Final PDF to printer

International
Financial
Management
Tenth Edition

Cheol S. Eun
Georgia Institute of Technology

Bruce G. Resnick
Wake Forest University

Tuugi Chuluun
Loyola University Maryland

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 Final PDF to printer

INTERNATIONAL FINANCIAL MANAGEMENT, TENTH EDITION

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10121. Copyright ©2024
by McGraw Hill LLC. All rights reserved. Printed in the United States of America. Previous editions
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Library of Congress Cataloging-in-Publication Data

Names: Eun, Cheol S., author. | Resnick, Bruce G., author. | Chuluun, Tuugi, author.
Title: International financial management / Cheol S. Eun, Georgia Institute of Technology,
Bruce G. Resnick, Wake Forest University, Tuugi Chuluun, Loyola University Maryland.
Description: Tenth edition. | New York, NY : McGraw Hill, [2024] |
Series: The McGraw-Hill education series in finance, insurance, and real estate | Includes index.
Identifiers: LCCN 2022038359 (print) | LCCN 2022038360 (ebook) |
ISBN 9781264413096 (paperback) | ISBN 9781266824739 (ebook)
Subjects: LCSH: International finance. | International business enterprises—Finance. |
Foreign exchange. | Financial institutions, International.
Classification: LCC HG3881 .E655 2024 (print) | LCC HG3881 (ebook) |
DDC 658.15/99—dc23/eng/20220906
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LC ebook record available at https://lccn.loc.gov/2022038360

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a
website does not indicate an endorsement by the authors or McGraw Hill LLC, and McGraw Hill LLC
does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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To Elizabeth
C.S.E.

To Donna
B.G.R.

To Arig and Amur

T.C.

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About the Authors

Cheol S. Eun,
Georgia Institute of Technology

Cheol S. Eun (Ph.D., NYU) is Professor Emeritus of Finance and the Thomas R.
Williams Chair (Ret.) at the Scheller College of Business, Georgia Institute of
Technology. Before joining Georgia Tech, he taught at the University of Minnesota and
the University of Maryland. He also taught at the Wharton School of the University
of Pennsylvania, Seoul National University, Korea Advanced Institute of Science and
Technology (KAIST), Singapore Management University, and the Esslingen University
of Technology (Germany) as a visiting professor. He has published extensively
on international finance issues in such major journals as the Journal of Finance,
Journal of Financial Economics, JFQA, Journal of Banking and Finance, Journal
of International Money and Finance, Management Science, and Oxford Economic
Papers. Also, he has served on the editorial boards of the Journal of Banking and
Finance, Journal of Financial Research, Journal of International Business Studies,
and European Financial Management. His research is widely quoted and referenced in
various scholarly articles and textbooks in the United States as well as abroad.
Dr. Eun is the founding chair of the Fortis/Georgia Tech Conference on
International Finance. The key objectives of the conference were to promote research
on international finance and provide a forum for interactions among academics,
practitioners, and regulators who are interested in vital current issues of international
finance.
Dr. Eun has taught a variety of courses at the undergraduate, graduate, and executive
levels, and was the winner of the Krowe Teaching Excellence Award at the University
of Maryland. He also has served as a consultant to many national and international
organizations, including the World Bank, Apex Capital, and the Korean Development
Institute, advising on issues relating to capital market liberalization, global capital raising,
international investment, and exchange risk management. In addition, he has been a
frequent speaker at academic and professional meetings held throughout the world.

Bruce G. Resnick,
Wake Forest University

Bruce G. Resnick is Professor Emeritus of Finance at the Wake Forest University

School of Business in Winston-Salem, North Carolina. Prior to retiring, he was the
Joseph M. Bryan Jr. Professor of Banking and Finance. He received a D.B.A. in finance
from Indiana University, an M.B.A. from the University of Colorado and a B.B.A.

vii

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viii ABOUT THE AUTHORS

from the University of Wisconsin-Oshkosh. Prior to joining Wake Forest, he taught

at Indiana University for 10 years, the University of Minnesota for five years, and
California State University, Chico for two years. He has served as a visiting professor
at Bond University in Gold Coast, Queensland, Australia, and at the Helsinki School
of Economics and Business Administration in Finland. Additionally, he served as the
Indiana University resident director at the Center for European Studies at Maastricht
University, the Netherlands. He also served as an external examiner to the Business
Administration Department of Singapore Polytechnic and as the faculty advisor on
Wake Forest University study trips to Japan, China, and Hong Kong.
Dr. Resnick taught M.B.A. and undergraduate courses in the areas of investments,
portfolio management, and international financial management. His research interests
include market efficiency studies and empirical tests of asset pricing models. A
major interest has been the optimal design of internationally diversified portfolios
constructed to control for parameter uncertainty and exchange rate risk. Most recently,
he has focused on studying the information content contained in Eurocurrency interest
rates and yield spread comparisons of domestic and international bonds. His research
articles have been published in most of the major academic journals in finance. Other
researchers and textbook authors have widely cited his research. He served for many
years as an associate editor for the Emerging Markets Review, Journal of Multinational
Financial Management, the Journal of Economics and Business, and the Journal of
Financial Research.

Tuugi Chuluun,
Loyola University Maryland

Tuugi Chuluun is a Travelers Scholar and an Associate Professor of Finance at

Sellinger School of Business and Management at Loyola University Maryland. She
holds a Ph.D. in Finance from the Georgia Institute of Technology, a master’s in
Financial Economics, and a bachelor’s degree in Economics from Ohio University.
Her research areas include international finance, corporate finance, and behavioral
finance. She has published in journals such as Journal of Banking and Finance,
Financial Management, Journal of Corporate Finance, Journal of Economic Behavior
and Organization, and Small Business Economics. Her research has also been featured
in magazines such as The Economist and Forbes Mongolia. Dr. Chuluun has taught
undergraduate and graduate courses in international finance, corporate finance,
investments, microeconomics, and macroeconomics at Loyola University Maryland,
Georgia Institute of Technology, and West Virginia University–Parkersburg, often
incorporating innovative teaching practices. At Loyola University Maryland, she was
selected as the ELMBA Program Distinguished Professor of the Year and received
the Sellinger School STAR Award in research. She has also received the Financial
Management Association’s Superior Faculty Advisor award.
Dr. Chuluun holds the Chartered Financial Analyst (CFA) designation. She is
the former president of the CFA Society Baltimore, Maryland’s largest membership
organization for investment professionals, and has served on the society’s board
since 2013. She was also the co-chair of the “Alpha and Gender Diversity Baltimore
Conference 2018,” which fostered collaborative discussion on how gender diversity
creates a competitive advantage for investment professionals and the broader finance
industry. Dr. Chuluun was a Visiting Scholar at the Brookings Institution and has
international consulting experience.

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Preface

Our Reason for Writing this Textbook

We (Cheol and Bruce) have been teaching international financial management to
undergraduates and M.B.A. students at Georgia Institute of Technology, Wake Forest
University, and at other universities we have visited for more than three decades. Dur-
ing this time period, we conducted many research studies, published in major finance
and statistics journals, concerning the operation of international financial markets. As
one might imagine, in doing this we put together an extensive set of teaching materi-
als that we used successfully in the classroom. As the years went by, we individually
relied more on our own teaching materials and notes and less on any one of the major
existing textbooks in international finance (most of which we tried at some point). In
the Ninth Edition, Tuugi Chuluun from Loyola University Maryland, joined us as a
co-author and continues the tradition we have established in offering up-to-date and
timely coverage of the subject of international financial management.
As you may be aware, the scope and content of international finance have been fast
evolving due to cycles of deregulations and regulations of financial markets, prod-
uct innovations, and technological advancements. As capital markets of the world are
becoming more integrated, a solid understanding of international finance has become
essential for astute corporate decision making. Reflecting the growing importance of
international finance as a discipline, we have seen a sharp increase in the demand for
experts in the area in both the corporate and academic worlds.
In writing International Financial Management, Tenth Edition, our goal was to
provide well-organized, comprehensive, and up-to-date coverage of the topics that take
advantage of our many years of teaching and research in this area. We hope the text
is challenging to students. This does not mean that it lacks readability. The text dis-
cussion is written so that a self-contained treatment of each subject is presented in a
user-friendly fashion. The text is intended for use at both the advanced undergraduate
and M.B.A. levels.

The Underlying Philosophy

International Financial Management, Tenth Edition, like the previous nine editions,
is written based on two tenets: emphasis on the basics and emphasis on a managerial
perspective.
Emphasis on the We believe that any subject is better learned if one is first well grounded in the
Basics basics. Consequently, we initially devote several chapters to the fundamental concepts
of international finance. After these are learned, the remaining material flows easily
from them. We always bring the reader back, as the more advanced topics are devel-
oped, to their relationship to the fundamentals. By doing this, we believe students will

ix

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x P RE FA C E

be left with a framework for analysis that will serve them well when they need to apply
this material in their careers in the years ahead.
We believe this approach has produced a successfuI textbook: International Finan-
cial Management is used in many of the best business schools in the world. Various
editions of the text have been translated into Chinese (in both traditional and sim-
plified forms), Spanish, Korean, and Indonesian. In addition, local co-authors have
assisted in preparing Canadian, Malaysian, and Indian adaptations.

Tenth Edition Organization

International Financial Management, Tenth Edition, has been completely updated.
Data tables and statistics are the most current available when the text went to press.
We added discussions of emerging topics and issues of global significance, such as
climate risk, coronavirus pandemic, cryptocurrencies, and transition from LIBOR to
Alternative Risk-Free Rates. Additionally, the chapters incorporate several new mini
cases and International Finance in Practice boxes that contain real-world illustrations
of chapter topics and concepts. The bullet points below highlight specific changes in
the Tenth Edition.

Chapter 1:
• Included political risk as an additional “unique” dimension of international
finance.
• Added a discussion of the origin and consequences of political risk using the
recent geopolitical events, such as Brexit, Chinese policy pivots, and the Russo-
Ukrainian war.
• Added two extra trends and developments, climate change and COVID-19
pandemic, including the physical and financial risks climate change poses to the
world and how countries can mitigate and adapt to the effects of climate change
via international cooperation, for example, Paris Climate Agreement. Also
included the economic and financial consequences of the COVID-19 pandemic,
such as supply chain disruption, higher inflation, rapid digitization of finance
and commerce, and rising inequalities.
• Updated Exhibits 1.1, 1.4, and 1.7, and added a new Exhibit 1.6 COVID-19
Shock and Macroeconomic Responses.
• Revised Mini Case: Nike and Sweatshop Labor.
• Added more References.

Chapter 2:
• Added new discussion of the role of cryptocurrencies and El Salvador’s
experiment of Bitcoin as its legal tender.
• Added discussion of the prospect of European “fiscal integration” to
complement monetary integration. Also, a discussion of Central Bank Digital
Currency (CBDC), a hot topic among central bankers around the world.
• Updated Exhibits 2.2, 2.3, 2.4, 2.7, 2.8, and 2.13.

Chapter 3:
• Created a new International Finance in Practice box titled “Squid Game and
the Rise of Global Services Trade.” This replaces the previous International
Finance in Practice box titled “The Dollar and the Deficit.”
• Revised Exhibit 3.1 with the latest U.S. balance of payments data and updated
the corresponding discussions throughout the chapter.

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P R E F A C E xi

• Modified and reorganized the discussion of the financial account for improved
clarity.
• Revised Exhibit 3.4 which depicts the composition of total official reserves,
and Exhibit 3.5 which presents the currency composition of the world’s foreign
exchange reserves.
• Updated Exhibits 3.6 and 3.7 which depict the current and financial account
balances of the major economies, and Exhibit 3.8 presenting the top U.S.
trading partners.
• Added two new EOC problems (Problems 1 and 2) for students to analyze the
U.S. current and financial account balances from a previous year.
• Added a new mini case to analyze the trends in China’s balance of payments to
replace the mini case on Mexico’s balance of payments problem.
• A new video explaining a balance of payments problem was added.

Chapter 4. Corporate Governance around the World

• Added a new section discussing the current issue of shareholder versus
stakeholder capitalism.
• Added a new Mini Case: The Petrobras Scandal.
• Included a discussion of how foreign activist shareholders can enhance
corporate governance using Toshiba’s recent experience.
• Created more EOC questions.

Chapter 5:
• Updated Exhibit 5.1 and Exhibits 5.3–5.13 with the latest data on the foreign
exchange market and modified the corresponding discussions throughout the
chapter.
• Updated the International Finance in Practice boxes titled “Electronification of
the FX Market” and “Chinese Yuan’s Road to Internationalization” to reflect
the recent developments.
• Revised Examples 5.2–5.4 on computing cross exchange-rates and
triangular arbitrage profits using the most recent data provided in the revised
exhibits.
• Revised Examples 5.5–5.7 describing forward premium/discount and
speculative forward positions.
• Added EOC Problem 1 for students to practice working with direct and indirect
exchange rate quotes, and Problem 14 for students to practice conducting
forward market speculation.
• Modified EOC Problem 12 on triangular arbitrage and turned it into a ­
multi-step problem that is easier to assign in Connect.
• Incorporated a discussion of empirical research on informal currency zones.
• Added a discussion about the reported decline in the correspondent banking
relationships.
• Included empirical research findings on the size of bid-ask spreads.
• Added videos on how exchange rates are quoted and cross-rates are computed
and videos showing detailed examples of triangular arbitrage problems.

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xii P RE FA C E

Chapter 6:
• Updated Exhibit 6.3 on carry trade, Exhibit 6.6 on real effective exchange
rates, Exhibit 6.7 on world prices, and Exhibit 6.8 on GDPs measured at PPP
exchange rate.
• Updated the International Finance in Practice box on Big Mac Index.
• Included a discussion on carry trade, including how households can effectively
become carry traders when they take out mortgages denominated in foreign
currencies.
• Modified EOC Problem 2.
• Added videos explaining interest rate parity and covered interest arbitrage using
detailed examples.

Chapter 7:
• Updated market data throughout the chapter.
• Added a discussion on empirical testing of currency options.
• Created four new EOC problems.
• Added videos describing the daily resettlement of futures contracts and the
characteristics of the different positions on call and put options.

Chapter 8:
• Extensively revised Exhibit 8.12 and discussed in detail how companies use
various financial and operational hedging methods in real world when they face
transaction exposure.
• Created more EOC problems and Mini Case.
• Added a significant number of References.

Chapter 9:
• Added a new International Finance in Practice titled, “The case study: How
BMW dealt with exchange rate risk.”
• Updated References.

Chapter 10:
• Reorganized the chapter, added a section on FASB ASC830, and revised and
consolidated the discussions of FASB 8, FASB 52, and FASB ASC830 under a
new section called “U.S. GAAP.”
• Revised the section on International Accounting Standards and incorporated a
discussion about the accounting standards in China.
• Highlighted the difference between the concept of measuring foreign
currency transactions and the concept of translating foreign currency financial
statements.
• Modified the currency symbols throughout the chapter for greater clarity and
consistency.

Chapter 11:
• Updated Exhibit 11.1 listing the world’s largest banks.
• Revised the discussion on capital adequacy standards and the Basel III accord
• Included a discussion on the termination of LIBOR as the major reference rate
for Eurocurrency deposits.

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P R E F A C E xiii

• Introduced the new series of reference rates, known collectively as

Alternative Risk-Free Rates, which went into effect for the various
Eurocurrencies.
• Introduced the Secured Overnight Financing Rate (SOFR) selected as the
replacement for USD LIBOR as the benchmark rate for Eurodollar deposits and
FRAs.
• CME Group SOFR futures contracts have been introduced as a vehicle for
hedging short-term USD interest rate risk in Eurodollar positions.
• Updated all associated Eurocurrency exhibits.
• Extensively revised and shortened the discussion on the Global Financial Crisis
to reflect the passage of time and its less significant bearing on the current
global macroeconomic environment.
• Relocated the In More Depth discussion on MBSs, SIVs, CDOs, and CDSs to
an appendix.
• Updated End-of-Chapter Internet Exercise 1 to highlight using SOFR in pricing
Eurodollar loans.

Chapter 12:
• Reorganized sections of the chapter, including a subsection on the currency
distribution, nationality, and type of issuers, to improve the content flow.
• Updated Exhibits 12.1–12.4 and 12.9–12.11 to provide a detailed overview
of the world’s bond markets using the most recent data and modified the
corresponding discussions throughout the chapter.
• Revised the reference rates used in floating-rate notes to reflect the switch from
LIBOR to other benchmark rates such as SOFR.
• Created a new mini case called “Alpha Gen Technologies: Panda or Dim Sum
Bonds?” for students to compare Chinese-yuan denominated panda and dim
sum bonds. This replaces the previous mini case called “Sara Lee Corporation’s
Eurobonds.”
• Added videos explaining the EOC problems.

Chapter 13:
• Updated Exhibits 13.1–13.4 and 13.8 to provide a detailed overview of
the world’s stock markets using the most recent data and modified the
corresponding discussions throughout the chapter.
• Added a discussion describing the trends in the cross-listings of Chinese firms
since the 1990s, including the stricter rules imposed recently on Chinese firms
listing abroad.
• Modified Exhibit 13.6 for greater clarity.
• Revised the discussion of market consolidations and mergers among stock
exchanges worldwide.
• Modified the discussion on ADRs to improve clarity.
• Revised Examples 13.1–13.3 using the latest stock prices of several cross-listed
firms.
• Expanded and revised the discussion of the factors that influence
international equity returns, such as macroeconomic factors, exchange rates,
industry factors, and market factors, by summarizing findings from extensive
empirical research.
• Added a new subsection on market factors.

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xiv P RE FA C E

Chapter 14:
• Updated Exhibits 14.1 and 14.2 with the most recent data.
• Incorporated the transition from LIBOR to alternative risk-free rates such as
SOFR in the discussions and explanations of swaps.
• End-of-chapter problems now use the new reference rates such as SOFR.
• Added videos that are guided examples of interest rate and currency swaps.

Chapter 15:
• Updated Exhibits 15.1, 15.2, 15.4, and 15.5 to present characteristics of and
correlations among major equity markets using the most recent data and
modified corresponding discussions throughout the chapter.
• Updated Exhibits 15.6–15.8 to present the composition of optimal international
equity portfolios and gains from international diversification.
• Reorganized and updated the content on home bias.
• Added a new EOC problem.
• Added new videos illustrating how to compute the rate of return on foreign
investment with and without hedging.

Chapter 16:
• Created a new exhibit, Exhibit 16.1, depicting the trends in the FDI outflows of
developed and developing regions.
• Updated Exhibits 16.1–16.5, 16.7, 16.9, and 16.12 and discussed the most
recent data and trends in global FDI, including cross-border M&As, and
political risk.
• Added a discussion of empirical findings on expropriations.

Chapter 17:
• Updated Exhibits 17.8 and 17.9.
• Provided a more detailed explanation of the International Asset Pricing Model.

Chapter 18:
• Clarified the wording in Example 18.2.
• Added a new mini case on evaluating a capital expenditure proposal in a wholly
owned foreign subsidiary—the case addresses methods for calculating and
discounting foreign cash flows in calculating the NPV of the project.

Chapter 19:
• Clarified the wording in Mini Case 1 on multilateral netting among
interaffiliate cash flows.

Chapter 20:
• Created a new section to define and summarize the global trade finance market
at the beginning of the chapter, including a discussion of the impact of the
COVID-19 pandemic on global trade finance.
• Included a new section surveying the export credit agencies worldwide.
• Created a new exhibit, Exhibit 20.2, presenting the top 25 countries by export
credit volume.
• Updated the International Finance in Practice box titled “Export-Import Bank
in Limbo” to incorporate the most recent developments.

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P R E F A C E xv

Chapter 21:
• Updated Exhibit 21.1 displaying corporate tax rates around the world.
• Updated Exhibit 21.2 displaying U.S. treaty withholding tax rates with selected
countries.
• Updated Exhibit 21.4 showing foreign tax credit offsets for subsidiary
operations using current tax rates.
• Eliminated less current International Finance in Practice boxes.
• Added a new International Finance In Practice box providing perspective on the
use of tax havens by MNCs to divert income from higher tax jurisdictions via
transfer pricing.
• Added a new section discussing the 2021 global deal formally endorsed in
Rome by 136 of 139 participating G-20 countries in conjunction with the
OECD to establish a minimum corporate tax rate of 15 percent.
• Updated the two end-of-chapter Internet exercises.

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 Exhibit 11.6 shows the relationship among the various interest rates we have dis-
cussed in this section specifically for the USD. On January 5, 2022, U.S. domestic banks Final PDF to printer
were paying .25 percent for six-month NCDs and the prime lending rate, the base rate
charged the bank’s most creditworthy corporate clients, was 3.25 percent. This appears
to represent a spread of 3.00 percent for the bank to cover operating costs and earn
a profit. Also on January 5, the six-month CME Term SOFR rate was .20 percent.
Thus, by comparison, it is reasonable to think that Eurobanks will accept six-month
Eurodollar time deposits, say, Eurodollar NCDs, at a bid rate of .43 percent, calculated
as the sum of the six-month CME Term SOFR rate of .20 percent + a six-month Bank
Credit premium of .43 percent – an interbank bid-ask spread of .20 percent. Similarly,
it is reasonable that a Eurobank would offer six-month Eurodollars in the interbank
market at .63 percent, calculated as the sum of the six-month CME Term SOFR rate of
.20 percent + the six-month Bank Credit premium of .43. By comparison, the Eurobank
would charge a corporate client a rate of .63 percent + X percent, where any lending

Key Features
margin less than 2.62 [= 3.25 – .63] percent appears to make the Eurodollar loan more
attractive than the prime rate loan. Since lending margins typically fall in the range of
.25 percent to 3 percent, with the median rate being .50 percent to 1.50 percent, the
exhibit shows the narrow borrowing-lending spreads of Eurobankers in the Eurodollar
credit market. This analysis seems to suggest that borrowers can obtain funds somewhat
more cheaply in the Eurodollar market. However, international competition in recent
years has forced U.S. commercial banks to lend domestically at rates below prime.
Examples—These are integrated
throughout the text, providing
EXAMPLE 11.1: Rollover Pricing of a Eurocredit students with immediate application of
Teltrex International can borrow $3,000,000 at a lending margin of .75 percent per the text concepts.
annum on a three-month rollover basis from Barclays in London. Suppose that three-
month CME Term SOFR is currently .53 percent and the three-month Bank Credit
premium is 26 basis points. Further suppose that over the second interval three-
month CME Term SOFR falls to .42 percent. How much will Teltrex pay in interest to
Barclays over the six-month period for the Eurodollar loan?
Solution: $3,000,000 × (.0053 + .0026 + .0075)/4 + $3,000,000 ×
(.0042 + .0026 + .0075)/4 = $11,550 + $10,725
= $22,275

ard Rate A major risk Eurobanks face in accepting Eurodeposits and in extending Eurocredits
ements is interest rate risk resulting from a mismatch in the maturities of the deposits and
credits. For example, if deposit maturities are longer than credit maturities, and inter- First Pages
est rates fall, the credit rates will be adjusted downward while the bank is still pay-
International
ing Finance
a higher rate on deposits.in Practiceif deposit maturities are shorter than credit
Conversely,
Boxes—Selected chapters
contain International Finance First Pages

in Practice boxes. These real- INTERNATIONAL FINANCE IN PRACTICE

world illustrations offer students
a practical look at the major CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE
Electronification of the Foreign Exchange Market 221

concepts presented in and

the chapter. Technological advances ranging from greater processing power electronically instead of relying on traditional voice trading.

[ (1 + i $) ]
(E − F T) to instantaneous data transfer
P e ≥ Max ___________, 0 (7.9) are transforming financial mar- For trades in some currency pairs, the share of electronic trade
ch11_305-340.indd 318
kets around the world, and the foreign exchange market is no
09/29/22 02:30 pm
volume was even higher in October 2021 such as 72 percent and
exception. Currency traders dealing currencies on behalf of 71 percent for trading in British pound–euro and U.S. dollar–
EXAMPLE 7.5: European Option-Pricing Valuation their clients by holding multiple telephone conversations and Hong Kong dollar, respectively. Similarly, some large financial
Let’s see if Equations 7.8 and 7.9 actually hold yelling
for the 112
intoSep EURphones
their Europeaniscall
no longer the norm. The Bank for institutions nowadays almost exclusively rely on electronic trad-
and the 112 Sep EUR European put options we considered. The last day of trading
International Settlementsa suggests that more than 70 percent
for both of these options is September 20, 2019, or in 179 days from March 25,
ing. Automation is a development that goes hand in hand with
of spot trading since 2013 4 is executed electronically. According
2019, the options quotation date. On that date, the 6-month dollar interest rate was electronification, and the Bank for International Settlements
to the North
2.673 percent. Thus, (1 + i$) is [1 + .02673 (179/360)] American
= 1.0133. Foreign
We will use the Exchange Volume Survey con- reports that an estimated 70 percent of orders on Electronic
September futures price of $1.1487/EUR on March ducted 25, by
2019,
theforFederal
FT. Thus,Reserve
for the Bank of New York in October Broking Services (EBS) are now submitted by algorithms,
112 Sep EUR call,
2021, about 57 percent of all foreign exchange transactions and rather than manually. This trend of increasing electronification
65 percent
3.78 ≥ Max [(114.87 − 112)/(1.0133), 0] = Max [2.83, 0] = 2.83.of spot transactions in North America are executed is depicted in the figure below.
Thus, the lower boundary relationship on the European call premium holds. For the
FX Electronic Trading Share (% of total monthly trade volume executed electronically)
112 Sep EUR put,
.94 ≥ Max [(112 − 114.87)/(1.0133), 0] = Max [− 2.83, 0] = 0. 60

Thus, the lower boundary relationship on the European put premium holds as well.
55
In More Depth
Percentage

50
Binomial Option-Pricing Model
The option pricing relationships we have discussed to this point have been lower
boundaries on the call and put premiums, instead of exact equality expressions for
premiums. The binomial option-pricing model provides an exact pricing formula for
45the
In More Depth—Some topics are by
a European call or put.5 We will examine only a simple one-step case of the binomial
model to better understand the nature of option pricing. In this case, the binomial 40 nature more complex than others. The
model assumes that at the end of the option period, the underlying foreign exchange
chapter sections that contain such
04

05

06

07

08

09

10

11

12

13

14

15

16

17

18

19

20

21

has either appreciated one step upward or depreciated one step downward from its
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

initial value. Year

We want to use the binomial model to value the PHLX 112 Sep EUR European
call from Exhibit 7.6. We see from the exhibit that the option premiumSource: is quoted
material are indicated by the section
Tabulated from data in Semi-Annual North American Foreign Exchange Volume Surveys, Federal
at 3.78 cents. The current spot price of the EUR in American terms is S0Reserve
cents. Our estimate of the option’s volatility (annualized standard deviation of the
= 113.14
heading “In More Depth” and are in
Bank of New York, October 2004–2021.

Changing
obtainedtrade execution
Investingmethods in the foreign exchange differences in market liquidity with electronic trading sys-
change in the spot rate) is σ = 6.18 percent, which was
.com website, www.investing.com. The last daymarket of tradingare,in in
from the
theturn,
call option colored text. These sections may be
is in with changes in the composition
associated tems. Information flow has increased dramatically as prices are
179 days on September 20, 2019, or in T = 179/365 of=market
.4904 years. The one-stepandbino-
mial model assumes that at the end of the option period the EUR
risk among
participants
will have appreciated
σ.√ T them. Thomson Reuters launched the first screen-
__
skipped without loss of continuity,
how they provide liquidity and share updated more frequently, such as every five milliseconds for
certain subscribers on the EBS platform.
to SuT = S0 · u or depreciated to SdT = S0 · d, where u = e and d = 1/u. The spot
rate at T will be either 118.14 = 113.14(1.0442) orbased
_____ 108.35trading
e .0618.√.4904 = 1.0442 and d = 1/u = .9576. At the exercise
systemwhere
= 113.14(.9576)
mous matching
price of E = platform
in 1982
system in 1992. Several big banks
112, the option
enabling the instructor to easily
u = and followed it with an anony- On the other hand, concerns are growing that the foreign
exchange market has become more volatile and prone to mar-
will only be exercised at time T if the EUR appreciates;
launched its exercise
a similar value would beplatform, EBS, in 1993 to com-
matching tailor the reading assignments to the
ket dysfunctions such as flash crashes. When the value of
pete with Thomson Reuters. In recent years, different nonbank British pound plummeted by more than 6 percent within mere
4
The 6-month dollar LIBOR rate was used as the reference rate here. Starting in 2022, LIBOR is no longer used to
students.
electronic market makers have emerged as significant liquidity End-of-chapter
seconds around 7 . . Hong Kong time (12 Questions
. . London time
AM AM
providers, taking market share away from the banks and the and 7 . . New York) on October 7, 2016, algorithmic trading
price new loans in the United States, and the secured overnight financing rate (SOFR) is replacing LIBOR as the
traditional venues of Thomson Reuters Matching and EBS.
benchmark interest rate for dollar-denominated securities. This transition is expected to be completed by 2023.
and Problems relating to the
PM
In More
was seen as the culprit for potentially having triggered a series
For example, XTX Markets, an electronic market-making firm
The binomial option-pricing model was independently derived by Sharpe (1978); Rendleman and Bartter
Depth sections of the text are also
of stop orders at a time of already thin trading and leading to a
5

(1979); and Cox, Ross, and Rubinstein (1979).

founded in 2015, already ranks fourth in the Euromoney maga- stream of automatic selling. Hence, the increasing electronifica-
indicated
zine ranking of top liquidity providers of foreign exchange in
2021. The firm reported a daily average volume of $295 billion
by blue type.
tion of the foreign exchange market is bringing new challenges,
services, and opportunities ranging from cloud servicing to
across asset classes, including foreign exchange, in 2021. new trading strategies. And what’s even more remarkable is the
The rising electronification in the foreign exchange market speed at which all these are happening.
has both positive and negative consequences. On the one hand,
xvi eun13092_ch07_205-230.indd 221
greater electronification has been associated with lower trad-
07/22/22 05:33 pm
a
Bank for International Settlements, “Monitoring of Fast-Paced Electronic
Markets,” September 2018.
ing costs, increased availability of and access to data, and more b
Ding, L., and J. Hiltrop. “The Electronic Trading Systems and Bid-Ask
efficient pricing. Ding and Hiltrop (2010),b for instance, docu- Spreads in the Foreign Exchange Market.” Journal of International Financial
mented narrower bid-ask spreads and reduced geographical Markets, Institutions & Money 20, no. 4 (2010), pp. 323–45.

137

eun13092_fm_i-xxviii.indd xvi 10/10/22 12:10 pm

 7. In a perfect capital market where stockholders can hedge exchange exposure as
well as the firm, it is difficult to justify exposure management at the corporate
level. In reality, capital markets are far from perfect, and the firm often has advan- Final PDF to printer
tages over the stockholders in implementing hedging strategies. There thus exists
room for corporate exposure management to contribute to the firm’s value.
8. Firms use both financial and operational methods to manage their FX risk expo-
sures. Survey studies show that firms most often use simple hedging methods
such as forward contracts, currency swaps, pricing strategies, and foreign currency 254 PART THREE FOREIGN EXCHANGE EXPOSURE AND MANAGE
debt. First Pages

KEY WORDS contingent exposure, 246 hedging through invoice reinvoice center, 249 4. Boeing just signed a contract to s
cross-hedging, 245 currency, 000 transaction
CHAPTER 8 MANAGEMENT
economic OF TRANSACTION
exposure, 233 EXPOSURE
lead/lag strategy, 248 exposure, 233 253 France will be billed €20 million p
exposure netting, 249 money market hedge, 240 translation exposure, 233 rate is $1.05/€ and the one-year forw
forward market options market
5.hedge,
Suppose
000your company has purchased
hedge, 000 a put option on the euro to manage exchange 6 percent in the United States and 5
exposure associated with an account receivable denominated in that currency. In
this case, your company can be said to have an “insurance” policy on its receiv- the volatile exchange rate between t
able. Explain in what sense this is so. exchange exposure.
6. Recent surveys of corporate exchange risk management practices indicate that
QUESTIONS manywould
1. How U.S. firms
7. exposure?
simplytransaction
you define do not hedge.
Should a firm hedge? Why or why not?
How would
exposure? Howyouis itexplain thisfrom
different result?
economic Questions and Problems—Each a. It is considering two hedging alt
8. Discuss
2. Using anand
example,
comparediscuss the possible
hedging effect
transaction of hedging
exposure usingonthe a firm’s
forwardtaxcontract
obligations.
ver- chapter contains a set of Questions forward
and or borrow euros from C
9. sus money
Explain market instruments.
contingent exposure andWhen dothe
discuss alternative
advantageshedging approaches
of using currencyproduce
options Which alternative would you rec
the same result?
to manage this type of currency exposure. Problems. This material can be used b. Other things being equal, at what
3. Discuss and compare and the discuss
costs ofthe
hedging by forward contracts and options
10. Explain cross-hedging
contracts.
factors determining its effectiveness.
by students on their own to test their ferent between the two hedging m
PROBLEMS The spreadsheet TRNSEXP.xls may be used in solving parts of problems 2, 3,tool
4. What are the advantages of
pared with the forward contract?
a currency options contract as a hedging com-
4, and 6. understanding of the material, 5.or Suppose
as that Baltimore Machinery
1. Cray Research sold a supercomputer to the Max Planck Institute in Germany on
credit and invoiced €10 million payable in six months. Currently, the six-month homework exercises assigned by the gave the Swiss client a choice of
forward exchange rate is $1.10/€ and the foreign exchange adviser for Cray
instructor. Questions and Problems months.
Research predicts that the spot rate is likely to be $1.05/€ in six months.
a. What is the expected gain/loss from a forward hedge? a. In the
relating to the In More Depth sections of example, Baltimore Mach
b. If you were the financial manager of Cray Research, would you recommend
hedging this euro receivable? Why or why not? the text are indicated by blue type. option to buy up to $10,000 usin
eun13092_ch08_231-264.indd 252 c. Suppose the foreign exchange adviser predicts that the future spot rate
08/08/22will
07:29be
pm exchange rate?
the same as the forward exchange rate quoted today. Would you recommend
hedging in this case? Why or why not? b. If the spot exchange rate turns ou
d. Suppose now that the future spot exchange rate is forecast to be $1.17/€. Would
you recommend hedging? Why or why not?
the Swiss client will choose to u
2. IBM purchased computer chips from NEC, a Japanese electronics concern, and 254 option
P A R T for
T Hthe
R ESwiss
E client? EX
FOREIGN
was billed ¥250 million payable in three months. Currently, the spot exchange rate
is ¥105/$ and the three-month forward rate is ¥100/$. The three-month money
c. What is the best way for Baltimo
market interest rate is 8 percent per annum in the United States and 7 percent per 6. Princess Cruise Company (PCC) pu
Questions with Excel Software—An icon in
annum in Japan. The management of IBM decided to use a money market hedge
for 500 million yen payable in one
to deal with this yen account payable. 4. Boeing
the margin indicates that the end-of-chapter one-year forward rate is 110/$. The
a. Explain the process of a money
meeting the yen obligation.
market hedge and compute the dollar cost of
France
question is linked to an
b. Conduct a cash flow analysis of the money market hedge.Excel program created 8 percent in the United States. PCC
rate is
by the authors. See the Ancillary Materials
3. You plan to visit Geneva, Switzerland, in three months to attend an international the strike price of $.0081 per yen fo
business conference. You expect to incur a total cost of SF5,000 for lodging, 6 perc
section for more information on the software.
meals, and transportation during your stay. As of today, the spot exchange rate is
$0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-
a. Compute the future dollar
Confirming Pages thecosts
vo
month call option on SF with an exercise price of $0.64/SF for the premium of market and forward hedges. exchan
$0.05 per SF. Assume that your expected future spot exchange rate is the same
as the forward rate. The three-month interest rate is 6 percent per annum in the b. Assuming that the forward excha
United States and 4 percent per annum in Switzerland. rate, compute the expected a. futur
It is
a. Calculate your expected dollar cost of buying SF5,000 if you choose to hedge
by a call option on SF.
the option hedge is used. forw
b. Calculate the future dollar cost of meeting this SF obligation if you decide to c. At what future spot rate doWh you
CFA Questions—Many chapters include
hedge using a forward contract.
Transfer Pricing and Related Issues option and forward hedge?
c. At what future spot exchange rate will you be indifferent between the forward
and option market hedges? Within a large business firm with multiple divisions, goods and services are frequently
b. Oth
problems from CFA Program Curriculum studyd. Illustrate the future dollar cost of meeting the SF payable against the future spot 7. Consider
transferred from one division to another. The process brings into question the transfer a U.S.-based companyfere tha
exchange rate under both the options and forward market hedges. price that should be assigned, for bookkeeping purposes, to the goods pany expects to receive payment on
or services as
materials. These CFA problems, indicated with they are transferred between divisions. Obviously, the higher the transfer price, the
the payment
larger will be the gross profits of the transferring division relative to the receiving divi- 5. Suppo
will be in Swiss franc
the CFA logo, show students the relevancy sion. Even within a domestic firm, it is difficult to decide on the transfer price. Within
a MNC, the decision is further compounded by exchange restrictions on decline gavefrt
the part of thein the value of the Swiss
of what is expected of certified professional host country where the receiving affiliate is located, a difference in income freetaxrate
between the two countries, and import duties and quotas imposed by the host country. month
rates is 2 percent, and the Swiss

The following case application illustrates the important transfer pricing ratesissues. are expected to remain fixed o
analysts. a. In t
eun13092_ch08_231-264.indd 253 08/08/22 07:29 pm is $0.5974.
opt
CASE Mintel Products Transfer Pricing Strategy
a. Indicate whether the U.S. compa
APPLICATION
Low versus High Markup Policy
to hedge currency risk. exc
Mintel Products Inc. manufactures goods for sale in the United States and overseas.
b. Calculate the no-arbitrageb.price
Finished goods are transferred from the parent firm to its wholly owned sales affiliate for If th
Case Applications—Case Applications forward contract that expiresthe
overseas retail sale. Mintel’s financial manager, Hilary Van Kirk, has decided that the firm’s
transfer pricing strategy should be reevaluated as part of a routine review of the opera- in t
are incorporated within selected tions of the sales affiliate. Van Kirk has decided to explore both a low and a high markup
c. It is now 30 days since the U.S.
policy. The analysis is to be done in U.S. dollars. She notes that both the parent firm and optc
chapters throughout the text in order spot rate is $0.55. Interestc.rates
the sales affiliate have a 40 percent income tax rate, that the variable production cost of
one unit is $1,500, and that the unit retail sales price charged by the sales affiliate to the
Wh
to enhance specific topics and help the U.S. company’s forward posi
final customer is $3,000. As a first step in her analysis, Van Kirk prepares Exhibit 21.5.
The upper portion of the exhibit presents the analysis of a low markup policy, where the 6. Prince
students apply theories and concepts transfer price is set at $2,000. The lower portion of the exhibit analyzes the effect of a
high markup policy, where the transfer price is $2,400 per unit. for 50
to real-world situations. First Pages Van Kirk notices from Exhibit 21.5 that the low markup policy results in larger pretax
income, income taxes, and net income per unit in the selling country. On the other hand, one-ye
the high markup policy has the opposite effect, that is, higher taxable income, income
taxes, and net profit per unit in the manufacturing country. She also notes that because 8 perc
the income tax rates are the same in both countries, the consolidated results are identical
regardless of whether the MNC follows a low or high transfer pricing scheme.
the str
a. Com
CHAPTER 8 MANAGEMENT OF TRANSACTION EXPOSURE 257
Exchange Restrictions
Van Kirk wonders if Mintel should be indifferent between the low and high markup poli-
cies, since the consolidated results are the same. She reasons, however, that if the dis- mar
MINI CASE Airbus’ Dollar Exposure Mini Cases—Almost every chapter
tribution country imposes exchange restrictions limiting or blocking the amount of profits
that can be repatriated to the manufacturing parent, Mintel would no longer be indiffer- b. Ass
Airbus sold an A400 aircraft to Delta Airlines, a U.S. company, and billed $30 million pay-
able in six months. Airbus is concerned about the euro proceeds from international sales
includes a mini case for student
ent between the two markup policies. It obviously would prefer the high markup policy.
According to Exhibit 21.5, the higher markup allows $240 per unit to be repatriated to the rate
and would like to control exchange risk. The current spot exchange rate is $1.05/€ and
the six-month forward exchange rate is $1.10/€. Airbus can buy a six-month put option
analysis of multiple concepts covered
parent that otherwise may have been blocked. This amount represents the $400 higher
markup minus the $160 additional taxes paid in the parent country. the
on U.S. dollars with a strike price of €0.95/$ for a premium of €0.02 per U.S. dollar.
Currently, six-month interest rate is 2.5 percent in the euro zone and 3.0 percent in the
throughout the chapter. These Mini
Van Kirk notes that the high markup policy is disadvantageous from the host country’s
perspective. eun13092_ch08_231-264.indd
If the transferring affiliate attempts
254to reposition funds by changing from the c. At
United States. low to the high markup policy, the exchange controls have been partially bypassed and
Case problems are real world in nature
there is a loss of tax revenue in the host country. Thus, the host country may take mea- opt
1. Compute the guaranteed euro proceeds from the American sale if Airbus decides sures to enforce a certain transfer price. She decides she needs to brush up on how this
to hedge using a forward contract. to show students how the theory and
might be accomplished and also to consider the effect of a difference in income tax rates 7. Consid
between the two affiliates.
2. If Airbus decides to hedge using money market instruments, what action does
Airbus need to take? What would be the guaranteed euro proceeds from the
concepts in the textbook relate to the pany e
American sale in this case?
everyday world. the pa
3. If Airbus decides to hedge using put options on U.S. dollars, what would
554be the
“expected” euro proceeds from the American sale? Assume that Airbus regards declin
the current forward exchange rate as an unbiased predictor of the future spot
exchange rate.
free ra
4. At what future spot exchange do you think Airbus will be indifferent between the rates a
option and money market hedge?
eun13092_ch21_545-564.indd 554 09/29/22 02:32 pm is $0.5
5. Assuming that you believe the current forward exchange rate is the best predictor

a. Ind
of the future spot exchange rate, what hedging method would you recommend to
Airbus? Justify your recommendation.

xvii
xvii to h
Richard May’s Options
CASE
It is Tuesday afternoon, February 14, 2012. Richard May, Assistant Treasurer at American
b. Cal
Digital Graphics (ADG), sits in his office on the 34th floor of the building that dominates forw
c. It is
Rockefeller Plaza’s west perimeter. It’s Valentine’s Day, and Richard and his wife have din-
ner reservations with another couple at Balthazar at 7:30. I must get this hedging memo
done, thinks May, and get out of here. Foreign exchange options? I had better get the
story straight before someone in the Finance Committee starts asking questions. Let’s spo
see, there are two ways in which I can envision us using options now. One is to hedge a
dividend due on September 15th from ADG Germany. The other is to hedge our upcom-
the
ing payment to Matsumerda for their spring RAM chip statement. With the yen at 78 and
increasing I’m glad we haven’t covered the payment so far, but now I’m getting nervous
eun13092_fm_i-xxviii.indd xvii and I would like to protect my posterior. An option to buy yen on June 10 might be just 10/10/22 12:10 pm
the thing.
 Final PDF to printer

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 Final PDF to printer

xx P RE FA C E

Ancillary Materials
To assist in course preparation, the following instructor ancillaries are within the
Instructor Library in Connect:
• Solutions Manual—Includes detailed suggested answers and solutions to the
end-of-chapter questions and problems, written by the authors.
• Test Bank—True/false and multiple-choice test questions for each chapter
prepared by Leslie Rush, University of Hawaii–West Oahu. Available as Word
documents and assignable within Connect.
• PowerPoint Presentations—PowerPoint slides for each chapter to use in
classroom lecture settings, created by the authors.
• Videos—Mini lectures and guided examples covering various quantitative
concepts, created by the authors. Assignable within Connect and linked to the
related end-of-chapter problems and questions.
The resources also include the International Finance Software that can be used with
this book. This Excel software has four main programs:
• A currency options pricing program allows students to price put and call
options on foreign exchange.
• A hedging program allows students to compare forward, money market
instruments, futures, and options for hedging exchange risk.
• A currency swap program allows students to calculate the cash flows and
notional values associated with swapping fixed-rate debt from one currency
into another.
• A portfolio optimization program based on the Markowitz model allows for
examining the benefits of international portfolio diversification.
The four programs can be used to solve certain end-of-chapter problems (marked with
an Excel icon) or assignments the instructor devises. A User’s Manual and sample
projects are included in the Instructor Resources.

Acknowledgments
We are indebted to the many colleagues who provided insight and guidance through-
out the development process. Their careful work enabled us to create a text that is
current, accurate, and modern in its approach. Among all who helped in this endeavor
for the Tenth Edition:

Brian Gendreau
University of Florida
Joseph F Greco
California State University, Fullerton
Robert Jozowski
Eckerd College
Irina Khindanova
University of Denver
Hong-Jen Abraham Lin
Brooklyn College, CUNY
Micki Pitcher
Davenport University

eun13092_fm_i-xxviii.indd xx 10/10/22 12:10 pm

 Final PDF to printer

P R E F A C E xxi

Hilmi Songur
University of Arizona
Robert Uptegraff
Oakland University
Ricardo Vicente
Brigham Young University – Hawaii
Qun Wu
University of Nevada-Reno
Geungu Yu
Jackson State University
Many people assisted in the production of this textbook. At the risk of overlooking
some individuals, we would like to acknowledge Brian Conzachi for the outstanding
job he did proofreading the entire manuscript. Additionally, we thank Yusri Zaro for
his hard work checking the accuracy of the solutions manual. Marta Gaia Bras, Ernest
Jang, Rohan-Rao Ganduri, Kristen Seaver, Milind Shrikhande, Jin-Gil Jeong, Sanjiv
Sabherwal, Sandy Lai, Jinsoo Lee, Hyung Suk Choi, Teng Zhang, Minho Wang, and
Victor Huang provided useful inputs into the text. Professsor Martin Glaum of the
Giessen University and Professor Thomas Schuster of DHBW Mannheim University,
both from Germany, also provided many valuable comments. Our special thanks go to
Dr. Ryan Brewster who created the excellent cover image for the 10th edition despite
his hectic schedule.
We also wish to thank the many professionals at McGraw Hill Education for their time
and patience with us. Charles Synovec, portfolio director; Michele Janicek, senior produc-
tion development manager, Barbara Hari, product developer; and Melissa Leick, senior
core content project manager have done a marvelous job guiding us through this edition.
Last, but not least, we would like to thank our families, Christine, James, and
Elizabeth Eun; Donna Resnick; and Puje Olkhanud, Maya Chuluun, and Dolgormaa
Tsegmed, for their tireless love and support, without which this book would not have
become a reality.
We hope that you enjoy using International Financial Management, Tenth Edition.
In addition, we welcome your comments for improvement. Please let us know either
through McGraw Hill Education, c/o Editorial, or at our e-mail addresses provided
below.

Cheol S. Eun
[email protected]
Bruce G. Resnick
[email protected]
Tuugi Chuluun
[email protected]

eun13092_fm_i-xxviii.indd xxi 10/10/22 12:10 pm

 Final PDF to printer

Contents
in Brief

PART ONE Foundations of International Financial Management

1 Globalization and the Multinational Firm, 3
2 International Monetary System, 37
3 Balance of Payments, 77
4 Corporate Governance Around the World, 101

PART TWO The Foreign Exchange Market, Exchange Rate

Determination, and Currency Derivatives
5 The Market for Foreign Exchange, 135
6 International Parity Relationships and Forecasting Foreign
Exchange Rates, 169
7 Futures and Options on Foreign Exchange, 205

PART THREE Foreign Exchange Exposure and Management

8 Management of Transaction Exposure, 233
9 Management of Economic Exposure, 265
10 Management of Translation Exposure, 285

PART FOUR World Financial Markets and Institutions

11 International Banking and Money Market, 307
12 International Bond Market, 341
13 International Equity Markets, 359
14 Interest Rate and Currency Swaps, 387
15 International Portfolio Investment, 407

PART FIVE Financial Management of the Multinational Firm

16 Foreign Direct Investment and Cross-Border Acquisitions, 443
17 International Capital Structure and the Cost of Capital, 471
18 International Capital Budgeting, 499
19 Multinational Cash Management, 519
20 International Trade Finance, 531
21 International Tax Environment and Transfer Pricing, 545

Glossary, 565
Index, 573

xxii

eun13092_fm_i-xxviii.indd xxii 10/10/22 12:10 pm

 Final PDF to printer

Contents

PART ONE Foundations of International Financial Management

CHAPTER 1 What’s Special about International Finance?, 4 Trade Liberalization and Economic Integration, 13
Globalization and the Foreign Exchange Risk, 4 Privatization, 16

Multinational Firm, 3 Political Risk, 4 Global Financial Crisis of 2008–2009, 17

Market Imperfections, 6 Brexit, 19
Expanded Opportunity Set, 7 COVID-19 Pandemic, 21
Goals for International Financial Management, 8 Climate Change, 24
Globalization of the World Economy: Major Trends Multinational Corporations, 25
and Developments, 10 Summary, 28
Emergence of Globalized Financial Markets, 10 m i n i c a s e : Nike and Sweatshop Labor, 31
Emergence of the Euro as a Global Currency, 11 a p p e n d i x 1 A : Gain from Trade: The Theory of
Europe’s Sovereign Debt Crisis of 2010, 12 Comparative Advantage, 33

CHAPTER 2 Evolution of the International Monetary System, 37 What Are the Benefits of Monetary Union?, 58
International Bimetallism: Before 1875, 38 Costs of Monetary Union, 59

Monetary System, 37 Classical Gold Standard: 1875–1914, 38 Prospects of the Euro: Some Critical Questions, 60
Interwar Period: 1915–1944, 40 The Mexican Peso Crisis, 62
Bretton Woods System: 1945–1972, 41 The Asian Currency Crisis, 63
The Flexible Exchange Rate Regime: 1973– Origins of the Asian Currency Crisis, 64
Present, 44 Lessons from the Asian Currency Crisis, 66
The Current Exchange Rate Arrangements, 46 The Argentine Peso Crisis, 66
Cryptocurrencies, 51 The Rise of the Chinese Renminbi, 68
European Monetary System, 53 Fixed versus Flexible Exchange Rate Regimes, 69
The Euro and the European Monetary Union, 54 Summary, 71
A Brief History of the Euro, 55 m i n i c a s e : Grexit or Not?, 74

CHAPTER 3 Balance of Payments Accounting, 77 Official Reserve Account, 86

Balance of Balance of Payments Accounts, 79 The Balance of Payments Identity, 89

Payments, 77 The Current Account, 80 Balance of Payments Trends in Major Countries, 90

international finance in practice: Squid Game and the Summary, 94
Rise of Global Services Trade, 81 m i n i c a s e : Trends in China’s Balance of
The Capital Account, 83 Payments, 97
The Financial Account, 83 a p p e n d i x 3 A : The Relationship between Balance of
Statistical Discrepancy, 85 Payments and National Income Accounting, 99

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CHAPTER 4 Governance of the Public Corporation: Key Consequences of Law, 115

Issues, 102
Corporate Governance Ownership and Control Pattern, 116
The Agency Problem, 103
Around the Private Benefits of Control, 118
Remedies for the Agency Problem, 105
World, 101 Board of Directors, 106
Capital Markets and Valuation, 120
Corporate Governance Reform, 120
Incentive Contracts, 106 Objectives of Reform, 121
international finance in practice: When Boards Are All in Political Dynamics, 121
the Family, 107
The Sarbanes-Oxley Act, 122
Concentrated Ownership, 107
The Cadbury Code
Accounting Transparency, 109 of Best Practice, 123
Debt, 109 The Dodd-Frank Act, 124
Shareholder Activism, 110 What Are Companies For?, 125
Overseas Stock Listings, 111 Summary, 126
Market for Corporate Control, 112 m i n i c a s e : Parmalat: Europe’s Enron, 129
Law and Corporate Governance, 112 m i n i c a s e : The Petrobras Scandal, 130

PART TWO  he Foreign Exchange Market, Exchange Rate

T
Determination, and Currency Derivatives
CHAPTER 5 Function and Structure of the FX Market, 136 Triangular Arbitrage, 151
The Market for international finance in practice: Electronification of Spot Foreign Exchange Market Microstructure, 154
the Foreign Exchange Market, 137
Foreign The Forward Market, 155
FX Market Participants, 140
Exchange, 135 Correspondent Banking Relationships, 141
Forward Rate Quotations, 155
Long and Short Forward Positions, 156
international finance in practice: Chinese Yuan’s Road to Forward Premium, 157
Internationalization, 142
Forward Cross-Exchange Rates, 158
The Spot Market, 144
Non-Deliverable Forward Contracts, 159
Spot Rate Quotations, 144
Swap Transactions, 159
Cross-Exchange Rate Quotations, 146
Exchange-Traded Currency Funds, 162
The Bid-Ask Spread, 148
Summary, 162
Spot FX Trading, 149
m i n i c a s e : Shrewsbury Herbal Products Ltd., 166
The Cross-Rate Trading Desk, 149

CHAPTER 6 Interest Rate Parity, 169 Fisher Effects, 187

International Parity Covered Interest Arbitrage, 172 Forecasting Exchange Rates, 189

Relationships and Interest Rate Parity and Exchange Rate Efficient Market Approach, 190
Determination, 175
Forecasting Foreign Currency Carry Trade, 176
Fundamental Approach, 191
Technical Approach, 192
Exchange Rates, 169 Reasons for Deviations from Interest Rate Parity, 177 Performance of the Forecasters, 194
Purchasing Power Parity, 180 Summary, 196
PPP Deviations and the Real Exchange Rate, 181 m i n i c a s e : Turkish Lira and Purchasing Power
international finance in practice: What the Big Mac Parity, 201
Index Says About Currencies, 182 a p p e n d i x 6 A : Purchasing Power Parity and
Evidence on Purchasing Power Parity, 184 Exchange Rate Determination, 204

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CHAPTER 7 Futures Contracts: Some Preliminaries, 206 American Option-Pricing Relationships, 217
Futures and Currency Futures Markets, 208 European Option-Pricing Relationships, 219

Options on Foreign Basic Currency Futures Relationships, 209 Binomial Option-Pricing Model, 221

Exchange, 205 Options Contracts: Some Preliminaries, 213 European Option-Pricing Formula, 223
Currency Options Markets, 213 Empirical Tests of Currency Options, 225
Currency Futures Options, 214 Summary, 226
Basic Option-Pricing Relationships at Expiration, 214 m i n i c a s e : The Options Speculators, 229

PART THREE Foreign Exchange Exposure and Management

CHAPTER 8 Three Types of Exposure, 233 Cross-Hedging Minor Currency Exposure, 245
Management Should the Firm Hedge?, 234 Hedging Contingent Exposure, 246

of Transaction Hedging Foreign Currency Receivables, 236 Hedging Recurrent Exposure with Swap
Contracts, 247
Exposure, 233 Forward Market Hedge, 236
Hedging through Invoice Currency, 248
Money Market Hedge, 239
Options Market Hedge, 240 Hedging via Lead and Lag, 248

Comparison of Hedging Strategies, 242 Exposure Netting, 249

Hedging Foreign Currency Payables, 243 What Risk Management Products Do Firms
Use?, 249
Forward Market Hedge, 243
Summary, 251
Money Market Hedge, 243
m i n i c a s e : Airbus’ Dollar Exposure, 257
Options Market Hedge, 244
c a s e : Richard May’s Options, 257
Comparison of Hedging Strategies, 244

CHAPTER 9 How to Measure Economic Exposure, 267 Diversification of the Market, 277
Management Measuring Asset Exposure, 267 R&D Efforts and Product Differentiation, 277

of Economic Hedging Asset Exposure, 269 i n t e r n at i o n a l f i n a n c e i n p r a c t i c e : Case Study:

How BMW Dealt with Exchange Rate Risk, 278
Exposure, 265 Operating Exposure: Definition, 270
Financial Hedging, 278
Illustration of Operating Exposure, 271
Determinants of Operating Exposure, 273 c a s e a p p l i c at i o n : Exchange Risk Management at
Merck, 279
Managing Operating Exposure, 275
Summary, 281
Selecting Low-Cost Production Sites, 276
m i n i c a s e : Economic Exposure of Albion Computers
Flexible Sourcing Policy, 276 PLC, 283

CHAPTER 10 Translation Methods, 285 c a s e a p p l i c at i o n : Consolidation of Accounts

According to FASB ASC 830: The Centralia
Management Current/Noncurrent Method, 286
Corporation, 292
of Translation Monetary/Nonmonetary Method, 286
Management of Translation Exposure, 296
Exposure, 285 Temporal Method, 286
Translation Exposure versus Transaction
Current Rate Method, 286 Exposure, 296
U.S. Generally Accepted Accounting Principles, 287 Hedging Translation Exposure, 297
FASB 8, 287 Balance Sheet Hedge, 297
FASB 52, 287 Derivatives Hedge, 298
FASB ASC 830, 289 Translation Exposure versus Operating
The Mechanics of the FASB ASC 830 Translation Exposure, 299
Process, 289 Summary, 299
Highly Inflationary Economies, 291 m i n i c a s e : Sundance Sporting Goods Inc., 301
International Accounting Standards, 291

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PART FOUR World Financial Markets and Institutions

CHAPTER 11 International Banking Services, 307 CME SOFR Futures Contracts, 321
International The World’s Largest Banks, 308 International Debt Crisis, 323

Banking and Money Reasons for International Banking, 309 The Problem, 323

Market, 307 Types of International Banking Offices, 309 Debt-for-Equity Swaps, 324
Correspondent Bank, 310 The Solution, 326
Representative Offices, 310 The Asian Crisis, 326
Foreign Branches, 310 Global Financial Crisis, 326
Subsidiary and Affiliate Banks, 311 The Credit Crunch, 327
Edge Act Banks, 311 Impact of the Financial Crisis, 329
Offshore Banking Centers, 311 Summary, 330
International Banking Facilities, 312 m i n i c a s e : Detroit Motors’ Latin American
Capital Adequacy Standards, 312 Expansion, 333

International Money Market, 315 a p p e n d i c e s 1 1 A : Eurocurrency Creation, 335

Eurocurrency Market, 315 a p p e n d i c e s 1 1 B : MBS, SIV, CDO, and CDS, 338

Eurocredits, 317 Mortgage-Backed Securities and Structured Investment

Vehicles, 338
Forward Rate Agreements, 318
Collateralized Debt Obligations, 338
Euronotes, 320
Credit Defaults Swaps, 338
Eurocommercial Paper, 321

CHAPTER 12 The World’s Bond Markets: A Statistical Floating-Rate Notes, 346

Perspective, 341
International Bond Equity-Related Bonds, 347
Foreign Bonds and Eurobonds, 341
Market, 341 Dual-Currency Bonds, 347
Currency Distribution, Nationality, and Type of International Bond Market Credit Ratings, 348
Issuer, 342
Eurobond Market Structure and Practices, 351
international finance in practice: Saudi Arabia Debuts on
Primary Market, 351
the International Bond Market, 343
Secondary Market, 352
Bearer Bonds and Registered Bonds, 343
Clearing Procedures, 352
National Security Regulations, 344
International Bond Market Indexes, 353
Security Regulations that Ease Bond Issuance, 345
Summary, 355
Global Bonds, 345
m i n i c a s e : Alpha Gen Technologies: Panda or Dim
Types of Instruments, 346
Sum Bonds?, 357
Straight Fixed-Rate Issues, 346
Euro-Medium-Term Notes, 346

CHAPTER 13 The World’s Equity Markets: A Statistical Global Registered Shares, 376
Perspective, 359
International Equity Empirical Findings on Cross-Listing and ADRs, 377
Market Capitalization, 359
Markets, 359 International Equity Market Benchmarks, 378
Market Liquidity, 362 iShares MSCI, 379
Market Concentration, 362 Factors Affecting International Equity Returns, 379
Market Structure, Trading Practices, and Costs, 362 Macroeconomic Factors, 381
Market Consolidations and Mergers, 366 Exchange Rates, 381
Trading in International Equities, 367 Industry Factors, 381
Cross-Listing of Shares, 367 Market Factors, 382
international finance in practice: Alibaba Sets IPO Summary, 383
Record with NYSE Debut, 371
m i n i c a s e : San Pico’s New Stock Exchange, 385
Yankee Stock Offerings, 371
American Depository Receipts, 372

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CHAPTER 14 Types of Swaps, 387 Equivalency of Currency Swap Debt Service

Obligations, 396
Interest Rate and international finance in practice: The World Bank’s First
Currency Swap, 388 Pricing the Basic Currency Swap, 397
Currency Swaps, 387
Size of the Swap Market, 388 A Basic Currency Swap Reconsidered, 397
The Swap Bank, 389 Variations of Basic Interest Rate and Currency
Swap Market Quotations, 389 Swaps, 399

Interest Rate Swaps, 391 Risks of Interest Rate and Currency Swaps, 400

Basic Interest Rate Swap, 391 Is the Swap Market Efficient?, 400

Pricing the Basic Interest Rate Swap, 393 Summary, 401

Currency Swaps, 393 m i n i c a s e : The Centralia Corporation’s Currency

Swap, 406
Basic Currency Swap, 393

CHAPTER 15 International Correlation Structure and Risk International Diversification through ADRs, 423
Diversification, 408
International Portfolio International Diversification through Hedge Funds, 424
Optimal International Portfolio Selection, 412
Investment, 407 International Diversification with Industry, Style, and
Effects of Changes in the Exchange Rate, 416 Factor Portfolios, 425
International Bond Investment, 419 Why Home Bias in Portfolio Holdings?, 427
International Diversification at Home, 421 Summary, 429
International Diversification through International m i n i c a s e : Solving for the Optimal International
Mutual Funds, 421 Portfolio, 434
International Diversification through Country a p p e n d i x 1 5 A : International Investment with
Funds, 421 Exchange Risk Hedging, 436
International Diversification through Exchange-Traded a p p e n d i x 1 5 B : Solving for the Optimal
Funds, 423 Portfolio, 438

PART FIVE Financial Management of the Multinational Firm

CHAPTER 16 Global Trends in FDI, 444 Vertical Integration, 451
Foreign Direct Why Do Firms Invest Overseas?, 448 Product Life Cycle, 452

­Investment and Trade Barriers, 448 Shareholder Diversification Services, 452

­Cross-Border Imperfect Labor Market, 448 Cross-Border Mergers and Acquisitions, 453
Intangible Assets, 449 Political Risk and FDI, 458
Acquisitions, 443
international finance in practice: Linear Sequence in Summary, 465
Manufacturing: Singer & Company, 450 m i n i c a s e : Enron versus Bombay Politicians, 467

CHAPTER 17 Cost of Capital, 471 Pricing-to-Market Phenomenon, 487

International Capital Cost of Capital in Segmented versus Integrated c a s e a p p l i c at i o n : Nestlé, 487
Markets, 474
Structure and the Asset Pricing under Foreign Ownership
Does the Cost of Capital Differ among Restrictions, 488
Cost of Capital, 471 Countries?, 475 The Financial Structure of Subsidiaries, 491
c a s e a p p l i c at i o n : Novo Industri, 477 Summary, 492
Cross-Border Listings of Stocks, 479 a p p e n d i x 1 7 A : , Pricing of Nontradable Assets:
Capital Asset Pricing under Cross-Listings, 484 Numerical Simulations, 497
The Effect of Foreign Equity Ownership
Restrictions, 486

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CHAPTER 18 Review of Domestic Capital Budgeting, 500 Sensitivity Analysis, 511

International Capital The Adjusted Present Value Model, 501 Purchasing Power Parity Assumption, 511

Budgeting, 499 Capital Budgeting from the Parent Firm’s Real Options, 511
Perspective, 503 Summary, 513
Generality of the APV Model, 505 m i n i c a s e 1 : Dorchester Ltd., 515
Estimating the Future Expected Exchange Rate, 506 m i n i c a s e 2 : Strik-it-Rich Gold Mining
c a s e a p p l i c at i o n : The Centralia Corporation, 506 Company, 516
Risk Adjustment in the Capital Budgeting m i n i c a s e 3 : Jesper Tech, 517
Analysis, 510

CHAPTER 19 The Management of International Cash Balances, 519 Cash Management Systems in Practice, 527
Multinational Cash c a s e a p p l i c at i o n : Teltrex’s Cash Management Summary, 528
System, 519
Management, 519 m i n i c a s e 1 : Efficient Funds Flow at Eastern
Bilateral Netting of Internal and External Net Cash Trading Company, 529
Flows, 524 m i n i c a s e 2 : Eastern Trading Company’s New
Reduction in Precautionary Cash Balances, 525 MBA, 529

CHAPTER 20 Global Trade Finance Market, 531 Export Credit Agencies Worldwide, 537
International Trade A Typical Foreign Trade Transaction, 532 Countertrade, 537

Finance, 531 Forfaiting, 535 Forms of Countertrade, 538

Government Assistance in Exporting, 535 international finance in practice: Guns and Sugar;
The Export-Import Bank and Affiliated The Defence Industry, 540
Organizations, 535 Some Generalizations about Countertrade, 541
international finance in practice: Export-Import Bank in Summary, 541
Limbo, 536 m i n i c a s e : American Machine Tools Inc., 543

CHAPTER 21 The Objectives of Taxation, 545 Tax Havens, 552

International Tax Tax Neutrality, 545 Controlled Foreign Corporation, 552

Environment and Tax Equity, 546 Transfer Pricing and Related Issues, 554

Transfer Pricing, 545 Types of Taxation, 546 c a s e a p p l i c at i o n : Mintel Products Transfer Pricing
Strategy, 554
Income Tax, 546
Withholding Tax, 548 international finance in practice: The Way Governments
Tax MNCs Is Long Past Due for a Change, 557
Value-Added Tax, 548
Miscellaneous Factors, 559
National Tax Environments, 550
Advance Pricing Agreement, 560
Worldwide Taxation, 550
Blocked Funds, 560
Territorial Taxation, 550
Summary, 561
Foreign Tax Credits, 551
m i n i c a s e 1 : Sigma Corp.’s Location Decision, 564
Organizational Structures, 551
m i n i c a s e 2 : Eastern Trading Company’s Optimal
Branch and Subsidiary Income, 551 Transfer Pricing Strategy, 564

Glossary, 565
Index, 573

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