A company needs cash balances in order to satisfy transactions, precautionary and speculative needs. In addition, some cash balances may be needed to satisfy banking requirements or compensating balances. * In a company with operations in more than one country, the needs for cash balances by foreign affiliates denominated in a number of currencies, must be coordinated with cash flows resulting from corporate activity. Additionally, these needs must be coordinated with expected and unexpected changes in exchange rates. Driven by new banking technology, fluctuating exchange rates and interest rates, cash and foreign exchange management has become an increasingly important issue in recent years. Advances in electronic funds transfer systems and the treasury use of the micro-computer are also challenging traditional practices in these areas in most of the industrial countries of North American and Western Europe. The growing importance of cash and foreign exchange management is fundamentally affecting the overall banking relationships of companies. 2 Nevertheless, very little is known about practices with regard to banking relations in the areas of cash and foreign exchange management, particularly outside the U.S.3 This study is an attempt to fill that gap in our knowledge as it surveys and compares practices in the United Kingdom, The Netherlands and Belgium in the areas of banking relations for cash and foreign exchange management. 4

Abstract The market risk premium (MRP) remains one of the most debated issues in corporate finance. The MRP is a critical input when measuring a company’s cost of equity and weighted cost of capital. Thus, a company’s estimate of the MRP can have major effects on its capital budgeting decisions. This is especially true when estimating the MRP in emerging markets, where expected returns are widely understood to be affected by variables other than those specified by the capital asset pricing model (CAPM). The purpose of this chapter is to investigate the degree of integration or lack thereof (segmentation) between capital markets and to develop a modified CAPM for financial decision-making in emerging markets.

In this paper an attempt is made to document the interdependence among stocks, bonds and gold. Gold is an important asset class and has often been seen as a safe haven and counter-cyclical investment vehicle. We present an extension of the work done by Diebold and Yilmaz (2009) using a spillover index methodology to examine whether gold returns and volatilities can predict U.S. stock and bond market movements or vice versa. For the sample period from January 1970 until April 2009, return spillovers appear muted. However, there is some evidence of volatility spillovers of which much is attributable to a spillover from innovations in stocks to bond return volatility. Spillovers in terms of returns are higher during the early 1980s, mid-1990s and the most recent financial crisis. Volatility spillovers have been very elevated in the recent financial crisis as well as late 1970s and early 1990s. The lack of any substantial relationship between gold and stocks and gold and bonds raises the question whether gold price movements can be used as a predictor for stocks and bond prices.

Using daily returns from 1980‐2006, we find a significant contemporaneous association between all European Union (EU) equity markets and Germany. There is, however, no significant indication that the German stock market leads or lags the movements in the other EU stock markets. A higher share of imports by Germany from other EU countries, as well as fluctuations and increased volatility in the exchange rate, have negative effects on stock market co‐movements. Conversely, the difference in equity market capitalization with Germany, the greater the foreign direct investment by Germany, and the fact of belonging to the eurozone all contribute to greater stock market co‐movement.

Using Geweke feedback measures, we present empirical evidence that largely supports the hypothesis that the stock markets of South American countries are highly affected by changes in commodity prices after controlling for changes in exchange rates, interest rates, and North American stock market changes. In total, six different Goldman Sachs commodity price indexes are tested against the unexplained variation in stock market returns for Argentina, Brazil, Chile, Colombia, Peru, and Venezuela, covering the period 1995-2007. The Argentinian, Brazilian, and Peruvian stock markets are significantly affected by changes in commodity prices the same day. Venezuela's stock market, however, does not react to changes in commodity prices, even including energy prices. Stock market returns for Chile show a contemporaneous relation with energy and metals prices, whereas Colombia's equity market is affected by price changes for agricultural and industrial metals. In all cases, we find a contemporaneous relation and no indication of a lead or lag relationship.

The equity market risk premium remains one of the most debated issues in corporate finance. Monthly returns for 19 developed equity markets and 16 emerging equity markets between 1970 and 2006 aided in examining the extent of integration of these markets with the U.S. stock market and the Morgan Stanley Capital International (MSCI) World Index. Geweke measures of feedback indicate that although both developed and emerging markets show a slight and gradual increase in integration, emerging markets reflect significant segmentation from the U.S. stock market and the world market index. Greater stock market integration is associated with a more favorable economic and political climate toward business. Additional risk premiums relative to the intertemporal capital asset pricing model (ICAPM) arise because of segmentation of emerging markets from the world. Valuing business investments in countries with at least partially segmented equity markets requires an adjusted capital asset pricing model (CAPM).

There is little agreement among academics or practitioners about how to measure the size of the equity market risk premium, particularly when it relates to investments in emerging markets. Using monthly equity returns for 22 developed and 24 emerging markets covering the period 1976–2006, the authors find that developed capital markets have experienced significant increases in their degree of integration with the U.S. and world market indexes, while emerging markets remain at least partly segmented from those of the U.S. and the world.For countries that are reasonably well integrated into global capital markets, the authors suggest using the U.S.—based equity market risk premium. But when valuing investments in emerging markets, they recommend use of the Capital Asset Pricing Model adjusted for political risk and a measure of co‐movement between the foreign and U.S. stock markets. The authors also remind readers that the equity market risk premium is supposed to be a forward‐looking measure, and that the common practice of inferring the future from the past can be misleading, particularly in the case of rapidly developing emerging markets.

Executive Summary.International real estate investment performance is highly sensitive to currency fluctuations. While large professional investors hedge currency at the portfolio level, not by asset class or asset, smaller, specialist investors hedge at the individual asset level, facing considerable specific risk. Hedging products are ill suited to international real estate. This paper uses a Monte Carlo framework to examine hedging using combinations of currency swaps for the rental income and expected terminal value of an office investment. The study suggests that the currency swap strategy results in considerable reduction of the downside risk associated with currency fluctuations and produces superior risk-adjusted returns.

We identify operating exposure as the most important and difficult to manage component of exchange risk. Our model identifies three components of foreign exchange exposure: direct operating exposure, the market demand effect, and the competitive effect. The size and relative importance of these components depends critically upon international market structure and firm strategies. We derive implications for managing foreign exchange exposure.

We investigate the spillover effect of the US equity market on the value of the dollar and therefore on the return and volatility of US equity investments for the international investor. The data are daily observations of the S & P 500 and the US dollar in terms of seven foreign currencies covering the period 1971–2002. Using Geweke measures of feedback, we find a high percentage of contemporaneous association between daily movements in the S & P 500 index and changes in the value of the dollar. A consistently positive relationship between the S & P 500 and the dollar is found for the period 1992–2002, creating a compounding effect for the foreign investor in US equities. However, investment by foreigners in US equities did not result in consistently higher returns but in higher volatility compared to their US counterparts for the period 1971–2002.

Using monthly Compustat data for 478 companies covering the period 1982–1998, we investigate which factors discriminate between financially successful and less successful companies. Financial success is measured using three different methods, i.e., the Sharpe ratio, Jensen’s alpha, and EVA. We consider a total of 10 different company specific characteristics as potential indicators of superior performance. A binary logit model is applied to quantify the relationship between the individual firm characteristics and the probability that a particular measure of success will be greater or lower than the average for all firms considered. We also calculate the percentage correct prediction by the model for each measure of success. We find that especially large profitable firms with efficient working capital management and a certain degree of uniqueness regarding their business are the most successful companies.

Using daily returns from 1988 through 1999 for Argentina, Brazil, Chile, Mexico, and Canada, and from 1993 to 1999 for Colombia, Peru and Venezuela, we investigate to what degree these equity markets are integrated with the US equity market and examine the factors that affect the level of economic integration. We find a statistically significant high percentage of contemporaneous association between the eight equity markets of the Americas and the stock market in the United States. A high share of trade with the United States has a strong positive effect on stock market comovements. Conversely, increased bilateral exchange rate volatility and a higher ratio of stock market capitalization relative to that of the United States contribute to lower comovement.

AbstractUsing daily returns from 1988 to 1998, we investigate to what degree twelve equity markets in Asia are integrated with Japan's equity market and examine the factors that affect the level of economic integration. We find that the equity markets of Australia, China, Hong Kong, Malaysia, New Zealand, and Singapore are highly integrated with the stock market in Japan. There is also evidence that these Asian markets become more integrated over time, especially since 1994. A higher import share as well as a greater differential in inflation rates, real interest rates, and gross domestic product growth rates have negative effects on stock market comovements between country pairs. Conversely, increased export share by Asian economies to Japan and greater foreign direct investment from Japan to other Asian economies contribute to greater comovement.

ABSTRACT Prior studies of industrialized countries have found that a definite relationship exists between the stock market returns and macroeconomic variables such as inflation and real output. This paper investigates the effects of changes in the consumer price index on industrial production and stock market returns for China. Six different types of Chinese shares are examined for the period 1994–1998. The results show a very significant positive relationship between inflation and real output. A positive and significant association is found between stock returns and real output in current periods. Inflation seems to have no impact on Chinese real stock returns. These relationships all hold for “B” shares, “H” shares and red chips. China's “A” share returns seem not to be impacted by either changes in domestic inflation or real industrial production.

ABSTRACT This paper analyzes the portfolio properties of the euro as it has been initially composed with 11 currencies and also in its anticipated future extended version comprising all 15 EC members. The period under investigation is January 1992 to October 1998. Using a U.S. investor's perspective, investing in the euro is a low risk-low return alternative compared to investing in the U.S. dollar. Results of the Gibbons, Ross and Shanken multivariate test show that the composition of the European common currency is mean-variance inefficient. PROPERTIES OF THE EURO - EUROPE'S NEW CURRENCY The launch of Europe's single currency, the euro, on January l, 1999, was without any doubt one of the most significant events in the economic and political development of Europe. In this major experiment in monetary arrangements, 11 European countries did unite in the European Monetary Union (EMU) with the European Central Bank (ECB) setting the short-term interest rate for the entire euro zone. The 11 countries that have adopted the euro are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. To participate in the single currency zone, countries were required to meet several criteria prescribed in the Maastricht Treaty of 1991, relating to inflation, interest rates, government debt, and exchange rate volatility. The four national currencies not taking part in the euro - the British pound, Danish kroner, Greek drachma, and the Swedish. kronor - will set fluctuation bands against the euro. These will be 15 per cent bands, as with the old Exchange Rate Mechanism, although some may want to keep their currencies in narrower bands. On January 1, 1999, the conversion rates between the euro and currencies from the 11 nations participating in the shared currency were set (see the appendix for the official exchange rates). All ECUs were automatically converted to euros on a one-to-one basis. The introduction of the euro creates two important long-term factors which may lead to an increased demand for the euro at the expense of the U.S. dollar: ( 1 ) the use of the euro as a reserve asset and (2) as a means of payment. Jager and de Jong (1987) examined the attractiveness of the ECU as a reserve asset and find that its reserve function will be substantially undermined by the exchange rate stability that is pursued in the EMU. Following the euro's introduction, Europe's foreign exchange reserves will become somewhat `excessive' as there will be little need for them to hold reserves as intervention in the foreign exchange market will be carried out by the ECB. Temperton ( 1997) estimates that the excess holdings of foreign exchange reserves could be as much as $300 billion. Attempts to reduce these reserves holdings could put a severe downward pressure on the U.S. dollar. On the other hand, EC authorities may not want to see the value of the euro strengthen too much against the dollar out of fear of losing international competitiveness. Undoubtedly, the euro will gain importance as a vehicle currency for international trade and finance. Although about half of world trade is denominated in U.S. dollars, the U.S. accounts for only 13% of global exports. Since the 11 euro-zone nations represent a much higher percentage of world exports, it is to be expected that a larger share of world trade will be denominated in euro, at the expense of the U.S. dollar. The introduction of the euro will, therefore, have far-reaching consequences for financial and commercial enterprises worldwide. According to Robinson (1998) as a result of the euro, corporate treasurers will see greater degrees of consistency and conformity because of money market and interest rate convergence, a concentration of banking relationships, and the rise of an efficient secondary financial market that resembles the U.S. secondary markets. The euro's arrival will also force Europe's investors to formulate new strategies and expand the range of asset classes. …

This paper investigates whether hedging the currency risk associated with international portfolios diversified into established and emerging markets leads to significant incremental returns. From the empirical results, for the period August 1989 to December 1997, the ineffectiveness of hedging for generating superior returns could be explained by the low correlations among the observed markets and the presence of negative index/currency correlations in many assets. In the particular case of emerging markets, the predominance of positive index/currency correlations suggests that the currency risk could compound the risk posed by these markets beyond the power of a hedging strategy.

The efficiency of gold as a portfolio component over 1978 - 1995 is examined here from the perspective of seven major industrialized countries. Gold offers diversification benefits but dismal performance in terms of a risk-return trade-off. As a result, the inclusion of gold in test portfolios did not provide any increase in risk-adjusted return over the period as a whole. It was an attractive component of a diversified portfolio only for the subperiod 1978 - 1983 and never thereafter.