Multinational finance

553 Pages·2008·9.704 MB·English

by  Butler, Kirt Charles

Multinational
Finance
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Multinational
Finance
Evaluating the Opportunities, Costs, and
Risks of Multinational Operations
Sixth Edition
KIRT C. BUTLER
Copyright©2016byKirtC.Butler.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
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LibraryofCongressCataloging-in-PublicationData:
Names:Butler,KirtCharles,author.
Title:Multinationalfinance:evaluatingopportunities,costs,andrisksof
multinationaloperations/KirtC.Butler.
Description:Sixthedition.|Hoboken,NewJersey:JohnWiley&Sons,Inc.,
[2016]|Includesbibliographicalreferencesandindex.
Identifiers:LCCN2015047252(print)|LCCN2016003024(ebook)|ISBN
9781119219682(pbk.:alk.paper)|ISBN9781119219705(ePub)|ISBN
9781119219712(AdobePDF)
Subjects:LCSH:Internationalbusinessenterprises—Finance.|Foreign
exchange.|Internationalfinance.
Classification:LCCHG4027.5.B882016(print)|LCCHG4027.5(ebook)|DDC
658.15/99—dc23
LCrecordavailableathttp://lccn.loc.gov/2015047252
CoverDesign:Wiley
CoverImage:Skyscrapers©FotoluminateLLC/Shutterstock
PrintedintheUnitedStatesofAmerica
10987654321
Contents
Preface xi
Acknowledgments xv
AbouttheAuthor xvii
PART ONE
TheInternationalFinancialEnvironment 1
CHAPTER1
AnIntroductiontoMultinationalFinance 3
1.1 TheGoalsoftheMultinationalCorporation 3
1.2 TheChallengesofMultinationalOperations 5
1.3 TheOpportunitiesofMultinationalOperations 6
1.4 FinancialManagementoftheMultinationalCorporation 11
1.5 Summary 12
CHAPTER2
WorldTradeandtheInternationalMonetarySystem 15
2.1 IntegrationoftheWorld’sMarkets 15
2.2 Balance-of-PaymentsStatistics 16
2.3 ExchangeRateSystems 18
2.4 ABriefHistoryoftheInternationalMonetarySystem 22
2.5 Summary 31
CHAPTER3
ForeignExchangeandEurocurrencyMarkets 35
3.1 CharacteristicsofFinancialMarkets 35
3.2 TheEurocurrencyMarket 36
3.3 TheForeignExchangeMarket 41
3.4 ForeignExchangeRatesandQuotations 44
3.5 HedgingwithCurrencyForwards 51
3.6 TheEmpiricalBehaviorofExchangeRates 54
3.7 Summary 56
CHAPTER4
TheInternationalParityConditionsandTheirConsequences 61
4.1 TheLawofOnePrice 61
4.2 ExchangeRateEquilibrium 63
v
vi CONTENTS
4.3 CoveredInterestArbitrageandInterestRateParity 66
4.4 LessReliableInternationalParityConditions 69
4.5 TheRealExchangeRate 74
4.6 ExchangeRateForecasting 78
4.7 Summary 81
Appendix4A:ContinuousCompounding 88
PART TWO
DerivativeSecuritiesforFinancialRiskManagement 93
CHAPTER5
CurrencyFuturesandFuturesMarkets 95
5.1 TheEvolutionofFuturesMarkets 95
5.2 FuturesContracts 97
5.3 ForwardversusFuturesMarketHedges 100
5.4 HedgingwithCurrencyFutures 104
5.5 Summary 113
CHAPTER6
CurrencyOptionsandOptionsMarkets 117
6.1 WhatIsanOption? 117
6.2 OptionPayoffProfiles 119
6.3 CurrencyOptionValuesPriortoExpiration 126
6.4 HedgingwithCurrencyOptions 129
6.5 ExchangeRateVolatilityRevisited 134
6.6 Summary 139
Appendix6A:CurrencyOptionValuation 143
CHAPTER7
CurrencySwapsandSwapsMarkets 149
7.1 TheGrowthoftheSwapsMarket 149
7.2 SwapsasPortfoliosofForwardContracts 151
7.3 CurrencySwaps 153
7.4 InterestRateSwaps 161
7.5 OtherTypesofSwaps 163
7.6 HedgingtheSwapBank’sExposuretoFinancialPriceRisk 165
7.7 Summary 166
PART THREE
ManagingtheRisksofMultinationalOperations 171
CHAPTER8
MultinationalTreasuryManagement 173
8.1 DeterminingFinancialGoalsandStrategies 173
8.2 ManagingInternationalTrade 174
Contents vii
8.3 PaymentMethodsandFinancingforInternationalTrade 176
8.4 ManagingCashFlows 181
8.5 ManagingExposurestoCurrencyRisk 183
8.6 Summary 190
Appendix8A:TheRationaleforHedgingCurrencyRisk 194
CHAPTER9
ManagingTransactionExposuretoCurrencyRisk 207
9.1 TransactionExposuretoCurrencyRisk 207
9.2 ManagingTransactionExposuresInternally 208
9.3 ManagingTransactionExposuresintheFinancialMarkets 214
9.4 TreasuryManagementinPractice 221
9.5 Summary 227
CHAPTER10
ManagingOperatingExposuretoCurrencyRisk 231
10.1 OperatingExposurestoCurrencyRisk 231
10.2 TheExposureofShareholders’Equity 234
10.3 ManagingOperatingExposuresintheFinancialMarkets 239
10.4 ManagingOperatingExposuresThroughOperations 243
10.5 PricingStrategyandtheCompetitiveEnvironment 245
10.6 Summary 247
CHAPTER11
ManagingTranslationExposureandAccountingforFinancialTransactions 253
11.1 FinancialAccountingandReportingStandards 253
11.2 TheCurrentRateMethodofIAS21andASC830–30 255
11.3 CorporateHedgingofTranslationExposure 257
11.4 AccountingforFinancialMarketInstruments 260
11.5 Accounting,Disclosure,andCorporateHedgingActivities 265
11.6 Summary 266
PART FOUR
ValuationandtheStructureofMultinationalOperations 273
CHAPTER12
ForeignMarketEntryandCountryRiskManagement 275
12.1 StrategicEntryintoInternationalMarkets 276
12.2 CountryRiskAssessment 281
12.3 StrategiesforManagingCountryRisk 287
12.4 ProtectingtheMultinational’sCompetitiveAdvantages 293
12.5 Summary 296
CHAPTER13
MultinationalCapitalBudgeting 299
13.1 TheAlgebraofMultinationalCapitalBudgeting 300
13.2 AnExample:Wendy’sRestaurantinNeverland 303
viii CONTENTS
13.3 InternationalParityDisequilibria 307
13.4 SpecialCircumstancesinCross-BorderInvestments 313
13.5 Summary 320
CHAPTER14
MultinationalCapitalStructureandCostofCapital 327
14.1 CapitalStructureandtheCostofCapital 328
14.2 ValuationofaForeignProjectwiththeWACC 332
14.3 TheCostofCapitalonMultinationalOperations 337
14.4 SourcesofFundsforMultinationalOperations 341
14.5 TheInternationalEvidenceofCapitalStructure 346
14.6 Summary 348
CHAPTER15
TaxesandMultinationalCorporateStrategy 355
15.1 TheObjectivesofNationalTaxPolicy 355
15.2 TypesofTaxation 357
15.3 TaxesandOrganizationForm 360
15.4 U.S.TaxationofForeign-SourceIncome 362
15.5 TransferPricingandTaxPlanning 367
15.6 TaxesandtheLocationofForeignAssetsandLiabilities 370
15.7 Summary 374
CHAPTER16
RealOptionsandCross-BorderInvestmentStrategy 379
16.1 RealOptionsandtheTheoryandPracticeofInvestment 379
16.2 MarketEntryasaSimpleRealOption 381
16.3 UncertaintyandtheValueoftheOptiontoInvest 389
16.4 MarketEntryasaCompoundRealOption 392
16.5 TheRealOptionApproachasComplementtoNPV 395
16.6 Summary 398
CHAPTER17
CorporateGovernanceandtheInternationalMarketforCorporateControl 405
17.1 CorporateGovernance 406
17.2 TheInternationalMarketforCorporateControl 418
17.3 TheInternationalEvidenceonMergersandAcquisitions 424
17.4 Summary 428
PART FIVE
InternationalPortfolioInvestmentandAssetPricing 433
CHAPTER18
InternationalCapitalMarkets 435
18.1 DomesticandInternationalCapitalMarkets 435
18.2 InternationalInvestmentVehicles 444
18.3 Cross-BorderFinancialStatementAnalysis 449
18.4 Summary 452
Contents ix
CHAPTER19
InternationalPortfolioDiversification 457
19.1 TheAlgebraofPortfolioDiversification 457
19.2 ReturnsonForeignInvestments 466
19.3 TheBenefitsofInternationalPortfolioDiversification 473
19.4 HomeBias 475
19.5 Summary 480
CHAPTER20
InternationalAssetPricing 485
20.1 TheInternationalCapitalAssetPricingModel(IAPM) 485
20.2 FactorModelsofExpectedandRequiredReturn 490
20.3 ContemporaryAssetPricingModels 499
20.4 Summary 501
Appendix:UsefulRulesandFormulas 509
Glossary 515
Index 533
Preface
Everythingshouldbemadeassimpleaspossible,butnotsimpler.
— AlbertEinstein
M
ultinationalFinanceassumestheviewpointofthefinancialmanagerofamulti-
national enterprise with operations in more than one country. The enterprise
could be a multinational corporation, a large financial institution, or a small part-
nershiporproprietorship.Thebookprovidesaframeworkforevaluatingthemany
opportunities, costs, and risks of multinational operations in a manner that allows
readerstoseebeyondthealgebraandterminologytogeneralprinciples.Thetextis
organizedintofiveparts:
■ PartI:TheInternationalFinancialEnvironment.Thetextbeginswithanintro-
duction to the international financial environment, currency and Eurocurrency
markets,andtheinternationalparityconditions.Chapters3and4oncurrency
and Eurocurrency markets are necessary prerequisites for most of the chapters
thatfollow.
■ Part II: Derivative Securities for Financial Risk Management. Chapters 5 to 7
covercurrencyderivatives—futures,options,andswaps—becauseoftheimpor-
tanceofthesederivativeinstrumentsinfinancialriskmanagement.
■ Part III: Managing the Risks of Multinational Operations. Part III covers the
multinationaltreasuryandthemultinationalcorporation’smanagementoftrans-
action,operating,andtranslationexposurestocurrencyrisk.
■ Part IV: Valuation and the Structure of Multinational Operations. Valuing and
structuringthecorporation’sinternationalassetsistheheartofthetext.Chapter
13 on cross-border capital budgeting has farmore depth than competing texts,
covering the international parity case as well as disequilibrium situations in
whichtheinternationalparityconditionsdonothold.Additionalchapterscover
country risk, multinational financing, taxation, real option valuation, and cor-
porategovernance.
■ Part V: International Portfolio Investment and Asset Pricing. The text supple-
ments the multinational corporate finance material in earlier chapters with
separatechaptersoninternationalcapitalmarkets,portfoliodiversification,and
assetpricing.
ReaderswithaninterestincorporatefinancewillfindthatPartsI,III,andIVpro-
videacomprehensivecoverageofthesetopicswithamanagerialfocusthroughout.
xi