International Finance: Putting Theory Into Practice - Weebly

International Finance: Putting Theory Into Practice

Piet Sercu Leuven School of Business and Economics

Katholieke Universiteit Leuven

14:20 on 2 July 2008

Preface

About this book

This book had a forerunner--"International Financial Markets and The Firm", coauthored with Raman Uppal, which came out in 1995. By 2003 or 2004 Raman and I had agreed that a text full of Italian Lira or German Marks and where traders still had a full two minutes to respond to market makers' quotes, might sooner or later risk getting outdated. Starting the revision itself turned out to be much more difficult than agreeing on the principle, though. In the end Raman, being so much busier and more rational than I am, preferred to bow out. How right he was. Still, now that the effort has become a sunk cost, forever bygone, I find that episodes where I sincerely curse the book (and myself and Princeton University Press) are becoming fewer and farther between. Actually, there now are several passages I actually begin to like.

Like the previous book, the book still targets finance students, or at least students that want a genuine finance text, not an international-management or -strategy text with a finance slant nor an international monetary economics text with some corporate applications. There is a continued bias in favor of financial markets and economic logic; the aim is to provide students with a coherent picture of international markets and selected topics in multinational corporate finance. Sure, during everyday practice later on, this framework will then get amended and corrected and qualified; but the feeling of fundamental coherence will remain, we hope.

This book is more analytical than the modal text in the field. Compared to the Sercu-Uppal book, some of the math has been dropped and new matter has been added. As before, a lot of it is in Appendices, thus stressing its optional character. The main difference, I think, is that the in-text math is brought in differently. While in International Financial Markets we had every theorem or proof followed by an example, now the example comes first whenever that is possible. If so, the proof is often even omitted, or turned into a DoItYourself assignment. In fact, a third innovation is that, at least in the chapters or sections that are sufficiently analytical rather than just factual, the reader is invited to prove or verify claims and solve analogous problems. The required level of math is surely not prohibitive; anybody who has finished a good finance course should be able to master these DoItYourself assignments. Still, while the required level of mathematical prowess is

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low, a capacity for abstract thinking and handling symbols remains vital.

Every Part, except the Intro one, now has its own introductory case, which is intended to stimulate the reader's appetite and which can be a source of assignments. The cases usually cover issues from most chapters in the Part.

A fifth change is that the Part on exchange-rate pricing is much reduced. The former three Chapters on exchange-rate theories, predictability, and forward bias are now shrunk to two. And, lastly, three wholly new chapters have been added: two on international stock markets--especially crosslisting with the associated corporategovernance issues--and one on Value at Risk.

Typically, a preface like this one continues with a discussion and motivation of the book's content. But my feeling is that most readers--and surely students-- skip prefaces anyway. Since the motivation of the structure is quite relevant, that material is now merged into the general introduction chapter, Chapter 1.

How to use this book

The text contains material for about two courses. One possibility is to take the second Part, International Financial Markets, as one course, and group the more business-finance oriented material (grouped into Exchange Risk, Exposure, and Risk Management (III) and Long-Term Financing and Investments (IV)) as a second. Fixed-income markets, which now is in Part III, could be included in the markets/instruments course, like it was in the 1995 book; and the whole package can also duplicate as an intro derivatives course, along with the apocryphal Chapter ?? that is available on my website. I myself run two 40-hr courses covering, respectively Parts II-III (Instruments, Risk Management) and Part IV (Stocks, bonds, capital budgeting).

For one single course one could focus, in Part II, on spot (Chapter 3) and forwards (Chapters 4 and 5), and then continue with the chapters on relevance of hedging and exposure (Chapters 12 and 13), to finish with capital budgeting (Chapter 21); this shortlist can be complemented by a few chapters of your liking.

Leuven, December 2006.

c P. Sercu, K.U.Leuven. Free copying stops Oct 1st, '08

Formatted 2 July 2008--14:20.

About the author

Piet Sercu is Professor of International Finance at the Katholieke Universiteit Leuven. He holds the degrees of Business Engineer, Master of Business Administration, and Doctor in Applied Economics from K.U. Leuven. He taught at the Flemish Business School in Brussels (1980-1986), prior to returning to Leuven, where he currently teaches the International Business Finance courses in the Masters and Advanced Masters programs. He also held Visiting Professor appointments at New York University, Cornell University, the University of British Columbia, the London Business School, and Universit?e Libre de Bruxelles. He taught shorter finance courses in Helsinki, Bandung (Indonesia), Leningrad, and India (as an UNDP expert and, in 1994, as a fellow of the European Indian Cooperation and Exchange Programme), and regularly teaches executive courses. He held the 1996/7 Francqui Chair at the Facult?es Universitaires Notre-Dame de la Paix at Namur, and the 2000/04 PricewaterhouseCoopers Chair on Value and Risk at KU Leuven, together with Marleen Willekens. Until 2000, he organized and taught doctoral courses in the European Doctoral Education Network, as part of the Finance faculty of the European Institute for Advanced Studies in Management. He was the 1994 VicePresident and 1995 President of the European Finance Association, won the 1999 Western Finance Association award for Corporate Finance (with Xueping Wu and Charley Park) and was Hanken Fellow in 2002.

His early research focused on International Asset Pricing with real exchange risk and inflation risk. He also did some work on corporate take-over models and lending but has recently returned to International Finance and hedging. He has published in the Journal of Finance, Journal of Banking and Finance, Journal of International Money and Finance, European Economic Review, and other journals. He is on the editorial boards of the European Financial Management Journal and the Journal for International Financial Markets, Institutions and Money.

Piet Sercu and Raman Uppal jointly won the 1995 Sanwa Prize for a monograph in International Finance, Exchange Rate Volatility, Trade, and Capital Flows under Alternative Currency Regimes, published by Cambridge University Press in 2000 and 2006. They also have produced International Financial Markets and The Firm (International Thomson Publishers, Cincinnati-London, 1995), the forerunner to this book and the source of much of its material. There are also a number of joint academic articles.

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Acknowledgments

There are many individuals who played an important role in the production of this book. First and foremost I thank Raman Uppal, not only for his invaluable contribution to the first book but also for the discussions about how to structure a new version, for translating the text parts of the old manuscript into LaTeX, and setting up a master file system to produce the whole. Thanks also to the former and current doctoral students or assistants who read earlier drafts of the first and second book and suggested several improvements: Badrinath H. R., Thi Ngoc Tuan Bui, Katelijne Carbonez, C?edric de Ville de Goyet, Kathy Dehoper?e, Marian Kane, Fang Liu, Rosanne Vanp?ee, Tom Vinaimont, and Xueping Wu. Marian, especially, did lots of work on the exercises, and Katelijne on the revised text. Prof. Martina Vandebroek occasionally helped with spreadsheets and graphs, at which she Excels; she, Fang Liu and Badrinath H. R. provided the empirical results for Chapters 10 and 11. Many thanks, lastly, to colleagues who read drafts and provided comments, some of them at Princeton's request but some even of their free will: Hu Shengmei, Karen Lewis, Bernard Dumas, Stan Standaert, Charles van Wymeersch, and an anonymous (but wholly positive) referee reporting to Princeton UP. Of course, I remain responsible for all remaining errors. Comments and feedback from readers about errors, presentation, and contents are very welcome: do email to piet.sercu@econ.kuleuven.be.

I dedicate this book to my parents, Jan Sercu and the late T?er`ese Reynaert, and to my wife Rita and children Maarten and Jorinde, who have patiently put up with my inattentive absent-mindedness during the time it has taken to complete this project and, come to think of it, most of the time before and after. December 2007

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