Multinational Finance: Evaluating the Opportunities, Costs, and Risks of Multinational Operations, 6th Edition

Kirt C. Butler



Deep coverage and rigorous examination of international corporate finance

Multinational Finance offers an advanced exploration of international corporate finance concepts and operations. Despite its status as one of the most rigorous texts on the topic, this book remains accessible and readable without sacrificing depth of coverage. Sidebars, key terms, essays, conceptual questions, and problems with solutions help aid in the learning process, while suggested readings and PowerPoint handouts reinforce the material and offer avenues for further exploration. This new sixth edition includes Excel templates that allow students to use real-world tools in a learning environment, and the modular structure facilitates course customization to individual objectives, interests, and preparatory level. The emphasis is on the basics of financial management, but coverage includes unique chapters on treasury management, asset pricing, hedging, options, and portfolio management in addition to traditional finance topics.

International finance is a diverse field with myriad specialties and a vast array of possible interests. This book allows students to view the field through the lens of a financial manager with investment or financial options in more than one country to give them a practical feel for real-world application.

• Understand the nature and operations of international corporate finance
• Evaluate opportunities, costs, and risks of multinational operations
• See beyond the numbers and terminology to the general principles at work
• Learn the markets, currencies, taxation, capital structure, governance, and more

Comprehensive, adaptable, and rigorously focused, this book gives students a solid foundation in international corporate finance, as well as a sound understanding of the tools and mechanics of the field. Designed for MBA and advanced undergraduate courses, Multinational Finance provides the deep coverage so essential to a solid education in finance.

Table of Contents

Preface

Acknowledgments

About the Author

Part One: The International Financial Environment

Chapter 1: An Introduction to Multinational Finance
1.1 The Goals of the Multinational Corporation
1.2 The Challenges of Multinational Operations
1.3 The Opportunities of Multinational Operations
1.4 Financial Management of the Multinational CorporationCORPORATION
1.5 Summary

Chapter 2: World Trade and the International Monetary System
2.1 Integration of the World’s Markets
2.2 Balance-of-Payments Statistics
2.3 Exchange Rate Systems
2.4 A Brief History of the International Monetary System
2.5 Summary

Chapter 3: Foreign Exchange and Eurocurrency Markets
3.1 Characteristics of Financial Markets
3.2 The Eurocurrency Market
3.3 The Foreign Exchange Market
3.4 Foreign Exchange Rates and Quotations
3.5 Hedging with Currency Forwards
3.6 The Empirical Behavior of Exchange Rates
3.7 Summary

Chapter 4: The International Parity Conditions and Their Consequences
4.1 The Law of One Price
4.2 Exchange Rate Equilibrium
4.3 Covered Interest Arbitrage and Interest Rate Parity
4.4 Less Reliable International Parity Conditions
4.5 The Real Exchange Rate
4.6 Exchange Rate Forecasting
4.7 Summary
Appendix 4A: Continuous Compounding

Part Two: Derivative Securities for Financial Risk Management

Chapter 5: Currency Futures and Futures Markets
5.1 The Evolution of Futures Markets
5.2 Futures Contracts
5.3 Forward Versus Futures Market Hedges
5.4 Hedging with Currency Futures
5.5 Summary

Chapter 6: Currency Options and Options Markets
6.1 What Is an Option?
6.2 Option Payoff Profiles
6.3 Currency Option Values Prior to Expiration
6.4 Hedging with Currency Options
6.5 Exchange Rate Volatility Revisited
6.6 Summary
Appendix 6A: Currency Option Valuation

Chapter 7: Currency Swaps and Swaps Markets
7.1 The Growth of the Swaps Market
7.2 Swaps as Portfolios of Forward Contracts
7.3 Currency Swaps
7.4 Interest Rate Swaps
7.5 Other Types of Swaps
7.6 Hedging the Swap Bank’s Exposure to Financial Price Risk
7.7 Summary

Part Three: Managing the Risks of Multinational Operations

Chapter 8: Multinational Treasury Management
8.1 Determining Financial Goals and Strategies
8.2 Managing International Trade
8.3 Payment Methods and Financing for International Trade
8.4 Managing Cash Flows
8.5 Managing Exposures to Currency Risk
8.6 Summary
Appendix 8A: The Rationale for Hedging Currency Risk

Chapter 9: Managing Transaction Exposure to Currency Risk
9.1 Transaction Exposure to Currency Risk
9.2 Managing Transaction Exposures Internally
9.3 Managing Transaction Exposures in the Financial Markets
9.4 Treasury Management in Practice
9.5 Summary

Chapter 10: Managing Operating Exposure to Currency Risk
10.1 Operating Exposures to Currency Risk
10.2 The Exposure of Shareholders’ Equity
10.3 Managing Operating Exposures in the Financial Markets
10.4 Managing Operating Exposures Through Operations
10.5 Pricing Strategy and the Competitive Environment
10.6 Summary

Chapter 11: Managing Translation Exposure and Accounting for Financial Transactions
11.1 Financial Accounting and Reporting Standards
11.2 The Current Rate Method of IAS 21 and ASC 830–30
11.3 Corporate Hedging of Translation Exposure
11.4 Accounting for Financial Market Instruments
11.5 Accounting, Disclosure, and Corporate Hedging Activities
11.6 Summary

Part Four: Valuation and the Structure of Multinational Operations

Chapter 12: Foreign Market Entry and Country Risk Management
12.1 Strategic Entry into International Markets
12.2 Country Risk Assessment
12.3 Strategies for Managing Country Risk
12.4 Protecting the Multinational’s Competitive Advantages
12.5 Summary

Chapter 13: Multinational Capital Budgeting
13.1 The Algebra of Multinational Capital Budgeting
13.2 An Example: Wendy’s Restaurant in Neverland
13.3 International Parity Disequilibria
13.4 Special Circumstances in Cross-Border Investments
13.5 Summary

Chapter 14: Multinational Capital Structure and Cost of Capital
14.1 Capital Structure and the Cost of Capital
14.2 Valuation of a Foreign Project with the WACC
14.3 The Cost of Capital on Multinational Operations
14.4 Sources of Funds for Multinational Operations
14.5 The International Evidence of Capital Structure
14.6 Summary

Chapter 15: Taxes and Multinational Corporate Strategy
15.1 The Objectives of National Tax Policy
15.2 Types of Taxation
15.3 Taxes and Organization Form
15.4 U.S. Taxation of Foreign-Source Income
15.5 Transfer Pricing and Tax Planning
15.6 Taxes and the Location of Foreign Assets and Liabilities
15.7 Summary

Chapter 16: Real Options and Cross-Border Investment Strategy
16.1 Real Options and the Theory and Practice of Investment
16.2 Market Entry as a Simple Real Option
16.3 Uncertainty and the Value of the Option to Invest
16.4 Market Entry as a Compound Real Option
16.5 The Real Option Approach as Complement to NPV
16.6 Summary

Chapter 17: Corporate Governance and the International Market for Corporate Control
17.1 Corporate Governance
17.2 The International Market for Corporate Control
17.3 The International Evidence on Mergers and Acquisitions
17.4 Summary

Part Five: International Portfolio Investment and Asset Pricing

Chapter 18: International Capital Markets
18.1 Domestic and International Capital Markets
18.2 International Investment Vehicles
18.3 Cross-Border Financial Statement Analysis
18.4 Summary

Chapter 19: International Portfolio Diversification
19.1 The Algebra of Portfolio Diversification
19.2 Returns on Foreign Investments
19.3 The Benefits of International Portfolio Diversification
19.4 Home Bias
19.5 Summary

Chapter 20: International Asset Pricing
20.1 The International Capital Asset Pricing Model (IAPM)
20.2 Factor Models of Expected and Required Return
20.3 Contemporary Asset Pricing Models
20.4 Summary

Appendix: Useful Rules and Formulas

Glossary

Index




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