Direct intervention 209
Currency Put Options 160 Indirect intervention 212
Factors affecting currency put option premiums 160 Exchange Rate Target Zones 213
Hedging with currency put options 161 Intervention as a Policy Tool 214
Speculating with currency put options 162 Influence of a weak home currency on the
Managing for Value: Cisco's dilemma when economy 214
hedging with put options 163 Influence of a strong home currency on the
Using the Web : Options prices 164 economy 214
Contingency Graphs for Currency Options 164 A Brief History of Exchange Rates 215
Contingency graph for a purchaser of a call option 164 Using the Web 220
Contingency graph for a seller of a call option 164 Using the Web 224
Contingency graph for a buyer of a put option 166 Using the Web 232
x CONTENTS
The global financial crisis 2007 onwards 232 8 Relationships Among Inflation,
Summary 234
Interest Rates and Exchange
Critical Debate 235
Self Test 235
Rates 274
Questions and Applications 235 Purchasing Power Parity (PPP) 275

Advanced Questions 236 Interpretations of purchasing power parity 275
Rationale behind purchasing power parity theory 276
Project Workshop 237
Derivation of purchasing power parity 277
Using PPP to estimate exchange rate effects 278
Running Your Own MNC 237
Graphic analysis of purchasing power parity 279
Blades PLC Case Study: Assessment of Testing the purchasing power parity theory 281
government influence on exchange Using the Web: Country inflation rates 283
rates 238 Why purchasing power parity does not occur 283
Small Business Dilemma: Assessment The real exchange rate 284
of central bank intervention by Purchasing power parity in the long run 286
the Sports Exports Company 239 Using the Web: Inflation and exchange rate
Appendix 6: Economic Considerations forecasts 287
of the Euro 240 Managing for Value: Indirect impact of
purchasing power parity on MNCs 287
International Fisher Effect (IFE) 287
7 International Arbitrage and Relationship with purchasing power parity 287
Interest Rate Parity 245 Implications of the IFE for the foreign
International Arbitrage 246 investment market 288
Locational arbitrage 246 Derivation of the international Fisher effect 290
Triangular arbitrage 249 Graphic analysis of the international Fisher effect 292
Covered interest arbitrage 253 Tests of the international Fisher effect 293
Comparison of Arbitrage Effects 257 Why the international Fisher effect does
Interest Rate Parity (IRP) 257 not occur 295
Derivation of interest rate parity 257 Comparison of the IRP, PPP and IFE Theories 296
Determining the forward premium 259 Summary 297
The approximate relationship between Critical Debate 298
forward premium and interest rate Self Test 298
differential 260 Questions and Applications 298
Graphic analysis of interest rate parity 261 Advanced Questions 300
How to test whether interest rate parity exists 263
Interpretation of interest rate parity 263
Does interest rate parity hold? 263
Considerations when assessing interest
rate parity 264
Blades PLC Case Study: Assessment of
Using the Web: Forward rates 266
purchasing power parity 304
Managing for Value: How interest rate parity Small Business Dilemma: Assessment of
affects IBM's hedge 266
the IFE by the Sports Exports Company 305
Summary 267
Appendix 8: Further Notes on Exchange
Critical Debate 267
Rate Models 306
Self Test 268


Part 2: Essays/discussion and academic
articles 312
Project Workshop 27 1
Discussion in the Boardroom 27 1
Running Your Own MNC 27 1 PART Ill: EXCHANGE RATE
Blades PLC Case Study: Assessment RISK MANAGEMENT 313
of potential arbitrage opportunities 272
Small Business Dilemma: Assessment of
prevailing spot and forward rates by 9 Forecasting Exchange Rates 314
the Sports Exports Company 273 Why Firms Forecast Exchange Rates 315
•
CONTENTS XI
Forecasting Techniques 318 Managing for Value: Philips Electronics

Market efficiency 318 exposure to exchange rate risk 363
Technical forecasting 320 Economic exposure to home currency
Using the Web 321 depreciation 364
Managing for Value: How MNCs' earnings Economic exposure of domestic firms 364
depend on currency values 322 Measuring economic exposure 364
Fundamental forecasting 322 Translation Exposure 369
Market-based forecasting 327 Does translation exposure matter? 369
Using the Web : Forward rates as forecasts 328 Determinants of translation exposure 369
Mixed forecasting 329 Examples of translation exposure 371
Forecasting Services 331 Summary 372
Using the Web: Exchange rate forecasts 331 Critical Debate 372
Performance of forecasting services 331 Self Test 372
Evaluation of Forecast Performance 331 Questions and Applications 373
Forecast accuracy over time 332 Advanced Questions 374
Statistical test of forecasts - the de-trending Project Workshop 376
problem 333 Discussion in the Boardroom 376
Should MNCs make exchange rate forecasts? 335 Running Your Own MNC 376
Exchange Rate Volatility 337 Blades PLC Case Study: Assessment of
Methods of forecasting exchange rate volatility 338 exchange rate exposure 377
Using the Web: Implied volatilities 340
Small Business Dilemma: Assessment of
Summary 340
exchange rate exposure by the Sports
Critical Debate 341 Exports Company 378
Self Test 341
Advanced Questions 343 11 Managing Transaction Exposure 379
Project Workshop 345 Transaction Exposure 380
Discussion in the Boardroom 345 Identifying net transaction exposure 380
Running Your Own MNC 345 Adjusting the invoice policy to manage exposure 380
Blades PLC Case Study: Forecasting Managing for Value: Centralized management
exchange rates 346 of exposure 381
Small Business Dilemma: Exchange rate Techniques to Eliminate Transaction Exposure 381
forecasting by the Sports Exports Futures hedge 382
Company 347 Forward hedge 382
Money market hedge 386
Currency option hedge 389
10 Measuring Exposure to Comparison of hedging techniques 391
Exchange Rate Fluctuations 348 Hedging policies of MNCs 400
Limitations of Hedging 400
Is Exchange Rate Risk Relevant? 349
Managing for Value: BP hedging strategy 400
Purchasing power parity argument 349
Limitation of hedging an uncertain amount 401
The investor hedge argument 349
Limitation of repeated short-term hedging 401
Currency diversification argument 349
Stakeholder diversification argument
Hedging Long-Term Transaction Exposure 402
349
Long-term forward contract 403
Response from MNCs 350
Currency swap 403
Managing for Value 350
Parallel loan 404
Types of Exposure 351
Borrowing policy 404
Transaction Exposure 351
Alternative Hedging Techniques 404
Estimating 'net' cash flows in each currency 351
Leading and lagging 404
Measuring the potential impact of the currency
Cross-hedging 405
exposure 353
Currency diversification 406
Assessing transaction exposure based on
Summary 406
value-at-risk 357
Critical Debate 406
Economic Exposure 361
Self Test 407
Economic exposure to home currency appreciation 362
••
XII CONTENTS
Advanced Questions
Project Workshop
410
413
PART IV: LONG-TERM
Discussion in the Boardroom 413 ASSET AND LIABILITY
Running Your Own MNC
Blades PLC Case Study: Management of
413
MANAGEMENT 451
transaction exposure 414

Small Business Dilemma: Hedging decisions 13 Foreign Direct Investment 452
by the Sports Exports Company 415 Investment Appraisal - The Modern Approach 453
Appendix 11 A: Calculating the Optimal Size Net present value 453
of a Cross Currency Hedge 416 Real options 454
Appendix 11 B: Non-Traditional Hedging Game theory and strategy 456
Techniques 418 A combined view 457
Motives for Foreign Direct Investment 458
Firm specific advantages 458
12 Managing Economic Exposure Internalization advantages 458
and Translation Exposure 426 Country specific advantages 458
Economic Exposure 427 Managing for Value 459
Using the Web 427 Managing for Value 459
Use of the income statement to assess Managing for Value 459
economic exposure 428 Managing for Value 460
How restructuring can reduce economic Using the Web: Foreign direct investment
~posum 430 indicators 460
Issues involved in the restructuring decision 432 Using the Web 460
A Case Study in Hedging Economic Using the Web: Foreign direct investment 460
Exposum 433 Managing for Value: Yahoo's decision to
Case Study- Silverton Ltd's dilemma 434 expand internationally 461
Managing for Value: How auto manufacturers Benefits of International Diversification 462
restructure to reduce exposure 434 Diversification analysis of international projects 462
Assessment of economic exposure 435 Diversification among countries 464
Assessment of each unit's exposure 436 Using the Web: Foreign direct investment
Identifying the source of the unit's exposure 437 information for a particular country 465
Possible strategies to hedge economic exposure 437
Host Government Views of Foreign Direct
Silverton's hedging solution 439
Investment 465
Limitations of Silverton's optimal hedging
strategy 439
The bargaining model 466
Hedging Exposure to Fixed Assets 439
Managing for Value: Tax paid by some
Managing Translation Exposure 440
global firms in UK 'an insult' 467
Use of forward contracts to hedge translation
~posum 441 Managing for Value 467
Limitations of hedging translation exposure 442 Managing for Value 468
Summary 443 Managing for Value 468
Critical Debate 443 Managing for Value 468
Self Test 443 Subsidiary Versus Parent Perspective 468
Questions and Applications 444 Tax differentials 469
Advanced Questions 445 Restricted remittances 469
Excessive remittances 469
Exchange rate movements 469
Summary of factors 469
Summary 471
Blades PLC Case Study: Assessment of
Critical Debate 4 71
economic exposure 44 7
Self Test 471
Small Business Dilemma: Hedging the Sports Questions and Applications 4 72
Exports Company's economic exposure to
Advanced Questions 4 73
exchange rate risk 448
Discussion in the Boardroom 4 74
Part 3: Essays/discussion and academic
articles 450
•••
CONTENTS XIII
Blades PLC Case Study: Consideration of Discussion in the Boardroom 506

foreign direct investment 475 Running Your Own MNC 506
Small Business Dilemma: Foreign direct Blades PLC Case Study: Country risk
investment decision by the Sports assessment 507
Exports Company 476 Small Business Dilemma: Country risk analysis
Appendix 13: Incorporating International at the Sports Exports Company 508
Tax Laws in the Investment Decision 477
15 Long-Term Financing 509

14 Country Risk Analysis 484 Long-Term Financing Decision 510
Why Country Risk Analysis is Important 485 Sources of equity 510
Political Risk Factors 485 Sources of debt 510
Attitude of consumers in the host country 486 Cost of Debt Financing 510
Actions of host government 486 Measuring the cost of financing 512
Blockage of fund transfers 487 Actual effects of exchange rate movements
Currency inconvertibility 487 on financing costs 514
War 487 Assessing the Exchange Rate Risk of Debt
Bureaucracy 488 Financing 515
Corruption 488 Use of exchange rate probabilities 515
Using the Web 488 Use of simulation 516
Financial Risk Factors 489 Reducing Exchange Rate Risk 516
Indicators of economic growth 490 Offsetting cash inflows 516
Types of country risk assessment 490 Managing for Value: General Electric's
Macroassessment of country risk 490 decision to rely on global financial markets 517
Microassessment of country risk 491 Forward Contracts 518
Techniques to Assess Country Risk 492 Currency Swaps 518
Check list approach 493 Parallel loans 519
Delphi technique 493 Diversifying among currencies 520
Quantitative analysis 493 Interest Rate Risk from Debt Financing 522
Inspection visits 493 The debt maturity decision 522
Combination of techniques 494 The fixed versus floating rate decision 523
Measuring Country Risk 494 Hedging with interest rate swaps 524
Variation in methods of measuring country risk 495 Plain vanilla swap 524
Using the country risk rating for decision-making 497 Using the Web : Long-term foreign interest rates 527
Comparing Risk Ratings Among Countries 497 Project Finance 527
Using the Web: Country risk ratings 497 Managing for Value 528
Market Approach to Country Risk Rating 497 Summary 528
Incorporating Country Risk in Capital Critical Debate 529
Budgeting 497 Self Test 529
Adjustment of the discount rate 498 Questions and Applications 530
Adjustment of the estimated cash flows 499
Managing for Value: Ireland invests in Spain 499
How country risk affects financial decisions 499
Reducing Exposure to Host Government
Takeovers 500
Blades PLC Case Study: Use of long-term
Use a short-term horizon 501
foreign financing 533
Rely on unique supplies or technology 501
Hire local labour 501 Small Business Dilemma: Long-term financing
Borrow local funds 502 decision by the Sports Exports Company 534
Purchase insurance 502
Summary 502 16 Ethics 535
Critical Debate 503 What Are Ethics? 536
Self Test 503 The Importance of Ethical Issues 536
Questions and Applications 503 Managing for Value 536
Advanced Questions 505 Managing for Value: The New Friends of the
Project Workshop 506 Earth? 537
•
XIV CONTENTS
Using the Web 537 Letters of credit (UC) 564

Poor regulation of markets 539 Drafts 564
Managing for Value: British banks face Consignment 564
US suit over 'mis-selling' £1 .6bn of Open account 564
sub-prime loans 539 Trade Finance Methods 565

Accounts receivable financing 565
Ethical Behaviour 540
Factoring 565
The Green Movement 541
Letters of credit (UC) 565
Managing for Value: Ethical procurement 541
Using the Web 568
Banker's acceptance 569
Working capital financing 57 1
Managing for Value 542 Medium-term capital goods financing
Islamic Finance 543 (forfaiting) 572
The ethical arguments of capitalist interest Countertrade 572
rates 544 Government Agencies for International Trade 573
Managing for Value: OFT gives the green Summary 574
light to 2000 per cent interest rates 544 Critical Debate 574
Islamic finance principles 545
Self Test 575
Prohibitions and encouraged practices 546
Islamic financial transactions 546
Murabaha(h) 547
ljara(h) 547
Mudharaba(h) 547 Discussion in the Boardroom 576

Musharaka(h) 547 Running Your Own MNC 576
Sukuk 548 Blades PLC Case Study: Assessment of
Globalization and its Discontents 548 international trade financing in Thailand 577
Globalization 548 Small Business Dilemma: Ensuring payment
Discontent 549 for products exported by the Sports
Managing for Value: S&P downgrades Exports Company 578
France and Austria 550
International Corporate Governance 551
18 Short-Term Financing 579
Corporate governance and outside parties 55 1
Differing control structures 55 1
Sources of Short-Term Financing 580
Why do governance structures differ? 552 Euronotes 580
Euro-commercial paper 580
Summary 553
Eurobank loans 580
Critical Debate 553
Internal Financing by MNCs 580
Self Test 553
Why MNCs Consider Foreign Financing 581
Foreign financing to offset foreign currency
inflows 581
Foreign financing to reduce costs 581
Blades PLC Case Study: Ethical debate 555
Using the Web: Forecasts of interest rates 583
Small Business Dilemma: Obtaining finance 556
Determining the Effective Financing Rate 583
Managing for Value: Outsourcing short-term
Part 4: Essays/discussion and academic asset and liability management 584
articles 559
Using the Web: Short-term foreign interest
rates 587
PART 5: SHORT-TERM Criteria Considered for Foreign Financing

Interest rate parity
587
587
ASSET AND LIABILllY Exchange rate forecasts 589
Actual Results from Foreign Financing
MANAGEMENT 561
Financing with a Portfolio of Currencies
591
593
Summary 594
17 Financing International Trade 562 Critical Debate 595
Payment Methods for International Trade 563

Self Test 595
Prepayment 563 Questions and Applications 595
CONTENTS xv
Advanced Questions 597 Summary 621

Project Workshop 598 Critical Debate 621
Discussion in the Boardroom 598 Self Test 621
Running Your Own MNC 598 Questions and Applications 622
Blades PLC Case Study: Use of foreign Advanced Questions 623
short-term financing 599 Project Workshop 623
Small Business Dilemma: Short-term financing Discussion in the Boardroom 624
by the Sports Exports Company 600 Running Your Own MNC 624
Blades PLC Case Study: International cash
management 625
19 International Cash Small Business Dilemma: Cash management
Management 601
at the Sports Exports Company 626
Cash Flow Analysis: Subsidiary Perspective 602 Part 5: Integrative problem 627
Subsidiary expenses 602 Part 5: Essays/discussion and academic
Subsidiary revenue 602 articles 629
Subsidiary dividend payments 602
Subsidiary liquidity management 603
Centralized Cash Management 603 20 Concluding Comments 630
Managing for Value: Flexsys' decision to The Significance of International Financial
use a multibank payments system 604 Management 631
Techniques to Optimize Cash Flows 605 Summary of the Book 631
Accelerating cash inflows 605 Advances 631
Minimizing currency conversion costs 605
Remaining Issues 632
Managing blocked funds 608
Managing intersubsidiary cash transfers 609 Appendix A: Answers to self-test questions 634
Complications in Optimizing Cash Flow 609
Appendix B: Maths and statistics support 645
Company-related characteristics 609
Government restrictions 610 Glossary 658
Characteristics of banking systems 61 0 Index 666
Investing Excess Cash 61 o
How to invest excess cash 610
Centralized cash management 611 ONLINE ADDITIONAL READING
Determining the effective yield 613 1 Multinational Restructuring
Implications of interest rate parity 615
2 Multinational Cost of Capital and Capital Structure
Use of the forward rate as a forecast 615
Use of exchange rate forecasts 616 3 Multinational Capital Budgeting
Diversifying cash across currencies 620
Dynamic hedging 620 Go to our dedicated CourseMate platform for students.
Multinational corporations (MNCs) continue to expand their operations globally. They must not only be
properly managed to apply their comparative advantages in foreign countries, but must also manage their
exposure to many forms and sources of risk. These firms' exposure is especially pronounced in developing
countries where currency values and economies are volatile. As international conditions change, so do
opportunities and risks. Those MNCs that are most capable of responding to changes in the international
financial environment will be rewarded. The same can be said for today's students who become the MNC
managers of the future.
LECTURER NOTES
Intended market and teaching strategy
This text presumes an understanding of basic corporate finance. It is suitable for both final year undergrad-
uate and master's level courses in international financial management. The text is not directed at the wider
business community but may nevertheless be of interest.
The text offers an intuitive and real world grasp of the concepts and issues in international finance. A
wealth of examples are provided to enable the student to see the implications of the subject to business,
mostly from an MNC perspective. This fuller explanation serves as a support for the lecturer who increas-
ingly has to deliver to students from diverse backgrounds.
Links to the academic literature are provided by a selection of peer reviewed articles from academic jour-
nals with related questions provided at the end of each part of the book. These articles have been specially
selected for their quality and accessibility to the typical final year and master's student. Giving academic
articles a stronger pedagogic role in this way recognizes the now widely available e-journal access which
allows such material to be an integral part of the learning programme.
The selection of academic articles is part of an extensive array of support material designed to ensure
that the student is able to reflect on and evaluate issues and problems in the subject to a high academic
level. Addressing the more technical aspects of the subject first, at the end of each chapter graded questions
are provided. The last questions have been given the subtitle of 'Project Workshop'; they enable the student
to apply ideas in the chapter directly to real world sources. These questions can be used as the basis of pro-
ject work that can constitute part of the final assessment of the course. At master's level the workshop exer-
cises may be used to form the element of research around which a dissertation can be written. A general
framework for projects is provided in the 'Project Workshop Notes' section on the instructor online support
resources. Spreadsheet and statistical packages combined with economic and exchange rate databases
made available to your students by your institution can be used with good effect to support such work.
The more discursive aspects of the subject constitute a second route to achieving a high quality of aca-
demic study. The 'Critical Debate' topics at the end of each chapter give the student the opportunity to dis-
cuss contentious issues in the chapter. The continuing case study, also at the end of each chapter, may be
used to help bring the subject within the students' grasp.
At the end of each of the five parts of the book there is an integrative problem that is mainly but not
wholly technically based. As noted above, the more discursive elements are reviewed in a section titled
'Essays/Discussion and Articles' also at the end of each part. These articles, some 36 in total, can be read
•
XVI
••
PREFACE XVII
and understood without further support material by final year and master's level students. More particu-
larly, they are not the listing of principal articles in the field which generally require specialist knowledge of
a number of papers; such articles are widely quoted elsewhere. Most institutions have e-journal access and
it will therefore be possible for all students in the class to have easy access to these papers. Essay questions,
for the most part based exclusively on the article, follow many of the article references. Aligning student
work directly with the sources in this way is an effective way of ensuring academic standards.
The difference between undergraduate level and master's is seen here as one of degree. Both levels
require clear, extended explanations. However, final year undergraduate courses may omit some of the
appendices and make occasional use of articles and workshop exercises and discussions; master's level
courses can be expected to make greater use of the higher level material.
Appendix B titled 'Maths and Statistics Support' is a useful way of ensuring that all students have an
adequate technical background for this subject.
Further support material for lecturers is available on the instructor online support resources.
These include:
• Instructor's manual
• ExamView test generator and testbank
• PowerPoint lecture slides
• Multiple choice questions for students.
The instructor's manual contains chapter overviews and coverage of key chapter themes and topics to stim-
ulate class discussion and answers to all the end-of-chapter questions.
The European edition

Existing users of the text may also be acquainted with the Madura US edition which this text replaces.
Almost all of the changes are additions or alterations to the US text and hence this edition is slightly longer.
Examples have been changed to non-US contexts. In defence of the greater use of the pound rather than
other currencies, all that can be said is that the text is in English and the second author is half French! A
choice had to be made. Other changes add some topics of a slightly more advanced nature, generally for
their real world relevance. Other sections have been rewritten mainly to give a rather more frank and at
times sceptical approach that is more in line with the European tradition. Topics such as the euro and Euro-
pean financial integration and a history of exchange rates have been given fuller treatment for obvious rea-
sons. Assessment material generally, and the academic paper programme in particular, has been added to
develop the reflective and evaluative aspects of study as interpreted in academia on this side of the Atlantic.
A number of other changes have also been made. Diagrams are more self-contained. There have been
some technical extensions. A fuller portfolio model is presented here simply so that students know how to
handle more than two investments! Real exchange rates are given greater prominence; the role of the
random walk in forecasting risk has been included; as has the calculation of optimal cross-currency hedges.
Cylinder or range forward options have been added to the existing list. Volume effects in scenario analysis
are worked out in greater detail. The international capital asset pricing model has been added. All of the
content related developments have been taught to specialist and non-specialist students by the second
author for many years. The project workshop exercises have been extended and reflect the second author's
experience in supervising countless projects. The maths and statistics support section has been enlarged
from the original, as has the project-based appendix (which can be found on CourseMate). And finally, the
glossary has been extended particularly to include those statistical and technical terms that appear in
articles and confuse the student. As most terms are defined throughout the text (highlighted in bold), the
comprehensive glossary can be found on CourseMate.
The overall intention has been to preserve the clarity of the original text whilst offering a closer fit to the
demands of Higher Education in Europe.
•• •
XVIII PREFACE
For the second edition of the adapted text, examples throughout the text have been updated in a more inter-
national context and the home currency is not always the British pound. The recent events of the global finan-
cial crisis have been covered, references to MNC practice brought up to date and more technical material has
been added. The appendix to Chapter 3 now includes the formula for the variance of a portfolio of interna-
tional risky foreign investments, which is oddly missing from most other texts. The appendix to Chapter 8 on
exchange rate modelling goes even further into the mathematics of the analysis, explaining such issues as unit
roots and half lives - terms that crop up increasingly in the literature. These additions provide extra optional
material and offer greater support for lecturers who want to pursue a more technical explanation. The chapters
on international restructuring and the multinational cost of capital have been placed on the accompanying
CourseMate as it was felt that the international element was not sufficient to justify separate chapters. More
generally, there is a greater awareness of the misbehaviour of markets that marks modern thinking.
For this third edition, the chapter on Multinational Capital Budgeting has been retired to the Internet
site and the international element of that chapter has been integrated with the chapter on Foreign Direct
Investment. This chapter has been extensively revised and extended to include host country-MNC relation-
ships. The issues that are key elements of this relationship have strong financial implications and are essen-
tial to the broader picture that is international investment. Part of this broader perspective is a recognition
that net present value is an incomplete model of project valuation. The value of post-investment decisions
as represented by real options is recognized, as well as the importance of competitor reactions as addressed
by game theory. Both developments are treated in non-mathematical form reflecting the current lack of a
robust operational model.
The chapter on long-term financing has now been extended to medium- and long-term financing with
particular reference to project finance. The definition of medium and long term is somewhat arbitrary espe-
cially given that outline plans of large companies rarely extend beyond 5 years.
There is now a new chapter on ethics. This departure gives overdue recognition of the many critiques of
the financial market ethic of profit maximization. In this respect practice has been somewhat in advance of
standard textbook treatment of financial management. MNCs are showing increasing sensitivity to the cri-
tique offered by alternative perspectives; this chapter recognizes the trend. We follow three major themes
with strong financial implications. Firstly, the Green movement with its advocacy of renewable resources;
secondly, Islamic finance affecting the very concept of a financial transaction; and finally, globalization and
its discontents reflecting concerns that the existing management of international finance threatens self-
destruction. Understanding and reacting to these alternative philosophies and viewpoints is essential in an
international environment.
In addition, there have been a number of statistical updates and minor adjustments as well as further
comments on current international financial affairs.
Taken together the changes to the third edition present a rather broader focus on financial management.
Given that the international emphasis means that a much richer context is encountered, the broader focus
•
seems appropriate.
Finally the style remains unchanged; I have attempted to explain issues in their basic elements before
clothing them in the language of finance.
ACKNOWLEDGEMENTS
For the European edition I would like to thank the reviewers for their sterling work and the publishing
team at Cengage Learning, in particular I would like to thank Annabel Ainscow and Abbie Jones for their
supportive comments and efficiency. My colleagues at Salford University have also been very encouraging;
my particular thanks go to Dr Neil Thompson and Dr Nazam Dzolkarnaini for comments on economic
aspects and to Professor Rose Baker who checked over some of the more advanced statistics. I, of course,
take responsibility for any inaccuracies.
Finally, I would like to thank my wife, Marlene, and two children, Anna and Joe, for their forbearance
in what is a very time-consuming and absorbing process.
Roland Fox
Sal(ord University
•
PREFACE XIX
The publisher would like to thank the following reviewers for their comments in this and previous editions:
Dionysia Dionysiou, University of Stirling, UK
Daniel Makina, UNISA, South Africa
Carl-Gustaf Malmstrbm, SBS Swiss Business School, Switzerland
Peter Morrison, University of Abertay Dundee, UK
Muhammad Azeem Qureshi, Oslo University College, Norway
Kami Rwegasira, Maastricht School of Management, The Netherlands
Kai-Hong Tee, University of Loughborough, UK
Konstantinos Tolikas, Cardiff University, UK

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PART
THE CHAPTER 6
NTERNAT ONAL EXCHANGE RATE
FNANCAL HISTORY AND THE
ENVRONMENT ROLE OF
PART 1 (Chapters 1-5) prfNldes an ove.rview of lhe mulhnati:>t>al corpo,atk:n (/',ANC) and the envirOnmMt in wh.dl it
GOVERNMENTS
oprt;r.;1tes. Chapu, t (Jxp/ains the goals of the MNC, tJ/Ong with the motNeS and riSks 0/ international busil6ss. Chaple, 2
desCroe.s the llt&n.t!ta1r!II now of ful)ds betwaari COU(JtfieS. Chapter 3 desc1ibas the inU!tnatJooal 6n.1ncitJJ markets and
how these /1lafksts fat'..iliU1te ongoing operatbns. Chapter 4 expliJVlS how exdtange ral9S are dStennined, wf'Jie Chaptw
5 provideS a badq'Ound on the Ct.07a".ICy futures and options l'flQrkets. MantJge,s ofMNCs mus.t undetSWld lhe intema-
LEARNING OBJECTIVES
tiot'W~ t desCribed in thooe Chapters in Otder tomal<& pr,::,pg-decisiotls. The specific objectives of this chapter are to;
Multinauonal
corporation (MNC I
• ExJiain hOw govenmanl$ can usemdireet intE'lrVGr'lbOn to inlh.H'ICQ Qxctmge rates.
foreign exchange markets
Imports Dividend
importing anduport,; remittance 1he prav;ous Chap<ers """' b'911) to e,qJIOre 11» -ions/Jlp wwoon th• ecor,omy and 11"19XChMgO rate. Govtlmr>lGl1ts
and lending use l h e ~ rme as an acx,nc,mic pclicy K'lstn.m:Nlt to afl6d the ec:voomy. Such po6CieS ca1 be de!.ermn&d drecl¥
by the (}OV<l(rment ar Midl,9C1ly !!'rough"~ 01 the Eurq,..., UrliOn '811or GB. Fi'ttJndal - need to be
fottign
subsidiaries I . ...-•... I ln1tn1atimw financial m.aruts ~
11 abkt t<>appreaate the relatk:Jnsl'llf) behva;;r'.l ~ s . intetgOY'9l'lm'31'1lt11 ~ atY.J t h e ~ rate policy to
wd?rsland the debate;, the /WJnciaJ P'9SS an<1-.1...., on the U<Q')- d9vel0pn)e(ll ot <l.<d""90 raies. lnfmnad by SUd1
• a dd:Jare, llnMcial~ hre lhOO able to c:tewse a poieyor> lltB'Y>atioMI /haflCe rekNarit to t!'t9r 1'11tirJrlaliO()§ ccxpora-
lion (M'IC). 11>e ~ OI e»:h8ng(, ,ate poNcy ;s iMtmtod Oya Mal histo,y Of tlOJabli> """'11S irciJdOg the nlCerlt
glObaJ rr,anc;a, a/sJs.
198
Part opening diagram A diagram at the beginning of Objectives These define what you can expect to
each part illustrates how the key concepts relate to one achieve as you read the chapter and what will be
another. assessed by the exercises and other assessments as the
chapter proceeds.
5 287
EXHIBIT 1.1 r.,,nc;a1 niare11&me,n '"'"' ...' or Mr«:s USING THE WEB
Centralized multi.national fin ancial management fo r subsidiaries A and 8 lnilation and exchange ra1c forKa.Sts
Informa tion .ibout anticipa1ed inOation and exchang(' rates is available .ii~hllp://www.woddbank.org,.
click on ' data .ind research', ' p rospects' .iOO 'prosp(.)(:ts, for the G lob a l Economy' (or a US a nd ~uro
f)rediction of ioilatiot'I a nd other economic factorS.
C3$b managnncn1 A
MANAGING FOR VALUE
Stock and debtor management A Stock and d<bior manag,,mmt B U Indirect impact of purchasing power parity on MNCs
Finance A F1nanuB
The purehaSing "°'"" piriy relation<t,p, tllOuQh not
exact. can mq:tain how soroo &.1ents can have ~
alfecisd beCauSe Illa pound became more expensive
l'E!lativa to the euro. reducing the dem.ar'ICf fa BribSh
effects on ~Cs U1ro&4i their f'll)aCl oo exdlal'qO prOduets.
rates. one <lOmmon axaTir,:69 is tha ~ Of Oil priee!; MNCs b9Sed in. Euro.tone OOl.lltries were al9o
lnvormmtA lnffSUllent B on inlalon Md theralae a, axdlanga ~oo.. Oumg affected. Those lhM export 10 the UK benefited
Uie year 2000, the rrsfc:et price OI oil i'IC:rea5ed sub· beeause thaS procllcts became dleaper to BrilkSh
Sla"ltiaty. ~ l.4)Ward press..xe on i:'lllatiCr'I rates in coru.1.XOOtS. Howewr. the iltatbn 1n the EuroZone
ooul\tries that impofl oil. The Eur¢1.lee1'1 countries thai countnas caused the European Central BMk to raiSe
Dccentralizcd m ulti.national financial ma nagement fo r subsidiaries A a nd 6 part~e in Iha euro i'fl)ort Oil, and were &tijeded in:eresl rates n an Mtenl)I to raQJCe the nflatklnary
to u~ ~her prioos Of 01. Since the UK produoeS Is pressure. ~ y . Illa ecooomieS 04 thOS<!
own di, it was not directl-f affootecf by the higher col.lnlries \wakGned, anct the kx:al dermt'ld tor the
rn.vkat price OI ol. Its MNCs, however. were adwrsel-f prom.Jets produeed by the: MNCs was reduced.
affedOO as a rest.A or ther- buSi'le$.S with the other MNCs that recogize their SUSCl:!ptibiity to raelgn
Europaan (::()U'llfie:S. tilla1ioo increased in E...ope ir'lilalion rates am mowatad lo rronitor foreign nflation
dunng 2000. which~ down.ward pressure oo ll'le and limit thar- expo.sure to oou11.trias that may experi-
euro relative to the British pound. MNCs in the UK that ence M abrupt Increase ITT inbic:ln.
export to t ~ l:urozon.e OOUltries v~ achusety
INTERNATIONAL FISHER EFFECT (IFE)

Alo ng with PPP t heory , a nother major thco r)' in interrutioruJ finance is the interna tio na l Fi.shcr effect (lFE)
t_ theory . lt uses intcr~t r ate rather th.in inAation rate differentials to expla in why exchange r.ites change o ver
Cash managm,mt A 1 Cub managom<nt 8

-
JJ== rime. The theory is d osdy re bred to rhe PPP theor)' because interest ra les a rc ofu.n hjghl)' corrcbted w ith
infla tion rates. H igh infla tion is typic.:illy accompanied hy hish intet'cst r:ues. According to Fisher the monc,.
t31)' o r nominal rate is a pprox-im.-udy t he sum of the rea l a nd infla tion rates. lf it is assumed that in\'esmrs in
d iffere nt countries require the s.:ime real (no n·infbrion } return for the s.:ime level o ( risk, then the o nly reason
SlOCk and dd>tor management A Stock and debtor managnmnt U for interest rates to differ for a given risk is differences in exp<"ctcd inflatio n (s« Exhib it 8.4 ).
#
Relationship with purchasing power parity
PmanccA .Finm« s
, RccaU 1hat PPP t heory suggests dut e xchange rate movements a re caused by in Aario n rate differentials.
II diffe rences in expected in.Aation a rc t he only reason for anr djffercncc- in no minal interest ra tes then interest
lnwstmm.1A lll\'OtmC11t B rates and inflation differences sho uld be the same. The lFE thCOI)' suggests that foreign currencies with rela·
, riveJr high intncst rates " '111 deprl."Ci..itc t he same way as c urrencies w ith high infl:irion r.n cs (Exhibit 8.4). The
following a nalr sis w ill conccntr.u e o n investments that a rc risk·lrtt, in the sense of guaranteeing the rnonc-
t:ll)' or nomina l rrturn - the a ctual cash. The ra tes offered by a cent ral bank wo uld be one such e xample.
Exhibits These give a visual representation of key Using the web Identifies websites that provide useful
concepts or data. information related to key concepts.
xx
372 PAAT 11 EXCKBNGEAATI: R5K ~ 341
CRmCAL DEBATE
SUMMARY What should an MNC use to forecast had been used tor buCSgeting. th9 dOllar cash l\)v,s resLft.
when budgeting? ing fnYn caSh i"lftows in l.heSi9 c1..nencies 'M>lJCS have
• MNCs with tes.s risk can cblain , ~ at bYM
financing costs. Shoe tl'lay may e>q)Gnenc::a l'r'\Or&
• Economic e.,q:iosura is atty Qxt>osure 01art
MNC's cash nows (direct o, indirect) to
Proposition: use the spot rate to forecast. 'M'len an l>lM highly ove-eSbfMled. Th& """""Eld il"'oon " a
MNC rnn oonduCls Unancial budgetl"lg, 1 must ootimate cotx1try can be accounted for tr,, ushg Wt nomnal Fltar·
VOlahb cash IIOwS beeause oc &xd'lange rate exeha'lge rat&movaMl\ts. MNCs can attElf'rl)t th9 values of its fOfegn curroocy cash flows that will bQ oot r:i.te. A hi~ nominal irUerast rate ifrJ'.)loo a high~ ot
""""""',...· ~ ra1e riSk can aJf9Ct thar to l'l"iBaSUr& their econoo'i! e,xposure> by recillY9d by the parent Sincie 11 iS well mcu·noo.ted' that Qxf)&Cl9d .nftatloo. Ba9ed en iuerast ,ate parity, ltleSe
linancing coots. Thus, MNCG may be'lef~ torn dete,mi"li'tg t.hQ G'Jdent to whi:::h !heir cast\ nows ffrrns catYIOI acct.xately lorecast luture values. MNCs wrreocies will have p,ooou~ disootlnts. lhll!... the tor·
hedging axd'a'lge rate risk. will be affectOO by thew EO<posure to &aCl'I foreign Should use the spot ra!e for budgMing. Changes l"I eoo- ward rate e.apttJroo tha eiq.')9cied lnllatbn dilfer~al
CISJ'91lCy. bet'o\"*11\ COlX"ltries because it is 1"111.Jenoed by tha nominal
• Troosactloo a,q:,osln Is lh9 aiq:,osise ot an oomic conditior\s are- dil1iCUt to prec:lct. iYld Iha- spot rate
MNC's ._.,Lffj cash transacttons to exd'\anga ra1e • TrMSlatioo e:xp:)SlJ"Eil is the a,q:iosure of an ml9Cts the best guess oc the tut...e spot rate if there ~e inlerast rate diltera'llia. Sinoa It ~ m s the lnflatlc:t'I dlf·
terenta. It ShOuld pfOYid& a rl)Ore accurate becasl of
movements. MNCs c.an moo.sum ttieir transaction MNC·.s oon90lidated fil'liVlcial statet'l'lenLS: oo ctiaoges In oo:)nomic condt,:)ns..
currMCies, 9:SJ')E!Ciely ltlOSe wrn:iocies in .hi(#l4'ffation
e.xposure by dett':n'nl'II~ their luture payatiaS ancJ toexchangeratemova·1'1ents. To measure Opposing view: use the forward rate to fontcasL countries.
reoelva.as posillons n vanous curra'ldas. alOng IIMSlalioi\exposue. MNCs C.M lomcast The spot rates or SOO'l9 Clrn)OCEIS do not rer;resant a.:x,u.
with lM vaia~ry levels and correlatiOOS OI thGSe lhBr oomingS in aacti toraign currency and rate or &..en oot.ased estimates 01 !h9 luture spo1 ,ates. With whom do you agree? US18 lnlOTrac or some other
Ol.ln'ef'ICieS.. From ltlis ink.nnation. they can assess lhen detarrnine the potantial exc:h~ rate M.rry currancies 01 develOpl~ ooun.tnes have
search engine to learn mo..e about lt'iS issue. Which argu-
how thQlr(eveAJe Md coots may change n JnC1\lef'OO('lts 01 ead'I curn;incy "*1we to thar
generaty daciinOO OV9 bn'le. These wrrGnei9S tend to b9 ment do you support1 Otta yoll' <>M'I q:ilnon on thiS
response to variws exchaf'lga rate scanarios. home CUTMC:y. il countries ltlat ha,..,a. h~ Inflation ,ates. It the spot rate iS9UQ.
CRmCAL DEBATE SELF TEST

At'IS\vers an;, prOYided in ~ i x A at the baCk or the acc....acy. baSed on the .DSOll.4& foracast arror as a
Should lnvesto,s ca.re about a.n MNC's translation esiimates oc cash nows. II ~ 1S1deroo.1imate cash nows lGXt. r,ercentage ol lhe real?ad value.
exposure? b9Cause- or hOw exd'\al'~9 rates atteaad ttlQ mJ)Ortad
oo,nings, they may underestrnate the vaue of the MNC. 1 Assume lhal the annual UK interest race is axpected 3 An anafySI has staled lllal Iha Sritlltl PoU>d SS9<nS
Proposition. No. The presant vak.Je ~ an MNC's cash
Evan It the val.le iS oorrect9d " Iha tut....a orx:e the 10 b9 7 pa' can ror each of the next 4 years. while to increas& il'l \•alue OYer the 2 WOOk.S ktowing
nows is basad on the cash. bllS that the parent reciwes.
market raalitaS oow the earnings v,.~re dstorted. SOf'l'l9 the ann~ tlterest rate in India is expected to be 20 annou'ICGI~ by th9 Bank or England {the SritiSh
Ally r'l'lpact 01 the exehang& raias on th9 fil'lal'lClal st.ate--
il'MlGtors may have sold their stock by the time the COi'· per oenL Deterrnne th9 ~opria!e 4-yls forward oentl'al bank} that It wll ralsa ,ntEl(QSI rates. It this
rnie,'itS is not ll'r1)0rtant unlaSS cash ltNls are anectect
recliOn ocoxs. Investors ShOuld bG coocened abOut an rat& precnlooi or dscoll'rt on 11'19 Indian ~ . which stat&nmt Is 1rue. what are th&- l"ll'Er9ncas regar<.1ng
MNCs ShOuld too.JS their M9rgy 00 assessing t h e ~
MNCrs translaUon e,q:)O!i.JrQ. ~ ShOucf recognize that C(dj be used to t:>recast thE:I percootaga d'lang9 h wGQk-lOrm or SOO'li-strong.tatn Qlficiency'?
~m or that cash lbNs to exchanQe rat& movetnMLS and
the eanings oc MNCs with t.ge translabOn expos.tJr-e may the rupee over the OO>ct 4 years.
Stlol.dd no1 be ooncierMCf with ~ mqlO~re ot their fil'WW'I· 4 Assume th.ail RUSSian k'lten)Sl ratas are muc:tl hi'1'et
be mora distorted than ~ aami'lgs ot MNCs ~ lo-.v
l
cial st.alemMts to a,cc~ rate ll'IOY9l'l'lGrlts. vaua is 2 Con.sider the ldk:YNing lnlOnnat!on than UK rteresl ra100. AJso assLrne that lntarest rate
abOut oa9h nows. atld il'IVGS10r'S IOCus on value. translation EIXPoStJ(Q. patly (doscusS9d in Cllapter 7) GXiSts. WO<Jlj you
Opposing view. t1ves1as do not haw.sufficient financial
data to d9""'9c <:ash fiO>NS. Thay COrM"IOl"lty USQ oo,nings
With whom do you agree? As well as IOOkl'tg 9!
lion e ~ . you rniitit lks to review Iha-
traf'!Sla.
concepc 01
Cunency Ulktay
forward
I Spot rate that
occurred 90-<lays
e,q)&Cl th& rolble to appraaat.e o, depreciate?
Explrun.
rate latet'
as a base. and it MrfW'IOS are ciS!orted, 90 wl 00 thek- market errtciancy. s Warden ~ IS considering a projec:1 in Vooe?u9Ja,
0.80euos 0.82....,. wtli<:h will b• ""<Y p,ofi!alll• 11 Iha local cmancy [bo~
var) apj'.:rec:iatoo against the Britisti po!Sld. n the boi-
SELF TEST O.Ot2wros 0.0\ \ airos var depreciates, lhe project wil reSUI h tosses.
Warden pc forecasis that us bolivar will ~~ac:late.
AnSw9<S ilr9 proyld9d in App9fldx A al Iha back ol Iha 2 llruma SA (France) oons.191$ l=rti~ ilS supples The bOlvar'S valu& hiStoricaly has bOOn V&:y Ydalia.
IGXl. trom eith(!f SwitlerlMd (denol'Aoated In Sw;ss Assl.ll'ling th9 forward rate was used to forecast As a manar,ar of Warden pie. would you- be ettntort•
trancs} er South Alrlca (denonwia!ed f"I randJ on a the tutLXB spot rate-, determine wt.ether In& caoodM able <Mlh lhls pr-t? Exi*>n.
1 Gt,a, 1ta1 ~... can °"""'Y""""..,
roMdLllll
tr'ICl"llhly baSIJ$. The Quality iS the sruM for bOth SOIX• dOlaJ or lhe Japan999 yg'I was lorecastad with mere
lrm'sexmrge rate oiSk byi.-u,g i1 a v!'.r<llyOI rnrs.
oes. Once Iha fi"m oompietes the a ~ t with a
mt ... (nm """"'"9d """" """""'9• - risk? su~er. It wl ba ObligOO to co~ioue using thaJ
Summary Found at the end of each chapter, the Critical debate A controversial topic is introduced, two
summary offers a useful method of reviewing knowledge opposing views are provided and students must decide
for exams by reminding students of what they have which view they support and why.
learned so far.
407 342
Opposing view. MNCs ShOui::I hadge. Faeig"I a«:l'lange shOuld also be kept as regular as possibl& for ir~orS
Is not
varialj:)(\ mat
part Of a buSliOOSS. Pred~ing itS vA'IO want s-ieady income. t..a,ge axehang& rate k>ssas QUES~ONSANDAPPUCA~ONS
wlJ9 is not In Ille axper1&> Of canpaMS whOS9 goalS could jeopardize suctl payments. Shariec~ waning
10 benetl torn a st,oog doh-could take out futures co~
1 Motives r« forecasting. E'.xplain corporaten'IOINes Iha - <>Jri~ a sp9C:l'<C period. would market.
are to make profits tnmugh prOV!di~ gOOd:S or S8ViCaS
tracts instead. k l < ~ axd'lat<ge rates. based foracasts have OVGresttnatEld or unoorastt-
0r ~h. It cs also lhe t1.Jty or ~metlt to mai'ltain
mated !he realiZec:f valJGS over lhiS periOd? Explain.
staaO{ protit:S so that sharaholders who have to sell ther-
With whom do you agree? ExM'li'l9 tha ~una"ltS on
2 Technical forecasting. Explain the t9Chnical tam.
sharas oocausa U'9\f ar• lao9d v.fill uv»,pe<:100 tils. dO nique for foroc.astng exchMge rates. \l\tu1J are some S Mixed forecasting. Explain the mixed l9Chr"it:p.Je for
both Sides. How WEii dO Iha pants mad& suppon Iha
not have to oo so ......t1en too cocnpanss· price is k:YN due l rhita1ionS of USing toctinical torecasti'lg to p(edict forecasting exd"lange rates.
case? 'Ml<lm dO you support and why?
to ac:,,..erse currency conditiOOs. 0:vk:IMd ~ ~rates?
6 Detecting a forecast bias.. Explain hOw to assess
3 Fundamental forecasting. Explain tn9 tundamenUJI penorrnanco " forocast,ng axehanga ....._ Explain
tec~ua tor torooasting exchange rates.. 1/Jhat ae hOw Lo OOt~t a bias in torncastng oxehar'I09 rates.
SELF TEST some lmitatOOS of using a lJnctanlOOtal tec:hnique to
7 Measuring forecast accl.W'aey. You are hired as a
fcxocast exchMge rates?
Answers a r e ~ in Apper'dx A ai: the baekof the laxt. 4 Sanib<ll Ud ~ - us gOO<IS (and pays In dOI· con&lltal't to assoos a firm's abily to ro,~t. lhe
I~~ month. It negoliates a 1-month forward 4 Matket--based forecasting. !:xplai~ too matk&t- firm haS devE*)ped a point tor'ee.ast ta two di1fGJ9nl
1 Mooldair pie. a UK firm. plMs to US9 a mav,y """"'1
con1.ract at t.h9 beglMlng ot '1NGry mottth 10 ~ Its basOO ted'tlkfa IOr torecastl'IQ &xe:tiange ra!es. ourrMCias presientGd h the tOliov.tg tabl&. The t'im
hedgo IO h9dge IS payment a 3000000 AusbaEan askS you to determne whid'I currency was for&.
payables. Assll't'l9 the US dollar ap~iatoo oonsiS· Vvtla! is !he ratiOf'lale ror using mark.91 ·baSed fa'&-
dOlarS IOI' AustralM goodS h 1 ~ · The- U< interast
tootty OV9 !he M:Xt s years. W.1 Sanbet oo atlootact? c:asts? lf the 91..fO appreciates substantially again.st casted 'Mlh greaiar aocuracy.
rate is 7 per OEl'II:, while tt~ AustralOO lneroot rate.IS 12
Explain.
per c::ent. The spot rate or 11'19 .Atistralian ddlar IS 1'0.45,
whl& lh! 1 · - k>\vard - Is £0.44. Do!amn9 Iha s Using the i'*'rmation trcn, quaSbOn 4, ~ S l hc,,,v
Period .L Yen foreca-st 1.Actual yen vsllel Dollar forecast j_Aetu.ru dolt a' value
~~ 01 BriliSh pounds neeood in 1 y(B if a ll10l'l8'J 8anlbal Ltd OOlJd mom affecttv\11y i~te ltSdf tom I £0.00SO £0.00SI £0.00 £o.61
,narket hedge is t.JSOO. the ,:,osstlle lo<(Harm as:ipreclabOO OI lhe US dOllar.
2 00048 O.ooS2 0 .62 0.6!
2 Usi'lg the inrorrnation f'l the p,EM:'>us questiOn, would 6 Hopkins Lid 11a~t9d goodS IO Swil2erland Md
Montctar be better on
heCSging th& payable$ with a wl ~ 2000000 SwiSS francs in 3 rnonthS. It 3 0.0053 0,0052 o.ro 0.65
money o'la'ket hedge or with a IOcwatd hedge? belliwes !he 3-1non.th klrward ra«:i 'h'i be ~1 ac:cisate o.ooss 0.0006 0.58 0.62
3 Usi'lg the inbmation abolA Montciar rrom the ht
aorecast a tha rut...a spot rate. The 3-mc:t1th rorward '
rate oc th& Swiss franc iS to.35. A ptA <iptlln is avail-
Quas.1ioo. ~.:wn the possble advantage ot a et..-· 8 Umitations of a h.n:lamental forecast. Wolngtion ~ e appreciation or dqlmciatiOn does this
able with an esase price a £0.36 and a premiun
rency Cl)bOn hedge over a money market hedQa tcr Ud believes that fu!Ure rOOII interest , a t e ~ forecast .-nJ:iy O\l9r IM 4-yea,- P(!fbd?
01 £0.02. Would HopkilS jl(afO< a p<.t ""4ion h9d(le
Montctar. Vvtla! is a possible diS.ad'YMtaQQ 01 mG wil affect (:O(change rates. and It has ~ied regres--
IO no h9dge? Expla.:l. 11 Foreign exchange market effic-iency. AsSU'l'l9
axraocy op«ion Mdga? Sion MaJysis to historieal data to assess the relab:>n-
!hat tor~ exc~ tnarkets v.!Elra foond to b9
st'lp. n wil use regre:s:sion C09ffidMts deivad lra'l'I
~-torm el'loeot. Vv'hat ooes this sugoest abolA
this Matysis, ak:lng with f<Jr'\:!C.asted raal t1lB"9Sl rat&
QUESTIONS AND APPLICATIONS l'r'IOYements, to predd exchange rates in too future.
utiu'lg !ac:hl'Ca a-.a~iS to specuata in 9U'OS? H
MNCs ~ th&I fomign Qxd'la09e rw.kets are
Explain at loos.1 thrOO limit.aliens of this methOd.
1 Consolidated exposure. OJk'lcy Corp. ootil'l"lQtes 2 Money mark6t hedge on receivables. Assl.J'Oe strong.fOrrn etricieot. why would lhey d9valq:i their
I.he k:towing cash ftOW'S in 90 dayS at its subsidianas that Har1lMd Point Ud {UK) has net "'°""'alll!>s
d 9 Consistent forecasts. BrimngtOI\ pie ss a UK· o.., IOmcas1S 01 Mure axdlango <alas? 1hal Is. wttf
as fObNS: 100000 Singapoia dollarS in 90 d&JS. The spot rate based MNC with SUbSidianQs In m::ist ma,or- ooun- \WUldn't they smply use tOday's quoted rates as
of the SS is to.32, and tl'le SinQapore ilterost rate Is tres. Eael\ subSiela,y iS reGpOl'ISible tor lorecastir,g ir'dcatOrS abOut lutur& ratoo? Attar all. today's
Net po$mon i:n each currency measured in the 2 per CElr'lt over 90 days. Suggest how the UK frm lhQ tullSS exc:tu3nge rate of its IOcal ourrency l'E!Eb\18 Q.JOted rates shOuld rQll9Ct al relevant int0rmalion.
parent's curTency Qn 100s of units) col.Ad impletnat1t a rnoneymarket h&dge. Be pl'adse. to the British pound. CorY1'1"19nt on this po&cy. How
12 Forecast error. The director o, CurrMcy forecasting
might Brin1'lin;;itoo oosixe consistal\t fcxecasts
at ChM'paogn,U,oona Lid says, 'The most Criicaf
Subsidiary ICun'OOCV 1 ICWTency 2 ICunency 3 3 Money market hedge on payabies. Asstim9 that
Belmona pie has "'" paya1119S of 200000 Mexican
""""'9 the difl"""'1 SUbsidiados?
task of forecasting e.xdlange rates iS not to derive a
~ In 180 days. The ~ n interest rata ls 7 1)8 10 Forecasting with a forwan:I rate. Assune that the poilt ootimate of a tuture &xehange rate bul lo
A +200 -300 -100
tao
CEll'lt 0i.·er day$. aod the spot rate Of th9 MwdCM 4-year al'lr'lJalittd interest rate n the UK is 9 per oent assess how wrong our estimate rni!tit be.' VvtlaJ
8 + 100 ....., -10 peso iS £0.-05. Suggest hOw Iha UK frn, could lmpl.. .wx, In& 4-)"Mr arnialiZe:f lntarest raia: II\ Sngc313ore d69S !his Staien'e'll moon?
....., men1 a money markel ~ & . Se piedse. .s 6 per C-ML Assume il'lterest rate parity hOldS for
c -180 + 200 a 4-year hOril'OI\. Assi..cne that th9 spot rate of too
13 Forecasting exchange rates of currencies that
previously were fixed When some countms in
4 Invoicing strate,gy. Assli'na UW Citadel rAc pur- Singapc,re dOllar- is to.40. If lhe forwt.d rate is used
Oelermi()Q the COf\SOldated .w exp:)Sl.Ja or the ChaSeS scme goods in Olile that ant denol'l"linat&d Cl Eastern £urtlf)G initialy abwed thE:lir CUTancies to
Lo torecast exchange ra'leS. whal wil be !he forecast fhJCluat& against the dob, WOUd tha fundam9~
MNC to oocti cwancy. Chitoa'i pesos. II alSO S91S goods dooominat9d In IOf the SinQapore dOllar's spot rate i'l 4 yearS? wtiaJ
Self tests A self test at the end of each chapter challenges Questions and applications A variety of questions and
the students on the key concepts. The answers are other applications is designed to give students a thorough
provided in Appendix A. familiarity with the chapter material and to open up areas
of further discovery.
•
XXI
475 35
BLADES R...C CASE STUDY StvlALL BUSINESS DILEMMA
Consideration of foreign direct investment Developing a multinational sporting goods industry

For the li>St - · l3laclos pie has been exporting to AJthOugh HOI tias also considered FOi in the USA. n BYery c~er of thrS text. soma oc the key concepts lrlMdS 11()(1'1 OOIOQ• days If the; ,ocatk>d sr;e;ng basket-
Thaiand i'I Ol'def to supp6Ernent iS dadinir)Q UK saleS. he W'Ol«I prefer th.al Blades invoo1 in ThailMd as .-e illustrMed with c¥'I appliealion to a sma1 sporting baliS sok:S l'I t~r h::>c'ne OOU'ltriaS. Moot ot them said
t.hder !he SXISting arrangGment., Blades SGls 180 000 opposed to the USA Forecasts l!Xlcate lMI the gOOds frm that COOOUCI.S lf'ltarMtiOnal l:AJSil'lElSS. they rarely notce::, baSketbells being sot:! i'l Sporti'lg
PQrS of rOller blades annualy to tOtertaiM"lel'll Prod· dem.w:t lOf roller bli:k:lQs in th9 USA is Simla' to that in lhase 'Small Business Odenna' featU'eS allow st1r goodS stores but that tMy ~ e d tt-e decneod la
ucts, a Thal ret.ai!er. IOf a ixed prcie denominated .-. 1he UK: Since Blades' U K ~ have reoentty da:::lr'W:ld dents to racx:>gnita th9 dilemmas lYld possible ded· basketbafs to increase" lhek hOn'le cc:iuntries. Conse.
Thai bmt. l'tl& agteemGrlt will laSI !Or another 2 years. beeauS& 01 U'le higl\ prices rt charges, Holt Ql(J)EICts slons that firms (such as this sportitXJ gooclS ti m) may quantty, Jm decided to sta1 a business Of proO.JCing
Furthermore, to dl'Mstty int£WnMio1'laly arid to take that FOi in lllO USA will~""""" IOOU!ls. F'urthOr- lace in a glObal anvi onmoot. Fa this Chapter, the IC>W·P<COd baskSlbals and ""P<'trQ toom to sporting
ac:tv.rrtage oc an attracttve ofter by Jogs lne.• a US more. bo!h dol"OestiC and roragl\ refer blade marurac. appliea!ioo Is on lh9 deye,opmen1 oc the sporting gOOdS diS1ributCfS in laeigo coul\tries. ThOSa distribu·
,etailer. !3lacJe:$ has ,ecMtty bel;)Jn e,qx,rting to the 1m~s are ialativEl)t wel establShed i"I th9 USA. so th9 gOOds firm that woukf conduct interna.tiooal buSll'IQSS. tas would U'IOO SElll the bQ.s~balS at lh9 rE«ail level.
USA. tklder the ,asultiog ag,oomel't. Jogs vllll pur. growth potenl.lal ltlere is lil'nilad. Hol bEllievas the Thai Last mon!h. .kn Logan from t aland OOO"l:ll&ted his Jim planned to expand hlS prO:'i.Jct IM Ol/9t lifne O('(:,Q
""""" 200000 PQrS OC 'Speedos' , - · pm,ar; rollef blade madtat OlklrS more "owth po«Mtial. oooergracllate-degrea In linMOO and d~ed to rx.ir- hO idenla:ld 0 - sporlS prociJCIS that hO oti\1lt sell 10
prOduct, anoualy at a fixed prve of $80 pe,-pair. Blades can set itS ~Cd.Jets al a lower priCa but sue his d'OOl'f"l of managing hiS cw.,n sporting goods k:tagi ~ goodS stores. He d&dded to cal his
Biaek!S' S®liers 01 too Medad oompcnents fOI' its generate hi(tlet prollt margils r"I Thailand thM fl can in tiusi')eSS . .kn hQd wCfkad f'l a spo,mg gOOd:S ShOp bus;ness 'Sports Expo-IS Company'. TO avoid ""'! rent
roller blade produdiCJ'I are IOC.ated J,Yi'l'larily ir'I ~ UK. the U<. nlis IS bOCauSe the Thai CUSlOO"er haS con,. ,\Ihle !)Oing to university In llelW, and he had noticed Md labOl.x ~ Ji'n pklM9d to i:;rodu::e tl'M:! bas.
whae Baoos incurs U'lQ majority of its cost oc gOOds mtted itsetl to purctiase a rixed t 11..tob9r of Blades' U'lal many CI.JSlOOierS wan!OO to pll'ChaOO a lo.v· kelballS n his garai;,e and to pertorm the work hi'l'lselt
SOid. AIIJ'lOuftl prices IOJ i'IPl,AS needed to tl'a'I~· products aMuaty Mly 11 II can puchaSa Speedos al a pooecf baSklllball. How<Ml<, thO spon,,g goodS store Thus. his main bwineSs ~ v«ra lh9 cost of the
lure roller blades va,y, recent oosts ha,,.,e run appro.xi· sl.bStantial discount from tha ti< pri'.:le. N~ass. whae l'lEt vrorked. lk& l'r'B'ly oth~s. sc«J ooty 1op..o1. ma!E)'iail used to produCe bask€4bals and expsnses
matGly £70 par pair. Blades also ~ s COO'f)OnMts since the cost oc o:xx:ts SOid incu'red " ~land iS tne-l:00 ba:sketbals. From hiiS &xperieoca, Jrn was assodatoo with llndi'lg diStnbutors il foreign o::,unries
trom Thclland because or tM ralativet,i low ~ oc slb:Sta'\tiaty oot,.,, that i'lct.xred ;, the USA, Bsaoos mvaie U'IM IOP·Of·the-1"'9 baSketbal:S had a hi{#, woo would at1M'l)t to SGII the baSketbals to sporting
rubber and plastic components and ooc.ause ot 1haf" has l'r"OOaQ9d to generate hii;t'lar pro~ margins from mark.up and that a low~st. tiaskatbal could posstlly goodS sto,os.
high qldity. These knpcrts are denominated in Thal Its To.:s exports and imports than il Iha UK. penetrate lhQ UK market. He also ktle-.v how to pr().
l>lht Md lllo oxact pfce (n bahl) <l<lponds on prevai- As a ln MCiaJ aootyst ta BladOS pie you generally 1 Is Sports Exports Co<ti,My a MNC?
d.JOe crid<.al bals. HiS goal was to create a lirm that
1'19 1'1'\t.lrk(lot J,Yicas tor ttiese cornpooentS in Thailal\:i. agra,e wih Ban HOl's assessment of the srtuation. would ~Cd.Jee kw1·priCE!d baSk.elbal:S and sell toorn 2 Wtry ate Ille agency OOSlS IOwOr lor Sports
Curroolly. ll"l)Uts s111\cient to manutact....-e a par- oc However, you are conoernoo that Thai OOnSumers a1 a whOl~e basis to vanous spocti'lg gOOd:s stOC'es Exports ~ ' Y uian ro, most MNCs?
«llkl< tiadOS cost opp,o><ffillely 3000 ThOi baht p« have f'lot been adfooted yiJl by the uniavourable eo:,. h the UK. UnK>rtu~tety, many sporting goods staes 3 Doos Sports Exports Co<ti,My have any oom-
PQ1' 01 tOIEr blades. nornic COnditiOOS. You believe. that they may Jedl.a'.::19 llegM to S<II IW.priood bOSl<elllOIS ;.,st belore .kn ~a.we advMtage 0\/01 potootial competitOrS n
Although Thailand hOO tioon a.-noog the wcn:rs thei SpeocflOQ 00 les:Su& prOdUCIS wit.'! the next yea. was abOut to st.¥t hiS business. The firm that began 10 lorai"°' coun,tres that coutJ produo& and .sel baS--
ras1001 i;,-owl'IQ QOOOOr'flle:S, mc,oo1 eve~s s'I ThalMd Therefor&. y()tJ thhk it WOlJd be t>Meficial to wait 1..11til P,Od\£<l lllO k>w-COSI basl<elllels aJrooct,, P,CMdOd ketballS tha'EI?
ha...e ncreasect th& level or eoononic Ul'IOOrtanty. Sp&. naxt ye«. vlhen the l.l'lfa-.t01.r~ eoooomc conditions many other products to spating goods stOfas in the 4 lbv vrotJd Jim LOgan decide whlCh foreign mi.·
dfically, the Thai tlaht, whieh had betltl peQged to the In. Thailand r'rlay subSide, to make a decision ragardl'lg U< and th(;fefOre had already established a busaness kets he would attempt to enter? Should ha ntially
dOUar, ts roN a lrM)l loating curency and MS oopra,.. FOi in Thal'a'ld. How9.'er. II economic conditiOf"IS in relatiOO:Ship with thaS9 S1or-es. Jim dd not belave that locus on one or many roreign marketS?
aatad subStanria!ly in raoont rnoothS. ~urtt\oo'l'lae, Tha<and f'r'll<""' owe lllO next yea, FDI may b<lCOmO he ooulef compQ1.e Wllh tt-.s firm in the UK market
recent kJVelS ol inllation il Thailand have bQQn \l9fy more wq)Qnsive ooth ~ target ftnns will be 5 Tho Sports Expons Company haS no immadiata
Rather than pssoo a differoot busOOSS. .kn
mora expensive M:t bGcause the bahl may appraci· pla(tS to oondoc1 drect baign i '!VeSlmMI. HOW·
high. HMC:e, lulure aconorr.c oondilbns 11 lhalMd deCldOO to · ~ tiS iooa on a gtebal basis. W'lila
ate. You a-e aso aw~e thal several ol Elaadies' UK 9\.'9, It r'nght col\Sider other m.s cos-tty methOds
ae h~ly uncertan. baSke1bal has not beer'I a tr.dtional sport in mai\y
Ben Holt, Baacles' fi'IMcial drector, iS ~ ~ o t S are considering mq:>Mding into Thaiand countnas. it has. beOOma more popular in some cou,.
o« establishing is t>usil'IGSS " torQign tMrkets.
What lnethodS migm lhe Spats Exports
OOf"ISdn'IQ FOi in ThallMd. He believeS that this is a In lllO next - - tnes in recent yeas. Furthermore, the wpMsictl oc
peflect tl'l'la to alher esutiiSh a Slaidiary or aocµ.re If Blades: acquires an axist.-q busi'loos in Thi:Mand Coolpany use to l'ICreaoo IS p,aseooe n toraign
c.at:."9 ne!worb In many colYltries would alOloY ra
markat.S by workrlg with ()(IQ- Of more toreign
an exiSlng buSiness in Thailand because. Iha unce1al'I or esl.ablshes a subsi::liary there bit lh& and oc naxt mld'I morGc exposure to baSketball games ;n lho9E!
economic: co~uoos and Iha dE!p,aciatioo 01 I.ha baht OOC'llpanias?
~ , it WOUid fulf• its SQrGEWnent with E'ntertannatll OOU'ltries r'I the h.1tt.1re. Jrn asked many ot his lorag'l
haw substantially IO\vernd !he initial costs ie«:iuirad 10,- PrOducts for the subseciuMt yoor. The Thai re~
FDt Holt believeS I.M ~Nth potEr'l1ial in Asia w,u ba has expressed M nterest in renewing lhe oonltactual
ax:Ltemety high Ol\::e the Th:. ecooomy st.abiizes. agreeY'let'l't witll Blades at that time • eaaoes
Case studies Allow students to apply chapter concepts Small business dilemma Students use the knowledge
to a specific situation of an MNC. they have learned so far to make decisions about a small
MNC.
1 Goergen. M.• ~ . M. and Ret"l'lebOOg, L (2005) ·Corporate Govoo'IMCe: ConY9tgooca e ~ !ro1n ~

THE INTERNATlONN... FINANCIAL ENVIRONMENT c,.,er regulation rafOrrns in Europa' . OxfOrd ~ Aev,ew, 20 (2), 243-68.
a --.,., ,,,. _ _ ar<1<flSadlan-ot /he™' corpcrate go,.,,rm,ice mcdss O<ARr>Od b y ~ et al.
Mesa Co. specializes in the product ion of s ma ll funcy pic:rurc frames, w hich a rc exported from che USA to
2 WOOdS, N. (2000) 'Tho Chalengo ol Good Gov<manco IO< thO tMF Md thO W0<1d Bank ThemSelwlS', WOfld Devel-
the UK. Mes.'l in\'oiccs the e.x pons in pounds a nd converts the pounds to dollar s w hen ther a re r«ei \'ed.
'¥:)l'(IOOt. 28 (5}. 823-41. A discussion of the pr0biams lacr.g ttiese instit~ions.
The British d emand for t hese fra mes is positivd)' rebred to ec:unomic conditions in the UK. Assume that
British inflati on a nd interest ra tes are simi lar to t he ra tes in the USA. M esa believes that t he US balance of a From a rooc.ing of the ~ articie, outine the p,e.sstAr9S 10r ref<:xm of the A\ifF and Watt &t'lk. Discuss the
trade deficit from crade betwttn che USA nnd the UK will ndjust m changing p riccs bctwC't'n the t wo co un- - -- _ , , _ OldemOCraJamg dod:siOm
tries~ while capital Rows w ill adjust to i nterest ra te dif'krc nci-als. Mc.sa believes th.at the value of t he pound 3 Cni,,, 0. al'<J Rseha', S. (2000) 'Sirangthening thO lr.tGmalionat FlnMCiat System: Key lssws', WClrld ~
is very sen.siti\'e to changing inte rna tio nal capital flows and is modera tely sens itive to c ha ng ing intema· 28 (6). 1133-42. The rt:*3 or the MF. c.ai:»tal nows aro exchangeiata,ogir'nas.
tional crade flows. Mesa is co nsidering the following information: a Privar.e S9ClOr ~ t ,s SSSMtial 10 eoo,)()fflie deve!Opment but ~r,ge rate V01ata·1y, moral htJ1:ard and
• The UK inna1,on rate iS expected to dedm&, whle th& US intlat.on rate is expected to rise. C;;Jpital now rest11'ctions /mil 11s cotrt.ributJon. EXf)lain and <Rscuss possible soAAbt'.ls.
• Br111Sh in1erast. ra1es ~e expecti)d to declne, while US lrU!est rates a-e Q)(pected to lnaease. 4 Cooway, P. (2000) 'The lntEma.tional Monetary Fl.l'ld in a lline c, Crisis: a raview OI St.wiey F'ISher's oosays from a
nme otcnsis: The lnternatx:lnat Hnancial System and DeJvebprnenr •.JoumtlJ ct Eccncm,c LilerattKe. 44.11~4.
Questions
a Revi&Nng the Crises ct lh9 1900S. i:s too IMFpart ot the p,Oblem? ~cu.ss.
1 ExJjain l'IO\v l1'la i'11ematiooa1 Lrade nows stiould Initially adjust l'I response to Iha- ctwigas " innatioo ~holdtlg s Morgan. A.£. and K.alSikeas. C.S. (1997) 'Th&orioo oc n tamatiooai Tracsa. Foreign lrwestinoot a"'ld F'r m lntB'Mtional-
exchange rates eons-tanl). Eiq:,lai) hc'.wt, the lntamatl:lnal capital flows: ShOl.ij adJuSt in response to the chal)98S in i'latiOn: a c r i t i q u e · , ~ ~ 35 (1}, ~7a A clear aod ,etalivdybtief tour around 0)9 area.
Interest rates (holding exchange rates oons1ant). a IM'tat c:ar, we raasotlably expect from trade and 11'18$tma1t lhOOrie.S? Q;tfhe tr)(} diSCuss.
2 Using the intormation p,ovid&d, wil Mesa SXPQCl the pould to ~ecia:1e Of depreciate in the fullxe? &:plain. 6 Cyr. AL (2003) 'The euro: faith. hope and pa-ity' . ltlt~nalbtWAl!ars. 75 CS). 979-92. AA axe&11enc h:IStorical oontext
,.,ct
MalyS>S.
3 Mooa b9lev9S lnternabOnal c.aptta II0\'1$ shift i"l respoose to ChalX}ilg i'lterast rate dill9r'OOtialS. ts lherG any rGQSOO a Coos.da' and e.raluate possbkJ future sceoan'os tor the ewo.
vkry the cl\Mgng interest rate d tlGrantials r'I thiS Qlral"r'l~ w l not n ~ t y cause ~ernati::)nal capta1 nows to
7 ZoffQr. J . (2012} Futur& 01 Dollar Hegemony. Ha-vad W'lterna:tiot'lal Review VOi 34, Issue 1, ~29
Change sgniticar.tly? Explain.
a Js rJ>&dOmhance Of thede,l;,good or bad tor illt~tlabonaf ~opmef'll?
4 Based on your ansv.,ar to q~iOO 2 , hO'N' vtoli'J Mesa's cash ltJwS be af'Jected by the axpacted exchange rate
mova"""'ts? Exjllain. 8 Rosenlhal. J. (20t2) Germany a'ld lhe t1Jr·o Crisis, World Allairs. May/Jr.na 2012 VCI. 175 tssue 1. 53-61
a Has the euro C/i$IS oot»CJ it'J the sta!OO goal ol lhe Ml!laStriClll treaty of ,:xomor;ng economie and sOdal ~
5 Based on. your answer 10 quastiOn 4. Shoulef Mesa consider ha(Jging is exchange tale riSk? II so. &x~ how 1t w,tJ-un the EU.
could hedge usng forward oonttacts. futures OC(ltrads and currencyoptiOns.
195 196
Integrative problem Found at the end of each part, this Essays/ discussion and academic articles At the end of
feature integrates the key concepts across chapters in that each Part, a list of articles allows students access to the
part. literature and provides essay practice.
••
XXII
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XXIII
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In æquali jure melior est conditio possidentis.
In equality of right, the condition of the person in
possession, is the better.
In alternativis electio est debitoris.

In alternatives, the power of election belongs to the
debtor.
In brevi aut charta generalia præsedunt specialia.

General things precede special, in a brief or writing.
In ambiguis casibus semper præsumitur pro rege.

In ambiguous cases, the presumption is always in
favour of the king.
In ambiguis orationibus maxime sententia spectanda est ejus, qui

eas protulisset.
In ambiguous speeches, the opinion of him is chiefly to
be considered who had uttered them.
In ambiguis pro dotibus respondere melius est.

In doubtful cases, it is better to answer for
endowments.
In atrocioribus delictis punitur affectus licet non sequatur effectus.

In the more atrocious transactions, the inclination is
punished, though the effect does not follow.
In capitalibus minor est pœna cogitationis manifestæ quam conatus
ex actu directo; et minor conatus quam patrati facinoris, ut sit
pœnitentiæ locus. Sed in proditione in terrorem aliter statutum est.
In capital cases, the punishment of an evident intention
is less, than an attempt by a direct act; and the
punishment of the attempt is less, than that of the deed
perpetrated, that there may be room for repentance:
but in treason, it is determined otherwise, for terror.
In capitalibus quid, quomodo, quando, ubi, a quo factum, cum

circumstantiis solemnibus, debent exponi.
In capital cases, the what, in what manner, and when,
where, and by whom done, with the particular
circumstances, ought to be explained.
In capitalibus sufficit generalis malitia cum facto paris gradus.

In capital cases, general malice, with a fact of an equal
degree of guilt, is sufficient.
In casu extremæ necessitatis omnia sunt communia.

In a case of extreme necessity, all things are common.
In civilibus ministerium excusat, in criminalibus non item.

In civil cases, the situation of a servant excuses, but
not so in criminal cases.
In civilibus proxima et directa præstare quis tenetur; in criminalibus

etiam consequentia.
In civil cases, one is bound to perform the nearest and
direct things; but in criminal cases, even consequent
things.
In civilibus voluntas pro facto reputabitur.
In civil cases, the will shall be considered for the deed.
In conjunctivis oportet utramque partem esse veram.

In co-partnerships, it is necessary that each party be
true.
In consimili casu, consimile debet esse remedium.

In a similar case there ought to be a similar remedy.
In consuetudinibus non diuturnitas temporis sed soliditas rationis est

consideranda.
In customs, not continuance of time, but solidity of
reason, is to be considered.
In contractibus, benigna; in testamentis benignior; in restitutionibus,

benignissima interpretatio facienda est.
In contracts, an interpretation must be made
favourable; in testaments more favourable; in
restitutions most favourable of all.
In contrahenda venditione ambiguum pactum contra venditorem

interpretandum est.
In contracting a sale, a doubtful bargain is to be
interpreted against the seller.
In criminalibus probationes debent esse luce clariores.

In criminal cases, proofs ought to be clearer than the
sun.
In criminalibus voluntas pro facto non reputabitur.

In criminal cases, the will must not be considered as
the deed.
In disjunctivis sufficit alteram partem esse veram.

In dissolution of partnerships, it is sufficient that one
party be true.
In dubiis magis dignum est accipiendum.

In doubtful cases, the more worthy is to be taken.
In dubiis non præsumitur pro testamento.

In doubtful cases, there is no presumption for a will.
In eo quod plus sit, semper inest et minus.

In that where there is more, there is less also included.
In eo quod vel is, qui petit, vel is, a quo petitur lucri factus est, durior
causa est petitoris.
In that which either he who seeks, or he from whom it
is sought, for the sake of gain, the cause of the
applicant is harder.
In favorabilibus, magis attenditur quod prodest quam quod nocet.

In favourable cases, we rather attend to what does
good, than to what does hurt.
In favorem vitæ, libertatis et innocentiæ, omnia præsumuntur.
In favour of life, liberty, and innocence, all things are
presumed.
In fictione juris semper subsistit æquitas.

Equity always subsists on the supposition of right.
In hæredes non solent transire actiones quæ pœnales ex maleficio

sunt.
Heirs are not liable to actions which are penal from
injury.
In his quæ de jure communi omnibus concedentur, consuetudo

alicujus patriæ vel loci est alleganda.
In those things which are conceded to all by common
right, the custom of any country or place is to be
alleged. [See Transcriber’s Note.]
In judicio non creditur nisi juratis.

In a trial, none are believed but those who are sworn.
In jure non remota causa, sed proxima spectatur.

On a trial, not the remote cause, but the nearest is
regarded.
In lege omnia semper in præsenti stare censentur.

In law, all things are always judged to stand in their
present state.
In maxima potentia minima licentia.
In the greatest power there is the least liberty.
In negotiis contrahendis alia causa habita est furiosorum, alia eorum

qui fari possunt, quamvis actum rei intelligerent; nam furiosus nullum
negotium contrahere potest; pupillus omnia, tutore, auctore, agere
potest.
In contracting business, the cause of madmen is to be
considered one thing, and the cause of those who can
speak another, in so far as they understand the
transaction of a matter; for a madman can contract no
business; a pupil can do all things with the authority of
his guardian.
In novo casu novum remedium apponendum est.

In an extraordinary case, an extraordinary remedy
must be applied.
In obscuris, inspici solere quod verisimile esset, aut quod plerumque

fieri solet.
In obscure cases, what is probable is wont to be
looked to; or what for the most part is used to be done.
In odium spoliatoris omnia præsumuntur.

All things are presumed in hatred of a defrauder.
In omnibus causis pro facto accipitur id, in quo per alium moræ sit,
quo minus fiat.
In all causes, that is taken for a fact, in which by
means of another there may be a hinderance to
prevent its being done.
In omnibus fere minori ætati succurritur.

In all cases aid is given to minors.
In omnibus obligationibus, in quibus dies non ponitur, præsenti die

debitur.
In all obligations in which a day is not fixed, it is due on
the present day.
In omnibus quidem, maxime tamen in jure, æquitas spectanda est.

In all things indeed, chiefly however in law, equity is to
be regarded.
In pari causa possessor potior haberi debet.

In an equal cause a possessor ought to be reckoned
preferable.
In pari delicto potior est conditio defendentis.

In an equal delict the state of the defender is better.
In præsentia majoris cessat potentia minoris.

In the presence of the greater, the power of the lesser
ceases.
In pœnalibus causis benignius interpretandum est.

In penal causes we ought to interpret more mercifully.
In re dubia magis inficiatio quam affirmatio intelligenda.
In a doubtful affair denial rather than affirmation is to
be understood.
In re obscura melius est favere repetitioni quam adventitio lucro.

In an obscure case it is better to favour repetition than
adventitious gain.
In rebus manifestis errat qui authoritates legum allegat: quia

perspicua vera non sunt probanda.
In evident things he errs who alleges the authorities of
the laws, because self-evident truths are not to be
proved.
In rebus novis constituendis evidens esse utilites debet, ut recedatur

ab eo jure, quod diu æquum visum est.
In settling new matters, the utility of doing so ought to
be evident, so that we may depart from that law which
long seemed just.
In rebus, quæ sunt favorabilia animæ, quam vis sunt damnosa

rebus, fiat aliquando extensio statuti.
In things which are favourable for life, although they be
hurtful to property, sometimes there may be an
extension of the statute.
In republica maxime sunt conservanda jura belli.

In a state, the laws of war are by all means to be
observed.
In restitutionem non in pœnam hæres succedit.
An heir succeeds to restitution not to punishment.
In rex non potest conjunctim tenere cum alio.

A king cannot hold conjunctly with another.
In satisfactionibus non permittitur amplius fiere quam semel factum

est.
In satisfaction, it is not allowed, that more should be
done than what has once been done.
In testamentis plenius voluntates testantium interpretantur.

In testaments the intention of the testators are most
fully interpreted.
In testamentis ratio tacita non debet considerari.

In testaments a silent reason ought not to be
considered.
In toto jure generi per speciem derogatur, et illud potissimum

habetur, quoad ad speciem directum est.
In the whole of law, species takes from genus, and that
is considered a chief point, which has a reference to
species.
In verbis non verba sed res et ratio quærenda est.

In words, not the words themselves, but matter and
reason are to be sought.
Incerta pro nullis habentur.
Uncertainties are accounted nullities.
Incertum ex incerto pendens lege reprobatur.

An uncertainty depending upon an uncertainty, is
reprobated in law.
Incidentia nolunt separari.

Incidents may not be separated.
Incidentia rei tacite sequuntur.

The incidents of a thing follow it, as a matter of course.
Incivile est, nisi tota lege perspecta, una aliqua particula ejus
proposita, judicare vel respondere.
To judge and answer is uncivil, if the whole law is not
attended to, any one clause of it being merely
proposed.
Incivile est nisi tota sententia perspecta de aliqua parte judicare.

It is uncivil to judge of any part, unless the whole of a
sentence be attended to.
Inclusio unius est exclusio alterius.

The inclusion of one, is the exclusion of the other.
Infans est qui propter defectum ætatis pro se fari nequeat.

He is a child who on account of defect of age, cannot
speak for himself.
Infantes de damno præstare tenentur, de pœna non item.

Children are obliged to performance concerning a loss,
but not in like manner concerning punishment.
Infinitum in jure reprobatur.

What is unbounded, is reprobated in law.
Iniquum est alios permittere alios inhibere mercaturam.

It is unjust to allow some to merchandize, and to
prohibit others.
Iniquum est aliquem rei sui esse judicem. In propria causa nemo
judex.
It is unjust that any one be a judge of his own affair. No
body is a judge in his own cause.
Injuria non præsumitur.

Injury is not anticipated.
Injuria propria non cadet in beneficium facientis.

An injury done to ones-self, will not fall to the benefit of
the doer.
Injuria servi dominium pertingit.

The master is liable for the damage done by his
servant.
Innuendo non facit verba per se actioni obnoxia si aliter non essent.
An inuendo does not make words, of themselves
obnoxious, liable to an action, if they were not so
otherwise.
Intentio legitime cognita, et legibus consentanea, maxime habenda.

An intention legitimately known and agreeable to the
laws, is to be regarded in an especial manner.
Intentio mea imponit nomen operi meo.

My intention gives a name to my work.
Inter arma silent leges.

The laws are silent amidst arms.
Interest reipublicæ ut judicia debitæ executioni mandentur.

It concerns the state that decisions be duly executed.
Interest reipublicæ ne maleficia remaneant impunita.

It concerns the state that injuries do not remain
unpunished.
Interest reipublicæ res judicatas non rescindere.

It concerns the state not to rescind matters that have
been judged.
Interest reipublicæ ut sit finis litium.

It concerns the state, that there be an end to law suits.
Interest reipublicæ ut carceres sint in tuto.

It concerns the state that prisons be secure.
Interest reipublicæ ut quilibet re sua bene utatur.

It concerns the state, that every one make good use of
his own property.
Interest reipublicæ ut bonis bene sit, et male malis, et suum cuique.

It concerns the state that it may be well with the good,
ill with the wicked, and that every one may have his
own.
Interpretare et concordare leges legibus est optimus interpretandi

modus.
To interpret and make the laws agree with laws, is the
best way of interpreting them.
Interpretatio fienda est ut res magis valeat quam pereat.

Such an interpretation ought to be made, as that a
thing may either rather prosper than perish.
Invito beneficium non datur.

A favour is not bestowed on one unwilling to receive it.
Invitat culpam qui peccatum præterit.

He encourages a fault, who passes over a
transgression.
Invitus nemo rem cogitur defendere.
Nobody is compelled, when unwilling, to defend his
property.
Ira hominis non implet justitium Dei.

The wrath of a man does not fulfil the justice of God.
Is damnum dat qui jubet dare, ejus vero nulla culpa est cui parere
necesse est.
He occasions a loss, who gives orders to cause it; but
no blame belongs to him who is under the necessity of
obeying.
Is, qui actionem habet ad rem recuperandam, ipsam rem habere

videtur.
He seems to have the property itself, who hath an
action to recover it.
Ita tuo utere ut alienum ne lædas.

Make such use of your own property, that you do not
hurt another man’s.
J.
Judex ante oculos æquitatem semper habere debet.
A judge ought always to have equity before his eyes.
Judex æquitatem semper spectare debet.

A judge ought always to regard equity.
Judex bonus nihil ex arbitrio suo faciat, nec propositio domesticiæ

voluntatis, sed juxta leges et jura pronunciet.
A good judge ought to do nothing of his own pleasure,
nor may he have in view the gratification of his private
inclination, but let him pronounce according to law and
justice.
Judex damnatur, cum nocens absolvitur.

The judge is condemned, when the guilty is acquitted.
Judex habere debet duos sales, salem sapientiæ, ne sit insipidus, et

salem conscientiæ, ne sit diabolus.
A judge ought to have two kinds of salts—the salt of
wisdom, that he may not be insipid; and the salt of
conscience, that he may not be a devil.
Judex non potest esse testis in propria causa.

A judge cannot be a witness in his own cause.
Judex non potest injuriam sibi datam punire.
A judge cannot punish an injury done to himself.
Judex non reddit plus quam quod petens ipse requirit.

A judge does not give more than the petitioner himself
requires.
Judicandum est legibus, non exemplis.

We must judge by the law, and not by examples.
Judices non tenentur exprimere causam sententiæ suæ.

Judges are not bound to express the cause of their
opinions.
Judices recenter et subtiliter excogitatis minime favent contra

communem legem.
Judges are by no means favourable to things raised
recently and subtilely against the common law.
Judicia posteriora sunt in lege fortiora.

The last decisions are stronger in law.
Judicia sunt tanquam jurisdicta.

Decisions are as it were jurisdictions.
Judicia sunt tanquam jurisdicta, et pro veritate accipiuntur.

Decisions are as it were jurisdictions, and are accepted
as truth.
Judicis est jus dicere, non dare.
It is the property of a judge to administer justice, not to
give it.
Judicis est judicare secundum allegata et probata.

It becomes a judge to decide according to things
alleged and proved.
Judicis officium est opus diei in die suo perficere.

It is the duty of a judge to accomplish his work from
day to day.
Judiciis posterioribus fides est adhibenda.

Credit is to be given to the latter decisions.
Judicium duodecim proborum et legalium hominum veritatis dictum

esse per communem Angliæ legem censetur.
The decision of twelve good and unexceptionable men,
is thought by the common law of England, to be the
dictate of truth.
Judicium est iis quæ pro religione faciant faveri etsi verba desint.
It is a decision to favour those things which make for
religion, although words be wanting.
Judicium non debet esse illusorium.

A decision ought not to be illusory.
Judicium redditur in invitos.
A decision is given against the unwilling.
Judicium semper pro veritate accipitur.

A decision is always received as truth.
Jura debet esse omni exceptione major.

It is proper that laws be greater than any exception.
Jura ecclesiastica sunt limitata.

Ecclesiastical laws are limited.
Jura eodem modo destituuntur quo constituuntur.

Laws are annulled in the same way they were enacted.
Jura naturæ sunt immutabilia.

The laws of nature are immutable.
Jura non in singulas personas sed generaliter constituuntur.

The laws are established not for individuals, but for the
general good.
Jura publica anteferenda privatis.

Public rights are to be preferred to private.
Jura publica ex privato promiscue decidi non debent.

Public rights ought not to be decided promiscuously,
according to a private right.
Jura sanguinis nullo jure civili dirimi possunt.

The rights of blood can be dissolved by no civil right.
Juratores sunt judices facti.

Jurors are judges of the fact.
Juramentum est indivisibile, et non est admittendum in parte verum

et in parte falsum.
An oath is indivisible, and is not to be admitted partly
true and partly false.
Jure naturæ æquum est, neminem cum alterius detrimento et injuria

fieri locupletiorem.
It is just by the law of nature, that no one become more
rich by the detriment and injury of another.
Juri non est consonum ut aliquis accessorius convincatur, antequam

aliquis de facto fuerit attinctus.
It is not consonant to law, that any accessory be
convicted before any one hath been found guilty of the
fact.
Jus accrescendi inter mercatores locum non habet.

The right of accrescing has no place among
merchants.
Jus accrescendi præfertur oneribus.
The right of accrescing is preferable to burdens.
Jus est ars boni et æqui.

Law is the art of what is good and just.
Jus naturale est quod apud omnes homines eandem habet

potentiam.
Natural law is that which hath the same power among
all men.
Jus publicum privatorum pactis mutare non potest.

The public law cannot be changed, by the agreements
of private persons.
Jus respicit æquitatem.

Law regards equity.
Jus sanguinis, quod in legitimis successoribus spectatur ipso

nativitatis tempore quæstium est.
The right of blood, which is considered in legitimate
succession, is sought for at the very time of birth.
Jus superveniens authori accrescens successori.

A privilege falling unexpectedly upon an author, or
inventor, is an addition to his successor.
Jusjurandum inter alios factum nec nocere nec prodesse debet.

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Management 3rd Edition by Jeff Madura

International Business Methods 11 Project Workshop 33

Project Workshop 63 Measuring Exchange Rate Movements 117

Critical Debate 131 Summary 169

Self Test 131 Critical Debate 170

Questions and Applications 131 Self Test 170

Project Workshop 134 Advanced Questions 173

Discussion in the Boardroom 134 Project Workshop 176

Running Your Own MNC 134 Discussion in the Boardroom 176

Trading futures 146

Questions and Applications 235 Purchasing Power Parity (PPP) 275

Self Test 268

Questions and Applications 268

Forecasting Techniques 318 Managing for Value: Philips Electronics

transaction exposure 414

Blades PLC Case Study: Consideration of Discussion in the Boardroom 506

15 Long-Term Financing 509

Using the Web 537 Letters of credit (UC) 564

sub-prime loans 539 Trade Finance Methods 565

Mudharaba(h) 547 Discussion in the Boardroom 576

PART 5: SHORT-TERM Criteria Considered for Foreign Financing

Payment Methods for International Trade 563

Advanced Questions 597 Summary 621

• ExamView test generator and testbank

• PowerPoint lecture slides

• Multiple choice questions for students.

The European edition

Dionysia Dionysiou, University of Stirling, UK

Daniel Makina, UNISA, South Africa

Carl-Gustaf Malmstrbm, SBS Swiss Business School, Switzerland

Peter Morrison, University of Abertay Dundee, UK

Muhammad Azeem Qureshi, Oslo University College, Norway

Kami Rwegasira, Maastricht School of Management, The Netherlands

Kai-Hong Tee, University of Loughborough, UK

Konstantinos Tolikas, Cardiff University, UK

foreign exchange markets

INTERNATIONAL FISHER EFFECT (IFE)

Cash managm,mt A 1 Cub managom<nt 8

CRmCAL DEBATE SELF TEST

BLADES R...C CASE STUDY StvlALL BUSINESS DILEMMA

Consideration of foreign direct investment Developing a multinational sporting goods industry

1 Goergen. M.• ~ . M. and Ret"l'lebOOg, L (2005) ·Corporate Govoo'IMCe: ConY9tgooca e ~ !ro1n ~

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• Qu izzes and self-test questions

In alternativis electio est debitoris.

In brevi aut charta generalia præsedunt specialia.

In ambiguis casibus semper præsumitur pro rege.

In ambiguis orationibus maxime sententia spectanda est ejus, qui

In ambiguis pro dotibus respondere melius est.

In atrocioribus delictis punitur affectus licet non sequatur effectus.

In capitalibus quid, quomodo, quando, ubi, a quo factum, cum

In capitalibus sufficit generalis malitia cum facto paris gradus.

In casu extremæ necessitatis omnia sunt communia.

In civilibus ministerium excusat, in criminalibus non item.

In civilibus proxima et directa præstare quis tenetur; in criminalibus

In conjunctivis oportet utramque partem esse veram.

In consimili casu, consimile debet esse remedium.