FINANCE es eo bee CORPORATE DECISIO GLOBAL MARKETS THOMAS J. O'BRIEN ae SECOND EDITIONCONTENTS Preface ix PART I. FOREIGN EXCHANGE RATES = I CHAPTER 1 Introduction to Foreign Exchange 3 FX Rates 4 FX Rate Changes 7 FX Volatility and FX Exposure ° andamental FX Supply and Demand B Imerbank FX Market 4 Central Banks and Balance of Payments “4 Speculators 0 ‘Triangular Arbitrage 7 FX Indexes 20 CHAPTER 2 Foreign Exchange and Purchasing Power 24 Absolute Purchasing Power Party (APPP) 25 FX Misvaluation 26 ‘The Big Mac Index n ‘OECD and APPP 29 FX Misvaluation and Trade Imbalances 3 Relative Purchasing Power Parity (RPPP) u Gold and FX Rates 40 “The Bretton Woods System of Pegged Exchange Rates (1944-1973) 41 The Euro 4 Curreney Boards and Dollarization 5 Trade Finance 5 ‘An asterisk preceding a section ttle designates advanced material that can be omitted without loss ofthe basic content ofan undergraduate course.“ Contente CHAPTER 3 Forward Foreign Exchange Long and Short Forward FX Positions Difference Check Settlement Forward FX Contracts and Hedging FX Transaction Exposure 56 ‘The Furocurrency Market 59 ‘Synthetic FX Forwans and Money Market Hedging 61 Mark-to-Market Value of a Forward FX Contract 65 FX Swaps and Futures 665 *PERL o CHAPTER 4 Foreign Exchange and Interest Rates 4 Covered Interest Arbitrage 15 Covered Interest Rate Party (CTRP) 1 CARP in Percentage Form 80 ‘Uncovered Interest Rate Parity (UIRP) 81 Interest Rate Changes and FX Rates 84 FX Forecasting 89 Siegel's Paradox 9% "Siegel's Paradox and Forward versus Expected FX Retes 2 PART I]. LONG-TERM FOREIGN EXCHANGE EXPOSURE _ _.99 CHAPTER § Foreign Exchange Operating Exposure lot FX Operating Exposure 101 FX Operating Exposure of a Foreign Subsidiary 106 FX Revenue and Cost Exposures and FX Pass-Through 109 Operational Hedging and Operating Leverage 113 “Theoretical Estimation of FX Operating Exposure 11s *Regression Estimation of FX Exposure 18 CHAPTER 6 Debt and Foreign Exchange Exposure 125, Should Firms Manage FX Exposure? 126 Debi Denominated in Foreign Currencies: Eurobonds 129 Debt and FX Net Cash Flow Exposures 130 FX Value Exposure 133 ‘EX Equity Exposure 136 Hedging FX Equity Exposure with Foreign Currency Debt 9