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SIXTH EDITION

GLOBAL

CORPORATE

FINANCE

SukKimandSeungH.Kim

Global Corporate Finance

World Value of the Dollar

The table below, based on foreign-exchange quotations from Reuters, gives the rates of exchange for the US dollar against various currencies as of Friday, July 9, 2004. Unless otherwise noted, all rates listed are middle rates of interbank bid and asked quotes, and are expressed in foreign currency units per one US dollar.

 

Value

Value

 

Value

Value

 

Value

Value

Country (Currency)

07/09

07/02

Country (Currency)

07/09

07/02

Country (Currency)

07/09

07/02

Albania (Lek)

100.850

100.300

Gambia (Dalasi)

29.7500

29.7500

(Kina)

3.1109

3.1090

Algeria (Dinar)

71.0100

71.0100

Ghana (Cedi)

9,027.5

9,025.0

Paraguay (Guarani) d

5,920.0

5,920.0

Angola (New Kwanza)

83.9911

83.7239

Gibraltar (Pound)

0.6269

0.6269

Peru (Nuevo Sol) d

3.4507

3.4686

Angola

 

 

Greenland

 

 

Philippines (Peso)

55.8036

55.8659

(Readj Kwanza)

83.9911

83.7239

(Danish Krone)

5.9905

6.0347

Pitcairn Island

 

 

Antigua

 

 

Grenada

 

 

(NZ $)

1.5200

1.5444

(East Caribbean $)

2.6700

2.6700

(East Caribbean $)

2.6700

2.6700

Poland (Zloty) o

3.6460

3.6750

Argentina (Peso)

2.9499

2.9464

Guadeloupe (Franc)

7.4330

7.4330

Puerto Rico (US $)

1.0000

1.0000

Armenia (Dram)

531.25

533.25

Guam (US $)

1.0000

1.0000

Qatar (Rial)

3.6398

3.6399

Aruba (Florin)

1.7900

1.7900

Guatemala (Quetzal)

7.8950

7.8850

Réunion, Ile de la

 

 

Australia (Dollar)

1.3835

1.4021

Guinea Bissau

 

 

(Franc)

7.4330

7.4330

Azerbaijan (Manat)

4,920.0

4,915.0

(CFA Franc)

528.63

532.93

Romania (Leu)

32,943.0

32,964.0

Bahamas (Dollar)

1.0000

1.0000

Guinea Rep. (Franc)

2,055.0

2,055.0

Russia (Ruble) m, b

29.1121

29.0107

Bahrain (Dinar)

0.3770

0.3770

Guyana (Dollar)

179.000

179.000

Rwanda (Franc)

563.25

562.75

Bangladesh (Taka)

59.1500

59.2500

Halti (Gourde)

33.1070

32.5000

Saint Christopher

 

 

Barbados (Dollar)

1.9900

1.9900

Honduras Rep.

 

 

(East Caribbean $)

2.6700

2.6700

Belarus (Ruble)

2,165.5

2,163.0

(Lempira)

18.2200

18.2100

Saint Helena (Pound)

0.6269

0.6269

Belize (Dollar)

1.9700

1.9700

Hong Kong (Dollar)

7.8003

7.8003

Saint Lucia

 

 

Benin (CFA Franc)

528.63

532.93

Hungary (Forint)

203.335

203.542

(East Caribbean $)

2.6700

2.6700

Bermuda (Dollar)

1.0000

1.0000

Iceland (Krona)

70.9900

72.1000

Saint Pierre (Franc)

7.4330

7.4330

Bhutan (Ngultrum)

47.6250

47.6250

India (Rupee) m

45.6204

45.7038

Saint Vincent

 

 

Bolivia

 

 

Indonesia (Rupiah)

8,896.8

9,132.4

(East Caribbean $)

2.6700

2.6700

(Boliviano) f

7.9298

7.9385

Iran (Rial) o

8,656.0

8,645.0

Samoa, American

 

 

Bosnia & Herzeg.

 

 

Israel (Shekel)

4.4823

4.4723

(US $)

1.0000

1.0000

(Convertible Mark)

1.5828

1.6113

Ivory Coast

 

 

Samoa, Western

 

 

Botswana (Pula)

4.5403

4.5883

(CFA Franc)

528.63

532.93

(Tala)

2.8063

2.7540

Bouvet Island

 

 

Jamaica (Dollar) o

60.8100

60.7200

Sã Tomé and Principe

 

 

(Krone)

6.8192

6.9052

Japan (Yen)

108.331

108.366

(Dobra)

8,700.0

8,700.0

Brazil (Real)

3.0423

3.0386

Jordan (Dinar)

0.7090

0.7090

Saudi Arabia (Riyal)

3.7509

3.7495

Brunei (Dollar)

1.7040

1.7155

Kazakhstan (Tenge)

135.300

135.850

Senegal (CFA Franc)

528.63

532.93

Bulgaria (Lev)

1.5755

1.5874

Kenya (Shilling)

79.7000

79.4500

Seychelles (Rupee)

5.1800

5.1800

Burkina Faso

 

 

Kiribati

 

 

Sierra Leone (Leone)

2,455.0

2,455.0

(CFA Franc)

528.63

532.93

(Australia $)

1.3836

1.4022

Singapore (Dollar)

1.7021

1.7114

Burundi (Franc)

1,075.3

1,075.5

Korea, North (Won)

2.2000

2.2000

Slovakia (Koruna)

32.1440

32.2997

Cambodia (Riel)

3,990.0

3,990.0

Korea, South (Won)

1,149.4

1,154.5

Slovenia (Tolar)

193.230

194.690

Cameroon (CFA Franc)

528.63

532.93

Kuwait (Dinar)

0.2948

0.2948

Solomon Islands

 

 

Canada (Dollar)

1.3184

1.3242

Laos, People DR

 

 

(Dollar)

7.2697

7.4375

Cape Verde Isl

 

 

(Kip)

7,882.0

7,882.0

Somalia (Shilling) d

2,620.0

2,620.0

(Escudo)

108.950

108.950

Latvia (Lat)

0.5341

0.5371

South Africa

 

 

Cayman Islands

 

 

Lebanon (Pound)

1,509.0

1,514.0

(Rand) c

6.0864

6.1162

(Dollar)

0.8200

0.8200

Lesotho (Maloti)

6.1000

6.1510

Sri Lanka (Rupee)

102.780

102.350

Central African Rep.

 

 

Liberia (US $)

1.0000

1.0000

Sudan (Dinar) c

259.540

259.540

(CFA Franc)

528.63

532.93

Libya (Dinar)

1.3233

1.3233

Sudan Rep. (Pound)

2,595.4

2,595.4

Chad (CFA Franc)

528.63

532.93

Liechtenstein

 

 

Suriname (Guilder)

2,515.0

2,515.0

Chile (Peso)

634.92

630.12

(Swiss Franc)

1.2234

1.2327

Swaziland

 

 

China (Yuan)

8.2781

8.2781

Lithuania (Lita)

2.7815

2.8027

(Lilangeni)

6.1510

6.1510

Colombia (Peso) o

2,668.8

2,670.2

Macau (Pataca)

8.0066

8.0066

Sweden (Krona)

7.4074

7.4571

Comoros (Franc)

454.327

454.327

Macedonia (Denar)

49.8200

51.5400

Switzerland (Franc)

1.2235

1.2326

Congo Dem. Rep.

 

 

Madagascar DR

 

 

Syria (Pound)

48.5200

50.2170

(CFA Franc)

528.63

532.93

(Malagasy Franc)

9,508.0

9,305.0

Taiwan (Dollar) o

33.5345

33.5458

Congo, People Rep.

 

 

Malawi (Kwacha)

108.750

108.550

Tanzania (Shilling)

1,100.0

1,107.0

(CFA Franc)

528.63

532.93

Malaysia (Ringgit) e

3.8000

3.8000

Thailand (Baht)

40.7332

40.6669

Costa Rica (Colon)

438.770

438.000

Maldives (Rufiyaa)

12.8000

12.8000

Togo, Rep.

 

 

Croatia (Kuna)

5.9379

5.9805

Mali Rep. (CFA Franc)

528.63

532.93

(CFA Franc)

528.63

532.93

Cuba (Peso)

1.0000

1.0000

Malta (Lira)

0.3437

0.3465

Tonga Islands

 

 

Cyprus (Pound)

0.4688

0.4718

Martinique (Franc)

7.4330

7.4330

(Pa’anga)

1.9608

1.9863

Czech. Republic

 

 

Mauritania (Ouguiya)

254.250

254.400

Trinidad & Tobago

 

 

(Koruna)

25.3743

25.8131

Mauritius (Rupee)

28.2400

28.2100

(Dollar)

6.1500

6.1500

Denmark (Krone)

5.9916

6.0350

Mexico (Peso)

11.4903

11.4482

Tunisia (Dinar)

1.2432

1.2473

Djibouti (Franc)

175.000

175.000

Moldova (Leu)

11.8500

11.8550

Turkey (Lira) h

1,449,275.4

1,449,275.4

Dominica

 

 

Mongolia (Tugrik) m

1,180.0

1,174.0

Turks & Cakos

 

 

(East Caribbean $)

2.6700

2.6700

Montserrat

 

 

(US $)

1.0000

1.0000

Dominican Rep. (Peso)

43.5000

45.0940

(East Caribbean $)

2.6700

2.6700

Uganda (Shilling)

1,741.5

1,761.5

Ecuador (US $) g

1.0000

1.0000

Morocco (Dirham)

8.8756

8.9315

Ukraine (Hryvnia)

5.3183

5.3190

Egypt (Pound)

6.2364

6.2201

Mozambique (Metical)

22,650.0

22,628.5

United Arab Emir.

 

 

El Salvador

 

 

Myanmar (Kyat)

6.4200

6.4200

(Dirham)

3.6730

3.6730

(Colon) d

8.7520

8.7520

Namibia (Dollar)

6.0500

6.1900

United Kingdom

 

 

Equatorial Guinea

 

 

Nauru Island

 

 

(Pound Sterling)

0.5378

0.5454

(CFA Franc)

528.63

532.93

(Australia $)

1.3836

1.4022

Uruguay (Peso) m

29.4118

29.5858

Estonia (Kroon)

12.6050

12.7063

Nepal (Rupee)

72.0000

72.0000

Vanuatu (Vatu)

113.220

115.000

Ethiopia (Birr) o

8.5800

8.6795

Netherlands Antilles

 

 

Venezuela

 

 

European Union

 

 

(Guilder)

1.7800

1.7800

(Bolivar) d

1,919.4

1,919.4

(Euro)

0.8057

0.8116

New Zealand (Dollar)

1.5200

1.5444

Vietnam (Dong) o

15,721.0

15,734.0

Faeroe Islands

 

 

Nicaragua

 

 

Virgin Islands

 

 

(Danish Krone)

5.9905

6.0347

(Cordoba Oro)

15.8400

15.8300

(US $)

1.0000

1.0000

Falkland Islands

 

 

Nigeria (Naira) m

134.550

133.300

Yemen (Rial) a

184.520

184.520

(Pound)

0.6269

0.6269

Norway (Krone)

6.8213

6.9061

Yugoslavia

 

 

Fiji (Dollar)

1.7449

1.7715

Oman (Sul Rial)

0.3850

0.3850

(New Dinar)

58.6293

58.9989

French Guiana

 

 

Pakistan (Rupee)

58.2072

58.3431

Zambia (Kwacha)

4,780.0

4,763.0

(Franc)

7.4330

7.4330

Panama (Balboa)

1.0000

1.0000

Zimbabwe (Dollar)

5,350.9

5,338.8

Gabon (CFA Franc)

528.63

532.93

Papua New Guinea

 

 

 

 

 

*US $ per national currency unit. a, Parallel; b, Russian Central Bank rate; c, commercial; d, free market; e, government rate; f, financial; h, floating rate as of 2/22/01; m, market; o, official.

Source: The Wall Street Journal, July 12, 2004, p. C13.

S I X T H E D I T I O N

G L O B A L

C O R P O R A T E F I N A N C E

t e x t a n d c a s e s

Suk H. Kim

University of Detroit Mercy

and

Seung H. Kim

St. Louis University

© 2006 by Suk H. Kim and Seung H. Kim

BLACKWELL PUBLISHING

350 Main Street, Malden, MA 02148-5020, USA

9600 Garsington Road, Oxford OX4 2DQ, UK

550 Swanston Street, Carlton, Victoria 3053, Australia

The right of Suk H. Kim and Seung H. Kim to be identified as the Authors of this Work has been asserted in accordance with the UK Copyright, Designs, and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs, and Patents Act 1988, without the prior permission of the publisher.

This edition published 2006 by Blackwell Publishing Ltd

1 2006

Library of Congress Cataloging-in-Publication Data

Kim, Suk H.

Global corporate finance : text and cases / Suk H. Kim, Seung H. Kim.—6th ed.

p.cm.

Includes bibliographical references and index.

ISBN-13:

978-1-4051-1990-0 (hardcover : alk. paper)

ISBN-10:

1-4051-1990-X

(hardcover : alk. paper) 1. International business enterprises—Finance.

2. International finance. 3.

International business enterprises—Finance—Case studies. I. Kim, Seung Hee.

II. Title.

 

 

 

HG4027.5.K557

2006

 

658.15¢99—dc22

 

 

 

 

 

2005022069

A catalogue record for this title is available from the British Library.

Set in 10 on 12 pt Adobe Garamond

by SNP Best-set Typesetter Ltd, Hong Kong Printed and bound in the United Kindom by TJ International, Padstow, Cornwall

The publisher’s policy is to use permanent paper from mills that operate a sustainable forestry policy, and which has been manufactured from pulp processed using acid-free and elementary chlorine-free practices. Furthermore, the publisher ensures that the text paper and cover board used have met acceptable environmental accreditation standards.

For further information on

Blackwell Publishing, visit our website:

www.blackwellpublishing.com

Contents

List of Figures

xii

List of Tables

xv

Preface and Acknowledgments

xviii

About the Authors

xxvii

Part I: The Global Financial Environment

1

Chapter 1: Introduction

3

Opening Case 1: TIAA-CREF Goes Global with Corporate Governance

3

1.1

Reasons to Study International Finance

5

1.2

Company Goals and Functions of Financial Management

8

1.3

Multinational Companies and their Performance

10

1.4

Principles of Global Finance

14

1.5

Agency Theory and Corporate Governance

18

1.6

Environmental Differences

21

1.7

The Structure of this Book

23

Summary

23

Questions

24

References

24

Case Problem 1: What Is a National Company?

25

Chapter 2: Motives for World Trade and Foreign Investment

28

Opening Case 2: The Effect of Foreign Investment on Exports

28

2.1

Motives for Foreign Trade

29

2.2

Economic Integration

38

vi

CONTENTS

 

 

 

 

 

 

 

2.3

Motives for Foreign Investment

43

 

2.4

A Synthesis of Foreign Trade and Investment Theories

46

 

Summary

47

 

Questions

47

 

Problems

48

 

References

49

 

Case Problem 2: The Fruits of Free Trade Under the World Trade Organization

49

Chapter 3: The Balance of Payments

54

Opening Case 3: Opportunity Cost and Comparative Advantage

54

3.1

An Overview of the Balance of Payments

55

3.2

Balance-of-Payments Accounts

57

3.3

The Actual Balance of Payments

63

3.4

How to Reduce a Trade Deficit

70

Summary

72

Questions

72

Problems

73

References

73

Case Problem 3: USA–China Trade Relations

74

Chapter 4: The International Monetary System

78

Opening Case 4: The Euro – A Story of Change

78

4.1

A Successful Foreign-Exchange System

81

4.2

A Brief History of the International Monetary System

87

4.3

The International Monetary Fund

94

4.4

The European Monetary Union

98

4.5

Proposals for Further International Monetary Reform

102

Summary

104

Questions

105

References

105

Case Problem 4: The Mexican Peso Crisis of December 1994

106

Part II: Corporate Foreign-Exchange Risk Management

111

Chapter 5: The Foreign-Exchange Market and Parity Conditions

113

Opening Case 5: The Volume of Foreign-Exchange Trading

113

5.1

Major Participants in the Exchange Market

115

5.2

Spot Exchange Quotation: The Spot Exchange Rate

120

5.3

Forward Exchange Quotation: The Forward Exchange Rate

125

5.4

International Parity Conditions

128

5.5

Arbitrages

136

CONTENTS vii

Summary

142

Questions

142

Problems

143

References

145

Case Problem 5: The Big Mac Hamburger Standard: February 2003

146

Chapter 6: Currency Futures and Options

148

Opening Case 6: Derivatives Risks

148

6.1

The Currency Futures Market

150

6.2

The Currency Options Market

157

6.3

Futures Options

169

Summary

170

Questions

171

Problems

171

References

173

Case Problem 6: Merck’s Use of Currency Options

174

Chapter 7: Financial Swaps

177

Opening Case 7: Why have Gillette and GE Chosen a Higher Cost of Funding?

177

7.1

The Emergence of the Swap Market

179

7.2

Plain Vanilla Swaps

183

7.3

Motivations for Swaps

187

Summary

191

Questions

192

Problems

192

References

193

Case Problem 7: Regulations of Derivatives Markets

193

Chapter 8: Exchange Rate Forecasting

196

Opening Case 8: Mundell Wins Nobel Prize in Economics

196

8.1

Measuring Exchange Rate Changes

197

8.2

The Forecasting Needs of the Multinational Company

199

8.3

Forecasting Floating Exchange Rates

201

8.4

Forecasting Fixed Exchange Rates

210

Summary

216

Questions

216

Problems

217

References

218

Case Problem 8: General Motors Operations in Mexico, and the Peso Crisis

218

Chapter 9: Managing Transaction Exposure and Economic Exposure

221

Opening Case 9: Avon’s Actions to Protect Against Volatile Currencies

221

9.1

The Basic Nature of Foreign-Exchange Exposures

222

viii

CONTENTS

 

 

 

 

 

 

 

9.2

Transaction Exposure Management

226

 

9.3

Economic Exposure Management

233

 

9.4

Currency Exposure Management Practices

235

 

Summary

238

 

Questions

238

 

Problems

239

 

References

241

 

Case Problem 9: Western Mining’s Economic Exposure Management

241

Chapter 10: Translation Exposure Management

243

Opening Case 10: Main Features of Accounting Exposure

243

10.1

Translation Rules

244

10.2

FASBs 8 and 52

247

10.3

Hedging Translation Exposure

251

Summary

252

Questions

253

Problems

254

References

256

Case Problem 10: Dell Mercosur

256

Part III: The Global Financing Strategy

261

Chapter 11: International Financial Markets

263

Opening Case 11: Foreign Investors Load Up with Asia’s Shares

263

11.1

Eurocurrency Markets

264

11.2

The Eurocurrency Interbank Market

269

11.3

The Asian Currency Market

274

11.4

The International Bond Market

276

11.5

The International Equity Market

281

11.6

Long-Term Capital Flows to Developing Countries

285

Summary

286

Questions

287

Problems

288

References

289

Case Problem 11: The Rise and Fall of the US Stock Market

290

Chapter 12: International Banking Issues and Country Risk Analysis

293

Opening Case 12: Argentina’s Currency Crisis

293

12.1

International Banking Operations

295

12.2

International Loans

298

12.3

Country Risk Analysis

309

CONTENTS ix

Summary

314

Questions

314

Problems

314

References

315

Case Problem 12: The World Bank

316

Chapter 13: Financing Foreign Trade

319

Opening Case 13: US Export–Import Bank Seeks Private Investors

319

13.1

Basic Documents in Foreign Trade

320

13.2

The Payment Terms of Export Transactions

326

13.3

Sources of Financing Foreign Trade

333

Summary

339

Questions

340

Problems

341

References

342

Case Problem 13: Arms Dealers Get Creative with Offsets

342

Chapter 14: Financing Foreign Investment

345

Opening Case 14: Failed US–Vietnamese Joint Ventures

345

14.1

Internal Sources of Funds

346

14.2

External Sources of Funds

349

14.3

Development Banks

357

Summary

362

Questions

363

Problems

363

References

364

Case Problem 14: IBM’s Strategic Alliances

364

Part IV: Global Investment Strategy

367

Chapter 15: International Working Capital Management

369

Opening Case 15: An Efficient Global Treasury Structure

369

15.1

The Basic Concepts of Working Capital Management

370

15.2

Cash Management

382

15.3

Accounts Receivable Management

388

15.4

Inventory Management

389

Summary

392

Questions

393

Problems

393

References

395

Case Problem 15: Navistar International’s Netting System

395

Chapter 16: International Portfolio Investment

398

Opening Case 16: LE Group Shows how Korea Inc. Might Restructure

398

16.1

Key Terminology

400

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