SOLUTION MANUAL FOR . .
International Financial Management, 10th Edition EUN Chapter
. . . . . . .
1-21
CHAPTER 1 .
GLOBALIZATION.AND.THE.MULTINATIONAL.FIRM
ANSWERS.&.SOLUTIONS.TO.END-OF-CHAPTER.QUESTIONS.AND.PROBLEMS
QUESTIONS
1. Why.is.it.important.to.study.international.financial.management?
Answer:. We.are.now.living.in.a.world.where.all.the.major.economic.functions,.such.as.consumption,.
production,.investment,.and.financing,.are.highly.globalized.. It.is.thus.essential. for.financial.manag
ers.to.fully.understand.vital.international.dimensions.of.financial.management.. This.global.shift.is.in.
marked.contrast.to.a.situation.that.existed.when.the.authors.of.this.book.were.learning.finance.a.few.d
ecades.ago.. At.that.time,.most.professors.customarily.(and.safely,.to.some.extent).ignored.internatio
nal.aspects.of.finance.. This.mode.of.operation.has.become.untenable.since.then.
2. How.is.international.financial.management.different.from.domestic.financial.management?
Answer:. There.are.three.major.dimensions.that.set.apart.international.finance.from.domestic.financ
e..They.are:
1. foreign.exchange.and.political.risks,
2. market.imperfections,.and
3. expanded.opportunity.set.
3. Discuss.the.major.trends.that.have.prevailed.in.international.business.during.the.last.two.dec
ades.
Answer:. The.2000s.brought.a.rapid.integration.of.international.capital.and.financial.markets..Impet
us.for.globalized.financial.markets.initially.came.from.the.governments.of.major.countries.that.had.b
egun.to.deregulate.their.foreign.exchange.and.capital.markets.. The.economic
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
,integration.and.globalization.that.began.in.the.eighties.and.nineties.are.picking.up.speed.in.the.2000
s..Trade.liberalization.and.economic.integration.continued.to.proceed.at.both.the.regional.and.globa
l.levels..Despite.sovereign.debt.crisis.in.Europe,.more.EU.member.countries.have.adopted.the.com
mon.currency,.the.euro,.that.effectively.became.the.second.global.currency.after.the.U.S..dollar..In.t
he.last.few.years,.however,.economic.nationalism.has.been.gaining.some.popularity,.as.exemplifie
d.by.the.Brexit.decision.of.the.United.Kingdom.and.the.so-called
―America.First‖.policies.of.the.Trump.Administration..To.the.extent.that.economic.nationalism.is.a.po
pulist.response.to.the.global.financial.crisis.and.Great.Recession,.it.may.subside.as.the.world.econo
my.continues.to.recover.
4. How.is.a.country‘s.economic.well-
being.enhanced.through.free.international.trade.in.goods.and.services?
Answer:. According.to.David.Ricardo,.with.free.international.trade,.it.is.mutually.beneficial.for.two.co
untries.to.each.specialize.in.the.production.of.the.goods.that.it.can.produce.relatively.most.efficiently
. and.then.trade.those.goods.. By.doing.so,.the.two.countries.can.increase.their.combined.production
,.which.allows.both.countries.to.consume.more.of.both.goods..This.argument.remains.valid.even.if.a.
country.can.produce.both.goods.more.efficiently.in.absolute.terms.than.the.other.country.. Internatio
nal.trade.is.not.a.‗zero-
sum‘.game.in.which.one.country.benefits.at.the.expense.of.another.country..Rather,.international.tra
de.could.be.an.‗increasing-.sum‘.game.from.which.all.players.become.winners.
5. What.considerations.might.limit.the.extent.to.which.the.theory.of.comparative.advantage.is.reali
stic?
Answer:. The.theory.of.comparative.advantage.was.originally.advanced.by.the.nineteenth.century.
economist.David.Ricardo.as.an.explanation.for.why.nations.trade.with.one.another..The.theory.clai
ms.that.economic.well-
being.is.enhanced.if.each.country.produces.what.it.has.a.comparative.advantage.in.producing.relati
ve.to.other.countries,.and.then.trade.products.
Underlying.the.theory.are.the.assumptions.of.free.trade.between.nations.and.that.the.factors.of.prod
uction.(labor,.technological.know-
how,.and.capital).are.relatively.immobile.. To.the.extent.that.these.assumptions.do.not.hold,.the.theo
ry.of.comparative.advantage.may.not.realistically.describe.international.trade.. In.addition,.free.trad
e.produces.winners.and.losers.and.if.the.losers.are.not.compensated,.free.trade.may.faces.political.
opposition.from.them.
6. What.are.multinational.corporations.(MNCs).and.what.economic.roles.do.they.play?
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
,Answer:. A.multinational.corporation.(MNC).can.be.defined.as.a.business.firm.incorporated.in.one.co
untry.that.has.production.and.sales.operations.in.many.other.countries..Indeed,.some.MNCs.have.o
perations.in.a.few.dozens.of.different.countries.. MNCs.obtain.financing.from.major.money.centers.a
round.the.world.in.many.different.currencies.to.finance.their.operations..Global.operations.force.the.t
reasurer‘s.office.to.establish.international.banking.relationships,.to.place.short-
term.funds.in.several.currency.denominations,.and.to.effectively.manage.foreign.exchange.risk.. By.
circumventing.and.also.taking.advantage.of.various.market.imperfections,.such.as.barriers.to.trade.
and.barriers.to.flow.of.people.and.capital.across.countries,.MNCs.contribute.to.greater.integration.of.
the.world.economy.and.ing.more.perfect.functioning.of.global.markets.
7. Ross.Perot,.a.former.Presidential.candidate.of.the.Reform.Party,.which.was.a.third.political.part
y.in.the.United.States,.had.strongly.objected.to.the.creation.of.the.North.American.Trade.Agreement.
(NAFTA),.which.nonetheless.was.inaugurated.in.1994..Perot.feared.the.loss.of.American.jobs.to.Me
xico.where.it.is.much.cheaper.to.hire.workers..What.are.the.merits.and.demerits.of.Perot‘s.position.o
n.NAFTA?.Considering.the.recent.economic.developments.in.North.America,.how.would.you.asses
s.Perot‘s.position.on.NAFTA?
Answer:.Since.the.inception.of.NAFTA,.many.American.companies.indeed.have.invested.heavily.in.
Mexico,.sometimes.relocating.production.from.the.United.States.to.Mexico..Although.this.might.hav
e.temporarily.caused.unemployment.of.some.American.workers,.they.were.eventually.rehired.by.ot
her.industries.often.for.higher.wages..At.the.same.time,.Mexico.has.been.experiencing.a.major.econ
omic.boom..It.seems.clear.that.both.Mexico.and.the.U.S..have.benefited.from.NAFTA..Perot‘s.conce
rn.appears.to.have.been.ill.founded.
8. In.1995,.a.working.group.of.French.chief.executive.officers.was.set.up.by.the.Confederation.of.Fr
ench.Industry.(CNPF).and.the.French.Association.of.Private.Companies.(AFEP).to.study.the.French.
corporate.governance.structure..The.group.reported.the.following,.among.other.things:. ―The.board.
of.directors.should.not.simply.aim.at.maximizing.share.values.as.in.the.U.K..and.the.U.S..Rather,.its.g
oal.should.be.to.serve.the.company,.whose.interests.should.be.clearly.distinguished.from.those.of.its.
shareholders,.employees,.creditors,.suppliers.and.clients.but.still.equated.with.their.general.commo
n.interest,.which.is.to.safeguard.the.prosperity.and.continuity.of.the.company‖..Evaluate.the.above.re
commendation.of.the.working.group.
Answer:.The.recommendations.of.the.French.working.group.clearly.show.that.shareholder.wealth.
maximization.is.not.a.universally.accepted.goal.of.corporate.management,.especially
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
, outside.the.United.States.and.possibly.a.few.other.Anglo-
Saxon.countries.including.the.United.Kingdom.and.Canada..To.some.extent,.this.may.reflect.the.fact.
that.share.ownership.is.not.wide.spread.in.most.other.countries.
9. Emphasizing.the.importance.of.voluntary.compliance,.as.opposed.to.enforcement,.in.the.after
math.of.such.corporate.scandals.as.those.involving.Enron.and.WorldCom,.U.S..President.George.
W..Bush.stated.that.while.tougher.laws.might.help,.―ultimately,.the.ethics.of.American.business.de
pends.on.the.conscience.of.America‘s.business.leaders.‖. Describe.your.view.on.this.statement.
Answer:. There.can.be.different.answers.to.this.question..If.business.leaders.always.behave. with.a.hi
gh.ethical.standard,.many.of.the.corporate.scandals.we.have.seen.lately.might.not.have.happened..S
ince.we.cannot.fully.depend.on.the.ethical.behavior.on.the.part.of.individual.business.leaders,.the.soc
iety.should.protect.itself.by.adopting.the.rules/regulations.and.governance.structure.that.would.induc
e.business.leaders.to.behave.in.the.interest.of.the.society.at.large..But.at.the.same.time,.we.need.to.m
ake.sure.that.excessive.regulations.do.not.stymy.free.enterprises,.an.important.engine.of.economic.g
rowth..It.is.important.to.strike.the.right.balance.
10. Suppose.you.are.interested.in.investing.in.shares.of.Samsung.Electronics.of.Korea,.which. is.a.w
orld.leader.in.mobile.phones,.TVs,.and.home.appliances..But.before.you.make.investment.decision,.
you.would.like.to.learn.about.the.company..Visit.the.website.of.Yahoo.(http://finance.yahoo.com).an
d.collect.information.about.Samsung.Electronics,.including.the.recent.stock.price.history.and.analyst
s‘.views.of.the.company..Discuss.what.you.learn.about.the.company..Also.discuss.how.the.instantan
eous.access.to.information.via.internet.would.affect. the.nature.and.workings.of.financial.markets.
Answer:.As.students.might.have.learned.from.visiting.the.website,.information.is.readily.available.e
ven.for.foreign.companies.like.Samsung.Electronics..Ready.access.to.international.information.hel
ps.integrate.financial.markets,.dismantling.barriers.to.international.investment.and.financing..Integr
ation,.however,.may.help.a.financial.shock.in.one.market.to.be.quickly.transmitted.to.other.markets.
11. Most.companies.make.corporate.decisions.to.maximize.their.profits,.without.taking.into.cons
ideration.the.possibly.negative.effects.of.corporate.activities.on.the.environments,.thereby
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
International Financial Management, 10th Edition EUN Chapter
. . . . . . .
1-21
CHAPTER 1 .
GLOBALIZATION.AND.THE.MULTINATIONAL.FIRM
ANSWERS.&.SOLUTIONS.TO.END-OF-CHAPTER.QUESTIONS.AND.PROBLEMS
QUESTIONS
1. Why.is.it.important.to.study.international.financial.management?
Answer:. We.are.now.living.in.a.world.where.all.the.major.economic.functions,.such.as.consumption,.
production,.investment,.and.financing,.are.highly.globalized.. It.is.thus.essential. for.financial.manag
ers.to.fully.understand.vital.international.dimensions.of.financial.management.. This.global.shift.is.in.
marked.contrast.to.a.situation.that.existed.when.the.authors.of.this.book.were.learning.finance.a.few.d
ecades.ago.. At.that.time,.most.professors.customarily.(and.safely,.to.some.extent).ignored.internatio
nal.aspects.of.finance.. This.mode.of.operation.has.become.untenable.since.then.
2. How.is.international.financial.management.different.from.domestic.financial.management?
Answer:. There.are.three.major.dimensions.that.set.apart.international.finance.from.domestic.financ
e..They.are:
1. foreign.exchange.and.political.risks,
2. market.imperfections,.and
3. expanded.opportunity.set.
3. Discuss.the.major.trends.that.have.prevailed.in.international.business.during.the.last.two.dec
ades.
Answer:. The.2000s.brought.a.rapid.integration.of.international.capital.and.financial.markets..Impet
us.for.globalized.financial.markets.initially.came.from.the.governments.of.major.countries.that.had.b
egun.to.deregulate.their.foreign.exchange.and.capital.markets.. The.economic
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
,integration.and.globalization.that.began.in.the.eighties.and.nineties.are.picking.up.speed.in.the.2000
s..Trade.liberalization.and.economic.integration.continued.to.proceed.at.both.the.regional.and.globa
l.levels..Despite.sovereign.debt.crisis.in.Europe,.more.EU.member.countries.have.adopted.the.com
mon.currency,.the.euro,.that.effectively.became.the.second.global.currency.after.the.U.S..dollar..In.t
he.last.few.years,.however,.economic.nationalism.has.been.gaining.some.popularity,.as.exemplifie
d.by.the.Brexit.decision.of.the.United.Kingdom.and.the.so-called
―America.First‖.policies.of.the.Trump.Administration..To.the.extent.that.economic.nationalism.is.a.po
pulist.response.to.the.global.financial.crisis.and.Great.Recession,.it.may.subside.as.the.world.econo
my.continues.to.recover.
4. How.is.a.country‘s.economic.well-
being.enhanced.through.free.international.trade.in.goods.and.services?
Answer:. According.to.David.Ricardo,.with.free.international.trade,.it.is.mutually.beneficial.for.two.co
untries.to.each.specialize.in.the.production.of.the.goods.that.it.can.produce.relatively.most.efficiently
. and.then.trade.those.goods.. By.doing.so,.the.two.countries.can.increase.their.combined.production
,.which.allows.both.countries.to.consume.more.of.both.goods..This.argument.remains.valid.even.if.a.
country.can.produce.both.goods.more.efficiently.in.absolute.terms.than.the.other.country.. Internatio
nal.trade.is.not.a.‗zero-
sum‘.game.in.which.one.country.benefits.at.the.expense.of.another.country..Rather,.international.tra
de.could.be.an.‗increasing-.sum‘.game.from.which.all.players.become.winners.
5. What.considerations.might.limit.the.extent.to.which.the.theory.of.comparative.advantage.is.reali
stic?
Answer:. The.theory.of.comparative.advantage.was.originally.advanced.by.the.nineteenth.century.
economist.David.Ricardo.as.an.explanation.for.why.nations.trade.with.one.another..The.theory.clai
ms.that.economic.well-
being.is.enhanced.if.each.country.produces.what.it.has.a.comparative.advantage.in.producing.relati
ve.to.other.countries,.and.then.trade.products.
Underlying.the.theory.are.the.assumptions.of.free.trade.between.nations.and.that.the.factors.of.prod
uction.(labor,.technological.know-
how,.and.capital).are.relatively.immobile.. To.the.extent.that.these.assumptions.do.not.hold,.the.theo
ry.of.comparative.advantage.may.not.realistically.describe.international.trade.. In.addition,.free.trad
e.produces.winners.and.losers.and.if.the.losers.are.not.compensated,.free.trade.may.faces.political.
opposition.from.them.
6. What.are.multinational.corporations.(MNCs).and.what.economic.roles.do.they.play?
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
,Answer:. A.multinational.corporation.(MNC).can.be.defined.as.a.business.firm.incorporated.in.one.co
untry.that.has.production.and.sales.operations.in.many.other.countries..Indeed,.some.MNCs.have.o
perations.in.a.few.dozens.of.different.countries.. MNCs.obtain.financing.from.major.money.centers.a
round.the.world.in.many.different.currencies.to.finance.their.operations..Global.operations.force.the.t
reasurer‘s.office.to.establish.international.banking.relationships,.to.place.short-
term.funds.in.several.currency.denominations,.and.to.effectively.manage.foreign.exchange.risk.. By.
circumventing.and.also.taking.advantage.of.various.market.imperfections,.such.as.barriers.to.trade.
and.barriers.to.flow.of.people.and.capital.across.countries,.MNCs.contribute.to.greater.integration.of.
the.world.economy.and.ing.more.perfect.functioning.of.global.markets.
7. Ross.Perot,.a.former.Presidential.candidate.of.the.Reform.Party,.which.was.a.third.political.part
y.in.the.United.States,.had.strongly.objected.to.the.creation.of.the.North.American.Trade.Agreement.
(NAFTA),.which.nonetheless.was.inaugurated.in.1994..Perot.feared.the.loss.of.American.jobs.to.Me
xico.where.it.is.much.cheaper.to.hire.workers..What.are.the.merits.and.demerits.of.Perot‘s.position.o
n.NAFTA?.Considering.the.recent.economic.developments.in.North.America,.how.would.you.asses
s.Perot‘s.position.on.NAFTA?
Answer:.Since.the.inception.of.NAFTA,.many.American.companies.indeed.have.invested.heavily.in.
Mexico,.sometimes.relocating.production.from.the.United.States.to.Mexico..Although.this.might.hav
e.temporarily.caused.unemployment.of.some.American.workers,.they.were.eventually.rehired.by.ot
her.industries.often.for.higher.wages..At.the.same.time,.Mexico.has.been.experiencing.a.major.econ
omic.boom..It.seems.clear.that.both.Mexico.and.the.U.S..have.benefited.from.NAFTA..Perot‘s.conce
rn.appears.to.have.been.ill.founded.
8. In.1995,.a.working.group.of.French.chief.executive.officers.was.set.up.by.the.Confederation.of.Fr
ench.Industry.(CNPF).and.the.French.Association.of.Private.Companies.(AFEP).to.study.the.French.
corporate.governance.structure..The.group.reported.the.following,.among.other.things:. ―The.board.
of.directors.should.not.simply.aim.at.maximizing.share.values.as.in.the.U.K..and.the.U.S..Rather,.its.g
oal.should.be.to.serve.the.company,.whose.interests.should.be.clearly.distinguished.from.those.of.its.
shareholders,.employees,.creditors,.suppliers.and.clients.but.still.equated.with.their.general.commo
n.interest,.which.is.to.safeguard.the.prosperity.and.continuity.of.the.company‖..Evaluate.the.above.re
commendation.of.the.working.group.
Answer:.The.recommendations.of.the.French.working.group.clearly.show.that.shareholder.wealth.
maximization.is.not.a.universally.accepted.goal.of.corporate.management,.especially
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
, outside.the.United.States.and.possibly.a.few.other.Anglo-
Saxon.countries.including.the.United.Kingdom.and.Canada..To.some.extent,.this.may.reflect.the.fact.
that.share.ownership.is.not.wide.spread.in.most.other.countries.
9. Emphasizing.the.importance.of.voluntary.compliance,.as.opposed.to.enforcement,.in.the.after
math.of.such.corporate.scandals.as.those.involving.Enron.and.WorldCom,.U.S..President.George.
W..Bush.stated.that.while.tougher.laws.might.help,.―ultimately,.the.ethics.of.American.business.de
pends.on.the.conscience.of.America‘s.business.leaders.‖. Describe.your.view.on.this.statement.
Answer:. There.can.be.different.answers.to.this.question..If.business.leaders.always.behave. with.a.hi
gh.ethical.standard,.many.of.the.corporate.scandals.we.have.seen.lately.might.not.have.happened..S
ince.we.cannot.fully.depend.on.the.ethical.behavior.on.the.part.of.individual.business.leaders,.the.soc
iety.should.protect.itself.by.adopting.the.rules/regulations.and.governance.structure.that.would.induc
e.business.leaders.to.behave.in.the.interest.of.the.society.at.large..But.at.the.same.time,.we.need.to.m
ake.sure.that.excessive.regulations.do.not.stymy.free.enterprises,.an.important.engine.of.economic.g
rowth..It.is.important.to.strike.the.right.balance.
10. Suppose.you.are.interested.in.investing.in.shares.of.Samsung.Electronics.of.Korea,.which. is.a.w
orld.leader.in.mobile.phones,.TVs,.and.home.appliances..But.before.you.make.investment.decision,.
you.would.like.to.learn.about.the.company..Visit.the.website.of.Yahoo.(http://finance.yahoo.com).an
d.collect.information.about.Samsung.Electronics,.including.the.recent.stock.price.history.and.analyst
s‘.views.of.the.company..Discuss.what.you.learn.about.the.company..Also.discuss.how.the.instantan
eous.access.to.information.via.internet.would.affect. the.nature.and.workings.of.financial.markets.
Answer:.As.students.might.have.learned.from.visiting.the.website,.information.is.readily.available.e
ven.for.foreign.companies.like.Samsung.Electronics..Ready.access.to.international.information.hel
ps.integrate.financial.markets,.dismantling.barriers.to.international.investment.and.financing..Integr
ation,.however,.may.help.a.financial.shock.in.one.market.to.be.quickly.transmitted.to.other.markets.
11. Most.companies.make.corporate.decisions.to.maximize.their.profits,.without.taking.into.cons
ideration.the.possibly.negative.effects.of.corporate.activities.on.the.environments,.thereby
©MCGRAW.HILL.LLC..ALL.RIGHTS.RESERVED..NO.REPRODUCTION.OR.DISTRIBUTION.WITHOUT.THE.PRIOR.WRITTEN.CONSENT.OF.MCGRAW.HILL.LLC
