CHAPTER 1 The Foreign Exchange Market 2
Opening CaseVolkswagen's Hedging Strategy 3
Introduction 4
The Functions of the Foreign Exchange Market 4
Currency Conversion 4
Insuring against Foreign Exchange Risk 6
Management FocusSouth African Airlines'Disastrous Currency Hedge 9
The Nature of the Foreign Exchange Market 9
Economic Theories of Exchange Rate Determination 10
Prices and Exchange Rates 11
Interest Rates and Exchange Rates 16
Investor Psychology and Bandwagon Effects 17
Country FocusWhy Did the Korean Won Collapses 18
Summary 19
Exchange Rate Forecasting 20
The Efficient Market School 20
The Infficient Market School 20
Approaches to Forecasting 20
Currency Convertibility 22
Implications for Managers 23
Transaction Exposure 23
Translation Exposure 23
Economic Exposure 24
Reducing Translation and Transaction Exposure 24
Management FocusTranslation Exposure at Baxter International 25
Reducing Economic Exposure 25
Other Steps for Managing Foreign Exchange Risk 26
Chapter Summary 27
Critical Thinking and Discussion Questions 28
Research Task 28
Closing CaseThe Rising Euro Hammers Auto Parts Manufacturers 29
CHAPTER 2 The International Monetary System 32
Opening CaseRescuing Brazil 33
Introduction 34
The Gold Standard 35
Mechanics of the Gold Standard 35
Strength of the Gold Standard 36
The Period between the Wars,1918-1939 36
The Bretton Woods System 37
The Role of the IMF 37
The Role of the World Bank 38
The Collapse of the Fixed Exchange Rate System 39
The Floating Exchange Rate Regime 40
The Jamaica Agreement 40
Exchange Rates since 1973 41
Fixed versus Floating Exchange Rates 43
The Case for Floating Exchange Rates 43
The Case for Fixed Exchange Rates 44
Who Is Right? 45
Exchange Rate Regimes in Practice 45
Pegged Exchange Rates 46
Currency Boards 47
Country FocusArgentina's Currency Board 48
Crisis Management by the IMF 48
Financial Crises in the Post-Bretton Woods Era 49
Mexican Currency Crisis of 1995 51
The Asian Crisis 51
Evaluating the IMF's Policy Prescriptions 55
Country FocusTurkey's 18th IMF Program 56
Implications for Managers 59
Currency Management 59
Business Strategy 60
Management FocusAirbus and the Euro 61
Corporate-Government Relations 61
Chapter Summary 62
Critical Thinking and Discussion Questions 62
Research Task 63
Closing CaseChina's Pegged Exchange Rate 63
CasesAmerica's Dollar Policy:Weak Dollar versus Strong Dollar 68
The 1994 Devaluation of the Mexican Peso and After 73
The Falling Dollar 79
CHAPTER 3 Accounting in the International Business 86
OPening CaseAdopting International Accounting Standards 87
Introduction 88
Country Differences in Accounting Standards 88
Relationship between Business and Providers of Capital 88
Political and Economic Ties with Other Countries 90
Inflation Accounting 91
Level of Development 91
Culture 91
National and International Standards 92
Lack of Comparability 92
Management FocusThe Consequences of Different Accounting Standards 93
International Standards 94
Management FocusNovartis Joins the International Accounting Club 95
Multinational Consolidation and Currency Translation 96
Consolidated Financial Statements 96
Currency Translation 98
Current U.S. Practice 99
Accounting Aspects of Control Systems 99
Exchange Rate Changes and Control Systems 100
Transfer Pricing and Control Systems 101
Separation of Subsidiary and Manager Performance 102
Chapter Summary 103
Critical Thinking and Discussion Questions 104
Research Task 104
Closing CaseChina's Developing Accounting System 105
CHAPTER 4 Financial Management in the International Business 108
OPening CaseChina Mobile 109
Introduction 110
Investment Decisions 111
Capital Budgeting 111
Project and Parent Cash Flows 112
Adjusting for Political and Economic Risk 112
Management FocusBlack Sea Energy Ltd. 113
Risk and Capital Budgeting 114
Financing Decisions 115
Financing Decisions and the Global Capital Market 115
Management FocusDeutsche Telekom Taps the Global Capital Market 117
Source of Financing 119
Financial Structure 119
Global Money Management:The Efficiency Objective 120
Minimizing Cash Balances 120
Reducing Transaction Costs 120
Global Money Management:The Tax Objective 120
Moving Money across Borders:Attaining Efficiencies and Reducing Taxes 122
Dividend Remittances 122
Royalty Payments and Fees 122
Transfer Prices 123
Fronting Loans 124
Techniques for Global Money Management 126
Centralized Depositories 126
Multilateral Netting 127
Chapter Summary 129
Critical Thinking and Discussion Questions 130
Research Task 130
Closing CaseFinancing Gol 130
CasesMerrill Lynch in Japan 136
GTIin Russia 137
Can Madison Avenue Marketing Help Developing Countries?The Case of Jordan 144
Glossary 147