Fundamentals of

Multinational

Finance

Sixth Edition

MICHAEL H. MOFFETT
Thunderbird School of Global Management
at Arizona State University

ARTHUR I. STONEHILL
Oregon State University and University of Hawaii at Manoa

DAVID K. EITEMAN
University of California, Los Angeles

Pearson
New York, NY
 Contents

PART 1 Global Financial Environment 1

Chapter 1 Multinational Financial Management: Opportunities and Challenges 2

1.1 Financial Globalization and Risk 3
1.2 The Global Financial Marketplace 4
GLOBAL FINANCE IN PRACTICE 1.1 The Rocketing Swiss Franc 8
1.3 The Theory of Comparative Advantage 11
1.4 What Is Different About International Financial Management? 12
GLOBAL FINANCE IN PRACTICE 1.2 The Peso, Dollar, Yen—and Pokemon Go 13
1.5 The Globalization Process 15
GLOBAL FINANCE IN PRACTICE 1.3 Corporate Responsibility and Corporate Sustainability 19
Summary Points 19
MINI-CASE: Crowdfunding Kenya 20
Questions 23
Problems 23
Internet Exercises 27

Chapter 2 The International Monetary System 28

2.1 History of the International Monetary System 28
GLOBAL FINANCE IN PRACTICE 2.1 Hammering Out an Agreement at Bretten Woods 31
GLOBAL FINANCE IN PRACTICE 2.2 SDR Expanded to Include Chinese Renminbi 32
2.2 Fixed Versus Flexible Exchange Rates 38
2.3 The Impossible Trinity 38
2.4 A Single Currency for Europe:The Euro 40
2.5 Emerging Markets and Regime Choices 42
GLOBAL FINANCE IN PRACTICE 2.3 Nigeria Undermines Currency Exchange Innovation 46
Summary Points 50
MINI-CASE: Iceland—A Small Country in a Global Crisis 51
Questions 56
Problems 56
Internet Exercises 58

Chapter 3 The Balance of Payments 60

3.1 Fundamentals of BOP Accounting 61
3.2 The Accounts of the Balance of Payments 63
GLOBAL FINANCE IN PRACTICE 3.1 The Global Current Account Surplus 65
GLOBAL FINANCE IN PRACTICE 3.2 A Country's Net International Investment Position (NIIP) 68
3.3 BOP Impacts on Key Macroeconomic Rates 71
3.4 Trade Balances and Exchange Rates 72
3.5 Capital Mobility 75
Summary Points 80
MINI-CASE: Global Remittances 81
Questions 85
Problems 86
Internet Exercises 89

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Chapter 4 Financial Goals and Corporate Governance 90

4.1 Ownership 90
GLOBAL FINANCE IN PRACTICE 4.1 Why Did Apple Start Paying a Dividend and Raising Debt? 97
4.2 Publicly Traded Versus Privately Held: The Global Shift 99
4.3 Corporate Governance 102
GLOBAL FINANCE IN PRACTICE 4.2 Why Did Dell Go Private? 102
GLOBAL FINANCE IN PRACTICE 4.3 Italian Cross-Shareholding and the End of the Salatto Buono 107
GLOBAL FINANCE IN PRACTICE 4.4 Is Good Governance Good Business Globally? 109
Summary Points 110
MINI-CASE: Volkswagens Defeat Devices and Stakeholder Control 111
Questions 115
Problems 116
Internet Exercises 119

PART 2 Foreign Exchange Theory and Markets 121

Chapter 5 The Foreign Exchange Market 122

5.1 Functions of the Foreign Exchange Market 122
5.2 Structure of the Foreign Exchange Market 123
GLOBAL FINANCE IN PRACTICE 5.1 Bankhaus Herstatt and Herstatt Risk 124
GLOBAL FINANCE IN PRACTICE 5.2 Malware, Bangladesh Bank, and Banker's Hours—2016 130
5.3 Transactions in the Foreign Exchange Market 131
GLOBAL FINANCE IN PRACTICE 5.3 The FX Global Code of Conduct 2016 131
5.4 Foreign Exchange Rates and Quotations 136
Summary Points 144
MINI-CASE: The Venezuelan Bolivar Black Market 144
Questions 147
Problems 148
Internet Exercises 151

Chapter 6 International Parity Conditions 152

6.1 Prices and Exchange Rates 153
GLOBAL FINANCE IN PRACTICE 6.1 The Immiseration of the North Korean People—The "Revaluation"
of the North Korean Won 155
6.2 Interest Rates and Exchange Rates 159
GLOBAL FINANCE IN PRACTICE 6.2 Was 2016 the Year of Textbook Failure? 161
6.3 Forward Rate as an Unbiased Predictorof the Future Spot Rate 169
GLOBAL FINANCE IN PRACTICE 6.3 Hungarian Mortgages 170
6.4 Prices, Interest Rates, and Exchange Rates in Equilibrium 171
Summary Points 173
MINI-CASE: Mrs. Watanabe and the Japanese Yen Carry Trade 173
Questions 176
Problems 177
Internet Exercises 181
Appendix: An Algebraic Primer to International Parity Conditions 183

Chapter 7 Foreign Currency Derivatives: Futures and Options 186

7.1 Foreign Currency Futures 187
7.2 Currency Options 189
GLOBAL FINANCE IN PRACTICE 7.1 Euro-Renminbi (EUR-RMB) Options Growth 191
GLOBAL FINANCE IN PRACTICE 7.2 The New Zealand Kiwi, Key, and Krieger 197
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7.3 Option Pricing and Valuation 197

Summary Points 202
MINI-CASE: KiKos and the South Korean Won 203
Questions 205
Problems 206
Internet Exercises 208

Chapter 8 Internst Rate Risk and Swaps 210

8.1 Interest Rate Foundations 210
GLOBAL FINANCE IN PRACTICE 8.1 The Trouble with LIB0R 211
GLOBAL FINANCE IN PRACTICE 8.2 European Sovereign Debt 216
8.2 Interest Rate Risk 217
8.3 Interest Rate Futures and FRAs 220
8.4 Interest Rate Swaps 222
GLOBAL FINANCE IN PRACTICE 8.3 Procter & Gamble and Bankers Trust 230
Summary Points 231
MINI-CASE: Argentina and the Vulture Funds 231
Questions 236
Problems 236
Internet Exercises 240

Chapter 9 Foreign Exchange Rate Determination and Intervention 241

9.1 Exchange Rate Determination:The Theoretical Thread 242
GLOBAL FINANCE IN PRACTICE 9.1 Technical Analysis of the JPY/USD Rate (Jan 2011 -Feb 2014) 245
9.2 Currency Market Intervention 246
GLOBAL FINANCE IN PRACTICE 9.2 Rules of Thumb for Effective Intervention 249
9.3 Disequilibrium: Exchange Rates in Emerging Markets 251
GLOBAL FINANCE IN PRACTICE 9.3 The European Monetary System's "Snake in a Tunnel" 252
GLOBAL FINANCE IN PRACTICE 9.4 Was George Soros to Blame for the Asian Crlsis? 255
9.4 Forecasting in Practice 257
Summary Points 261
MINI-CASE: Russian Ruble Roulette 262
Questions 264
Problems 265
Internet Exercises 269

PART 3 Foreign Exchange Exposure 271

Chapter 10 Transaction Exposure 272

10.1 Types of Foreign Exchange Exposure 272
10.2 Why Hedge? 273
GLOBAL FINANCE IN PRACTICE 10.1 Hedging and the German Automobile Industry 276
10.3 Transaction Exposure 276
10.4 Transaction Exposure Management: The Case of Ganado 278
GLOBAL FINANCE IN PRACTICE 10.2 Currency Losses at Greenpeace 281
GLOBAL FINANCE IN PRACTICE 10.3 Forward Rates and the Cost of Hedging 286
10.5 Risk Management in Practice 287
GLOBAL FINANCE IN PRACTICE 10.4 The Credit Crisis and Option Volatilities in 2009 288
Summary Points 289
MINI-CASE: China Noah Corporation 289
Questions 295
Problems 295
Internet Exercises 300
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Chapter 11 Translation Exposure 301

11.1 Overview of Translation 301
11.2 Translation Methods 304
11.3 Ganado Corporation's Translation Exposure 308
GLOBAL FINANCE IN PRACTICE 11.1 When the Hedge Becomes the Problem 309
GLOBAL FINANCE IN PRACTICE 11.2 Foreign Subsidiary Valuation 312
11.4 Managing Translation Exposure 312
GLOBAL FINANCE IN PRACTICE 11.3 Foreign Currency Hedge Accounting 314
Summary Points 314
MINI-CASE: McDonald's, Hoover Hedges, and Cross-Currency Swaps 315
Questions 317
Problems 318
Internet Exercises 319

Chapter 12 Operating Exposure 321

12.1 A Multinational^ Operating Exposure 321
GLOBAL FINANCE IN PRACTICE 12.1 Expecting the Devaluation—Ford and Venezuela 324
12.2 Measuring Operating Exposure: Ganado Germany 326
12.3 Strategie Management of Operating Exposure 330
GLOBAL FINANCE IN PRACTICE 12.2 Do Fixed Exchange Rates Increase Corporate Currency Risk
in Emerging Markets? 331
GLOBAL FINANCE IN PRACTICE 12.3 The United Kingdom and Europe: Trans-Channel Currency Shifts 332
12.4 Proactive Management of Operating Exposure 333
GLOBAL FINANCE IN PRACTICE 12.4 Hedging Hogs: Risk Sharing at Harley-Davidson 336
Summary Points 339
MINI-CASE: Brexit and Rolls-Royce 339
Questions 343
Problems 344
Internet Exercises 347

PART 4 Financing the Global Firm 349

Chapter 13 Global Cost and Availability of Capital 350

13.1 Financial Globalization and Strategy 350
GLOBAL FINANCE IN PRACTICE 13.1 Ferrari's IP0—The Potential of the Prancing Horse 352
13.2 International Portfolio Theory and Diversifikation 354
13.3 The Role of International Portfolio Investors 360
GLOBAL FINANCE IN PRACTICE 13.2 Emerging Market Growth Companies—IPOs and Corporate
Governance 361
GLOBAL FINANCE IN PRACTICE 13.3 Culture and Investment Behavior 364
13.4 The Cost of Capital for MNEs Compared to Domestic Firms 364
Summary Points 368
MINI-CASE: Novo Industri A/S (Novo) 368
Questions 372
Problems 372
Internet Exercises 376

Chapter 14 Funding the Multinational Firm 377

14.1 Designing a Strategy to Source Capital Globally 378
14.2 Optimal Financial Structure 379
14.3 Raising Equity Globally 382
14.4 Depositary Receipts 385
GLOBAL FINANCE IN PRACTICE 14.1 The Planned Directed Equity Issue of PA Resources of Sweden 385
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14.5 Private Placement 390

14.6 Raising Debt Globally 392
14.7 Financing Foreign Subsidiaries 393
GLOBAL FINANCE IN PRACTICE 14.2 Islamic Finance 394
GLOBAL FINANCE IN PRACTICE 14.3 Financial Structure of a Russian Joint Venture 398
Summary Points 399
MINI-CASE: Petrobräs of Brazil and the Cost of Capital 399
Questions 402
Problems 403
Internet Exercises 406

Chapter 15 Multinational Tax Management 407

GLOBAL FINANCE IN PRACTICE 15.1 The Impact of Tax on Business Decisions 408
15.1 Tax Principles and Practices 408
GLOBAL FINANCE IN PRACTICE 15.2 The Panama Papers 415
GLOBAL FINANCE IN PRACTICE 15.3 Offshore Profits and Dividend Repatriation 417
15.3 Google: An Illustrative Gase of Profit Repositioning 425
GLOBAL FINANCE IN PRACTICE 15.4 Hewlett-Packard's Offshore Cash and Staggered Loan Program 426
15.4 Global Tax Competitiveness 427
Summary Points 429
MINI-CASE: Apple's Global iTax Strategy 430
Questions 434
Problems 435
Internet Exercises 437

Chapter 16 International Ttade Finance 438

16.1 The Trade Relationship 438
16.2 Key Documents 443
GLOBAL FINANCE IN PRACTICE 16.1 Florence—The Birthplace of Trade Financing 445
16.3 Government Programs to Help Finance Exports 449
16.4 Trade Financing Alternatives 450
GLOBAL FINANCE IN PRACTICE 16.2 Factoring in Practice 452
16.5 Forfaiting 453
Summary Points 455
MINI-CASE: Crosswell International and Brazil 456
Questions 459
Problems 459
Internet Exercises 461

PART 5 Foreign Investments and Operations 463

Chapter 17 Foreign Direct Investment and Political Risk 464

17.1 The Foreign Direct Investment Decision 464
17.2 Structural Choices for Foreign Market Entry 465
GLOBAL FINANCE IN PRACTICE 17.1 Drugs, Public Policy, and the Death Penalty 471
17.3 Political Risk: Definition and Classification 471
17.4 Financial Impacts of Political Risk 472
17.5 Political Risk Mitigation 476
GLOBAL FINANCE IN PRACTICE 17.2 Selective Examples of Expropriation in the Global Oil and Gas Industry 477
GLOBAL FINANCE IN PRACTICE 17.3 Structuring Incentives in Foreign Direct Investments 482
Summary Points 482
MINI-CASE: Tengiz—The Definition of Political Risk 483
Questions 486
Internet Exercises 487
Contents

Chapter 18 Multinational Capital Budgetlng and Cross-Border Acquisltions 489

18.1 Complexities of Budgeting for a Foreign Project 490
18.2 Illustrative Case: Cemex Enters Indonesia 493
GLOBAL FINANCE IN PRACTICE 18.1 Venezuelan Currency and Capital Controls Force Devaluation of Business 503
18.3 Real Option Analysis 505
18.4 Project Financing 506
18.5 Cross-Border Mergers and Acquisitions 507
GLOBAL FINANCE IN PRACTICE 18.2 Values Change: GE Appliances and Electrolux 509
GLOBAL FINANCE IN PRACTICE 18.3 Statoil of Norway's Acquisition of Esso of Sweden 513
Summary Points 513
MINI-CASE: Elan and Royalty Pharma 514
Questions 518
Problems 518
Internet Exercises 521

Answers A-l
Glossary G-l
Index 1-1