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GLOBAL EDITION

MULTINATIONAL BUSINESS FINANCE
12TH EDITION

David K.

Arthur I.

Michael H.

EITEMAN
University of California, Los Angeles

STONEHILL
Oregon State University and the University of Hawaii at Manoa

MOFFETT
Thunderbird School of Global Management

Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Contents
PART I G l o b a l Financial E n v i r o n m e n t 1 Chapter 1 Globalization and the MyBtiBnatiomaO Enterprise 2 Globalization and Creating Value in the Multinational Enterprise 3 The Theory of Comparative Advantage 4 What Is Different about Global Financial Management? 7 Market Imperfections: A Rationale for the Existence of the Multinational Firm 8 The Globalization Process 9 Summary Points 13 MINI-CASE: Porsche Changes Tack 13 Questions • Problems • Internet Exercises 19

Chapter 2 Financial Goals and Corporate Governance Who Owns the Business? 22 What Is the Goal of Management? 24 Corporate Governance 28 Summary Points 40

MINI-CASE: Governance Failure at Enron 41 Questions n Problems n Internet Exercises 45

Chapter 3 IDie international Monetary System History of the International Monetary System 50 Contemporary Currency Regimes 56 Emerging Markets and Regime Choices 62 The Birth of a European Currency: The Euro 64 Exchange Rate Regimes: What Lies Ahead? 69 Summary Points 70 MINI-CASE: The Revaluation of the Chinese Yuan 71 Questions • Problems • Internet Exercises 74

Chapter 4 International Business Transactions: The BaBance of Payments Typical Balance of Payments Transactions: China 79 Fundamentals of Balance of Payments Accounting 80 The Accounts of the Balance of Payments 81 The Capital and Financial Account 83 The Balance of Payments in Total 89 The Balance of Payments Interaction with Key Macroeconomic Variables 91 Trade Balances and Exchange Rates 94 Capital Mobility 97 Summary Points 99 MINI-CASE: Turkey's Kriz (A): Deteriorating Balance of Payments 100 Questions • Problems D Internet Exercises 102

Chapter 5

Current Multinational Financial Challenges: The Credit Crisis of 2007-2009 106 The Seeds of Crisis: Subprime Debt 106 The Transmission Mechanism: Securitization and Derivatives of Securitized Debt 109 The Fallout: The Crisis of 2007 and 2008 120

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Contents

The Remedy: Prescriptions for an Infected Global Financial Organism 129 Summary Points 131 MINI-CASE: Letting Go of Lehman Brothers 132 Questions D Problems • Internet Exercises 134

PART II

Foreign Exchange Theory and Markets Chapter & The Foreign Exchange Market 138

137

Geographical Extent of the Foreign Exchange Market 138 Functions of the Foreign Exchange Market 139 Market Participants 140 Transactions in the Interbank Market 142 Foreign Exchange Rates and Quotations 148 Summary Points 156 MINI-CASE: The Venezuelan Bolivar Black Market 157 Questions D Problems a Internet Exercises 160

Chapter? InternationaB Parity Conditions 164 Prices and Exchange Rates 164 Interest Rates and Exchange Rates 172 Forward Rate as an Unbiased Predictor of the Future Spot Rate 181 Prices, Interest Rates, and Exchange Rates in Equilibrium 183 Summary Points 184 MINI-CASE: Currency Pass-Through at Porsche 185 Questions • Problems • Internet Exercises 186 Appendix: An Algebraic Primer to International Parity Conditions 193

Chapter 8 Foreign Currency ierivatoves Foreign Currency Futures 198 Currency Options 201 Foreign Currency Speculation 203 Option Pricing and Valuation 210 Currency Option Pricing Sensitivity 213 Prudence in Practice 221

197

Summary Points 222 MINI-CASE: Warren Buffett's Love-Hate Relationship with Derivatives 223 Questions • Problems • Internet Exercises 226 Appendix: Currency Option Pricing Theory 230

Chapter 9 Interest Rate and Currency Swaps 234 Defining Interest Rate Risk 234 Management of Interest Rate Risk 237 Trident Corporation: Swapping to Fixed Rates 245 Currency Swaps 246 Trident Corporation: Swapping Floating Dollars into Fixed Rate Swiss Francs 247 Counterparty Risk 249 Summary Points 250 MINI-CASE: McDonald's Corporation's British Pound Exposure 251 Questions n Problems • Internet Exercises 252

Chapter 10 Foreign Exchange Rate Determination and Forecasting Exchange Rate Determination: The Theoretical Thread 257 The Asset Market Approach to Forecasting 260

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Contents

Disequilibrium: Exchange Rates in Emerging Markets 262 Illustrative Case: The Asian Crisis ^262 Illustrative Case: The Argentine Crisis of 2002 265 Forecasting in Practice 270 Summary Points 274 MINI-CASE: JPMorgan Chase's Forecasting Accuracy 274 Questions • Problems • Internet Exercises 276

PART III

Foreign Exchange Exposure

281

Chapter 11 Transaction Exposure 282 Types of Foreign Exchange Exposure 282 Why Hedge? 284 Measurement of Transaction Exposure 287 Trident's Transaction Exposure 289 Management of an Account Payable 297 Risk Management in Practice 299 Summary Points 300 MINI-CASE: Xian-Janssen Pharmaceutical (China) and the Euro 301 Questions D Problems D Internet Exercises 303 Appendix: Complex Options 312

Chapter 12 Operating Exposure 320 Attributes of Operating Exposure 320 Illustrating Operating Exposure: Trident 322 Strategic Management of Operating Exposure 326 Proactive Management of Operating Exposure 329 Contractual Approaches: Hedging the Unhedgeable 336 Summary Points 337 MINI-CASE: Toyota's European Operating Exposure 338 Questions a Problems a Internet Exercises 340

Chapter 13 Translation Exposure Overview of Translation 344 Translation Methods 347 Translation Example: Trident Europe 350 Comparing Translation Exposure with Operating Exposure 355 Managing Translation Exposure 355 Summary Points 359 MINI-CASE: LaJolla Engineering Services 360 Questions H Problems • Internet Exercises 362

PART IV

Financing the Global Firm

365

Chapter 14 The Global Cost and Availability of Capita! 36® Weighted Average Cost of Capital 368 The Demand for Foreign Securities: The Role of International Portfolio Investors 373 The Cost of Capital for MNEs Compared to Domestic Firms 379 Solving a Riddle: Is the Weighted Average Cost of Capital for MNEs Really Higher Than for Their Domestic Counterparts? 380 Summary Points 382 MINI-CASE: Novo Industri A/S (Novo) 383 Questions D Problems • Internet Exercises 387

Contents

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Chapter 15 Sourcang Equity Globally 391 Designing a Strategy to Source Equity Globally 392 Foreign Equity Listing and Issuance 395 Effect of Cross-Listing and Equity Issuance on Share Price 397 Barriers to Cross-Listing and Selling
Equity Abroad 399 Alternative Instruments to Source Equity in Global Markets 400 Summary Points 404 MINI-CASE: Petrobras of Brazil and the Cost of Capital 404 Questions • Problems a Internet Exercises 408

Optimal Financial Structure 410 Optimal Financial Structure and the MNE 411 Financial Structure of Foreign Subsidiaries 414 International Debt Markets 418 Summary Points 424 MINI-CASE: Tirstrup BioMechanics (Denmark): Raising Dollar Debt 424 Questions • Problems o Internet Exercises 426

PART V

Foreign Investment Decisions Chapter 17

431

International Portfolio Theory and Diversificationi. 432

International Diversification and Risk 432 Internationalizing the Domestic Portfolio 435 National Markets and Asset Performance 441 Summary Points 446 MINI-CASE: Is Modern Portfolio Theory Outdated? 447 Questions a Problems • Internet Exercises 448

Chapter 18 Foreign Direct Investment Theory and Political Risk Sustaining and Transferring Competitive Advantage 452 The OLI Paradigm and Internalization 455 Deciding Where to Invest 457 How to Invest Abroad: Modes of Foreign Involvement 458 Foreign Direct Investment Originating in Developing Countries 462 Foreign Direct Investment and Political Risk 464 Assessing Political Risk 465 Firm-Specific Risks 466 Country-Specific Risks: Transfer Risk 469 Country-Specific Risks: Cultural and Institutional Risks 472 Global-Specific Risks 476 Summary Points 479 MINI-CASE: Mattel's Chinese Sourcing Crisis of 2007 480 Questions a Problems a Internet Exercises 483

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Chapter 19 Multinational Capital Budgeting 487 Complexities of Budgeting for a Foreign Project 488 Project versus Parent Valuation 489 Illustrative Case: Cemex Enters Indonesia 490 Real Option Analysis 502 Project Financing 503 Summary Points 505 MINI-CASE: Trident's Chinese Market Entry—An Application of Real Option Analysis 505 Questions n Problems • Internet Exercises 507

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Contents

PART VI

Managing Multinational Operations Chapter 20 Multinational Tax Management

513 514

Tax Principles 514 Transfer Pricing 522 Tax Management at Trident 524 Tax Haven Subsidiaries and International Offshore Financial Centers 525 Summary Points 527 MINI-CASE: Stanley Works and Corporate Inversion 527 Questions • Problems n Internet Exercises 531

Chapter 21 Working Capital Management 535 Trident Brazil's Operating Cycle 535 Trident's Repositioning Decisions 537 Constraints on Repositioning Funds 539 Conduits for Moving Funds by Unbundling Them 539 International Dividend Remittances 540 Net Working Capital 542 International Cash Management 548 Financing Working Capital 552 Summary Points 556 MINI-CASE: Honeywell and Pakistan International Airways 557 Questions • Problems n Internet Exercises 559

Chapter 22 Global Petroleum Development: Fiscal Regimes and Funding Financing Petroleum Development 566 Fiscal Regimes 566 Development Agreements 566 Concessions 569 Royalty/Tax Systems 570 Production Sharing Agreements 572 Service Agreements 574 Added Contractual Features 576 Top-Line Risks 578 Petroleum Prices 579 A Hypothetical Sub-Saharan PSA 581 PSA Evolution 584 Funding Petroleum Development 587 Summary Points 590 MINI-CASE: Petroleum Development and the Curse of Oil 590 Questions • Problems o Internet
Exercises 593

565

Answers to Selected Problems Glossary Index 598 610

595

Credits 627