international finance.Putting Theory Into Practice -Piet Sercu(国际金融指定用书)
Contents
I Introduction and Motivation for International Finance 1
1 Why does the Existence of Borders Matter for Finance? 3
1.1 Key Issues in International Business Finance . . . . . . . . . . . . . . . . . 4
1.1.1 Exchange-rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.1.2 Segmentation of the Consumer-good Markets . . . . . . . . . . . . 6
1.1.3 Credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1.4 Political risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.1.5 Capital-Market Segmentation Issues, including Aspects of Corporate
Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.1.6 International Tax Issues . . . . . . . . . . . . . . . . . . . . . . . . 10
1.2 What is on the International CFO's desk? . . . . . . . . . . . . . . . . . . 11
1.2.1 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.2.2 Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.2.3 Hedging and, more Generally, Risk Management . . . . . . . . . . 12
1.2.4 Interrelations Between Risk Management, Funding and Valuation . 12
1.3 Overview of this Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.3.1 Part I: Motivation and Background Matter . . . . . . . . . . . . . 13
1.3.2 Part II: International Financial Markets . . . . . . . . . . . . . . . 13
1.3.3 Part III: Exchange Risk, Exposure, and Risk Management . . . . . 14
1.3.4 Part IV: Long-term Financing and Investment Decisions . . . . . . 14
2 International Finance: Institutional Background 17
2.1 Money and Banking: A Brief Review . . . . . . . . . . . . . . . . . . . . . 17
2.1.1 The Roles of Money . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1.2 How Money Is Created . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 The International Payment Mechanism . . . . . . . . . . . . . . . . . . . . 30
2.2.1 Some Basic Principles . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2.2 Domestic Interbank Transfers: Real-time Gross Settlement vs. Periodic
Netting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.2.3 International payments . . . . . . . . . . . . . . . . . . . . . . . . 34
2.3 International (\Euro") Money and Bond Markets . . . . . . . . . . . . . . 35
2.4 What is the Balance of Payments? . . . . . . . . . . . . . . . . . . . . . . 37
2.4.1 Denition & Principles Underlying the Balance of Payments . . . 37
2.4.2 Some Nitty-gritty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.4.3 Statistical Discrepancy/Errors and Omissions . . . . . . . . . . . . 43
2.4.4 Where do Current Account Surpluses or Decits Come From? . . . 44
2.4.5 The Net International Investment Account . . . . . . . . . . . . . 45
2.5 Exchange-rate Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.5.1 Fixed Exchange Rates Relative to Gold . . . . . . . . . . . . . . . 48
2.5.2 Fixed Exchange Rates vis-a-vis a Single Currency . . . . . . . . . 49
2.5.3 Fixed Exchange Rates Relative to a Basket . . . . . . . . . . . . . 53
2.5.4 The 1979{1993 Exchange Rate Mechanism (ERM) of the European
Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.5.5 Other Exchange Rate Systems . . . . . . . . . . . . . . . . . . . . 60
2.6 Test Your Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.6.1 Quiz Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.6.2 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
II Currency Markets 67
3 Spot Markets for Foreign Currency 73
3.1 Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
3.1.1 Denition of Exchange Rates . . . . . . . . . . . . . . . . . . . . . 74
3.1.2 Our Convention: Home Currency per Unit of Foreign Currency . . 75
3.1.3 The Indirect Quoting Convention . . . . . . . . . . . . . . . . . . . 76
3.1.4 Bid and Ask Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
3.1.5 Primary rates v cross rates . . . . . . . . . . . . . . . . . . . . . . 79
3.1.6 Inverting Exchange Rates in the Presence of Spreads . . . . . . . . 81
3.2 Major Markets for Foreign Exchange . . . . . . . . . . . . . . . . . . . . . 82
3.2.1 How Exchange Markets Work . . . . . . . . . . . . . . . . . . . . . 82
3.2.2 Markets by Location and by Currency . . . . . . . . . . . . . . . . 89
3.2.3 Markets by Delivery Date . . . . . . . . . . . . . . . . . . . . . . . 90
3.3 The Law of One Price for Spot Exchange Quotes . . . . . . . . . . . . . . 92
3.3.1 Arbitrage across Competing Market Makers . . . . . . . . . . . . . 95
3.3.2 Shopping Around across Competing Market Makers . . . . . . . . 95
3.3.3 Triangular Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.4 Translating FC Figures: Nominal rates, PPP rates, and Deviations from PPP 102
3.4.1 The PPP rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
3.4.2 Commodity Price Parity . . . . . . . . . . . . . . . . . . . . . . . . 107
3.4.3 The Real Exchange Rate and (Deviations from) Absolute PPP . . 108
3.4.4 The Change in the Real Rate and (deviations from) Relative PPP 109
3.5 CFO's Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.6 TekNotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
3.7 Test Your Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
3.7.1 Quiz Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
3.7.2 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
4 Understanding Forward Exchange Rates for Currency 123
4.1 Introduction to Forward Contracts . . . . . . . . . . . . . . . . . . . . . . 123
4.2 The Relation Between Exchange and Money Markets . . . . . . . . . . . . 127
4.3 The Law of One Price and Covered Interest Parity . . . . . . . . . . . . . 132
4.3.1 Arbitrage and Covered Interest Parity . . . . . . . . . . . . . . . . 133
4.3.2 Shopping Around (The Pointlessness of |) . . . . . . . . . . . . . 135
4.3.3 Unfrequently Asked Questions on CIP . . . . . . . . . . . . . . . . 135
4.4 The Market Value of an Outstanding Forward Contract . . . . . . . . . . . 140
4.4.1 A general formula . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
4.4.2 Corollary 1: The Value of a Forward Contract at Expiration . . . 142
4.4.3 Corollary 2: The Value of a Forward Contract at Inception . . . . 144
4.4.4 Corollary 3: The Forward Rate and the Risk-Adjusted Expected
Future Spot Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
4.4.5 Implications for Spot Values; the Role of Interest Rates . . . . . . 147
4.4.6 Implications for the Valuation of Foreign-Currency Assets or Liabilities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
4.4.7 Implication for the Relevance of Hedging . . . . . . . . . . . . . . 150
4.5 CFO's Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
4.6 Appendix: Interest Rates, Returns, and Bond Yields . . . . . . . . . . . . 153
4.6.1 Links Between Interest Rates and Eective Returns . . . . . . . . 153
4.6.2 Common Pitfalls in Computing Eective Returns . . . . . . . . . . 156
4.7 Appendix: The Forward Forward and the Forward Rate Agreement . . . . 158
4.7.1 Forward Contracts on Interest Rates . . . . . . . . . . . . . . . . 158
4.7.2 Why FRAs Exist . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
4.7.3 The Valuation of FFs (or FRAs) . . . . . . . . . . . . . . . . . . . 159
4.7.4 Forward Interest Rates as the Core of the Term Structure(s) . . . 163
4.8 Test Your Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
4.8.1 Quiz Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
4.8.2 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
5 Using Forwards for International Financial Management 171
5.1 Practical Aspects of Forwards in Real-world Markets . . . . . . . . . . . . 171
5.1.1 Quoting Forward Rates with Bid-Ask Spreads . . . . . . . . . . . . 171
5.1.2 Provisions for Default . . . . . . . . . . . . . . . . . . . . . . . . . 173
5.2 Using Forward Contracts (1): Arbitrage . . . . . . . . . . . . . . . . . . . 176
5.2.1 Synthetic Forward Rates . . . . . . . . . . . . . . . . . . . . . . . . 177
5.2.2 Implications of Arbitrage and Shopping-around . . . . . . . . . . . 177
5.2.3 Back to the Second Law . . . . . . . . . . . . . . . . . . . . . . . . 178
5.3 Using Forward Contracts (2): Hedging Contractual Exposure . . . . . . . 179
5.3.1 Measuring Exposure from Transactions on a Particular Date . . . 180
5.3.2 Hedging Contractual Exposure from Transactions on a Particular
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
5.4 Using Forward Contracts (3): Speculation . . . . . . . . . . . . . . . . . . 188
5.4.1 Speculating on the Future Spot Rate . . . . . . . . . . . . . . . . . 188
5.4.2 Speculating on the Forward Rate or on the Swap Rate . . . . . . . 190
5.5 Using Forward Contracts (4): Minimizing the Impact of Market Imperfections
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
5.5.1 Shopping Around to Minimize Transaction Costs . . . . . . . . . . 192
5.5.2 Swapping for Tax Reasons . . . . . . . . . . . . . . . . . . . . . . . 196
5.5.3 Swapping for Information-cost Reasons . . . . . . . . . . . . . . . 197
5.5.4 Swapping for Legal Reasons: Replicating Back-to-Back Loans . . . 199
5.6 Using the Forward Rate in Commercial, Financial and Accounting Decisions 207
5.6.1 The Forward Rate as the Intelligent Accountant's Guide . . . . . . 207
5.6.2 The Forward Rate as the Intelligent Salesperson's Guide . . . . . . 209
5.6.3 The Forward Rate as the Intelligent CFO's Guide . . . . . . . . . . 209
5.7 CFO's Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
5.7.1 Key Ideas for Arbitrageurs, Hedgers, and Speculators . . . . . . . 211
5.7.2 The Economic Roles of Arbitrageurs, Hedgers, and Speculators . . 213
5.8 Test Your Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
5.8.1 Quiz Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
5.8.2 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
6 The Market for Currency Futures 219
6.1 Handling Default Risk in Forward Markets: Old & New Tricks . . . . . . . 220
6.1.1 Default Risk and Illiquidity of Forward Contracts . . . . . . . . . . 220
6.1.2 Standard Ways of Reducing Default Risk in the Forward Market . 221
6.1.3 Reducing Default Risk by Variable Collateral or Periodic Recontracting
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222


21.4.2 Management of Transfer Risk after the Imposition of Capital Controls 811
21.4.3 How to Account for Transfer Risk in NPV Calculations . . . . . . 812
21.4.4 Other Political Risks . . . . . . . . . . . . . . . . . . . . . . . . . . 813
21.5 Issue #4: Make sure to Include All Incremental Cash Flows . . . . . . . . 814
21.6 Other Things to do in Spreadsheets While you're There . . . . . . . . . . . 815
21.7 CFO's summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 817
21.8 TekNotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820
21.9 Test Your Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823
21.9.1 Quiz Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823
21.9.2 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825
22 Negotiating a Joint-Venture Contract: the NPV Perspective 827
22.1 The Three-Step Approach to Joint-Venture Capital Budgeting . . . . . . . 829
22.2 A Framework for Prot Sharing . . . . . . . . . . . . . . . . . . . . . . . . 831
22.3 Case I: A Simple Pro-Rata Joint Branch with Neutral Taxes and Integrated
Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 832
22.4 Case II: Valuing A Pro-Rata Joint Branch When Taxes Dier . . . . . . . 834
22.5 Case III: An Unbundled Joint Venture with a License Contract or a Management
Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 837
22.5.1 Possible Motivations for a License Contract . . . . . . . . . . . . . 838
22.5.2 The Equal-Gains Principle with a License Contract . . . . . . . . . 840
22.5.3 Finding Fair Equity Share when Terms of License Contract Are
Given . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 842
22.5.4 Finding the Fair Royalty for a Given Equity Share . . . . . . . . . 843
22.6 CFO's Summary & Extensions . . . . . . . . . . . . . . . . . . . . . . . . . 844
22.7 Test Your Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 849
22.7.1 Quiz Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 849
22.7.2 Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850