International Finance Complete Summary (Jeff Madura and Roland Fox)

International Finance

Table of Contents
Chapter 1: Multinational Financial Management: An Overview............................................................2
Chapter 2: International Flow of Funds.................................................................................................6
Chapter 3: International Financial Markets.........................................................................................11
Chapter 4: Exchange Rate Determination............................................................................................16
Chapter 5: Currency Derivatives..........................................................................................................19
Chapter 6: Government Influence on Exchange Rates.........................................................................25
Chapter 7: International Arbitrage And Interest Rate Parity................................................................29
Chapter 8: Relationships among Inflation, Interest Rates and Exchange Rates...................................33
Chapter 9: Forecasting Exchange Rates...............................................................................................37
Chapter 10: Measuring Exposure to Exchange Rate Fluctuations........................................................40
Chapter 11: Managing Transaction Exposure......................................................................................44
Chapter 12: Managing Economic Exposure and Translation Exposure................................................48
Chapter 14: Multinational Capital Budgeting.......................................................................................50
Chapter 16: Country Risk Analysis.......................................................................................................52
Chapter 17: Multinational Capital Structure and Cost of Capital.........................................................55
Chapter 18: Long-Term Debt Financing...............................................................................................59
Chapter 20: Short-Term Financing.......................................................................................................62
Chapter 21: International Cash Management......................................................................................64




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,Chapter 1: Multinational Financial Management: An Overview
Objectives:

 Identify the management goal and organizational structure of the Multinational Corporation
 Describe the key theories that justify international business.
 Explain the common methods used to conduct international business.
 Provide a model for valuing the MNC.

Managers are expected to make decisions that will maximize the stock price.

How Business Disciplines Are Used to Manage the MNC:
Common finance decisions include:
 Whether to discontinue operations in a particular country
 Whether to pursue new business in a particular country
 Whether to expand business in a particular country
 How to finance expansion in a particular country

Finance decisions are influenced by other business discipline functions:
 Marketing
 Management
 Accounting and information systems

Agency Problems: The conflict of goals between managers and shareholders
Agency Costs: Cost of ensuring that managers maximize shareholder wealth.

Costs are normally higher for MNCs than for purely domestic firms for several reasons:
 Monitoring managers of distant subsidiaries in foreign countries is more difficult.
 Foreign subsidiary managers raised in different cultures may not follow uniform goals.
 Sheer size of larger MNCs can create large agency problems.
 Some non-U.S. managers tend to downplay the short-term effects of decisions.

 Parent control of agency problems
 Parent should clearly communicate the goals for each subsidiary to ensure managers
focus on maximizing the value of the subsidiary.
 Corporate control of agency problems
 Entire management of the MNC must be focused on maximizing shareholder wealth.
 Sarbanes-Oxley Act (SOX)
 Ensures a more transparent process for managers to report on the productivity and
financial condition of their firm.

 How SOX Improved Corporate Governance of MNCs
 Establishing a centralized database of information
 Ensuring that all data are reported consistently among subsidiaries
 Implementing a system that automatically checks for unusual discrepancies relative
to norms
 Speeding the process by which all departments and subsidiaries have access to all
the data they need
 Making executives more accountable for financial statements




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, Management Structure of MNC
 Centralized
 Allows managers of the parent to control foreign subsidiaries and therefore reduce
the power of subsidiary managers.
 Decentralized
 Gives more control to subsidiary managers who are closer to the subsidiary’s
operation and environment.
 How the Internet Facilitates Management Control
 Makes it easier for parent to monitor the actions and performance of its foreign
subsidiaries.

Why MNCs Pursue International Business:
Theory of Comparative Advantage: Specialization increases production efficiency.
Imperfect Markets Theory: Factors of production are somewhat immobile, providing incentive to
seek out foreign opportunities.
Product Cycle Theory: As a firm matures, it recognizes opportunities outside its domestic market.
(Exhibit 1.2)




1.2

How Firms Engage in International Business
International Trade
Licensing
Franchising
Joint Ventures
Acquisitions of Existing Operations
Establishment of New Foreign Subsidiaries

International Trade
 Relatively conservative approach that can be used by firms to:
o penetrate markets (by exporting).
o obtain supplies at a low cost (by importing).
 Minimal risk — no capital at risk
o The internet facilitates international trade by allowing firms to advertise their
products and accept orders on their websites.
Licensing
 Obligates a firm to provide its technology (copyrights, patents, trademarks, or trade names)
in exchange for fees or some other specified benefits.
 Allows firms to use their technology in foreign markets without a major investment and
without transportation costs that result from exporting.

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