Multinational Business FinanceF IFTEENTH EDIT ION

GLOBAL EDIT ION

David K.

EITEMANUniversity of California,

Los Angeles

Arthur I.

STONEHILLOregon State University

and University of Hawaii at Manoa

Michael H.

MOFFETTThunderbird School

of Global Management at Arizona State University

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan

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PART 1 Global Financial Environment 21

Chapter 1 Multinational Financial Management: Opportunities and Challenges 221.1 The Global Financial Marketplace 231.2 The Theory of Comparative Advantage 311.3 What Is Different about International Financial Management? 321.4 The Globalization Process 35Summary Points 40Mini-Case Crowdfunding Kenya 40Questions ■ Problems ■ Internet Exercises 43

Chapter 2 The International Monetary System 492.1 History of the International Monetary System 502.2 Fixed Versus Flexible Exchange Rates 592.3 The Impossible Trinity 592.4 A Single Currency for Europe: The Euro 612.5 Emerging Markets and Regime Choices 64Summary Points 69Mini-Case The Internationalization (or Not) of the Chinese Renminbi 69Questions ■ Problems ■ Internet Exercises 72

Chapter 3 The Balance of Payments 773.1 Fundamentals of BOP Accounting 783.2 The Accounts of the Balance of Payments 803.3 BOP Impacts on Key Macroeconomic Rates 883.4 Trade Balances and Exchange Rates 903.5 Capital Mobility 93Summary Points 99Mini-Case Global Remittances 99Questions ■ Problems ■ Internet Exercises 104

Chapter 4 Financial Goals and Corporate Governance 1094.1 Business Ownership 1104.2 Publicly Traded Versus Privately Held: The Global Shift 118

Contents

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4.3 Corporate Governance 121Summary Points 129Mini-Case Volkswagen’s Defeat Devices and Stakeholder Control 130Questions ■ Problems ■ Internet Exercises 134

PART 2 Foreign Exchange Theory and Markets 139

Chapter 5 The Foreign Exchange Market 1405.1 Functions of the Foreign Exchange Market 1405.2 Structure of the Foreign Exchange Market 1415.3 Transactions in the Foreign Exchange Market 1495.4 Foreign Exchange Rates and Quotations 155Summary Points 162Mini-Case The Venezuelan Bolivar Black Market 163Questions ■ Problems ■ Internet Exercises 166

Chapter 6 International Parity Conditions 1716.1 Prices and Exchange Rates 1726.2 Interest Rates and Exchange Rates 1796.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate 1896.4 Prices, Interest Rates, and Exchange Rates in Equilibrium 190Summary Points 192Mini-Case Mrs. Watanabe and the Japanese Yen Carry Trade 192Questions ■ Problems ■ Internet Exercises 195Appendix: An Algebraic Primer to International Parity Conditions 202

Chapter 7 Foreign Currency Derivatives: Futures and Options 2067.1 Foreign Currency Futures 2077.2 Foreign Currency Options 2097.3 Option Pricing and Valuation 2177.4 Currency Option Pricing Sensitivity 218Summary Points 225Mini-Case KiKos and the South Korean Won 225Questions ■ Problems ■ Internet Exercises 228

Appendix: Currency Option Pricing Theory 233

Chapter 8 Interest Rate Risk and Swaps 2358.1 Interest Rate Foundations 2368.2 The Cost of Debt 2398.3 Interest Rate Risk 2448.4 Interest Rate Futures and FRAs 2478.5 Interest Rate Swaps 248Summary Points 257Mini-Case Argentina and the Vulture Funds 257Questions ■ Problems ■ Internet Exercises 262

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Chapter 9 Foreign Exchange Rate Determination and Intervention 2689.1 Exchange Rate Determination: The Theoretical Thread 2699.2 Currency Market Intervention 2739.3 Disequilibrium: Exchange Rates in Emerging Markets 2799.4 Currency Forecasting in Practice 284Summary Points 289Mini-Case Iceland—A Small Country in a Global Crisis 289Questions ■ Problems ■ Internet Exercises 294

PART 3 Foreign Exchange Exposure 301

Chapter 10 Transaction Exposure 30210.1 Types of Foreign Exchange Exposure 30210.2 Why Hedge? 30410.3 Transaction Exposure 30610.4 Transaction Exposure Management 30810.5 Transaction Exposure Management in Practice 317Summary Points 321Mini-Case China Noah Corporation 321Questions ■ Problems ■ Internet Exercises 327Appendix A: Complex Option Hedges 334Appendix B: The Optimal Hedge Ratio and Hedge Effectiveness 342

Chapter 11 Translation Exposure 34411.1 Overview of Translation 34511.2 Translation Methods 34811.3 Aidan Corporation’s Translation Exposure 35111.4 Managing Translation Exposure 356Summary Points 361Mini-Case Electrolux of Sweden’s Currency Management 361Questions ■ Problems ■ Internet Exercises 367

Chapter 12 Operating Exposure 37012.1 A Multinational’s Operating Exposure 37112.2 Measuring Operating Exposure: Aidan Turkey 37512.3 Strategic Management of Operating Exposure 38012.4 Proactive Management of Operating Exposure 382Summary Points 388Mini-Case Brexit and Rolls-Royce 389Questions ■ Problems ■ Internet Exercises 393

PART 4 Financing the Global Firm 399

Chapter 13 Global Cost and Availability of Capital 40013.1 Financial Globalization and Strategy 40013.2 International Portfolio Theory and Diversification 40413.3 The Role of International Portfolio Investors 410

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13.4 The Cost of Capital for MNEs Compared to Domestic Firms 41413.5 Illustrative Case: Novo Industri A/S (Novo) 418Summary Points 422Mini-Case Ferrari’s IPO—The Potential of the Prancing Horse 423Questions ■ Problems ■ Internet Exercises 431

Chapter 14 Funding the Multinational Firm 43714.1 Designing a Strategy to Source Capital Globally 43814.2 Optimal Financial Structure 43914.3 Raising Equity Globally 44214.4 Depositary Receipts 44514.5 Private Placement 45014.6 Raising Debt Globally 45214.7 Financing Foreign Subsidiaries 455Summary Points 459Mini-Case CEMEX’s Debt Dilemma 460Questions ■ Problems ■ Internet Exercises 466

Chapter 15 Multinational Tax Management 47115.1 Tax Principles and Practices 47215.2 Multinational Tax Management 47915.3 Google: An Illustrative Case of Profit Repositioning 48915.4 Global Tax Competitiveness 49215.5 U.S. Tax Law Change in 2017 494Summary Points 496Mini-Case Apple’s Global iTax Strategy 496Questions ■ Problems ■ Internet Exercises 501

Chapter 16 International Trade Finance 50516.1 The Trade Relationship 50516.2 Key Documents 51016.3 Government Programs to Help Finance Exports 51716.4 Trade Financing Alternatives 51816.5 Forfaiting 521Summary Points 523Mini-Case Crosswell International and Brazil 524Questions ■ Problems ■ Internet Exercises 527

PART 5 Foreign Investments and Investment Analysis 531

Chapter 17 Foreign Direct Investment and Political Risk 53217.1 The Foreign Direct Investment Decision 53217.2 Structural Choices for Foreign Market Entry 53417.3 Political Risk: Definition and Classification 53917.4 Financial Impacts of Political Risk 54017.5 Political Risk Mitigation 545

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Summary Points 551Mini-Case Tengiz—The Definition of Political Risk 551Questions ■ Internet Exercises 555

Chapter 18 Multinational Capital Budgeting and Cross-Border Acquisitions 55818.1 Complexities of Budgeting for a Foreign Project 55918.2 Illustrative Case: Cemex Enters Indonesia 56218.3 Real Option Analysis 57418.4 Project Financing 57518.5 Cross-Border Mergers and Acquisitions 576Summary Points 582Mini-Case Elan and Royalty Pharma 583Questions ■ Problems ■ Internet Exercises 587

Answers to Selected End-of-Chapter Problems 592Glossary 596Index 614

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