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International Financial Economics

Corporate Decisions in Global Markets

Second Edition

Thomas J. O'Brien

Publication Date - September 2005

ISBN: 9780195175042

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

Retail Price to Students: $198.95

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.

BLEmploys a practical, financial perspective with real-world applications
BLIncludes expanded material on currency swaps to show their role in foreign exchange exposure management
BLOffers a detailed description of economic foreign exchange exposure
BLProvides 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