1.1 The Rise of the International Company 5
1.2 The Internationalization of Business and Finance 24
1.3 International Financial Management: Theory and Practice 36
1.4 Outline of the Text 42
APPENDIX 1A The Origins and Consequences of International Trade 45 2 EXCHANGE RATE DETERMINATION 51
2.1 Setting the Equilibrium Spot Exchange Rate 52
2.2 Expectations and the Asset Market Model of Exchange Rates 58
2.3 The Fundamentals of Central Bank Intervention 73
2.4 The Equilibrium Approach to Exchange Rates 80
2.5 Summary and Conclusions 83
3 THE INTERNATIONAL MONETARY SYSTEM 87
3.1 Alternative Exchange Rate Systems 88
3.2 A Brief History of the International Monetary System 97
3.3 The European Monetary System and Monetary Union 109
3.4 Emerging Market Currency Crises 129
3.5 Summary and Conclusions 132
4 CURRENCIES: EXPECTATIONS, PARITIES, AND FORECASTING 135
4.1 Arbitrage and the Law of One Price 135
4.2 Purchasing Power Parity 138
4.3 The Fisher Effect 147
4.4 The International Fisher Effect 153
4.5 Interest Rate Parity Theory 157
4.6 The Relationship Between the Forward Rate and the Future Spot Rate 162
4.7 Currency Forecasting 165
4.8 Summary and Conclusions 171
5 THE INTERNATIONAL MONETARY SYSTEM AND THE BALANCE OF PAYMENTS 178
5.1 Balance-of-Payments Categories 179
5.2 The International Flow of Goods, Services, and Capital 184
5.3 Coping with the Current-Account Deficit 193
5.4 Summary and Conclusions 203
6 COUNTRY RISK 208 6.1 Measuring Political Risk 209
6.2 Economic and Political Factors Underlying Country Risk 218
6.3 Country Risk Analysis in International Lending 236
6.4 Summary and Conclusions 243 PART 2 CURRENCY AND DERIVATIVES MARKETS 7 CURRENCY MARKETS 249
7.1 Organization of the Foreign Exchange Market
250 7.2 The Spot Market 257
7.3 The Forward Market 265
7.4 Summary and Conclusions 269
8 CURRENCY DERIVATIVES 272
8.1 Futures Contracts 272
8.2 Currency Options 279