“International Finance: Theory into Practice” by Piet Sercu is a comprehensive exploration of the complexities of global financial markets and instruments. This book bridges the gap between theoretical finance models and real-world applications, making it essential for students, academics, and practitioners alike. The global financial system is more interconnected than ever, and Sercu’s work offers a guide for navigating this complex terrain. Readers are introduced to advanced concepts of international trade, currency exchange mechanisms, and risk management strategies, providing a deep understanding of financial decision-making in a cross-border context.

In the opening sections, Sercu introduces the key concepts of international finance, establishing a foundation for understanding cross-border trade and investment. He begins with the essential idea that international finance deals with markets across national boundaries, which introduces additional complexities such as currency exchange rates and differing regulatory environments.

Example: Sercu uses the example of a European company investing in U.S. assets to explain exchange rate risk. He highlights how fluctuations in the EUR/USD exchange rate can either enhance or diminish returns, depending on market conditions.

Quote: “International finance is not just finance writ large—it is finance in a world where distance and borders complicate every transaction.”

This section delves into the mechanics of exchange rate regimes, both fixed and floating, and their influence on international trade and investment. Sercu examines the Bretton Woods system, currency pegs, and more modern floating exchange rate systems.

He discusses the pros and cons of each system, demonstrating how governments can manipulate currencies to achieve certain economic outcomes, such as fostering exports or stabilizing their economies.

Example: The book analyzes China’s policy of keeping the renminbi undervalued relative to the U.S. dollar in the early 2000s to boost its export-driven growth.

Quote: “The exchange rate is not just a number on a screen; it is a lever that countries can pull to influence their economic destiny.”

One of the core theoretical frameworks in international finance is the concept of parity conditions, which Sercu covers extensively. These include purchasing power parity (PPP), interest rate parity (IRP), and the Fisher effect, which provide the theoretical basis for understanding how prices and interest rates should adjust between countries.

Sercu uses mathematical models and real-world examples to show how these parity conditions often hold in theory but can break down due to market frictions and government interventions.

Example: He illustrates deviations from PPP by comparing the price of a McDonald’s Big Mac across different countries, a playful but insightful demonstration of how price levels can vary internationally.

A critical component of international finance is managing exposure to foreign exchange risk. Sercu provides a detailed analysis of hedging strategies using forward contracts, futures, options, and swaps. He explains when and why companies should hedge and the potential costs of doing so.

This section also explores the concept of economic exposure—how unexpected changes in exchange rates can impact a company’s long-term competitive position, beyond just the immediate transaction-level risk.

Example: A multinational corporation with operations in several countries is used as a case study to demonstrate how foreign exchange risk can affect everything from pricing strategies to supply chain management.

Quote: “Hedging is a necessary evil—it protects the firm from uncertainty, but at a cost that must be carefully weighed against the benefits.”

Sercu’s book also delves into the world of international portfolio diversification, where investors can reduce risk by spreading their investments across different countries. By investing in foreign markets, investors are not only exposed to currency risk but also to political, economic, and legal risks that they wouldn’t face domestically.

Sercu illustrates how international diversification can reduce overall portfolio risk, as foreign investments are often less correlated with domestic assets.

Example: The author explains how an American investor can benefit from investing in emerging markets in Asia, where high growth rates may compensate for higher volatility.

In this section, Sercu explains the motives behind foreign direct investment (FDI) and how multinational corporations (MNCs) manage international operations. He discusses the advantages of establishing subsidiaries abroad, such as gaining access to new markets or cheaper labor.

Sercu also addresses the challenges that MNCs face, including political risk, transfer pricing issues, and the complexities of repatriating profits. The role of tax havens and international tax planning is explored, showing how companies attempt to minimize tax liabilities in a global setting.

Example: A case study of a U.S. tech company expanding its manufacturing to Southeast Asia demonstrates the strategic decision-making involved in FDI and the risks inherent in these investments.

The book covers capital structure decisions for multinational firms, addressing the unique challenges that arise when raising capital in international markets. Sercu explains how companies balance the use of debt and equity financing while considering the cost of capital, tax implications, and currency risk.

This section is particularly relevant to CFOs and financial managers of global companies, as Sercu provides tools for optimizing capital structure in a cross-border context.

Example: A European firm raising debt in the U.S. market is used to explain the concept of the “home bias” in capital markets, and how firms can overcome this by diversifying their financing sources.

Sercu’s detailed exploration of derivatives provides readers with a solid understanding of how financial instruments like options, futures, and swaps are used to hedge against various forms of risk, including currency risk and interest rate risk.

The book emphasizes the importance of using derivatives wisely, as these instruments can also amplify risk if not properly managed. Sercu discusses real-world instances where poor use of derivatives led to financial disasters, such as the collapse of Barings Bank due to unauthorized derivatives trading.

Example: The book uses the 1997 Asian Financial Crisis to illustrate the dangers of speculative attacks on currencies and the role that derivatives played in amplifying the financial turmoil.

In “International Finance: Theory into Practice,” Piet Sercu combines theoretical insights with practical applications to offer a thorough guide to the global financial landscape. Whether discussing the intricacies of currency risk or the benefits of international portfolio diversification, Sercu always ties his analysis back to real-world examples and case studies. His balanced approach between theory and practice makes the book accessible to both finance students and professionals looking to deepen their understanding of international markets.

Sercu’s work remains highly relevant, particularly in today’s increasingly globalized economy where exchange rate volatility, international investments, and financial risk management are more critical than ever.

Critical Reception: The book has been praised for its clarity in explaining complex concepts, especially its real-world applications, which set it apart from more theoretical finance texts. It is often used in graduate-level finance courses and by professionals in multinational firms.

Relevance to Current Issues: With the rise of emerging markets and growing international trade tensions, the book provides a robust framework for understanding how firms and investors can navigate the challenges and opportunities of the global financial system.

By blending theory with practical examples, “International Finance: Theory into Practice” by Piet Sercu equips readers with the tools needed to thrive in the complex world of global finance.