(eBook PDF) International Financial

Management 12th by Jeff Madura

Visit to download the full and correct content document:
https://ebooksecure.com/download/ebook-pdf-international-financial-management-12t
h-by-jeff-madura/
Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Brief Contents

Preface, xx
About the Author, xxvi

PART 1: The International Financial Environment 1

1 Multinational Financial Management: An Overview 3
2 International Flow of Funds 33
3 International Financial Markets 63
4 Exchange Rate Determination 107
5 Currency Derivatives 135

PART 2: Exchange Rate Behavior 187

6 Government Influence on Exchange Rates 189
7 International Arbitrage and Interest Rate Parity 225
8 Relationships among Inflation, Interest Rates, and Exchange Rates 255

PART 3: Exchange Rate Risk Management 293

9 Forecasting Exchange Rates 295
10 Measuring Exposure to Exchange Rate Fluctuations 323
11 Managing Transaction Exposure 355
12 Managing Economic Exposure and Translation Exposure 393

PART 4: Long-Term Asset and Liability Management 415

13 Direct Foreign Investment 417
14 Multinational Capital Budgeting 435
15 International Corporate Governance and Control 471
16 Country Risk Analysis 497
17 Multinational Capital Structure and Cost of Capital 521
18 Long-Term Debt Financing 545

PART 5: Short-Term Asset and Liability Management 571

19 Financing International Trade 573
20 Short-Term Financing 593
21 International Cash Management 615
Appendix A: Answers to Self-Test Questions 650
Appendix B: Supplemental Cases 663
Appendix C: Using Excel to Conduct Analysis 684
Appendix D: International Investing Project 692
Appendix E: Discussion in the Boardroom 695
Glossary 702
Index 709

vii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Contents

Preface, xx
About the Author, xxvi

PART 1: The International Financial Environment 1

1: MULTINATIONAL FINANCIAL MANAGEMENT: AN OVERVIEW 3
1-1 Managing the MNC, 3
1-1a How Business Disciplines Are Used to Manage the MNC, 4
1-1b Agency Problems, 4
1-1c Management Structure of an MNC, 6
1-2 Why Firms Pursue International Business, 8
1-2a Theory of Comparative Advantage, 8
1-2b Imperfect Markets Theory, 8
1-2c Product Cycle Theory, 8
1-3 How Firms Engage in International Business, 9
1-3a International Trade, 10
1-3b Licensing, 10
1-3c Franchising, 11
1-3d Joint Ventures, 11
1-3e Acquisitions of Existing Operations, 11
1-3f Establishment of New Foreign Subsidiaries, 11
1-3g Summary of Methods, 12
1-4 Valuation Model for an MNC, 13
1-4a Domestic Model, 13
1-4b Multinational Model, 14
1-4c Uncertainty Surrounding an MNC’s Cash Flows, 16
1-4d Summary of International Effects, 20
1-4e How Uncertainty Affects the MNC’s Cost of Capital, 21
1-5 Organization of the Text, 21
Term Paper on the International Credit Crisis, 31

2: INTERNATIONAL FLOW OF FUNDS 33

2-1 Balance of Payments, 33
2-1a Current Account, 33
2-1b Capital Account, 35
2-1c Financial Account, 36
2-2 Growth in International Trade, 36
2-2a Events That Increased Trade Volume, 37
2-2b Impact of Outsourcing on Trade, 38
2-2c Trade Volume among Countries, 39
2-2d Trend in U.S. Balance of Trade, 41
2-3 Factors Affecting International Trade Flows, 42
2-3a Cost of Labor, 42
2-3b Inflation, 42
ix

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
x Contents

2-3c National Income, 43

2-3d Credit Conditions, 43
2-3e Government Policies, 43
2-3f Exchange Rates, 47
2-4 International Capital Flows, 51
2-4a Factors Affecting Direct Foreign Investment, 51
2-4b Factors Affecting International Portfolio Investment, 52
2-4c Impact of International Capital Flows, 52
2-5 Agencies That Facilitate International Flows, 54
2-5a International Monetary Fund, 54
2-5b World Bank, 55
2-5c World Trade Organization, 56
2-5d International Financial Corporation, 56
2-5e International Development Association, 56
2-5f Bank for International Settlements, 56
2-5g OECD, 57
2-5h Regional Development Agencies, 57

3: INTERNATIONAL FINANCIAL MARKETS 63

3-1 Foreign Exchange Market, 63
3-1a History of Foreign Exchange, 63
3-1b Foreign Exchange Transactions, 64
3-1c Foreign Exchange Quotations, 67
3-1d Interpreting Foreign Exchange Quotations, 69
3-2 International Money Market, 74
3-2a Origins and Development, 75
3-2b Money Market Interest Rates among Currencies, 76
3-3 International Credit Market, 77
3-3a Syndicated Loans in the Credit Market, 78
3-3b Regulations in the Credit Market, 79
3-3c Impact of the Credit Crisis, 80
3-4 International Bond Market, 80
3-4a Eurobond Market, 81
3-4b Development of Other Bond Markets, 82
3-4c Risk of International Bonds, 83
3-4d Impact of the Greek Crisis, 84
3-5 International Stock Markets, 85
3-5a Issuance of Stock in Foreign Markets, 85
3-5b Issuance of Foreign Stock in the United States, 86
3-5c Non-U.S. Firms Listing on U.S. Exchanges, 87
3-5d Investing in Foreign Stock Markets, 88
3-5e How Market Characteristics Vary among Countries, 89
3-5f Integration of Stock Markets, 90
3-5g Integration of International Stock Markets and Credit Markets, 91
3-6 How Financial Markets Serve MNCs, 91
Appendix 3: Investing in International Financial Markets, 99

4: EXCHANGE RATE DETERMINATION 107

4-1 Measuring Exchange Rate Movements, 107
4-2 Exchange Rate Equilibrium, 108
4-2a Demand for a Currency, 109

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Contents xi

4-2b Supply of a Currency for Sale, 110

4-2c Equilibrium, 110
4-2d Change in the Equilibrium Exchange Rate, 111
4-3 Factors That Influence Exchange Rates, 112
4-3a Relative Inflation Rates, 113
4-3b Relative Interest Rates, 114
4-3c Relative Income Levels, 115
4-3d Government Controls, 116
4-3e Expectations, 116
4-3f Interaction of Factors, 117
4-3g Influence of Factors across Multiple Currency Markets, 119
4-3h Impact of Liquidity on Exchange Rate Adjustment, 120
4-4 Movements in Cross Exchange Rates, 120
4-4a Explaining Movements in Cross Exchange Rates, 122
4-5 Capitalizing on Expected Exchange Rate Movements, 122
4-5a Institutional Speculation Based on Expected Appreciation, 122
4-5b Institutional Speculation Based on Expected Depreciation, 123
4-5c Speculation by Individuals, 124
4-5d The “Carry Trade”, 124

5: CURRENCY DERIVATIVES 135

5-1 Forward Market, 135
5-1a How MNCs Use Forward Contracts, 135
5-1b Bank Quotations on Forward Rates, 136
5-1c Premium or Discount on the Forward Rate, 137
5-1d Movements in the Forward Rate over Time, 138
5-1e Offsetting a Forward Contract, 138
5-1f Using Forward Contracts for Swap Transactions, 139
5-1g Non-Deliverable Forward Contracts, 139
5-2 Currency Futures Market, 140
5-2a Contract Specifications, 140
5-2b Trading Currency Futures, 141
5-2c Comparing Futures to Forward Contracts, 142
5-2d Credit Risk of Currency Futures Contracts, 143
5-2e How Firms Use Currency Futures, 143
5-2f Speculation with Currency Futures, 145
5-3 Currency Options Market, 146
5-3a Option Exchanges, 146
5-3b Over-the-Counter Market, 146
5-4 Currency Call Options, 147
5-4a Factors Affecting Currency Call Option Premiums, 147
5-4b How Firms Use Currency Call Options, 148
5-4c Speculating with Currency Call Options, 149
5-5 Currency Put Options, 151
5-5a Factors Affecting Currency Put Option Premiums, 151
5-5b Hedging with Currency Put Options, 152
5-5c Speculating with Currency Put Options, 152
5-5d Contingency Graph for the Purchaser of a Call Option, 154
5-5e Contingency Graph for the Seller of a Call Option, 154
5-5f Contingency Graph for the Buyer of a Put Option, 154
5-5g Contingency Graph for the Seller of a Put Option, 155

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
xii Contents

5-5h Conditional Currency Options, 156

5-5i European Currency Options, 157
Appendix 5A: Currency Option Pricing, 168
Appendix 5B: Currency Option Combinations, 172
Part 1 Integrative Problem: The International Financial Environment, 186

PART 2: Exchange Rate Behavior 187

6: GOVERNMENT INFLUENCE ON EXCHANGE RATES 189
6-1 Exchange Rate Systems, 189
6-1a Fixed Exchange Rate System, 189
6-1b Freely Floating Exchange Rate System, 191
6-1c Managed Float Exchange Rate System, 192
6-1d Pegged Exchange Rate System, 193
6-1e Dollarization, 198
6-2 A Single European Currency, 198
6-2a Monetary Policy in the Eurozone, 199
6-2b Impact on Firms in the Eurozone, 199
6-2c Impact on Financial Flows in the Eurozone, 199
6-2d Exposure of Countries within the Eurozone, 200
6-2e Impact of Crises within the Eurozone, 200
6-2f Impact on a Country That Abandons the Euro, 202
6-2g Impact of Abandoning the Euro on Eurozone Conditions, 202
6-3 Government Intervention, 203
6-3a Reasons for Government Intervention, 203
6-3b Direct Intervention, 204
6-3c Indirect Intervention, 207
6-4 Intervention as a Policy Tool, 208
6-4a Influence of a Weak Home Currency, 208
6-4b Influence of a Strong Home Currency, 208
Appendix 6: Government Intervention during the Asian Crisis, 217

7: INTERNATIONAL ARBITRAGE AND INTEREST RATE PARITY 225

7-1 International Arbitrage, 225
7-1a Locational Arbitrage, 225
7-1b Triangular Arbitrage, 227
7-1c Covered Interest Arbitrage, 230
7-1d Comparison of Arbitrage Effects, 234
7-2 Interest Rate Parity (IRP), 234
7-2a Derivation of Interest Rate Parity, 235
7-2b Determining the Forward Premium, 236
7-2c Graphic Analysis of Interest Rate Parity, 238
7-2d How to Test Whether Interest Rate Parity Holds, 240
7-2e Interpretation of Interest Rate Parity, 240
7-2f Does Interest Rate Parity Hold?, 240
7-2g Considerations When Assessing Interest Rate Parity, 241
7-3 Variation in Forward Premiums, 242
7-3a Forward Premiums across Maturities, 242
7-3b Changes in Forward Premiums over Time, 243

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Contents xiii

8: RELATIONSHIPS AMONG INFLATION, INTEREST RATES,

AND EXCHANGE RATES 255
8-1 Purchasing Power Parity (PPP), 255
8-1a Interpretations of Purchasing Power Parity, 255
8-1b Rationale behind Relative PPP Theory, 256
8-1c Derivation of Purchasing Power Parity, 256
8-1d Using PPP to Estimate Exchange Rate Effects, 257
8-1e Graphic Analysis of Purchasing Power Parity, 258
8-1f Testing the Purchasing Power Parity Theory, 260
8-1g Why Purchasing Power Parity Does Not Hold, 263
8-2 International Fisher Effect (IFE), 264
8-2a Fisher Effect, 264
8-2b Using the IFE to Predict Exchange Rate Movements, 265
8-2c Implications of the International Fisher Effect, 266
8-2d Derivation of the International Fisher Effect, 267
8-2e Graphical Analysis of the International Fisher Effect, 269
8-3 Tests of the International Fisher Effect, 271
8-3a Limitations of the IFE, 272
8-3b IFE Theory versus Reality, 273
8-4 Comparison of the IRP, PPP, and IFE, 274
Part 2 Integrative Problem: Exchange Rate Behavior, 284
Midterm Self-Exam, 285

PART 3: Exchange Rate Risk Management 293

9: FORECASTING EXCHANGE RATES 295
9-1 Why Firms Forecast Exchange Rates, 295
9-2 Forecasting Techniques, 296
9-2a Technical Forecasting, 296
9-2b Fundamental Forecasting, 298
9-2c Market-Based Forecasting, 302
9-2d Mixed Forecasting, 304
9-2e Guidelines for Implementing a Forecast, 305
9-3 Forecast Error, 306
9-3a Measurement of Forecast Error, 306
9-3b Forecast Errors among Time Horizons, 307
9-3c Forecast Errors over Time Periods, 307
9-3d Forecast Errors among Currencies, 307
9-3e Forecast Bias, 307
9-3f Comparison of Forecasting Methods, 310
9-3g Forecasting under Market Efficiency, 311
9-4 Using Interval Forecasts, 312
9-4a Methods of Forecasting Exchange Rate Volatility, 312

10: MEASURING EXPOSURE TO EXCHANGE RATE FLUCTUATIONS 323

10-1 Relevance of Exchange Rate Risk, 323
10-1a The Investor Hedge Argument, 324
10-1b Currency Diversification Argument, 325
10-1c Stakeholder Diversification Argument, 325
10-1d Response from MNCs, 325

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
xiv Contents

10-2 Transaction Exposure, 326

10-2a Estimating “Net” Cash Flows in Each Currency, 326
10-2b Exposure of an MNC’s Portfolio, 327
10-2c Transaction Exposure Based on Value at Risk, 331
10-3 Economic Exposure, 335
10-3a Exposure to Local Currency Appreciation, 335
10-3b Exposure to Local Currency Depreciation, 336
10-3c Economic Exposure of Domestic Firms, 337
10-3d Measuring Economic Exposure, 337
10-4 Translation Exposure, 339
10-4a Determinants of Translation Exposure, 340
10-4b Exposure of an MNC’s Stock Price to Translation Effects, 341

11: MANAGING TRANSACTION EXPOSURE 355

11-1 Policies for Hedging Transaction Exposure, 355
11-1a Hedging Most of the Exposure, 355
11-1b Selective Hedging, 355
11-2 Hedging Exposure to Payables, 356
11-2a Forward or Futures Hedge on Payables, 356
11-2b Money Market Hedge on Payables, 357
11-2c Call Option Hedge on Payables, 357
11-2d Comparison of Techniques to Hedge Payables, 360
11-2e Evaluating the Hedge Decision, 363
11-3 Hedging Exposure to Receivables, 363
11-3a Forward or Futures Hedge on Receivables, 363
11-3b Money Market Hedge on Receivables, 364
11-3c Put Option Hedge on Receivables, 364
11-3d Comparison of Techniques for Hedging Receivables, 367
11-3e Evaluating the Hedge Decision, 370
11-3f Summary of Hedging Techniques, 370
11-4 Limitations of Hedging, 371
11-4a Limitation of Hedging an Uncertain Payment, 371
11-4b Limitation of Repeated Short-Term Hedging, 371
11-5 Alternative Hedging Techniques, 373
11-5a Leading and Lagging, 374
11-5b Cross-Hedging, 374
11-5c Currency Diversification, 374
Appendix 11: Nontraditional Hedging Techniques, 388

12: MANAGING ECONOMIC EXPOSURE AND TRANSLATION EXPOSURE 393

12-1 Managing Economic Exposure, 393
12-1a Assessing Economic Exposure, 395
12-1b Restructuring to Reduce Economic Exposure, 396
12-1c Issues Involved in the Restructuring Decision, 398
12-2 A Case of Hedging Economic Exposure, 399
12-2a Savor Co.’s Dilemma, 399
12-2b Possible Strategies for Hedging Economic Exposure, 401
12-2c Savor’s Hedging Strategy, 402
12-2d Limitations of Savor’s Hedging Strategy, 403
12-3 Hedging Exposure to Fixed Assets, 403

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Contents xv

12-4 Managing Translation Exposure, 404

12-4a Hedging with Forward Contracts, 404
12-4b Limitations of Hedging Translation Exposure, 405
Part 3 Integrative Problem: Exchange Risk Management, 413

PART 4: Long-Term Asset and Liability Management 415

13: DIRECT FOREIGN INVESTMENT 417
13-1 Motives for Direct Foreign Investment, 417
13-1a Revenue-Related Motives, 417
13-1b Cost-Related Motives, 418
13-1c Comparing Benefits of DFI among Countries, 420
13-1d Measuring an MNC’s Benefits of DFI, 421
13-2 Benefits of International Diversification, 421
13-2a Diversification Analysis of International Projects, 423
13-2b Diversification among Countries, 424
13-3 Host Government Views of DFI, 425
13-3a Incentives to Encourage DFI, 425
13-3b Barriers to DFI, 427
13-3c Government-Imposed Conditions on Engaging in DFI, 428

14: MULTINATIONAL CAPITAL BUDGETING 435

14-1 Subsidiary versus Parent Perspective, 435
14-1a Tax Differentials, 435
14-1b Restrictions on Remitted Earnings, 436
14-1c Exchange Rate Movements, 436
14-1d Summary of Factors, 436
14-2 Input for Multinational Capital Budgeting, 437
14-3 Multinational Capital Budgeting Example, 439
14-3a Background, 439
14-3b Analysis, 440
14-4 Other Factors to Consider, 441
14-4a Exchange Rate Fluctuations, 442
14-4b Inflation, 445
14-4c Financing Arrangement, 445
14-4d Blocked Funds, 448
14-4e Uncertain Salvage Value, 448
14-4f Impact of Project on Prevailing Cash Flows, 450
14-4g Host Government Incentives, 450
14-4h Real Options, 451
14-5 Adjusting Project Assessment for Risk, 451
14-5a Risk-Adjusted Discount Rate, 451
14-5b Sensitivity Analysis, 452
14-5c Simulation, 452
Appendix 14: Incorporating International Tax Law in Multinational Capital Budgeting, 464

15: INTERNATIONAL CORPORATE GOVERNANCE AND CONTROL 471

15-1 International Corporate Governance, 471
15-1a Governance by Board Members, 471
15-1b Governance by Institutional Investors, 472
15-1c Governance by Shareholder Activists, 472

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
xvi Contents

15-2 International Corporate Control, 473

15-2a Motives for International Acquisitions, 473
15-2b Trends in International Acquisitions, 474
15-2c Barriers to International Corporate Control, 474
15-2d Model for Valuing a Foreign Target, 475
15-2e Impact of the SOX Act on the Valuation of Targets, 476
15-3 Factors Affecting Target Valuation, 476
15-3a Target-Specific Factors, 477
15-3b Country-Specific Factors, 477
15-4 Example of the Valuation Process, 478
15-4a International Screening Process, 478
15-4b Estimating the Target’s Value, 479
15-4c Changes in Valuation over Time, 481
15-5 Disparity in Foreign Target Valuations, 482
15-5a Expected Cash Flows of the Foreign Target, 482
15-5b Exchange Rate Effects on Remitted Earnings, 483
15-5c Required Return of Acquirer, 483
15-6 Other Corporate Control Decisions, 483
15-6a International Partial Acquisitions, 483
15-6b International Acquisitions of Privatized Businesses, 484
15-6c International Divestitures, 484
15-7 Control Decisions as Real Options, 486
15-7a Call Option on Real Assets, 486
15-7b Put Option on Real Assets, 487

16: COUNTRY RISK ANALYSIS 497

16-1 Country Risk Characteristics, 497
16-1a Political Risk Characteristics, 497
16-1b Financial Risk Characteristics, 499
16-2 Measuring Country Risk, 501
16-2a Techniques for Assessing Country Risk, 501
16-2b Deriving a Country Risk Rating, 502
16-2c Comparing Risk Ratings among Countries, 505
16-3 Incorporating Risk in Capital Budgeting, 505
16-3a Adjustment of the Discount Rate, 505
16-3b Adjustment of the Estimated Cash Flows, 507
16-3c Analysis of Existing Projects, 510
16-4 Preventing Host Government Takeovers, 510
16-4a Use a Short-Term Horizon, 510
16-4b Rely on Unique Supplies or Technology, 511
16-4c Hire Local Labor, 511
16-4d Borrow Local Funds, 511
16-4e Purchase Insurance, 511
16-4f Use Project Finance, 511

17: MULTINATIONAL CAPITAL STRUCTURE AND COST OF CAPITAL 521

17-1 Components of Capital, 521
17-1a External Sources of Debt, 522
17-1b External Sources of Equity, 523

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Contents xvii

17-2 The MNC’s Capital Structure Decision, 524

17-2a Influence of Corporate Characteristics, 524
17-2b Influence of Host Country Characteristics, 525
17-2c Response to Changing Country Characteristics, 526
17-3 Subsidiary versus Parent Capital Structure Decisions, 526
17-3a Impact of Increased Subsidiary Debt Financing, 527
17-3b Impact of Reduced Subsidiary Debt Financing, 527
17-3c Limitations in Offsetting a Subsidiary’s Leverage, 527
17-4 Multinational Cost of Capital, 527
17-4a MNC’s Cost of Debt, 527
17-4b MNC’s Cost of Equity, 528
17-4c Estimating an MNC’s Cost of Capital, 528
17-4d Comparing Costs of Debt and Equity, 528
17-4e Cost of Capital for MNCs versus Domestic Firms, 529
17-4f Cost-of-Equity Comparison Using the CAPM, 531
17-5 Cost of Capital across Countries, 533
17-5a Country Differences in the Cost of Debt, 533
17-5b Country Differences in the Cost of Equity, 535

18: LONG-TERM DEBT FINANCING 545

18-1 Financing to Match the Inflow Currency, 545
18-1a Using Currency Swaps to Execute the Matching Strategy, 546
18-1b Using Parallel Loans to Execute the Matching Strategy, 547
18-2 Debt Denomination Decision by Subsidiaries, 550
18-2a Debt Decision in Host Countries with High Interest Rates, 551
18-2b Debt Denomination to Finance a Project, 554
18-3 Debt Maturity Decision, 556
18-3a Assessment of the Yield Curve, 556
18-3b Financing Costs of Loans with Different Maturities, 556
18-4 Fixed versus Floating Rate Debt Decision, 557
18-4a Financing Costs of Fixed versus Floating Rate Loans, 558
18-4b Hedging Interest Payments with Interest Rate Swaps, 558
Part 4 Integrative Problem: Long-Term Asset and Liability Management, 569

PART 5: Short-Term Asset and Liability Management 571

19: FINANCING INTERNATIONAL TRADE 573
19-1 Payment Methods for International Trade, 573
19-1a Prepayment, 573
19-1b Letters of Credit, 574
19-1c Drafts, 574
19-1d Consignment, 575
19-1e Open Account, 575
19-1f Impact of the Credit Crisis on Payment Methods, 575
19-2 Trade Finance Methods, 576
19-2a Accounts Receivable Financing, 576
19-2b Factoring, 576
19-2c Letters of Credit (L/Cs), 577
19-2d Banker’s Acceptances, 581
19-2e Working Capital Financing, 583

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
xviii Contents

19-2f Medium-Term Capital Goods Financing (Forfaiting), 584

19-2g Countertrade, 584
19-3 Agencies That Facilitate International Trade, 585
19-3a Export-Import Bank of the United States, 585
19-3b Private Export Funding Corporation, 587
19-3c Overseas Private Investment Corporation, 587

20: SHORT-TERM FINANCING 593

20-1 Sources of Foreign Financing, 593
20-1a Internal Short-Term Financing, 593
20-1b External Short-Term Financing, 594
20-1c Access to Funding during the Credit Crisis, 594
20-2 Financing with a Foreign Currency, 594
20-2a Comparison of Interest Rates among Currencies, 595
20-3 Determining the Effective Financing Rate, 596
20-4 Criteria Considered in the Financing Decision, 597
20-4a Interest Rate Parity, 597
20-4b The Forward Rate as a Forecast, 598
20-4c Exchange Rate Forecasts, 599
20-5 Actual Results from Foreign Financing, 601
20-6 Financing with a Portfolio of Currencies, 603
20-6a Portfolio Diversification Effects, 605
20-6b Repeated Financing with a Currency Portfolio, 606

21: INTERNATIONAL CASH MANAGEMENT 615

21-1 Multinational Working Capital Management, 615
21-1a Subsidiary Expenses, 615
21-1b Subsidiary Revenue, 616
21-1c Subsidiary Dividend Payments, 616
21-1d Subsidiary Liquidity Management, 616
21-2 Centralized Cash Management, 617
21-2a Accommodating Cash Shortages, 618
21-3 Optimizing Cash Flows, 618
21-3a Accelerating Cash Inflows, 618
21-3b Minimizing Currency Conversion Costs, 619
21-3c Managing Blocked Funds, 621
21-3d Managing Intersubsidiary Cash Transfers, 621
21-3e Complications in Optimizing Cash Flow, 621
21-4 Investing Excess Cash, 622
21-4a Determining the Effective Yield, 622
21-4b Implications of Interest Rate Parity, 624
21-4c Using the Forward Rate as a Forecast, 624
21-4d Using Exchange Rate Forecasts, 626
21-4e Diversifying Cash across Currencies, 628
21-4f Dynamic Hedging, 629
Appendix 21: Investing in a Portfolio of Currencies, 635
Part 5 Integrative Problem: Short-Term Asset and Liability Management, 639
Final Self-Exam, 641

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Contents xix

Appendix A: Answers to Self-Test Questions, 650

Appendix B: Supplemental Cases, 663
Appendix C: Using Excel to Conduct Analysis, 684
Appendix D: International Investing Project, 692
Appendix E: Discussion in the Boardroom, 695
Glossary, 702
Index, 709

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Preface

Businesses evolve into multinational corporations (MNCs) so that they can capitalize on
international opportunities. Their financial managers must be able to assess the interna-
tional environment, recognize opportunities, implement strategies, assess exposure to
risk, and manage that risk. The MNCs most capable of responding to changes in the
international financial environment will be rewarded. The same can be said for the
students today who may become the future managers of MNCs.

INTENDED MARKET
International Financial Management, 12th Edition, presumes an understanding of basic
corporate finance. It is suitable for both undergraduate and master’s level courses in in-
ternational financial management. For master’s courses, the more challenging questions,
problems, and cases in each chapter are recommended, along with special projects.

ORGANIZATION OF THE TEXT

International Financial Management, 12th Edition, is organized to provide a background
on the international environment and then to focus on the managerial aspects from a
corporate perspective. Managers of MNCs will need to understand the environment
before they can manage within it.
The first two parts of the text establish the necessary macroeconomic framework.
Part 1 (Chapters 1 through 5) introduces the major markets that facilitate international
business. Part 2 (Chapters 6 through 8) describes relationships between exchange rates
and economic variables and explains the forces that influence these relationships.
The rest of the text develops a microeconomic framework with a focus on the mana-
gerial aspects of international financial management. Part 3 (Chapters 9 through 12) ex-
plains the measurement and management of exchange rate risk. Part 4 (Chapters 13
through 18) describes the management of long-term assets and liabilities, including
motives for direct foreign investment, multinational capital budgeting, country risk anal-
ysis, and capital structure decisions. Part 5 (Chapters 19 through 21) concentrates on the
MNC’s management of short-term assets and liabilities, including trade financing, other
short-term financing, and international cash management.
Each chapter is self-contained so that professors can use classroom time to focus on the
more comprehensive topics while relying on the text to cover other concepts. The manage-
ment of long-term assets (Chapters 13 through 16 on direct foreign investment, multina-
tional capital budgeting, multinational restructuring, and country risk analysis) is covered
before the management of long-term liabilities (Chapters 17 and 18 on capital structure
and debt financing) because the financing decisions depend on the investment decisions.
Nevertheless, these concepts are explained with an emphasis on how the management of
long-term assets and long-term liabilities is integrated. For example, multinational capital
budgeting analysis demonstrates how the feasibility of a foreign project may depend on the
financing mix. Some professors may prefer to teach the chapters on managing long-term
liabilities prior to teaching the chapters on managing long-term assets.
The strategic aspects, such as motives for direct foreign investment, are covered before
the operational aspects, such as short-term financing or investment. For professors who
xx

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Preface xxi

prefer to cover the MNC’s management of short-term assets and liabilities before the
management of long-term assets and liabilities, the parts can be rearranged because
they are self-contained.
Professors may limit their coverage of chapters in some sections where they believe
the text concepts are covered by other courses or do not need additional attention
beyond what is in the text. For example, they may give less attention to the chapters in
Part 2 (Chapters 6 through 8) if their students take a course in international economics.
If professors focus on the main principles, they may limit their coverage of Chapters 5,
15, 16, and 18. In addition, they may give less attention to Chapters 19 through 21 if
they believe that the text description does not require elaboration.

APPROACH OF THE TEXT

International Financial Management, 12th Edition, focuses on management decisions
that maximize the value of the firm. The text offers a variety of methods to reinforce
key concepts so that instructors can select the methods and features that best fit their
teaching styles.
■ Part-Opening Diagram. A diagram is provided at the beginning of each part to illustrate
how the key concepts covered in that part are related.
■ Objectives. A bulleted list at the beginning of each chapter identifies the key concepts
in that chapter.
■ Examples. The key concepts are thoroughly described in the chapter and supported
by examples.
■ International Credit Crisis. Coverage of the international credit crisis is provided in
each chapter where applicable; this coverage focuses on European countries that
have experienced problems in making their debt payments and on the exposure of
their banks to credit problems.
■ Term Paper on the International Credit Crisis. Suggested assignments for a term
paper on the international credit crisis are provided at the end of Chapter 1.
■ Web Links. Websites that offer useful related information regarding key concepts are
provided in each chapter.
■ Summary. A bulleted list at the end of each chapter summarizes the key concepts.
This list corresponds to the list of objectives at the beginning of the chapter.
■ Point/Counter-Point. A controversial issue is introduced, along with opposing
arguments, and students are asked to determine which argument is correct and to
explain why.
■ Self-Test Questions. A “Self-Test” at the end of each chapter challenges students on
the key concepts. The answers to these questions are provided in Appendix A.
■ Questions and Applications. Many of the questions and other applications at the end
of each chapter test the student’s knowledge of the key concepts in the chapter.
■ Continuing Case. At the end of each chapter, the continuing case allows students to
use the key concepts to solve problems experienced by a firm called Blades, Inc.
(a producer of roller blades). By working on cases related to the same MNC over a
school term, students recognize how an MNC’s decisions are integrated.
■ Small Business Dilemma. The Small Business Dilemma at the end of each chapter
places students in a position where they must use concepts introduced in the chap-
ter to make decisions about a small MNC called Sports Exports Company.
■ Internet/Excel Exercises. At the end of each chapter, there are exercises that expose
the students to applicable information available at various Web sites, enable the ap-
plication of Excel to related topics, or a combination of these. For example, students

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
xxii Preface

learn how to obtain exchange rate information online and apply Excel to measure
the value at risk.
■ Integrative Problem. An integrative problem at the end of each part integrates the
key concepts of chapters within that part.
■ Midterm and Final Examinations. A midterm self-exam is provided at the end of
Chapter 8, which focuses on international macro and market conditions (Chapters 1
through 8). A final self-exam is provided at the end of Chapter 21, which focuses
on the managerial chapters (Chapters 9 through 21). Students can compare their
answers to those in the answer key provided.
■ Supplemental Cases. Supplemental cases allow students to apply chapter concepts to
a specific situation of an MNC. All supplemental cases are located in Appendix B.
■ Running Your Own MNC. This project allows each student to create a small inter-
national business and apply key concepts from each chapter to run the business
throughout the school term. The project is available in the textbook companion site
(see the “Online Resources” section).
■ International Investing Project. Located in Appendix D, this project allows students
to simulate investing in stocks of MNCs and foreign companies and requires them
to assess how the values of these stocks change during the school term in response
to international economic conditions. The project is also available on the textbook
companion site (see the “Online Resources” section).
■ Discussion in the Boardroom. Located in Appendix E, this project allows students to
play the role of managers or board members of a small MNC that they created and
to make decisions about that firm. This project is also available on the textbook
companion site (see the “Online Resources” section).
■ The variety of end-of-chapter and end-of-part exercises and cases offer many
opportunities for students to engage in teamwork, decision making, and
communication.

ONLINE RESOURCES
The textbook companion site provides resources for both students and instructors.
Students: Access the following resources by going to www.cengagebrain.com and
searching ISBN 9781133947837: Running Your Own MNC, International Investing
Project, Discussion in the Boardroom, Key Terms Flashcards, and chapter Web links.
Instructors: Access textbook resources by going to www.cengage.com, logging in
with your faculty account username and password, and using ISBN 9781133947837 to
search for instructor resources or to add instructor resources to your account.

INSTRUCTOR SUPPLEMENTS
The following supplements are available to instructors.
■ Instructor’s Manual. Revised by the author, the Instructor’s Manual contains the
chapter theme, topics to stimulate class discussion, and answers to end-of-chapter
Questions, Case Problems, Continuing Cases (Blades, Inc.), Small Business Dilem-
mas, Integrative Problems, and Supplemental Cases.
■ Test Bank. The expanded test bank, which has also been revised by the author,
contains a large set of questions in multiple choice or true/false format, including
content questions as well as problems.
■
™
Cognero Test Bank. Cengage Learning Testing Powered by Cognero is a flexible
™
online system that allows you to: author, edit, and manage test bank content from

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
 Preface xxiii

multiple Cengage Learning solutions; create multiple test versions in an instant;

deliver tests from your LMS, your classroom, or wherever you want. The Cognero
™
®
Test Bank contains the same questions that are in the Microsoft Word Test Bank.
All question content is now tagged according to Tier I (Business Program Interdis-
ciplinary Learning Outcomes) and Tier II (Finance-specific) standards topic,
Bloom’s Taxonomy, and difficulty level.
■ PowerPoint Slides. The PowerPoint Slides clarify content and provide a solid guide
for student note-taking. In addition to the regular notes slides, a separate set of
exhibit-only PPTs are also available.

ADDITIONAL COURSE TOOLS

■ Cengage Learning Custom Solutions. Whether you need print, digital, or hybrid
course materials, Cengage Learning Custom Solutions can help you create your
perfect learning solution. Draw from Cengage Learning’s extensive library of texts
and collections, add your own original work, and/or create customized media and
technology to match your learning and course objectives. Our editorial team will
work with you through each step, allowing you to concentrate on the most impor-
tant thing—your students. Learn more about all our services at www.cengage.com/
custom.
■ The Cengage Global Economic Watch (GEW) Resource Center. This is your
source for turning today’s challenges into tomorrow’s solutions. This online portal
houses the most current and up-to-date content concerning the economic crisis.
Organized by discipline, the GEW Resource Center offers the solutions that in-
structors and students need in an easy-to-use format. Included are an overview and
timeline of the historical events leading up to the crisis, links to the latest news and
resources, discussion and testing content, an instructor feedback forum, and a
Global Issues Database. Visit www.cengage.com/thewatch for more information.

ACKNOWLEDGMENTS
Many of the revisions and expanded sections contained in this edition are due to com-
ments and suggestions from students who used previous editions. In addition, many pro-
fessors reviewed various editions of the text and had a major influence on its content and
organization. All are acknowledged below in alphabetical order.
Tom Adamson, Midland University P. R. Chandy, University of North Texas
Raj Aggarwal, University of Akron Prakash L. Dheeriya, California State
Richard Ajayi, University of Central University – Dominguez Hills
Florida Benjamin Dow, Southeast Missouri State
Alan Alford, Northeastern University University
Yasser Alhenawi, University of Evansville Margaret M. Forster, University of Notre
H. David Arnold, Auburn University Dame
Robert Aubey, University of Wisconsin Lorraine Gilbertson, Webster University
Bruce D. Bagamery, Central Washington Charmaine Glegg, East Carolina University
University Anthony Yanxiang Gu, SUNY – Geneseo
James C. Baker, Kent State University Anthony F. Herbst, Suffolk University
Gurudutt Baliga, University of Delaware Chris Hughen, University of Denver
Laurence J. Belcher, Stetson University Abu Jalal, Suffolk University
Richard Benedetto, Merrimack College Steve A. Johnson, University of Texas –
Bharat B. Bhalla, Fairfield University El Paso
Rahul Bishnoi, Hofstra University Manuel L. Jose, University of Akron

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
Another random document with
no related content on Scribd:
drawers, their contents thrown on the floor, and all the evidence of a
hurried search met their eyes.
They passed from the little sitting-room to the bedroom, and here
again the visitors had left traces of their investigations.
“Hullo!” Jimmy stopped and picked up a soft felt hat. He looked
inside; the dull lining bore the name of an Egyptian hatter.
“Connor’s!” he said.
“Ah!” said Angel softly, “so Connor takes a hand, does he?”
One of the detectives who had followed them in grasped Angel’s
arm.
“Look, sir!” he whispered.
Half-hidden by the heavy hangings of the window, a man crouched in
the shadow.
“Come out of that!” cried Angel.
Then something in the man’s attitude arrested his speech. He
slipped forward and pulled back the curtain.
“Connor!” he cried.
Connor it was indeed, stone dead, with a bullet hole in the center of
his forehead.
 CHAPTER XIV
OPENING THE SAFE

The four men stood in silence before the body. Jimmy bent and
touched the hand.
“Dead!” he said.
Angel made no reply, but switched on every light in the room. Then
he passed his hands rapidly through the dead man’s pockets; the
things he found he passed to one of the other detectives, who laid
them on the table.
“A chisel, a jemmy, a center-bit, lamp, pistol,” enumerated Angel. “It
is not difficult to understand why Connor came here; but who killed
him?”
He made a close inspection of the apartment. The windows were
intact and fastened, there were no signs of a struggle. In the sitting-
room there were muddy footmarks, which might have been made by
Connor or his murderer. In the center of the room was a small table.
During Angel’s frequent absences from his lodgings he was in the
habit of locking his two rooms against his servants, who did their
cleaning under his eye. In consequence, the polished surface of the
little table was covered with a fine layer of dust, save in one place
where there was a curious circular clearing about eight inches in
diameter. Angel examined this with scrupulous care, gingerly pulling
the table to where the light would fall on it with greater brilliance. The
little circle from whence the dust had disappeared interested him
more than anything else in the room.
“You will see that this is not touched,” he said to one of the men; and
then to the other, “You had better go round to Vine Street and report
this—stay, I will go myself.”
As Jimmy and he stepped briskly in the direction of the historic police
station, Angel expressed himself tersely.
“Connor came on his own to burgle; he was surprised by a third
party, who, thinking Connor was myself, shot him.”
“That is how I read it,” said Jimmy. “But why did Connor come?”
“I have been expecting Connor,” said Angel quietly. “He was not the
sort of man to be cowed by the fear of arrest. He had got it into his
head that I had got the secret of the safe, and he came to find out.”
Inside the station the inspector on duty saluted him.
“We have one of your men inside,” he said pleasantly, referring to the
Frenchman; then, noticing the grave faces of the two, he added, “Is
anything wrong, sir?”
Briefly enough the detective gave an account of what had happened
in Jermyn Street. He added his instructions concerning the table,
and left as the inspector was summoning the divisional surgeon.
“I wonder where we could find Spedding?” asked Angel.
“I wonder where Spedding will find us?” added Jimmy grimly.
Angel looked round in surprise.
“Losing your nerve?” he asked rudely.
“No,” said the cool young man by his side slowly; “but somehow life
seems more precious than it was a week ago.”
“Fiddlesticks!” said Angel. “You’re in love.”
“Perhaps I am,” admitted Jimmy in a surprised tone, as if the idea
had never occurred to him before.
Angel looked at his watch.
“Ten o’clock,” he said; “time for all good people to be in bed. Being
myself of a vicious disposition, and, moreover, desirous of washing
the taste of tragedy out of my mouth, I suggest we walk steadily to a
place of refreshment.”
“Angel,” said Jimmy, “I cannot help thinking that you like to hear
yourself talk.”
“I love it,” said Angel frankly.

In a little underground bar in Leicester Square they sat at a table

listening to a little string band worry through the overture to
Lohengrin.
The crowded room suited their moods. Jimmy, in his preoccupation,
found the noise, the babble of voices in many tongues, and the wail
of the struggling orchestra, soothing after the exciting events of the
past few hours. To Angel the human element in the crowd formed
relaxation. The loud-speaking men with their flashy jewelry, the
painted women with their automatic smiles, the sprinkling of keen-
faced sharps he recognized, they formed part of the pageant of life—
the life—as Angel saw it.
They sat sipping their wine until there came a man who, glancing
carelessly round the room, made an imperceptible sign to Angel, and
then, as if having satisfied himself that the man he was looking for
was not present, left the room again.
Angel and his companion followed.
“Well?” asked Angel.
“Spedding goes to the safe to-night,” said the stranger.
“Good,” said Angel.
“The guard at the safe is permanently withdrawn by Spedding’s
order.”
“That I know,” said Angel. “It was withdrawn the very night the
‘Borough Lot’ came. On whose behalf is Spedding acting?”
“On behalf of Connor, who I understand is one of the legatees.”
Angel whistled.
“Whew! Jimmy, this is to be the Grand Finale.”
He appeared deep in thought for a moment.
“It will be necessary for Miss Kent to be present,” he said after a
while.
From a neighboring district messenger office he got on by the
telephone to a garage, and within half an hour they were ringing the
bell at Kathleen’s modest little house.
The girl rose to greet them as they entered. All sign of the last night’s
fatigue had vanished.
“Yes,” she replied, “I have slept the greater part of the day.”
Angel observed that she studiously kept her eyes from Jimmy, and
that that worthy was preternaturally interested in a large seascape
that hung over the fireplace.
“This is the last occasion we shall be troubling you at so late an
hour,” said Angel, “but I am afraid we shall want you with us to-
night.”
“I will do whatever you wish,” she answered simply. “You have been,
both of you, most kind.”
She flashed a glance at Jimmy, and saw for the first time the surgical
dressing on his head.
“You—you are not hurt?” she cried in alarm, then checked herself.
“Not at all,” said Jimmy loudly, “nothing, I assure you.”
He was in an unusual panic, and wished he had not come.
“He tripped over a hearthrug and fell against a marble mantelpiece,”
lied Angel elaborately. “The marble has been in the possession of
my family for centuries, and is now badly, and I fear irretrievably,
damaged.”
Jimmy smiled, and his smile was infectious.
“A gross libel, Miss Kent,” he said, recovering his nerve. “As a matter
of fact——”
“As a matter of fact,” interrupted Angel impressively, “Jimmy was
walking in his sleep——”
“Be serious, Mr. Angel,” implored the girl, who was now very
concerned as she saw the extent of Jimmy’s injury, and noticed the
dark shadows under his eyes. “Was it Spedding?”
“It was,” said Angel promptly. “A little attempt which proved a failure.”
Jimmy saw the concern in the girl’s eyes, and, manlike, it cheered
him.
“It is hardly worth talking about,” he said hastily, “and I think we
ought not to delay our departure a second.”
“I will not keep you a moment longer than I can help,” she said, and
left the room to dress herself for the journey.
“Jimmy,” said Angel, as soon as she had gone, “cross my hand with
silver, pretty gentleman, and I will tell your fortune.”
“Don’t talk rot,” replied Jimmy.
“I can see a bright future, a dark lady with big gray eyes, who——”
“For Heaven’s sake, shut up!” growled Jimmy, very red; “she’s
coming.”
They reached the Safe Deposit when the bells of the city were
chiming the half-hour after eleven.
“Shall we go in?” asked Jimmy.
“Better not,” advised Angel. “If Spedding knows we have a key it
might spoil the whole show.”
So the car slowly patrolled the narrow length of Lombard Street, an
object of professional interest to the half-dozen plain-clothes
policemen who were on duty there.
They had three-quarters of an hour to wait, for midnight had rung out
from the belfries long before a big car came gliding into the
thoroughfare from its western end. It stopped with a jerk before the
Safe Deposit, and a top-hatted figure alighted. As he did so, Angel’s
car drew up behind, and the three got down.
Spedding, professionally attired in a frock-coat and silk hat, stood
with one foot on the steps of the building and his hand upon the key
he had fitted.
He evinced no surprise when he saw Angel, and bowed slightly to
the girl. Then he opened the door and stepped inside, and Angel and
his party followed. He lit the vestibule, opened the inner door, and
walked into the darkened hall.
Again came the click of switches, and every light in the great hall
blazed.
The girl shivered a little as she looked up at the safe, dominating and
sinister, a monument of ruin, a materialization of the dead regrets of
a thousand bygone gamblers. Solitary, alone, aloof it rose, distinct
from the magnificent building in which it stood—a granite mass set in
fine gold. Old Reale had possessed a good eye for contrasts, and
had truly foreseen how well would the surrounding beauty of the
noble hall emphasize the grim reality of the ugly pedestal.
Spedding closed the door behind them, and surveyed the party with
a triumphant smile.
“I am afraid,” he said in his smoothest tones, “you have come too
late.”
“I am afraid we have,” agreed Angel, and the lawyer looked at him
suspiciously.
“I wrote you a letter,” he said. “Did you get it?”
“I have not been home since this afternoon,” said Angel, and he
heard the lawyer’s little sigh of relief.
“I am sorry,” Spedding went on, “that I have to disappoint you all; but
as you know, by the terms of the will the fortunate person who
discovers the word which opens the safe must notify me, claiming
the right to apply the word on the combination lock.”
“That is so,” said Angel.
“I have received such a notification from one of the legatees—Mr.
Connor,” the lawyer went on, and drew from his pocket a paper, “and
I have his written authority to open the safe on his behalf.”
He handed the paper to Angel, who examined it and handed it back.
“It was signed to-day,” was all that he said.
“At two o’clock this afternoon,” said the lawyer. “I now——”
“Before you go any further, Mr. Spedding,” said Angel, “I might
remind you that there is a lady present, and that you have your hat
on.”
“A thousand pardons,” said the lawyer with a sarcastic smile, and
removed his hat. Angel reached out his hand for it, and mechanically
the lawyer relinquished it.
Angel looked at the crown. The nap was rubbed the wrong way, and
was covered with fine dust.
“If you desire to valet me,” said the lawyer, “I have no objection.”
Angel made no reply, but placed the hat carefully on the mosaic floor
of the hall.
“If,” said the lawyer, “before I open the safe, there is any question
you would like to ask, or any legitimate objection you would wish to
raise, I shall be happy to consider it.”
“I have nothing to say,” said Angel.
“Or you?” addressing Jimmy.
“Nothing,” was the laconic answer.
“Or Miss Kent perhaps——?”
Kathleen looked him straight in the face as she answered coldly—
“I am prepared to abide by the action of my friends.”
“There is nothing left for me to do,” said the lawyer after the slightest
pause, “but to carry out Mr. Connor’s instructions.”
He walked to the foot of the steel stairway and mounted. He stopped
for breath half-way up. He was on a little landing, and facing him was
the polished block of granite that marked where the ashes of old
Reale reposed.
 Pulvis
Cinis
et
Nihil
said the inscription. “‘Dust, cinders and nothing,’” muttered the
lawyer, “an apt rebuke to one seeking the shadows of vanity.”
They watched him climb till he reached the broad platform that
fronted the safe door. Then they saw him pull a paper from his
pocket and examine it. He looked at it carefully, then twisted the dials
cautiously till one by one the desired letters came opposite the
pointer. Then he twisted the huge handle of the safe. He twisted and
pulled, but the steel door did not move. They saw him stoop and
examine the dial again, and again he seized the handle with the
same result. A dozen times he went through the same process, and
a dozen times the unyielding door resisted his efforts. Then he came
clattering down the steps, and almost reeled across the floor of the
hall to the little group. His eyes burnt with an unearthly light, his face
was pallid, and the perspiration lay thick upon his forehead.
“The word!” he gasped. “It’s the wrong word.”
Angel did not answer him.
“I have tested it a dozen times,” cried the lawyer, almost beside
himself, “and it has failed.”
“Shall I try?” asked Angel.
“No, no!” the man hissed. “By Heaven, no! I will try again. One of the
letters is wrong; there are two meanings to some of the symbols.”
He turned and remounted the stairs.
“The man is suffering,” said Jimmy in an undertone.
“Let him suffer,” said Angel, a hard look in his eyes. “He will suffer
more before he atones for his villainy. Look, he’s up again. Let the
men in, Jimmy, he will find the word this time—and take Miss Kent
away as soon as the trouble starts.”
The girl saw the sudden mask of hardness that had come over
Angel’s face, saw him slip off his overcoat, and heard the creaking of
boots in the hall outside. The pleasant, flippant man of the world was
gone, and the remorseless police officer, inscrutable as doom, had
taken his place. It was a new Angel she saw, and she drew closer to
Jimmy.
An exultant shout from the man at the safe made her raise her eyes.
With a flutter at her heart, she saw the ponderous steel door swing
slowly open.
Then from the man came a cry that was like the snarl of some wild
beast.
“Empty!” he roared.
He stood stunned and dumb; then he flung himself into the great
steel room, and they heard his voice reverberating hollowly. Again he
came to the platform holding in his hand a white envelope. Blindly he
blundered down the stairs again, and they could hear his heavy
breathing.
“Empty!” His grating voice rose to a scream. “Nothing but this!” He
held the envelope out, then tore it open.
It contained only a few words—
“Received on behalf of Miss Kathleen Kent the contents of
this safe.
“(Signed) James Cavendish Stannard, Bart.
Christopher Angel.”
Dazed and bewildered, the lawyer read the paper, then looked from
one to the other.
“So it was you,” he said.
Angel nodded curtly.
“You!” said Spedding again.
“Yes.”
“You have robbed the safe—you—a police officer.”
“Yes,” said Angel, not removing his eyes from the man. He motioned
to Jimmy, and Jimmy, with a whispered word to the girl, led her to the
door. Behind him, as he returned to Angel’s side, came six plain-
clothes officers.
“So you think you’ve got me, do you?” breathed Spedding.
“I don’t think,” said Angel, “I know.”
“If you know so much, do you know how near to death you are?”
“That also I know,” said Angel’s even voice. “I’m all the more certain
of my danger since I have seen your hat.”
The lawyer did not speak.
“I mean,” Angel went on calmly, “since I saw the hat that you put
down on a dusty table in my chambers—when you murdered
Connor.”
“Oh, you found him, did you—I wondered,” said Spedding without
emotion. Then he heard a faint metallic click, and leapt back with his
hand in his pocket.
But Jimmy’s pistol covered him.
He paused irresolutely for one moment; then six men flung
themselves upon him, and he went to the ground fighting.
Handcuffed, he rose, his nonchalant self, with the full measure of his
failure apparent. He was once again the suave, smooth man of old.
Indeed, he laughed as he faced Angel.
“A good end,” he said. “You are a much smarter man than I thought
you were. What is the charge?”
“Murder,” said Angel.
“You will find a difficulty in proving it,” Spedding answered coolly,
“and as it is customary at this stage of the proceedings for the
accused to make a conventional statement, I formally declare that I
have not seen Connor for two days.”
Closely guarded, he walked to the door. He passed Kathleen
standing in the vestibule, and she shrank on one side, which amused
him. He clambered into the car that had brought him, followed by the
policemen, and hummed a little tune.
He leaned over to say a final word to Angel.
“You think I am indecently cheerful,” he said, “but I feel as a man
wearied with folly, who has the knowledge that before him lies the
sound sleep that will bring forgetfulness.”
Then, as the car was moving off, he spoke again—
“Of course I killed Connor—it was inevitable.”
And then the car carried him away.
Angel locked the door of the deposit, and handed the key to
Kathleen.
“I will ask Jimmy to take you home,” he said.
“What do you think of him?” said Jimmy.
“Spedding? Oh, he’s acted as I thought he would. He represents the
very worst type of criminal in the world; you cannot condemn, any
more than you can explain, such men as that. They are in a class by
themselves—Nature’s perversities. There is a side to Spedding that
is particularly pleasant.”
He saw the two off, then walked slowly to the City Police Station.
The inspector on duty nodded to him as he entered.
“We have put him in a special cell,” he said.
“Has he been well searched?”
“Yes, sir. The usual kit, and a revolver loaded in five chambers.”
“Let me see it,” said Angel.
He took the pistol under the gaslight. One chamber contained an
empty shell, and the barrel was foul. That will hang him without his
confession, he thought.
“He asked for a pencil and paper,” said the inspector, “but he surely
does not expect bail.”
Angel shook his head.
“No, I should imagine he wants to write to me.”
A door burst open, and a bareheaded jailer rushed in.
“There’s something wrong in No. 4,” he said, and Angel followed the
inspector as he ran down the narrow corridor, studded with iron
doors on either side.
The inspector took one glance through the spy-hole.
“Open the door!” he said quickly.
With a jangle and rattle of bolts, the door was opened. Spedding lay
on his back, with a faint smile on his lips; his eyes were closed, and
Angel, thrusting his hand into the breast of the stricken man, felt no
beat of the heart.
“Run for a doctor!” said the inspector.
“It’s no use,” said Angel quietly, “the man’s dead.”
On the rough bed lay a piece of paper. It was addressed in the
lawyer’s bold hand to Angel Esquire.
The detective picked it up and read it.
“Excellent Angel,” the letter ran, “the time has come when I must
prove for myself the vexed question of immortality. I would say that I
bear you no ill will, nor your companion, nor the charming Miss Kent.
I would have killed you all, or either, of course, but happily my
intentions have not coincided with my opportunities. For some time
past I have foreseen the possibility of my present act, and have worn
on every suit one button, which, colored to resemble its fellows, is in
reality a skilfully molded pellet of cyanide. Farewell.”
Angel looked down at the dead man at his feet. The top cloth-
covered button on the right breast had been torn away.
 CHAPTER XV
THE SOLUTION

If you can understand that all the extraordinary events of the

previous chapters occurred without the knowledge of Fleet Street,
that eminent journalists went about their business day by day without
being any the wiser, that eager news editors were diligently
searching the files of the provincial press for news items, with the
mystery of the safe at their very door, and that reporters all over
London were wasting their time over wretched little motor-bus
accidents and gas explosions, you will all the easier appreciate the
journalistic explosion that followed the double inquest on Spedding
and his victim.
It is outside the province of this story to instruct the reader in what is
so much technical detail, but it may be said in passing that no less
than twelve reporters, three sub-editors, two “crime experts,” and
one publisher were summarily and incontinently discharged from
their various newspapers in connection with the “Safe Story.” The
Megaphone alone lost five men, but then the Megaphone invariably
discharges more than any other paper, because it has got a
reputation to sustain. Flaring contents bills, heavy black headlines,
and column upon column of solid type, told the story of Reale’s
millions, and the villainous lawyer, and the remarkable verse, and the
“Borough Lot.” There were portraits of Angel and portraits of Jimmy
and portraits of Kathleen (sketched in court and accordingly
repulsive), and plans of the lawyer’s house at Clapham and sketches
of the Safe Deposit.
So for the three days that the coroner’s inquiry lasted London, and
Fleet Street more especially, reveled in the story of the old croupier’s
remarkable will and its tragic consequences. The Crown solicitors
very tactfully skimmed over Jimmy’s adventurous past, were brief in
their examination of Kathleen; but Angel’s interrogation lasted the
greater part of five hours, for upon him devolved the task of telling
the story in full.
It must be confessed that Angel’s evidence was a remarkably
successful effort to justify all that Scotland Yard had done. There
were certain irregularities to be glossed over, topics to be avoided—
why, for instance, official action was not taken when it was seen that
Spedding contemplated a felony. Most worthily did Angel hold the
fort for officialdom that day, and when he vacated the box he left
behind him the impression that Scotland Yard was all foreseeing, all
wise, and had added yet another to its list of successful cases.
The newspaper excitement lasted exactly four days. On the fourth
day, speaking at the Annual Congress of the British Association, Sir
William Farran, that great physician, in the course of an illuminating
address on “The first causes of disease,” announced as his firm
conviction that all the ills that flesh is heir to arise primarily from the
wearing of boots, and the excitement that followed the appearance in
Cheapside of a converted Lord Mayor with bare feet will long be
remembered in the history of British journalism. It was enough, at
any rate, to blot out the memory of the Reale case, for immediately
following the vision of a stout and respected member of the
Haberdasher Company in full robes and chain of office entering the
Mansion House insufficiently clad there arose that memorable
newspaper discussion “Boots and Crime,” which threatened at one
time to shake established society to its very foundations.
“Bill is a brick,” wrote Angel to Jimmy. “I suggested to him that he
might make a sensational statement about microbes, but he said that
the Lancet had worked bugs to death, and offered the ‘no boots’
alternative.”
It was a fortnight after the inquiry that Jimmy drove to Streatham to
carry out his promise to explain to Kathleen the solution of the
cryptogram.
It was his last visit to her, that much he had decided. His rejection of
her offer to equally share old Reale’s fortune left but one course
open to him, and that he elected to take.
She expected him, and he found her sitting before a cozy fire idly
turning the leaves of a book.
Jimmy stood for a moment in an embarrassed silence. It was the first
time he had been alone with her, save the night he drove with her to
Streatham, and he was a little at a loss for an opening.
He began conventionally enough speaking about the weather, and
not to be outdone in commonplace, she ordered tea.
“And now, Miss Kent,” he said, “I have got to explain to you the
solution of old Reale’s cryptogram.”
He took a sheet of paper from his pocket covered with hieroglyphics.
“Where old Reale got his idea of the cryptogram from was, of course,
Egypt. He lived there long enough to be fairly well acquainted with
the picture letters that abound in that country, and we were fools not
to jump at the solution at first. I don’t mean you,” he added hastily. “I
mean Angel and I and Connor, and all the people who were
associated with him.”
The girl was looking at the sheet, and smiled quietly at the faux pas.
“How he came into touch with the ‘professor——’”
“What has happened to that poor old man?” she asked.
“Angel has got him into some kind of institute,” replied Jimmy. “He’s
a fairly common type of cranky old gentleman. ‘A science potterer,’
Angel calls him, and that is about the description. He’s the sort of
man that haunts the Admiralty with plans for unsinkable battleships,
a ‘minus genius’—that’s Angel’s description too—who, with an
academic knowledge and a good memory, produced a reasonably
clever little book, that five hundred other schoolmasters might just as
easily have written. How the professor came into Reale’s life we
shall never know. Probably he came across the book and discovered
the author, and trusting to his madness, made a confidant of him. Do
you remember,” Jimmy went on, “that you said the figures reminded
you of the Bible? Well, you are right. Almost every teacher’s Bible, I
find, has a plate showing how the alphabet came into existence.”
He indicated with his finger as he spoke.
“Here is the Egyptian hieroglyphic. Here is a ‘hand’ that means ‘D,’
and here is the queer little Hieratic wiggle that means the same
thing, and you see how the Phœnician letter is very little different to
the hieroglyphic, and the Greek ‘delta’ has become a triangle, and
locally it has become the ‘D’ we know.” He sketched rapidly.

“All this is horribly learned,” he said, “and has got nothing to do with
the solution. But old Reale went through the strange birds, beasts
and things till he found six letters, S P R I N G, which were to form
the word that would open the safe.”
“It is very interesting,” she said, a little bewildered.
“The night you were taken away,” said Jimmy, “we found the word
and cleared out the safe in case of accidents. It was a very risky
proceeding on our part, because we had no authority from you to act
on your behalf.”
“You did right,” she said. She felt it was a feeble rejoinder, but she
could think of nothing better.
“And that is all,” he ended abruptly, and looked at the clock.
“You must have some tea before you go,” she said hurriedly.
They heard the weird shriek of a motor-horn outside, and Jimmy
smiled.
“That is Angel’s newest discovery,” he said, not knowing whether to
bless or curse his energetic friend for spoiling the tête-à-tête.
“Oh!” said the girl, a little blankly he thought.
“Angel is always experimenting with new noises,” said Jimmy, “and
some fellow has introduced him to a motor-siren which is claimed to
possess an almost human voice.”
The bell tinkled, and a few seconds after Angel was ushered into the
room.
“I have only come for a few minutes,” he said cheerfully. “I wanted to
see Jimmy before he sailed, and as I have been called out of town
unexpectedly——”
“Before he sails?” she repeated slowly. “Are you going away?”
“Oh, yes, he’s going away,” said Angel, avoiding Jimmy’s scowling
eyes. “I thought he would have told you.”
“I——” began Jimmy.
“He’s going into the French Congo to shoot elephants,” Angel rattled
on; “though what the poor elephants have done to him I have yet to
discover.”
“But this is sudden?”
She was busy with the tea-things, and had her back toward them, so
Jimmy did not see her hand tremble.
“You’re spilling the milk,” said the interfering Angel. “Shall I help
you?”
“No, thank you,” she replied tartly.
“This tea is delicious,” said Angel, unabashed, as he took his cup.
He had come to perform a duty, and he was going through with it.
“You won’t get afternoon tea on the Sangar River, Jimmy. I know
because I have been there, and I wouldn’t go again, not even if they
made me governor of the province.”
“Why?” she asked, with a futile attempt to appear indifferent.
“Please take no notice of Angel, Miss Kent,” implored Jimmy, and
added malevolently, “Angel is a big game shot, you know, and he is
anxious to impress you with the extent and dangers of his travels.”
“That is so,” agreed Angel contentedly, “but all the same, Miss Kent,
I must stand by what I said in regard to the ‘Frongo.’ It’s a deadly
country, full of fever. I’ve known chaps to complain of a headache at
four o’clock and be dead by ten, and Jimmy knows it too.”
“You are very depressing to-day, Mr. Angel,” said the girl. She felt
unaccountably shaky, and tried to tell herself that it was because she
had not recovered from the effects of her recent exciting
experiences.
“I was with a party once on the Sangar River,” Angel said, cocking a
reflective eye at the ceiling. “We were looking for elephants, too, a
terribly dangerous business. I’ve known a bull elephant charge a
hunter and——”
“Angel!” stormed Jimmy, “will you be kind enough to reserve your
reminiscences for another occasion?”
Angel rose and put down his teacup sadly.
“Ah, well!” he sighed lugubriously, “after all, life is a burden, and one
might as well die in the French Congo—a particularly lonely place to
die in, I admit—as anywhere else. Good-by, Jimmy.” He held out his
hand mournfully.
“Don’t be a goat!” entreated Jimmy. “I will let you know from time to
time how I am; you can send your letters via Sierra Leone.”
“The White Man’s Grave!” murmured Angel audibly.
“And I’ll let you know in plenty of time when I return.”
“When!” said Angel significantly. He shook hands limply, and with the
air of a man taking an eternal farewell. Then he left the room, and
they could hear the eerie whine of his patent siren growing fainter
and fainter.
“Confound that chap!” said Jimmy. “With his glum face and
extravagant gloom he——”
“Why did you not tell me you were going?” she asked him quietly.
She stood with a neat foot on the fender and her head a little bent.
“I had come to tell you,” said Jimmy.
“Why are you going?”
Jimmy cleared his throat.
“Because I need the change,” he said almost brusquely.
“Are you tired—of your friends?” she asked, not lifting her eyes.
“I have so few friends,” said Jimmy bitterly. “People here who are
worth knowing know me.”
“What do they know?” she asked, and looked at him.
“They know my life,” he said doggedly, “from the day I was sent
down from Oxford to the day I succeeded to my uncle’s title and
estates. They know I have been all over the world picking up strange
acquaintances. They know I was one of the”—he hesitated for a
word—“gang that robbed Rahbat Pasha’s bank; that I held a big
share in Reale’s ventures—a share he robbed me of, but let that
pass; that my life has been consistently employed in evading the
law.”
“For whose benefit?” she asked.
“God knows,” he said wearily, “not for mine. I have never felt the
need of money, my uncle saw to that. I should never have seen
Reale again but for a desire to get justice. If you think I have robbed
for gain, you are mistaken. I have robbed for the game’s sake, for
the excitement of it, for the constant fight of wits against men as
keen as myself. Men like Angel made me a thief.”
“And now——?” she asked.
“And now,” he said, straightening himself up, “I am done with the old
life. I am sick and sorry—and finished.”
“And is this African trip part of your scheme of penitence?” she
asked. “Or are you going away because you want to forget——”
Her voice had sunk almost to a whisper, and her eyes were looking
into the fire.
“What?” he asked huskily.
“To forget—me,” she breathed.
“Yes, yes,” he said, “that is what I want to forget.”
“Why?” she said, not looking at him.
“Because—oh, because I love you too much, dear, to want to drag
you down to my level. I love you more than I thought it possible to