【正文】 se portfolio against which the proxy betas are estimated the . market portfolio, the local portfolio, or the world market portfolio? ? 3. Should the market risk premium be based on the . market or the local market? ? 4. How, if at all, should country risk be incorporated in the cost of capital estimates? 59 DISCOUNT RATES FOR FOREIGN INVESTMENTS ? Three alternatives for estimating proxy betas are proposed here. ? Local Companies ? Proxy Industry ? Adjusted . Industry Beta ? In employing the CAPM, the base portfolio against which the proxy betas are estimated can be the home portfolio or the global market portfolio. ? The Impact of Globalization on the Cost of Capital ? Other things being equal, the use of a global CAPM means a lower cost of capital for this pany. ? Empirical Evidence ? The Relevant Market Risk Premium 60 ESTABLISHING A WORLDWIDE CAPITAL STRUCTURE ? The Cost of Debt Capital ? In general, the aftertax dollar cost of borrowing in the local currency for a foreign affiliate equals the aftertax interest expense plus the change in the exchange rate. ? The capital structure problem for the multinational enterprise is to determine the mix of debt and equity for the parent entity and for all consolidated and unconsolidated subsidiaries that maximizes shareholder wealth. ? Foreign Subsidiary Capital Structure ? Conform to the capital structure of the parent pany ? Reflect the capitalization norms in each foreign country ? Vary to take advantage of opportunities to minimize the MNC’s cost of capital 61 ESTABLISHING A WORLDWIDE CAPITAL STRUCTURE ? Political Risk Management ? Currency Risk Management ? Leverage and Foreign Tax Credit ? Leasing and Taxes ? CostMinimizing Approach to Global Capital Structure ? Valuing LowCost Financing Opportunities ? Taxes ? ZeroCoupon Bonds ? Debt versus Equity Financing ? Government Credit and Capital Control ? Government Subsidies and Incentives 62 PART IV FOREIGN INVESTMENT ANALYSIS CHAPTER 15 INTERNATIONAL PORTFOLIO INVESTMENT 63 Learning Objectives ● To describe the risks and advantages of international investing ● To explain how international investing can allow investors to achieve a better riskreturn tradeoff than by investing solely in . securities ● To identify the barriers to investing overseas ● To describe the various ways in which . investors can diversify into foreign securities ● To calculate the currency risk associated with investing in securities issued in different markets and denominated in various currencies ● To calculate the return associated with investing in securities issued in different markets and denominated in various currencies 64 THE RISKS AND BENEFITS OF INTERNATIONAL EQUITY INVESTING ? The risks of international investing ? 1. Changes in currency exchange rates ? 2. Dramatic changes in market value ? 3. Political, economic, and social events ? 4. Lack of liquidity ? 5. Less information ? 6. Reliance on foreign legal remedies ? 7. Different market operations ? This relation follows from the basic rule of portfolio diversification: The broader the diversification, the more stable the returns and the more diffuse the risks. 65 THE RISKS AND BENEFITS OF INTERNATIONAL EQUITY INVESTING ? Correlations and the Gains from Diversification ? Foreign market betas, which are a measure of market risk derived from the capital asset pricing model, are calculated relative to the . market in the same way that individual asset betas are calculated ? The obvious conclusion is that international diversification pushes out the efficient frontier—the set of portfolios that has the smallest possible standard deviation for its level of expected return and has the maximum expected return for a given level of risk—allowing investors simultaneously to reduce their risk and increase the。 Avoid surprises 32 DESIGNING A HEDGING STRATEGY ? Costs and Benefits of Standard Hedging Techniques ? Exposure Netting ? Exposure ting involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in a way such that losses (gains) on the first exposed position will be offset by gains (losses) on the second currency exposure. ? Accounting for Hedging and FASB 133 33 MANAGING TRANSLATION EXPOSURE ? Firms have three available methods for managing their translation exposure: (1) adjusting fund flows, (2) entering into forward contracts, and (3) exposure ting. ? Funds adjustment involves altering either the amounts or the currencies (or both) of the planned cash flows of the parent or its subsidiaries to reduce the firm’s local currency accounting exposure. ? Evaluating Alternative Hedging Mechanisms ? Ordinarily, the selection of a fundsadjustment strategy cannot proceed by evaluating each possible technique separately without risking suboptimization. 34 MANAGING TRANSACTION EXPOSURE ? Various techniques for managing transaction exposure ? Forward Market Hedge ? MoneyMarket Hedge ? Risk shifting ? Pricing Decision ? Exposure ting ? Currency Risk Sharing ? Currency Collars ? CrossHedging ? Foreign Currency Options 35 PART II FOREIGN EXCHANGE RISK MANAGEMENT CHAPTER 5 MEASURING AND MANAGING ECONOMIC EXPOSURE 36 Learning Objectives ● To define economic exposure and exchange risk and distinguish between the two ● To define operating exposure and distinguish between it and transaction exposure ● To identify the basic factors that determine the foreign exchange risk faced by a particular pany or project ● To describe the marketing, production, and financial