726 Part Eight Risk Management
bre44380_ch27_707-731.indd 726 09/30/15 12:10 PM
In addition to currency risk, overseas operations may be exposed to extra political risk. How-
ever, firms may be able to structure the financing to reduce the chances that government will
change the rules of the game.There are a number of useful textbooks in international finance. Here is a small selection:
P. Sercu, International Finance: Theory into Practice (Princeton: Princeton University Press, 2009).
D. K. Eiteman, A. I. Stonehill, and M. H. Moffett, Multinational Business Finance, 13th ed. (Reading,
MA: Pearson Addison Wesley, 2012).
A. C. Shapiro, Multinational Financial Management, 10th ed. (New York: John Wiley & Sons, 2013).
Here are some general discussions of international investment decisions and associated exchange
risks:
G. Allayannis, J. Ihrig, and J. P. Weston, “Exchange-Rate Hedging: Financial versus Operational Strat-
egies,” American Economic Review 91 (May 2001), pp. 391–395.
D. R. Lessard, “Global Competition and Corporate Finance in the 1990s,” Journal of Applied Corpo-
rate Finance 3 (Winter 1991), pp. 59–72.
M. D. Levi and P. Sercu, “Erroneous and Valid Reasons for Hedging Foreign Exchange Exposure,”
Journal of Multinational Financial Management 1 (1991), pp. 25–37.
Listed below are a few of the articles on the relationship between interest rates, exchange rates, and
inflation:
Forward and spot exchange rates
M. D. Evans and K. K. Lewis, “Do Long-Term Swings in the Dollar Affect Estimates of the Risk Pre-
mia?” Review of Financial Studies 8 (1995), pp. 709–742.
Interest rate parity
K. Clinton, “Transaction Costs and Covered Interest Arbitrage: Theory and Evidence,” Journal of
Political Economy 96 (April 1988), pp. 358–370.
Purchasing power parity
K. Froot and K. Rogoff, “Perspectives on PPP and Long-run Real Exchange Rates,” in G. Grossman
and K. Rogoff (eds.), Handbook of International Economics (Amsterdam: North-Holland Publish-
ing Company, 1995).
K. Rogoff, “The Purchasing Power Parity Puzzle,” Review of Economic Literature 34 (June 1996),
pp. 667–668.
A. M. Taylor and M. P. Taylor, “The Purchasing Power Parity Debate,” Journal of Economic Perspectives
18 (Autumn 2004), pp. 135–158.Select problems are available in McGraw-Hill’s Connect.
Please see the preface for more information.● ● ● ● ●FURTHER
READING● ● ● ● ●PROBLEM
SETS
BASIC- Exchange rates Look at Table 27.1.
a. How many Japanese yen do you get for your dollar?
b. What is the one-month forward rate for yen?
c. Is the yen at a forward discount or premium on the dollar?
d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
e. If the one-year interest rate on dollars is 1.5% annually compounded, what do you think is
the one-year interest rate on yen?