International Financial Markets and The Firm

Piet Sercu, Raman Uppal

Publisher: Thomson, 1995 , 731 pages

ISBN: 1-86152-354-8

Synopsis:

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The latest book in The Current Issues in Finance Series, Piet Sercu and Raman Uppal's INTERNATIONAL FINANCIAL MARKETS AND THE FIRM sets a new standard in its clarity and rigor.

Distinguishing features include:

• Unified approach based on arbitrage-free pricing, which can be used to value assets whose payoffs depend on the exchange rate.
• In-depth discussions of the economic role of the forward rate and the value of a forward contract. Implications for corporate managemnent and valuable insights fro option pricing are examined.
• Descriptions of the empirical behavior of exchange rates and its implications for foreign exchange traders, treasurers, and corporate managers. readers examine how inflation-based theories fail to explain exchange rates and how the forward rate is a biased predicator of the future spot rate. Track records of various econometric methods and professional forecasters are reviewed.
• Comprehensive study of when and why the firm can increase its value by hedging foreign exchange risk: how to measure exposure to foreign exchange rates; and how to select the best hedging instrument.
• Economic analysis of the various payment and credit insurance techniques used in international trade, including countertrade.
• Stepwise approach on how to value foreign direct investment projects, with a discussion of generic international taxation systems and their implications for transfer policies, cost of capital models in integrated and segmented markets, and joint venture projects.
  

Table of Contents:

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• An Introduction to International Financial Markets
• I.1 Money and Banking: A Brief Review
• I.2 The International Payment Mechanism
• I.3 Euromarkets
• I.4 Exchange Rate Regimes
• Part I International Financial Markets
• Chapter 1 Spot Exchange Markets
• 1.1 Exchange Rates
• 1.2 Major Markets for Foreign Exchange
• 1.3 The Law of One Price for Spot Exchange Quotes
• 1.4 Triangular Arbitrage
• 1.5 Implications for the Treasurer
• Chapter Review Questions
• Chapter 2 Forward Contracts in Perfect Markets
• 2.1 Introduction to Forward Contracts
• 2.2 The Relationship between Exchange and Money Markets
• 2.3 The Law of One Price and Interest Rate Parity
• 2.4 Interpreting the Forward Premium or Discount
• 2.5 Concluding Remarks
• Chapter Review Questions
• Appendix 2A Interest Rates, Returns, and Bond Yields
• Chapter 3 The Value of a Forward Contract and Its Implications
• 3.1 The Market Value of an Outstanding Forward Contract
• 3.2 Implications: The Value at Expiration and at Inception
• 3.3 Insights for Financial Reporting
• 3.4 Insights for Corporate Hedging and Investments Policies
• Chapter Review Questions
• Chapter 4 Forward Contracts and Market Imperfections
• 4.1 Credit Risk in Forward Contracts
• 4.2 How Forward Rates are Quoted with Bid-Ask Spreads
• 4.3 Synthetic Forward Rates
• 4.4 The Arbitrage Bounds on the Forward Bid and Ask Rates
• 4.5 Empirical Tests of the Arbitrage Bounds
• 4.6 Bounds Imposed on the Forward Range by Least Cost Dealing
• 4.7 Implications of Spreads for the Financial Manager
• Chapter Review Questions
• Chapter 5 Currency Futures Markets
• 5.1 Currency Futures Markets
• 5.2 Effect of Marketing to Market on Futures Prices
• 5.3 Hedging with Futures Contracts
• 5.4 Conclusion: Pros and Cons of Futures Contracts Relative to Forward Contracts
• Chapter Review Questions
• Appendix 5A Computing the Hedge Regression Coefficient
• Appendix 5B The Effect of Interest Rates on Futures Prices: A Formal Discussion
• Chapter 6 Currency Options
• 6.1 An Introduction to Currency Options
• 6.2 Institutional Aspects of Options Markets
• 6.3 Bounds on Option Values
• 6.4 A Graphical Analysis of European Options
• 6.5 Options as Hedging or Speculating Devices
• 6.6 Implications of the Corporate Treasurer
• Chapter Review Questions
• Appendix 6A Options on Currency Futures, Premium Affairs, and Futures-Style Options
• Appendix 6B The Effect of the Forward Premium on the Probability of Early Exercise
• Chapter 7 Pricing Currency Options Using the Binomial Model
• 7.1 The Logic of Binomial Option Pricing
• 7.2 Notation and Assumptions for the Multiperiod Binomial Model
• 7.3 Pricing the One-Period European Currency Call
• 7.4 Pricing the N-Period European Call
• 7.5 Towards the Black-Scholes Formula
• 7.6 Pricing Other European-Type Derivative Assets
• 7.7 Pricing American Options
• 7.8 Conclusion
• Chapter Review Questions
• Appendix 7A Choosing the Parameters of the Binomial Model
• Appendix 7B Pricing Options on Foreign Currency T-Bills and on Currency Futures
• Chapter 8 Pricing European Options: The Lognormal Model
• 8.1 Assumptions of the Continuous-Time Option Pricing Model
• 8.2 A Discrete-Time Derivation of the Continuous-Time Model
• 8.3 How To Use the Continuous-Time Option Valuation Formula
• 8.4 Related Option Pricing Models
• 8.5 Conclusions
• Chapter Review Questions
• Appendix 8A Derivation of the Expected Expiration Value of the Call Option
• Appendix 8B Stochastic Calculus and the Black-Scholes Equation
• Chapter 9 International Bond and Money Markets
• 9.1 Eurobanking Products
• 9.2 Eurosecurity Markets
• 9.3 Eurocurrency Futures Contracts
• 9.4 Conclusions
• Chapter Review Questions
• Appendix 9A Term Structures, Bond Yields, and Interest Rates
• Chapter 10 Currency and Interest Rate Swaps
• 10.1 Earlier Swap-Like Contracts
• 10.2 The Fixed-for-Fixed Currency Swaps
• 10.3 Interest Rate Swaps
• 10.4 Cross-Currency Swaps
• 10.5 Cocktail Swaps
• 10.6 Conclusions
• Chapter Review Questions
• Part II Exchange Rate Determination
• Chapter 11 Purchasing Power Parity
• 11.1 Commodity Price Parity
• 11.2 Absolute Purchasing Power Parity
• 11.3 Relative Purchasing Power Parity
• 11.4 Empirical Tests of the Price Parity Relations
• 11.5 PPP as a Theory of Exchange Rate Determination
• 11.6 Implications for Managers of the Evidence on PPP
• Chapter Review Questions
• Chapter 12 The Balance of Payments
• 12.1 What Is the Balance of Payments?
• 12.2 The Net International Investment Account
• 12.3 The BOP Approach to Exchange Rate Determination
• 12.4 Conclusions
• Chapter Review Questions
• Appendix 12A Relationship between the BOP and Fiscal Policy
• Chapter 13 Portfolio Theories of Exchange Rate Determination
• 13.1 Monetary Theory of Exchange Rate Determination
• 13.2 An Asset's Contribution to Portfolio Mean and Variance
• 13.3 Mean-Variance Portfolio Choice
• 13.4 Conclusions
• Chapter Review Questions
• Appendix 12A Return and Risk of a Portfolio Containing Risk-Free Assets
• Chapter 14 Risk and Return in Forward Markets
• 14.1 The Unbiased Expectations Hypothesis (UEH)
• 14.2 Regression Tests of UEH
• 14.3 Can Risk Premium Explain Violations of UEH?
• 14.4 Other Explanations for Violations of UEH
• 14.5 Testing UEH in Real Terms
• 14.6 Implications for Financial Decision Making
• Chapter Review Questions
• Chapter 15 Forecasting Exchange Rates
• 15.1 Technical Analysis
• 15.2 Fundamental Models of Exchange Rate Forecasting
• 15.3 Evaluating the Performance of Forecasters
• 15.4 Implications for Treasury Management
• Chapter Review Questions
• Part III International Risk Management
• Chapter 16 The Relevance of Hedging
• 16.1 Conditions for Irrelevance of a Firm's Hedging Decision
• 16.2 Arguments in Favor of Hedging Exchange Risk
• 16.3 Irrelevant Arguments
• 16.4 Conclusion
• Chapter Review Questions
• Chapter 17 Measuring and Managing Contractual Exposure to the Exchange Rate
• 17.1 The Concepts of Risk and Exposure
• 17.2 Contractual Exposure from Transactions for a Particular Date and Currency
• 17.3 Aggregate Contractual Exposure over Several Transcations for a Particular Currency
• 17.4 What Does Management of Contractual Exposure Achieve?
• Chapter Review Questions
• Chapter 18 Measuring and Managing Operating Exposure to the Exchange Rate
• 18.1 Introduction to Operating Exposure
• 18.2 The Importance of the Economic Environment in Which the Firm Operates
• 18.3 Measuring and Hedging Operating Exposure
• 18.4 Conclusions for Treasury Management
• Chapter Review Questions
• Chapter 19 Measuring and Managing Accounting Exposure
• 19.1 What Is Accounting Exposure?
• 19.2 Why Firms Need To Translate Financial Statements
• 19.3 The Choice of Different Translation Methods
• 19.4 Conclusions for Managers
• Chapter Review Questions
• Chapter 20 Managing the Risks in International Trade
• 20.1 Payment Modes without Bank Participation
• 20.2 Documentary Payment Modes with Bank Participation
• 20.3 Other Standard Ways to Cope with Default Risk
• 20.4 Export-Backed Financing
• 20.5 Countertrade
• 20.6 Conclusion
• Chapter Review Questions
• Appendix 20A Some Institutional Details of Documentary Credits
• Part IV International Investment Decisions
• Chapter 21 International Capital Budgeting
• 21.1 Domestic Capital Budgeting: A Quick Review
• 21.2 Forms of Foreign Policy
• 21.3 Taxes and Three-Step International Capital Budgeting
• 21.4 Transfer Risks
• 21.5 Other Political Risks
• 21.6 Incremental Cash Flows
• 21.7 Exchange Risk and Market Segmentation
• 21.8 A Checklist for NPV Analysis
• Chapter Review Questions
• Appendix 21A Alternate Ways to Account for Investment in Working Capital
• Chapter 22 Exchange Risk and Capital Market Segmentation
• 22.1 Procedures for Valuing Risk-Free Foreign Cash Flows
• 22.2 Procedures for Valuing Risky Foreign Cash Flows
• 22.3 The Single-Country CAPM
• 22.4 The International CAPM
• 22.5 Conclusions for Capital Budgeting
• Chapter Review Questions
• Appendix 22A Linking the International CAPM to Multivariate Regressions
• Chapter 23 International Taxation
• 23.1 Multiple Taxation versus Tax Neutrality
• 23.2 International Taxation of a Branch: The Credit System
• 23.3 International Taxation of a Branch: The Exclusion System
• 23.4 Remittances from a Subsidiary: An Overview
• 23.5 International Taxation of a Subsidiary: The Credit System
• 23.6 International Taxation of a Subsidiary: The Exclusion System
• 23.7 Conclusion
• Chapter Review Questions
• Chapter 24 Valuation and Negotiation of Joint Venture Projects
• 24.1 The Three-Step Approach to Joint-Venture Capital Budgeting
• 24.2 A Framework for Profit Sharing
• 24.3 Case I: A Simple Pro-Rata Joint Branch with Neutral Taxes and Integrated Capital Markets
• 24.4 Case II: Valuing a Pro-Rata Joint Branch when Taxes or Discount Rates Differ
• 24.5 Case III: An Unbundled Joint Venture with a License Contract or a Management Contract
• 24.6 Concluding Comments
• Chapter Review Questions
• Chapter 25 International Capital Budgeting Using Option Pricing Theory
• 25.1 Situations Where the Option Pricing Approach Is Suitable
• 25.2 Valuation Using the NPV Criterion
• 25.3 Valuation Using Option Pricing Methods
• 25.4 Valuation of Interdependent Options
• 25.5 Concluding Remarks
• Chapter Review Questions
• Appendix 25A Analytical Solution: Optimal Timing Problem in Continuous Time