As globalization is redefining the field of corporate finance, international finance is increasingly permeating most financial transactions, which in yesteryears were deemed to be strictly domestic transactions. In fact, it is very difficult to understand what is happening in capital markets without a firm grasp of currency markets, the investment strategies of sovereign wealth funds, carry trades, foreign exchange derivative products, and so forth.
Similarly, project finance cannot be understood without a firm grasp of valuation concepts in a cross-border context. Indeed, international finance is now part and parcel of the basic literacy of any financial executive whether she or he is an investment banker, a treasurer, a CFO, a portfolio manager, or a loan officer. There is no hiding from international finance.
And yet the field of international finance textbooks is not terribly crowded, with the three or four leading titles showing signs of multiple editions fatigue.
What is needed is a book offering a fresh perspective on international finance that transcends the boundaries of ethnocentric thinking and an overly U.S.-centric approach—a book that brings the fascinating and rapidly unfolding story of emerging capital markets and their daring multinationals in the mainstream of international finance. International Corporate Finance is purporting to be such a book.
What Makes This Book Unique
There are several features that will set International Corporate Finance apart from rival books:
- Most chapters are developed around a real-life but simplified mini-case to anchor theoretical concepts to managerial situations. This allows the reader to grasp the practical relevance of the topic addressed before being introduced to the necessary theoretical frameworks.
- Each chapter provides real-life illustrations. The purpose is to make international finance as alive as possible. Typically this is done as boxed inserts called “International Corporate Finance in Practice,” written in a lighter style meant to wake up the reader by being reasonably provocative.
- Most chapters provide simple decision rules and pragmatic “how-to” answers to key managerial issues—at least one in each chapter. Many texts often provide a narrative solution to managerial questions raised but fail to provide simple yet rigorous closure to the reader.
- Several chapters, such as Islamic Banking and Finance, Asian Finance and Bank- ing, Cross-Border Mergers and Acquisitions, and Project Finance, are completely new material that no other textbook currently covers. This book systematically incorporates the story of the BRIC countries (Brazil, Russia, India, and China) and their daring multinationals, thereby balancing out an overly U.S.-centric and Wall Street–anchored approach to international corporate finance.
- Most chapters include separate case studies (found on the website) that are real- life decision-making situations. Although much shorter than typical Harvard Business School case studies (the industry standard), they capture multifaceted financial management in an engaging manner and typically result in 30 to 45
minutes of lively class discussion.
- When appropriate, historical perspective and landmark transactions are presented to put concepts in context. In-depth coverage of the subprime crisis (2008) and the euro crisis (2010–) is developed in the context of ill-functioning financial markets.
- While primarily focused on international corporate finance, the book is structured in such a way that it could also be used for a course on global capital markets, as Parts One, Two, and Three provide comprehensive coverage of capital markets.
- A companion quarterly newsletter provides instructors with up-to-date corporate and market developments drawn from the financial press, investment banks’ research departments, and relevant websites. It will facilitate instructors’ task of making each lecture topical and current.
Audience For This Book
International Corporate Finance targets not only the business school market— primarily MBAs, undergraduate seniors, and executive MBAs—but also schools of international affairs and public administration. In draft form it has also been widely used in executive training programs at banks, multinationals, and increasingly government and regulatory agencies.
The book is intended for students taking an elective in international corporate finance that may be part of a finance major (but not necessarily). Although prior exposure to economics and corporate finance would be helpful, the book is self- contained and has no prerequisites.
International Corporate Finance should also appeal to a growing international/ export market beyond the domestic university/college market. More generally, there is an explosion in the number of MBA programs offered in emerging market countries such as China, India, Brazil, Russia, and Mexico, where international finance is at the center in the curriculum simply because of the global orientation of these economies.
For this rapidly growing market, it is imperative to approach international financial management from an emerging market perspective as well as a U.S. or European perspective. Specific chapters on Asian and Islamic finance and banking as well as BRIC countries, along with illustrations and problems/exercises, should be strong elements of differentiation vis-à-vis existing texts.
Meeting The Challenge Of International Corporate Finance
International finance is one of the most topical and lively business topics making the front page of any business daily, but, perhaps because of the unique role played by financial derivatives, it is also a highly complex, arcane, technical, and mystifying subject for the average business student. Herein lies the challenge for the instructor and the student: how to capitalize on the star power and captivating nature of international finance without sacrificing the rigor of the explanation.
Textbooks all too often err on the side of academic correctness and read like treatises written for other knowledge- able academics rather than fresh-faced students. My approach is to start (most) chapters with real-life decisions—situations to hook the reader who presumably wants to know what possible answers struggling managers could implement—and then derive theory, rather than starting from a theoretical construct at the risk of losing the reader before turning to applications.
For example, the chapter on trade financing starts with:
Tata Motors of India’s export manager, Raju Aneja, has just signed an export order for 1,000 Nanos—its new revolutionary minicar—with Atlas Distrib- utors, a Vespa scooter dealership based in Casablanca (Morocco). The ex- port sale is denominated in euros (€) and calls for payment of €20 million on delivery—scheduled for approximately three months from time of shipment. Tata Motors has never had any commercial dealings with Atlas but was en- visioning a long-term relationship with the Moroccan firm. However, it was concerned about the importer’s solvency. The Moroccan dirham was pegged to the euro and partially convertible. How should Tata Motors finance its export trade? Raju knew that this would be the first of many similar deals that Tata Motors was hoping to forge with other emerging market countries where the Nano was expected to meet with much commercial success.
Similarly, the chapter on debt financing starts with:
JetBlue Airlines was seeking to raise $250 million in a seven-year note to upgrade its aging fleet. Ms. Rousse—JetBlue’s newly appointed CFO—was reviewing the different funding options offered by its investment bankers, which included a domestic dollar-denominated zero-coupon bond priced at 61 percent, a dollar-denominated Eurobond with a 7.25 percent annual coupon, and a samurai bond denominated in yen with a semiannual cou- pon of 4.00 percent. Last, a floating-rate note denominated in euros paying euro-LIBOR + 165 basis points was also being considered. Ms. Rousse was perplexed by the array of currency denominations and the significant differ- ences in nominal interest rates, both of which complicated direct compari- sons among the different funding options.
Both chapters progressively build a more rigorous framework as they progress. In the same vein, a rich array of exercises and problems accompany each chapter; they are more than mechanical numerical applications of what is discussed in the chapter itself. Last but not least, most chapters offer a separate short case study (found on the book’s website) for fruitful discussion.
What Is In The Book?
This book is divided into six parts:
- Part One: The International Monetary Environment
- Part Two: The Foreign Exchange Market and Currency Derivatives
- Part Three: International Financing
- Part Four: Managing Foreign Exchange Risk
- Part Five: Cross-Border Valuation and Foreign Investment Analysis
- Part Six: Managing the Multinational Financial System
Part One: The International Monetary Environment. Part One examines the monetary environment within which international financing decisions are made. How exchange rates are determined and the unique role played by central banks’ intervention in setting currency values is the focus of Chapter 2, whereas Chapter 3 presents a brief history of the international monetary system. The architecture of the world economy is outlined in Chapter 4 through the lens of national balance of payments accounting, which records the key flows linking national economies.
Part Two: The Foreign Exchange Market and Currency Derivatives. After introducing the foreign exchange market and its inner workings (Chapter 5), Part Two discusses the valuation of the mother of all currency derivatives—the forward contract—in the context of the theory of interest rate parity (Chapter 6). Currency futures, options, and swaps are detailed in Chapter 7, which shows how they can be harnessed for the purpose of risk management.
Part Three: International Financing. If globalization of financial markets has gone a long way toward eradicating differences in national cost of capital, they have not been entirely erased. This is why global financial markets are often characterized as mildly segmented rather than fully integrated (Chapter 8). Part Three outlines funding as a global procurement decision from both equity markets (Chapter 9) and debt markets (Chapter 10). The uniqueness of financing strategies and capital markets in two regions of the world that loom especially large on the global economy—namely East Asia and the Middle East—is addressed in separate chapters. Chapter 12 profiles the idiosyncrasies of Asian finance and banking in the context of Japan, South Korea, and China, whereas Chapter 13 explores the mysteries of Islamic finance.
Part Four: Managing Foreign Exchange Risk. The exchange rate variable permeates all key financial management decisions and injects a considerable degree of variability in a firm’s overall risk profile. Part Four starts by asking whether hedging part or all of a firm’s exposure to currency risk is indeed value creating for the firm’s own- ers and therefore warranted (Chapter 14). To the extent that exchange rate forecast- ing (Chapter 15) is a treacherous activity in the context of clean floating exchange rates, we take a “total risk” view of risk management. Exporters and importers as well as multinational corporations and globally reaching financial institutions generally hedge both transaction and translation exposures by using forwards, futures, options, or swaps. Measuring and managing transaction, translation, and economic exposures are discussed in Chapters 16, 17, and 18, respectively.
Part Five: Cross-Border Valuation and Foreign Investment Analysis. Part Five develops a valuation framework for cross-border investments that uniquely incorporates the different variables such as foreign exchange risk, country risk, asymmetric tax treatment, and different inflation rates. Chapter 20 contrasts different metrics such as net present value of asset-based cash flows or equity-based cash flows ver- sus adjusted present value metrics, and reviews the necessary adjustments to be made to the cost of capital used as the discount rate in international valuation.
The framework is applied to cross-border mergers and acquisitions in Chapter 21 and large-scale infrastructural project finance in Chapter 22. Taking the perspective of asset managers manning the desks of mutual funds, pension funds, hedge funds, or sovereign wealth funds, global investing in stocks and bonds is addressed in Chapter 23, which gauges the limit of geographical diversification in the context of ever-increasingly integrated capital markets.
Part Six: Managing the Multinational Financial System. Central to the successful implementation of a global strategy, multinational corporations need financial planning, budgeting, and control systems that incorporate the unique operating circumstances of each and every foreign subsidiary while ensuring that strategic goals are duly achieved (Chapter 24). Finally, Chapter 25 shows how financial decisions should be optimized to exploit fully the multinational enterprise system.