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Chapter 21 - International Corporate Finance
21-1
Chapter 21
INTERNATIONAL CORPORATE FINANCE
CHAPTER WEB SITES
Section
Web Address
CHAPTER ORGANIZATION
21.3 Purchasing Power Parity
21.4 Interest Rate Parity, Unbiased Forward Rates, and the International Fisher Effect
Covered Interest Arbitrage
21.5 International Capital Budgeting
21.6 Exchange Rate Risk
Chapter 21 - International Corporate Finance
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ANNOTATED CHAPTER OUTLINE
21.1. Terminology
Lecture Tip: Eurodollars are “deposits of U.S. dollars in banks located
outside the United States.” However, you should emphasize that Eurodollars
are not actual U.S. currencies deposited in a bank, but are bookkeeping
entries on a bank’s ledger. These deposits are loaned to the Euro bank’s U.S.
Chapter 21 - International Corporate Finance
21.2. Foreign Exchange Markets and Exchange Rates
Video Note: “Foreign Exchange Market” looks at how Honda protects itself against
changing exchange rates.
A. Exchange Rates
Most currency trading is done with currencies being quoted in U.S.
dollars.
Chapter 21 - International Corporate Finance
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Lecture Tip: The opportunity to exploit a triangle arbitrage may
Lecture Tip: The late economist Milton Friedman provided a
primer on exchange rates in the November 2, 1998 issue of Forbes
magazine. He described three types of exchange rate regimes.
Chapter 21 - International Corporate Finance
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21.3. Purchasing Power Parity
A. Absolute Purchasing Power Parity
trade, and differences in the product
B. Relative Purchasing Power Parity
Lecture Tip: When asked, “Which is better – a stronger dollar or
a weaker dollar?” most students answer a stronger one. While this
Chapter 21 - International Corporate Finance
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cheaper against the yen in an effort to reduce our trade deficit with
Japan.
Lecture Tip: The concept of relative PPP can be reinforced by
considering an identical product that sells in both England and the
21.4. Interest Rate Parity, Unbiased Forward Rates, and the International Fisher
Effect
A. Covered Interest Arbitrage
Example:
Chapter 21 - International Corporate Finance
B. Interest Rate Parity
C. Forward Rates and Future Spot Rates
D. Putting It All Together
Uncovered interest parity (UIP) – combining UFR and IRP gives:
Chapter 21 - International Corporate Finance
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21.5. International Capital Budgeting
A. Method 1: The Home Currency Approach
1. The home currency approach
Using UIP:
Chapter 21 - International Corporate Finance
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C. Unremitted Cash Flows
Ethics Note: The following case may be used as a class example to
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Reports later surfaced that Libya had constructed a chemical
weapons factory. Imhausen did not deny the plant’s existence but
Imhausen, as well as the government of Libya, claimed that the
21.6. Exchange Rate Risk
A. Short-Run Exposure
Exchange rate risk – the risk of loss arising from fluctuations in
exchange rates
Lecture Tip: There were several earnings warnings for the third
quarter of 2000 by multinational firms. One of the biggest reasons
Chapter 21 - International Corporate Finance
B. Long-Run Exposure
C. Translation Exposure
D. Managing Exchange Rate Risk
21.7. Political Risk
21.8. Summary and Conclusions
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