International Bank Management -- Contents -- List of Figures -- List of Tables -- Preface -- Part I Overview -- 1 Basic Premises -- 1.1 Introduction -- 1.2 Risk-Return Tradeoffs -- 1.2.1 MM theory of capital structure -- 1.2.2 Capital asset pricing model -- 1.2.3 Option pricing theory -- 1.2.4 Agency theory -- 1.3 Why Financial Institutions Are Necessary -- 1.3.1 Actuarial risk -- 1.3.2 Informational efficiency -- 1.4 Competitive Markets and Impediments -- 1.5 Market Hierarchies -- 1.6 Uniqueness of a Bank -- 1.7 Risk Dimensions of the Banking Business -- 1.8 Conclusion -- NOTES -- Part II Foundation -- 2 Globalization of Commercial Banking -- 2.1 Historical Background -- 2.2 Structure of an International Banking Organization -- 2.2.1 Conventional form of international banking -- 2.2.2 Management typology for foreign presence -- 2.2.3 Specific forms for US-based banks -- 2.3 International Banking Activities -- 2.4 Globalization of Financial Markets -- 2.4.1 Changing role of government -- 2.4.2 Innovations in communication technology -- 2.4.3 Increased volatility in interest and foreign exchange rates -- 2.5 Conclusion -- Appendix A: Foreign Exchange Rate Systems -- Free-float System -- Fixed Exchange Rate System -- Managed Float -- Appendix B: European Union -- European Financial Regulation -- Appendix C: Balance of Payment -- Current Account -- Capital Account -- Official Reserve Account -- Statistical Discrepancy -- Appendix D: US Regulation for Foreign Banks -- Appendix E: Deregulation, Globalization and Japanese Banking -- NOTES -- 3 Foreign Exchange Market Participation -- 3.1 Introduction -- 3.2 Institutional Background -- 3.3 Mechanics of Currency Quotes and Trading -- 3.3.1 Spot market -- 3.3.2 Forward market -- 3.3.3 Settlement date -- 3.4 Locational Arbitrage -- 3.4.1 Two-location arbitrage -- 3.4.2 Triangular arbitrage.

3.5 Theories of the Foreign Exchange Market -- 3.5.1 Interest rate parity theory (IRPT) -- 3.5.2 Purchasing power parity theory -- 3.5.3 Fisher Open parity -- 3.5.4 Unbiased forward market hypothesis -- 3.5.5 Foreign exchange rate predictability -- 3.5.6 Foreign exchange market and market hierarchy -- 3.6 Motivations of Participants in the Foreign Exchange Market -- 3.6.1 Hedging -- 3.6.2 Speculation -- 3.7 Risk-Return Tradeoffs in Foreign Exchange Transactions -- 3.8 Conclusion -- NOTES -- 4 Eurocurrency Market -- 4.1 Introduction -- 4.2 Development of the Eurocurrency Market -- 4.2.1 Structure -- 4.2.2 Functions of the Eurocurrency markets -- 4.2.3 Money supply growth in the Eurocurrency market -- 4.3 Eurocurrency Centers -- 4.4 Eurocurrency Interest Rates -- 4.4.1 Term structure of interest rates -- 4.4.2 Potential bank runs -- 4.4.3 Causal relationship between offshore and domestic interest rates -- 4.5 Activities in the Eurocurrency Market -- 4.6 Eurocredits and Investments -- 4.6.1 Notes issuance facility (NIF) -- 4.6.2 Euro-commercial paper issue -- 4.6.3 Floating rate notes -- 4.6.4 Asset-backed commercial paper and notes -- 4.6.5 Syndicated loans -- 4.6.6 Eurobond market -- 4.7 Conclusion -- NOTES -- 5 Futures and Options in Currency and Interest Rate Markets -- 5.1 Introduction -- 5.2 Forward and Futures Contracts -- 5.2.1 Organized exchange -- 5.2.2 Standardized contract -- 5.2.3 Clearing house -- 5.2.4 Margin requirement and marked-to-market -- 5.3 Functions of Futures Contracts -- 5.3.1 Currency futures -- 5.3.2 Interest rate futures -- 5.3.3 Use of interest rate futures -- 5.4 Option Markets -- 5.4.1 Call and put -- 5.4.2 Exchange-traded and over-the-counter option markets -- 5.4.3 Relationship between futures and options: put-call parity -- 5.4.4 Option valuation -- 5.5 Option on Futures/Forward Contracts -- 5.6 Conclusion.

Appendix F: Derivation of the Futures Price Under Risk Neutrality -- Appendix G: Derivation of the Optimal Hedge Ratio -- Appendix H: Derivation of the Price Sensitivity Ratio -- NOTES -- Part III Applications -- 6 Swaps and Other Derivative Instruments -- 6.1 Introduction -- 6.2 Swap Market -- 6.2.1 Background -- 6.2.2 Pricing schedule -- 6.2.3 Rationale for swap transactions -- 6.2.4 Valuation of interest rate swap -- 6.2.5 Currency swaps market -- 6.2.6 Risks in swap arrangements -- 6.2.7 Swaptions -- 6.3 Other Derivative Instruments -- 6.3.1 Interest rate cap -- 6.3.2 Interest rate floors -- 6.3.3 Interest rate collars -- 6.3.4 Cap floaters -- 6.3.5 Range forward contracts -- 6.3.6 Indexed currency option notes -- 6.3.8 Knockout options -- 6.3.9 Basket option -- 6.4 Credit Derivatives -- 6.4.1 Basic types -- 6.4.2 Credit derivative and synthetic repurchase agreement -- 6.4.3 Alternative approaches to pricing credit derivatives -- 6.5 Conclusion -- NOTES -- 7 International Credit Function for Private Business -- 7.1 Introduction -- 7.2 Cross-border Trade Transaction and its Financing -- 7.2.1 Unique or special characteristics of cross-border trade -- 7.2.2 Mechanics of the cross-border trade transaction -- 7.2.3 Shipment-related documents -- 7.2.4 Bilateral payment or financing modes -- 7.3 Trade-related Financing and Risk Insurance -- 7.3.1 Financial institutions -- 7.3.2 Government agencies -- 7.3.3 Private institutions -- 7.4 Countertrade -- 7.4.1 Bank's role in countertrade -- 7.5 Banking Services and Multinational Corporations -- 7.6 Special Financing Needs of Customers -- 7.6.1 Project finance -- 7.6.2 Merger and acquisition financing -- 7.7 Conclusion -- Appendix I: Private Credit (Loan) Analysis -- Basic Analytical Structure -- Applicability to Foreign Borrowers -- Some Additional Remarks on Implementing a Credit Evaluation Framework.

NOTES -- 8 Sovereign Risk Analysis -- 8.1 Introduction -- 8.2 Traditional Country Risk Analysis -- 8.2.1 Default probability Pi -- 8.2.2 Economic factors Xij -- 8.2.3 Political factors Xij -- 8.3 Portfolio Approach -- 8.4 Debt Crisis Management in the 1980s -- 8.4.1 Loan default and negotiations -- 8.4.2 Alternative solutions -- 8.5 The Debt Crisis of the 1980s -- 8.5.1 Shift to market-based economies -- 8.5.2 Changing scope of bank activities -- 8.5.3 Modifications in the notion of country risk -- 8.6 Recent Financial Crises since 1990 -- 8.6.1 Crises in the 1990s -- 8.6.2 Analysis of the Asian financial crisis -- 8.6.3 Economic fundamentals of the Asian crisis -- 8.6.4 Experience in the USA -- 8.6.5 Crisis in the 2000s - Latin America -- 8.7 Conclusion -- Appendix J: Chronology of the Asian Financial Crisis -- NOTES -- 9 Asset and Liability Management -- 9.1 Introduction -- 9.2 Interest Risk Measurement -- 9.2.1 Gap analysis -- 9.2.2 Duration gap model -- 9.3 Foreign Exchange and Gap Management -- 9.4 Convexity -- 9.5 Managing Interest Rate Risk -- 9.5.1 Basic immunization procedure in gap versus d-gap models -- 9.5.2 Balance sheet management strategies -- 9.5.3 Off-balance sheet activities -- 9.6 Conclusion -- Appendix K: Hedging Rule for a Bank Facing a Parallel Shift in Term Structure -- Appendix L: Derivation of the Duration Immunization Rule for a Bank Facing a Non-Parallel Shift in Term Structure -- NOTES -- Part IV: Trends and Future Directions -- 10 Capital Adequacy -- 10.1 Introduction -- 10.2 The Key Role of Capital -- 10.3 Development of Capital-based Regulation: Background -- 10.4 Development of Capital Requirement in the USA -- 10.4.1 Details of the risk-based capital requirements -- 10.4.2 Implementation of the capital standards in the USA -- 10.4.3 Ramifications of capital requirements.

10.4.4 Limitations of the risk-based capital standards -- 10.5 Modifications in the Basel Standards -- 10.5.1 VAR model -- 10.5.2 External credit rating -- 10.6 Conclusion -- NOTES -- 11 Toward Investment Banking Activities -- 11.1 Introduction -- 11.2 Historical Background -- 11.2.1 Laws and regulations -- 11.2.2 Relationship versus transaction orientation -- 11.3 Major Investment Banking Activities -- 11.3.1 Underwriting new issues -- 11.3.2 Trading securities and risk arbitrage -- 11.3.3 New product development -- 11.3.4 Advisory services -- 11.3.5 Complementarities of activities -- 11.4 Scope of Activities by Commercial and Investment Banks -- 11.4.1 Short-term seasonal loans -- 11.4.2 Medium- and long-term loans and bonds -- 11.4.3 Equity funding -- 11.5 Mergers of Commercial and Investment Banks -- 11.5.1 Acquisitions for equity underwriting -- 11.5.2 Acquisitions for other motives -- 11.5.3 Acquisitions and organizational integration -- 11.6 Capital Adequacy Regulations for Investment Banks -- 11.6.1 Trade-related capital -- 11.6.2 Derivative-related capital -- 11.6.3 A comparison of capital requirements for the two institutions -- 11.7 Challenges and Opportunities -- 11.8 Conclusion -- NOTES -- 12 Bank Strategy -- 12.1 Introduction -- 12.2 Changes in External Environments: The International Dimension -- 12.2.1 Economic development and product life cycle -- 12.2.2 Arbitraging structural inefficiencies: Lessons from the Enron case -- 12.2.3 Phases of economy and relationship versus transaction orientation -- 12.3 Changes in External Environments: The Internet -- 12.3.1 Strategic ramifications of Internet banking activities -- 12.4 Strategic Considerations: Activities and Resources -- 12.4.1 Scope and scale of activities -- 12.4.2 Availability and augmentation of resources -- 12.5 Conclusion -- Appendix M: Cost Analysis for Internet Transactions.

Perspective of the Bank.