CHAPTER 1
The Foreign Exchange Market 3
Opening Case
The Rise
(and Fall) of the Japanese Yen 3
Introduction 4
The Functions of the Foreign Exchange Market 5
Currency
Conversion 5
Insuring
against Foreign Exchange Risk 6
Management Focus
Volkswagen’s Hedging Strategy 8
The Nature of the Foreign Exchange Market 9
Economic Theories of Exchange Rate Determination 10
Prices and
Exchange Rates 11
Country Focus
Quantitative Easing, Inflation, and the U.S. Dollar 15
CHAPTER 1
The Foreign Exchange Market 3
Opening Case
The Rise
(and Fall) of the Japanese Yen 3
Introduction 4
The Functions of the Foreign Exchange Market 5
Currency
Conversion 5
Insuring
against Foreign Exchange Risk 6
Management Focus
Volkswagen’s Hedging Strategy 8
The Nature of the Foreign Exchange Market 9
Economic Theories of Exchange Rate Determination 10
Prices and
Exchange Rates 11
Country Focus
Quantitative Easing, Inflation, and the U.S. Dollar 15
Interest
Rates and Exchange Rates 16
Investor
Psychology and Bandwagon Effects 17
Summary of
Exchange Rate Theories 18
Exchange Rate Forecasting 18
The
Efficient Market School 18
The
Inefficient Market School 19
Approaches
to Forecasting 19
Currency Convertibility 20
Implications for Managers 21
Management Focus
Dealing with the Rising Euro 23
Chapter Summary 25
Critical Thinking and Discussion Questions 25
Research Task 26
Closing Case
Billabong 26
Endnotes 28
CHAPTER 2
The International Monetary
System 31
Opening Case
Iceland’s Economic
Recovery 31
Introduction 32
The Gold Standard 33
Mechanics of the Gold Standard 33
Strength of the Gold Standard 33
The Period between the Wars: 1918–1939 34
The Bretton Woods System 34
The Role of the IMF 35
The Role of the World Bank 36
The Collapse of the Fixed
Exchange Rate System 36
The Floating Exchange Rate Regime
37
The Jamaica Agreement 38
Exchange Rates since 1973 38
Country Focus
The U.S. Dollar, Oil Prices,
and Recycling
Petrodollars 41
Fixed versus Floating Exchange
Rates 41
The Case for Floating Exchange Rates 42
The Case for Fixed Exchange Rates 43
Who Is Right? 44
Exchange Rate Regimes in
Practice 44
Pegged Exchange Rates 44
Currency Boards 45
Crisis Management by the IMF
46
Financial Crises in the Post–Bretton Woods
Era 46
Country Focus
The Mexican Currency Crisis of
1995 47
Evaluating the IMF’s Policy Prescriptions 48
Implications for Managers 51
Management
Focus
Airbus and the Euro 52
Chapter Summary 53
Critical Thinking and
Discussion Questions 54
Research Task 55
Closing Case
Currency Trouble in
Malawi 55
Endnotes 56
CHAPTER 3
The Global Capital Market 59
Opening Case
Declining Cross-Border
Capital Flows:
Retreat or Reset? 59
Introduction 60
Benefits of the Global Capital
Market 60
Functions of a Generic Capital Market 61
Attractions of the Global Capital Market 61
Management
Focus
Deutsche Telekom Taps the
Global Capital
Market 63
Growth of the Global Capital Market 66
Global Capital Market Risks 68
Country Focus
Did the Global Capital Markets
Fail Mexico? 69
The Eurocurrency Market 70
Genesis and Growth of the Market 70
Attractions of the Eurocurrency Market 71
Drawbacks of the Eurocurrency Market 72
The Global Bond Market 72
Attractions of the Eurobond Market 73
The Global Equity Market 73
Foreign Exchange Risk and the
Cost of Capital 75
Implications for Managers 75
Chapter Summary 76
Critical Thinking and
Discussion
Questions 77
Research Task 77
Closing Case
Industrial and
Commercial Bank
of China 77
Endnotes 78
CHAPTER 4
Accounting and Finance in the
International Business 81
Opening Case
Tax Strategy at Google 81
Introduction 82
National Differences in
Accounting Standards 83
International Accounting
Standards 84
Management
Focus
Chinese Accounting 85
Accounting Aspects of Control
Systems 86
Exchange Rate Changes and Control Systems 87
Transfer Pricing and Control Systems 88
Separation of Subsidiary and Manager Performance 89
Financial Management: The
Investment Decision 89
Capital Budgeting 89
Project and Parent Cash Flows 90
Adjusting for Political and Economic Risk 90
Management
Focus
Black Sea Oil and Gas Ltd. 91
Risk and Capital Budgeting 92
Financial Management: The
Financing Decision 93
Financial Management: Global
Money Management 93
Minimizing Cash Balances 93
Reducing Transaction Costs 95
Managing the Tax Burden 96
Moving Money across Borders 97
Chapter Summary 101
Critical Thinking and
Discussion Questions 102
Research Task 102
Closing Case
Microsoft’s Acquisition
of Skype 103
Endnotes 104
Cases
South Korean Currency
Crisis 106
Russian Ruble Crisis
and Its Aftermath 107
Caterpillar: Competing
in a World of Fluctuating
Currencies 109
Glossary 111
