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International Financial Economics

Corporate Decisions in Global Markets

Second Edition

Thomas J. O'Brien

Publication Date - 01 September 2005

ISBN: 9780195175042

320 pages
7-1/2 x 9-1/4 inches

An authoritative guide to real-world decisions in corporate finance.


Completely updated and revised, the second edition of International Financial Economics: Corporate Decisions in Global Markets applies the principles of financial economics to explain how international corporate finance decisions are made in the real world.

Written from a practical, financial perspective versus one of pure economic theory, the text is divided into three sections. The first section provides a comprehensive discussion of exchange rates. The next section offers an in-depth look at a firm's foreign exchange exposure measurement and hedging. The material highlights the connection between foreign exchange exposure in profit and foreign exchange exposure in equity, as well as the impact of foreign currency debt and currency swaps. The third section examines overseas investment decisions in both countries integrated with the global financial market and those still segmented from it. Coverage emphasizes the cost of capital and accounting for overseas investments and hedging of foreign exchange risk.

International Financial Economics: Corporate Decisions in Global Markets is ideal for advanced undergraduate and graduate courses in global financial management.


  • Employs a practical, financial perspective with real-world applications
  • Includes expanded material on currency swaps to show their role in foreign exchange exposure management
  • Offers a detailed description of economic foreign exchange exposure
  • Provides additional material on overseas investment decisions when exchange rates are not correctly valued

  • About the Author(s)

    Thomas J. O'Brien is Professor and Head of the Finance Department at the University of Connecticut. He is the author and coauthor of several books on financial management and has published numerous articles in professional journals including the Journal of Finance, Financial Management, European Financial Management, and the Financial Analyst's Journal.

    Previous Publication Date(s)

    September 1989


    "This text provides an exciting, fresh approach to international financial management. Masterfully written by a recognized leader in the field, International Financial Economics is unique for its clarity, creativity, and coverage. O'Brien explains the material thoroughly, yet concisely, by relying on economic intuition and artfully weaving together theoretical concepts and fascinating examples. The book will be appealing to a variety of audiences. It is appropriately sophisticated for MBA students, but accessible to undergraduates, and up-to-date for practitioners in finance. I highly recommend this text for anyone seeking answers to the complex problems in international finance."--Reid W. Click, George Washington University

    Table of Contents

      * denotes advanced material that can be omitted without loss of the basic content of an undergraduate course.
      FX ratesduction to Foreign Exchange
      FX Rate Changes
      FX Volatility and FX Exposure
      Fundamental FX Supply and Demand
      Interbank FX market
      Central Banks and Balance of Payments
      Triangular Arbitrage
      2. Foreign Exchange and Purchasing Power
      Absolute Purchasing Power Parity (APPP)
      FX Misevaluation
      The Big Mac Index
      OECD and APPP
      FX Misvaluation and Trade Imbalances
      Relative Purchasing Power Parity (RPPP)
      Gold and FX Rates
      The Bretton Woods System of Pegged Exchange Rates (1944-1973)
      The Euro
      Currency Boards and Dollarization
      * Trade Finance
      3. Forward Foreign Exchange
      Long and Short Forward FX Positions
      Difference Check Settlement
      Forward FX Contracts and Hedging FX Transaction Exposure
      The Eurocurrency Market
      Synthetic FX Forwards and Money Market Hedging
      Market-to-Market Value of a Forward FX Contract
      FX Swaps and Futures
      * PERLs
      4. Foreign Exchange and Interest Rates
      Covered Interest Arbitrage
      Covered Interest Rate Parity (CIRP)
      CIRP in Percentage Form
      Uncovered Interest Rate Parity (UIRP)
      Interest Rate Changes and FX Rates
      FX Forecasting
      Siegel's Paradox
      * Siegel's Paradox and Forward versus Expected FX Rates
      5. Foreign Exchange Operating Exposure
      FX Operating Exposure
      FX Operating Exposure of a Foreign Subsidiary
      FX Revenue and Cost Exposures and FX Pass-Through
      Operational Hedging and Operating Leverage
      Theoretical Estimation of FX Operating Exposure
      * Regression Estimation of FX Exposure
      6. Debt and Foreign Exchange Exposure
      Should Firms Manage FX Exposure?
      Debt Denominated in Foreign Currencies: Eurobonds
      Debt and FX Net Cash Flow Exposures
      FX Value Exposure
      FX Equity Exposure
      Hedging FX Equity Exposure with Foreign Currency Debt
      FX Net Cash Flow Exposure versus FX Equity Exposure
      Debt Maturity
      Estimation of FX Equity Exposure
      Unlevering Estimated FX Equity Exposure
      7. Currency Swaps
      World Bank-IBM Swap
      Fixed-for-Fixed Currency Swaps
      Parallel Loans and Back-to-Back Loans
      Swap-Driven Financing
      Settlement of Swap Components with Difference Checks
      Mark-to-Mark Valuation of Currency Swaps
      Off-Market Swaps
      Currency Swaps and FX Equity Exposure
      Managing FX Equity Exposure with Currency Swaps
      * Unlevering Estimated FX Equity Exposure
      8. Economic Foreign Exchange Exposure
      Economics of Foreign Exchange, Price, and Volume
      * Compound FX Revenue Exposure
      * Competitive FX Revenue Exposure
      * FX Revenue Exposure: Domestic Firm with a Foreign Competitor
      * FX Operating Exposure of a Foreign Subsidiary with a Foreign Competitor
      9. Global Finance and the Cost of Capital
      Returns on Foreign Assets
      Depositary Receipts
      Cost of Capital
      The Capital Asset Pricing Model
      Global Equity Beta and the Cost of Equity
      Risk-Free Rate
      Cost of Debt and the WACC
      Systematic FX Risk
      * Risk-Adjusted Uncovered Interest Rate Parity
      10. Cost of Capital for Overseas Investments
      Operating Risk Approach
      Accounting Beta Method
      Country beta Method
      Emerging Market Investments
      Cost of Capital in a Foreign Country
      Unlevering Equity Betas: Basic Case
      * WACC and Operating Risk
      * Unlevering Equity Betas: General Case
      * Pure Play Proxy Method
      * FX Exposure and Beta
      * Risk and return in Non-US Dollar Currencies
      11. Accounting for Foreign Investments and Hedging
      FX Translation and SFAS 52
      Hedging and SFAS 133
      Cash Flow Hedges
      Net Investment Hedges
      FX Value Exposure vs. FX Accounting Exposure
      12. Overseas Investment Decisions
      Overseas Acquisition
      Production Relocation
      Foreign Currency Perspective
      Interpreting NPVs of the Currency Perspectives
      Equilibrium NPV or Home Currency NPV
      Impact of Hedging and Financing Decisions
      Expansion of Overseas Capacity
      * Forecasts of Corrections of FX Misvaluation
      * Asset Values and Correction of FX Misvaluation