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International Financial Management

International Financial Management Cover

 

Synopses & Reviews

Publisher Comments:

International Financial Management provides a strong foundation for students? first encounter with the subject of international finance. As multinational corporations (MNCs) continue to expand their operations globally they must not only be properly managed to apply their comparative advantages in foreign countries, but must also manage their exposure to many forms and sources of risk. Those MNCs that are most capable of responding to changes in the international financial environment will be rewarded. The same can be said for today?s students who become the MNC managers of the future. International Financial Management combines a strong foundation in international finance theory with current, practical applications. It provides thorough, up-to-date treatment of cutting-edge international finance issues along with traditional treatment of international financial management. This book, although it presumes an understanding of basic corporate finance, is renowned for its readability and clear explanation as well as its extensive use of hands-on, real-world applications and student-oriented pedagogy. It is suitable for both final-year undergraduate and master?s level courses. The European edition replaces the majority of US examples in the text and questions with alternative UK and European examples. The default currency quoted in general examples is now Sterling or the euro rather than the US dollar. More-advanced topics have been added to extend the discussion, as well as specifically European issues such as the euro, European financial integration and the history of exchange rates.

About the Author

Jeff Madura is the SunTrust Bank Professor of Finance at Florida Atlantic University. He has written several textbooks, including International Financial Management and Financial Markets and Institutions. His research on topics of banking and financial markets has been published in numerous journals, including Journal of Financial and Quantitative Analysis, Journal of Money, Credit and Banking, Journal of Banking and Finance, Applied Financial Economics, Journal of Risk and Insurance, Journal of Financial Research and Journal of Financial Services Research. He has received awards for excellence in teaching and research, and has served as a consultant for commercial banks, securities firms, and other corporations. He has served as a Director for the Southern Finance Association and Eastern Finance Association, and served as President of the Southern Finance Association.

Table of Contents

Preface Walk through tour PART 1 THE INTERNATIONAL FINANCIAL ENVIRONMENT 1 MULTINATIONAL FINANCIAL MANAGEMENT: AN OVERVIEW Goal of the MNC Conflicts with the MNC goal Impact of management control Impact of corporate control Constraints interfering with the MNC?s goal Theories of international business Economic theories Business theories International business methods International trade Using the web: Trade conditions for industries Licensing Franchising Joint ventures Acquisitions of existing operations Establishing new foreign subsidiaries Summary of methods International opportunities Investment opportunities Financing opportunities Opportunities in Europe Using the web: Updated euro information Opportunities in North and South America Opportunities in Asia Exposure to international risk Exposure to exchange rate movements Exposure to foreign economies Exposure to political risk Overview of an MNC?s cash flows Valuation model for an MNC Managing for value: Yahoo!?s decision to expand internationally Domestic model Valuing international cash flows Impact of financial management and international conditions on value Organization of the text Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Developing a multinational sporting goods industry 2 INTERNATIONAL FLOW OF FUNDS Balance of payments Current account Financial account Overall balance of payments International trade flows Distribution of exports and imports for major countries Balance of trade trends Using the web: Updated trade and investment conditions Trade agreements Trade disagreements Factors affecting international trade flows Impact of inflation Impact of national income Impact of government restrictions Impact of exchange rates Interaction of factors Correcting a balance of trade deficit Why a weak home currency is not a perfect solution International capital flows Factors affecting FDI Using the web: FDI information Factors affecting international portfolio investment Agencies that facilitate international flows International Monetary Fund World Bank World Trade Organization International Financial Corporation International Development Association Bank for International Settlements Regional development agencies How international trade affects an MNC?s value Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma 3 INTERNATIONAL FINANCIAL MARKETS Motives for using international financial markets Motives for investing in foreign markets Motives for providing credit in foreign markets Motives for borrowing in foreign markets Foreign exchange market A brief history of foreign exchange for developed countries Foreign exchange transactions Using the web: Historical exchange rates Managing for value: Intel?s currency trading Interpreting foreign exchange quotations Currency futures and options markets International money market Market efficiency Origins and development Standardizing global bank regulations International credit market Syndicated loans International bond market Eurobond market Development of other bond markets Comparing interest rates among currencies International stock markets Issuance of foreign shares in the United States Issuance of shares in foreign markets Using the web: Stock market trading information International financial markets and the MNC How financial markets affect an MNC?s value Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma Appendix 3: Investing in international financial markets 4 EXCHANGE RATE DETERMINATION Measuring exchange rate movements Exchange rate equilibrium Demand for a currency Supply of a currency for sale Equilibrium Factors that influence exchange rates Relative inflation rates Relative interest rates Relative income levels Government controls Expectations Interaction of factors Managing for value: Impact of exchange rate changes on cash flows for Renault, Nestlé and Philips Speculating on anticipated exchange rates Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Assessment by the Sports Exports Company of factors that affect the British pound?s value 5 CURRENCY DERIVATIVES Forward market How MNCs use forward contracts Using the web: Forward rates Non-deliverable forward contracts Currency futures market Contract specifications Trading futures Comparison of currency futures and forward contracts Pricing currency futures Credit risk of currency futures contracts Speculation with currency futures How firms use currency futures Closing out a futures position Transaction costs of currency futures Currency options market Option exchanges Over-the-counter market Currency call options Factors affecting currency call option premiums How firms use currency call options Speculating with currency call options Currency put options Factors affecting currency put option premiums Hedging with currency put options Speculating with currency put options Managing for value: Cisco?s dilemma when hedging with put options Using the web: Option prices Contingency graphs for currency options Contingency graph for a purchaser of a call option Contingency graph for a seller of a call option Contingency graph for a buyer of a put option Contingency graph for a seller of a put option Conditional currency options European and American currency options Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Use of currency futures and options by the Sports Exports Company Appendix 5A: Currency option pricing Appendix 5B: Currency option combinations Part 1: Integrative problem Part 1: Essays/discussion and articles PART 2 EXCHANGE RATE BEHAVIOUR 6 GOVERNMENT INFLUENCE ON EXCHANGE RATES Exchange rate systems Fixed exchange rate system Managed float exchange rate system Pegged exchange rate system Currency boards Dollarization Freely floating exchange rate system Classification of exchange rate arrangements Government intervention ? the process Using the web: Central bank website links Reasons for government intervention Direct intervention Indirect intervention Exchange rate target zones Intervention as a policy tool Influence of a weak home currency on the economy Influence of a strong home currency on the economy A brief history of exchange rates Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Assessment of government influence on exchange rates Small business dilemma: Assessment of central bank intervention by the Sports Exports Company Appendix 6: Economic considerations of the euro 7 INTERNATIONAL ARBITRAGE AND INEREST RATE PARITY International arbitrage Locational arbitrage Triangular arbitrage Covered interest arbitrage Comparison of arbitrage effects Interest rate parity Derivation of interest rate parity Determining the forward premium Graphic analysis of interest rate parity How to test whether interest rate parity exists Interpretation of interest rate parity Does interest rate parity hold? Considerations when assessing interest rate parity Changes in forward premiums Managing for value: How interest rate parity affects IBM?s hedge Using the web: Forward rates Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Assessment of potential arbitrage opportunities Small business dilemma: Assessment of prevailing spot and forward rates by the Sports Exports Company 8 RELATIONSHIPS AMONG INFLATION, INTEREST RATES, AND EXCHANGE RATES Purchasing power parity (PPP) Interpretations of purchasing power parity Rationale behind purchasing power parity theory Derivation of purchasing power parity Using PPP to estimate exchange rate effects Graphic analysis of purchasing power parity Testing the purchasing power parity theory Using the web: Country inflation rates Why purchasing power parity does not occur The real exchange rate Purchasing power parity in the long run Using the web: Inflation and exchange rate forecasts Managing for value: Indirect impact of purchasing power parity on MNCs International Fisher effect (IFE) Relationship with purchasing power parity Implications of the IFE for the foreign investment market Derivation of the international Fisher effect Graphic analysis of the international Fisher effect Tests of the international Fisher effect Why the international Fisher effect does not occur Comparisons of the IRP, PPP, and IFE theories Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma Appendix 8: Further notes on exchange rate models Part 2: Integrative problem Part 2: Essays/discussion and articles PART 3 EXCHANGE RATE RISK MANAGEMENT 9 FORECASTING EXCHAGE RATES Why firms forecast exchange rates Forecasting techniques Technical forecasting Managing for value: How MNC?s earnings depend on currency values Fundamental forecasting Market-based forecasting Using the web: Forward rates as forecasts Mixed forecasting Forecasting services Using the web: exchange rate forecasts Performance of forecasting services Evaluation of forecast performance Forecast accuracy over time Forecast accuracy among currencies Search for forecast bias Statistical test of forecast bias Graphic evaluation of forecast performance Comparison of forecasting methods Forecasting under marketing efficiency Exchange rate volatility Methods of forecasting exchange rate volatility Using the web: Implied volatilities Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Forecasting exchange rates Small business dilemma: Exchange rate forecasting by the Sports Exports Company 10 MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS Is exchange rate risk relevant? Purchasing power parity argument The investor hedge argument Currency diversification argument Stakeholder diversification argument Response from MNCs Types of exposure Transaction exposure Estimating ?net? cash flows in each currency Measuring the potential impact of the currency exposure Assessing transaction exposure based on value-at-risk Economic exposure Economic exposure to home currency appreciation Managing for value: Philips Electronics exposure to exchange rate risk Economic exposure to home currency depreciation Economic exposure of domestic firms Measuring economic exposure Translation exposure Does translation exposure matter Determinants of translation exposure Examples of translation exposure Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Assessment of exchange rate exposure by the Sports Exports Company 11 MANAGING TRANSACTION EXPOSURE Transaction exposure Identifying net transaction exposure Adjusting the invoice policy to manage exposure Managing for value: Centralized management of exposure Techniques to eliminate transaction exposure Futures hedge Forward hedge Money market hedge Currency option hedge Comparison of hedging techniques Hedging policies of MNCs Managing for value: BP hedging strategy Limitations of hedging Limitation of hedging an uncertain amount Limitation of repeated short-term hedging Hedging long-term transaction exposure Long-term forward contract Currency swap Parallel loan Borrowing policy Alternative hedging techniques Leading and lagging Cross-hedging Currency diversification Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Hedging decisions by the Sports Exports Company Appendix 11A: Calculation the optimal size of a cross currency hedge Appendix 11B: Non-traditional hedging techniques 12 MANAGING ECONOMIC EXPOSURE AND TRANSLATION EXPOSURE Economic exposure Use of the income statement to assess economic exposure How restructuring can reduce economic exposure Issues involved in the restructuring decision Managing for value: How auto manufacturers restructure to reduce exposure A case study in hedging economic exposure Silverton ltd?s dilemma Assessment of economic exposure Assessment of each unit?s exposure Identifying the source of the unit?s exposure Possible strategies to hedge economic exposure Silverton?s hedging solution Limitations of Silverton?s optimal hedging strategy Hedging exposure to fixed assets Managing translation exposure Use of forward contracts to hedge translation exposure Limitations of hedging translation exposure Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Hedging the Sports Exports Company?s economic exposure to exchange rate risk Part 3: Integrative problem Part 3: Essays/discussion and articles PART 4 LONG-TERM ASSET AND LIABILITY MANAGEMENT 13 FOREIGN DIRECT INVESTMENT Motives for foreign direct investment Revenue-related motives Cost-related motives Comparing benefits of FDI among countries Using the web: FDI indicators Using the web: Foreign direct investment Comparing benefits of FDI over time Managing for value Benefits of international diversification Diversification analysis of international projects Diversification among countries Decisions subsequent to FDI Using the web: FDI information for a particular country Host government views of FDI Incentives to encourage FDI Barriers to FDI Government-imposed conditions to engage in FDI Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Consideration of foreign direct investment Small business dilemma: Foreign direct investment decision by the Sports Exports Company 14 MULTINATIONAL CAPITAL BUDGETING Subsidiary versus parent perspective Tax differentials Restricted remittances Excessive remittances Exchange rate movements Summary of factors Input for multinational capital budgeting Multinational capital budgeting example Background Analysis Factors to consider in multinational capital budgeting Exchange rate fluctuations Inflation Financing arrangement Blocked funds Uncertain salvage value Impact of project on prevailing cash flows Host government incentives Real options Adjusting project assessment for risk Risk-adjusted discount rate Sensitivity analysis Managing for value: Senior plc?s decision to set up in Cape Town Simulation Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma Appendix 14: Incorporating international tax laws in multinational capital budgeting 15 MULTINATIONAL RESTRUCTURING Background on multinational restructuring Trends in international acquisitions Managing for value: International acquisitions Model for valuing a foreign target Assessing potential acquisitions after the Asian crisis Assessing potential acquisitions in Europe Factors that affect the expected cash flows of the foreign target Target-specific factors Country-specific factors Example of the valuation process International screening process Estimating the target?s value Changes in valuation over time Why valuations of a target may vary among MNCs Estimated cash flows of the foreign target Exchange rate effects on the funds remitted Required return of acquirer Other types of multinational restructuring International partial acquisitions International acquisitions of privatized businesses International alliances International divestitures Restructuring decisions as real options Call option on real assets Put option on real assets Managing for value: Mazda?s decision to restructure Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Assessment of an acquisition in Thailand Small business dilemma: Multinational restructuring by the Sports Exports Company 16 COUNTRY RISK ANALYSIS Why country risk analysis is important Political risk factors Attitude of consumers in the host country Actions of host government Blockage of fund transfers Currency inconvertibility War Bureaucracy Corruption Financial risk factors Indicators of economic growth Types of country risk assessment Macroassessment of country risk Microassessment of country risk Techniques to assess country risk Checklist approach Delphi technique Quantitative analysis Inspection visits Combination of techniques Measuring country risk Variation in methods of measuring country risk Using the country risk rating for decision making Comparing risk ratings among countries Using the web: Country risk ratings Actual country risk ratings across countries Incorporating country risk in capital budgeting Managing for value: Ireland invests in Spain Adjustment of the discount rate Adjustment of the estimated cash flows How country risk affects financial decisions Reducing exposure to host government takeovers Use a short-term horizon Rely on unique supplies or technology Hire local labour Borrow local funds Purchase insurance Use project finance Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Country risk assessment Small business dilemma: Country risk analysis at the Sports Exports Company 17 MULTINATIONAL COST OF CAPITAL AND CAPITAL STRUCTURE Background on cost of capital Calculating the cost of capital in a single market Cost of capital for MNCs The International Capital Asset Pricing Model (ICAPM) The CAPM The ICAPM CAPM and ICAPM application issues Implications of the ICAPM and CAPM for an MNC?s risk Managing for value: SABMiller Costs of capital across countries Country differences in the cost of debt Country differences in the cost of equity Combining the costs of debt and equity Estimating the cost of debt and equity Using the cost of capital for assessing foreign projects Derive net present values based on the weighted average cost of capital Adjust the weighted average cost of capital for the risk differential Derive the net present value of the equity investment The MNC?s capital structure decision Influence of corporate characteristics Influence of country characteristics Revising the capital structure in response to changing conditions Interaction between subsidiary and parent financing decisions Impact of increased debt financing by the subsidiary Impact of reduced debt financing by the subsidiary Summary of interaction between subsidiary and parent financing decisions Local versus global target capital structure Offsetting a subsidiary?s high degree of financial leverage Offsetting a subsidiary?s low degree of financial leverage Limitations in offsetting a subsidiary?s abnormal degree of financial leverage Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study Small business dilemma: Multinational capital structure decision at the Sports Exports Company 18 LONG-TERM FINANCING Long-term financing decision Sources of equity Sources of debt Cost of debt financing Measuring the cost of financing Actual effects of exchange rate movements on financing costs Assessing the exchange rate risk of debt financing Use of exchange rate probabilities Use of simulation Reducing exchange rate risk Offsetting cash inflows Managing for value: General Electric?s decision to rely on global financial markets Forward contracts Currency swaps Parallel loans Diversifying among currencies Interest rate risk from debt financing The debt maturity decision The fixed versus floating rate decision Hedging with interest rate swaps Plain vanilla swap Using the web: Long-term foreign interest rates Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: Use of long-term foreign financing Small business dilemma: Long-term financing decision by the Sports Exports Company Part 4; Integrative problem Part 4: Essays/discussion and articles PART 5 SHORT-TERM ASSET AND LIABILITY MANAGEMENT 19 FINANCING INTERNATIONAL TRADE Payment methods for international trade Prepayment Letters of credit (L/C) Drafts Consignment Open account Trade finance methods Accounts receivable financing Factoring Letters of credit (L/C) Bankers acceptance Working capital financing Medium-term capital goods financing (forfaiting) Countertrade Government agencies for international trade Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the Boardroom Running your own MNC Blades plc case study: Assessment of international trade financing in Thailand Small business dilemma: Ensuring payment for products exported by the Sports Exports Company 20 SHORT-TERM FINANCING Sources of short-term financing Euronotes Euro-commercial paper Eurobank loans Internal financing by MNCs Why MNCs consider foreign financing Foreign financing to offset foreign currency inflows Foreign financing to reduce costs Using the web: Forecasts of interest rates Determining the effective financing rate Managing for value: Outsourcing short-term asset and liability management Using the web: Short-term foreign interest rates Criteria considered for foreign financing Interest rate parity Exchange rate forecasts Actual results from foreign financing Financing with a portfolio of currencies Portfolio diversification effects Repeated financing with a currency portfolio Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the Boardroom Running your own MNC Blades plc case study: Use of foreign short-term financing Small business dilemma: Short-term financing by the Sports Exports Company 21 INTERNATIONAL CASH MANAGEMENT Cash flow analysis: subsidiary perspective Subsidiary expenses Subsidiary revenue Subsidiary dividend payments Subsidiary liquidity management Centralized cash management Managing for value: Flexsys? decision to use a multibank payments system Techniques to optimize cash flows Accelerating cash inflows Minimizing currency conversion costs Managing blocked funds Managing intersubsidiary cash transfers Complications in optimizing cash flows Company-related characteristics Government restrictions Characteristics of banking systems Investing excess cash How to invest excess cash Centralized cash management Determining the effective yield Implications of interest rate parity Use of the forward rate as a forecast Use of exchange rate forecasts Diversifying cash across currencies Dynamic hedging Summary Critical debate Self test Questions and applications Advanced questions Project workshop Discussion in the boardroom Running your own MNC Blades plc case study: International cash management Small business dilemma: Cash management at the Sports Exports Company Part 5: Integrative problem Part 5: Essays/discussion and articles 22 CONCLUDING COMMENTS The significance of international financial management Summary of the book Advances Remaining issues Appendix A: Answers to self-test questions Appendix B: Maths and statistics support Index

Product Details

ISBN:
9781844803606
Publisher:
Cengage Learning
Subject:
Finance
Author:
Madura, Jeff
Author:
Fox, Roland
Subject:
Investments & Securities - General
Subject:
Business-Accounting and Finance
Copyright:
Publication Date:
January 2007
Binding:
TRADE PAPER
Grade Level:
Professional and scholarly
Language:
English
Pages:
752
Dimensions:
3.68 in.

Related Subjects

Business » Accounting and Finance
Business » Investing

International Financial Management
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