INTERNATIONAL FINANCIAL
MANAGEMENT FINAL EXAM QUESTIONS
WITH CORRECT DETAILED ANSWERS ||
ALREADY GRADED A+RECENT VERSION
Suppose that you are a U.S. producer of a commodity good competing with foreign
producers. Your inputs of production are priced in dollars and you sell your output
in dollars. If the U.S. currency depreciates against the currencies of our trading
partners, -ANSWER✔️your competitive position is likely improved.
Suppose Mexico is a major export market for your U.S.-based company and the
Mexican peso depreciates drastically against the U.S. dollar, as it did in December
1994. This means that -ANSWER✔️your company's products can be priced out of
the Mexican market, as the peso price of American imports will rise following the
peso's fall.
Although the world economy is much more integrated today than was the case 10
or 20 years ago, a variety of barriers still hamper free movements of people, goods,
services, and capital across national boundaries. These barriers include -
ANSWER✔️information asymmetry.
excessive transportation costs.
legal restrictions.
What major dimension sets apart international finance from domestic finance? -
ANSWER✔️Expanded opportunity set
Foreign exchange and political risks
Market imperfections
,Foreign Exchange Risk - ANSWER✔️risk that foreign currency profits may
evaporate in dollar terms due to unanticipated unfavorable exchange rate
movements
Political Risk - ANSWER✔️sovereign governments have the right to regulate the
movement of goods, capital, and people across their borders
Market Imperfections - ANSWER✔️Legal restrictions on the movement of
goods, people, and money; transaction costs; shipping costs; tax arbitrage
Expanded Opportunity Set - ANSWER✔️Doesn't make sense to play in only one
corner of the sandbox
Europe's Sovereign-Debt Crisis of 2010 - ANSWER✔️Greek government
revealed its budget deficit for the year; investors downgraded Greek bonds to junk
GATT(General Agreement on Tariffs and Trade) - ANSWER✔️a mutual
agreement among member countries that has reduced many barriers to trade
NAFTA(The North American Free Trade Agreement) - ANSWER✔️calls for
phasing out impediments to trade between Canada, Mexico, and the United States
over a 15-year period beginning in 1994
Privatization - ANSWER✔️the selling of state-run enterprises to investors; also
known as "denationalization"
Chinese Privatization - ANSWER✔️Chinese citizens can buy "A" shares,
foreigners are limited to "B" shares
Global Financial Crisis of 2008-2009 - ANSWER✔️Households and financial
institutions borrowed too much and took too much risk
Multinational Corporations(MNC) - ANSWER✔️a firm that has been
incorporated in one country and has production and sales operations in other
countries
Comparative Advantage - ANSWER✔️exists when one party can produce a good
or service as a lower opportunity cost than another party
,Bimetallism(before 1875) - ANSWER✔️double standards in the sense that both
gold and silver were used as money
Classical Gold Standard(1875-1914) - ANSWER✔️The exchange rate between
two countries currencies would be determined by their relative gold contents
Interwar Period(1915-1944) - ANSWER✔️exchange rates fluctuated as countries
widely used "predatory" depreciations of their currencies as a means of gaining
advantage in the world export market
Bretton Woods System(1945-1972) - ANSWER✔️goal was exchange rate
stability without the gold standard; result was created of the IMF and the World
Bank
The Flexible Exchange Rate Regime(1973-present) - ANSWER✔️central banks
were allowed to intervene in the exchange rate markets to iron out unwarranted
volatilities(gold was abandoned as an international reserve asset)
Free Float - ANSWER✔️the largest number of countries, about 33, allow market
forces to determine their currency's value
Managed Float - ANSWER✔️About 46 countries combine government
intervention with market forces to set exchange rates
Pegged to Another Currency - ANSWER✔️such as the U.S. dollar or euro
No National Currency - ANSWER✔️some countries do not bother printing their
own currency(some of bin dollarized, other use the euro)
Currency Board - ANSWER✔️fixed exchange rates combined with restrictions
on the issuing government
Conventional Peg - ANSWER✔️country buys or sells foreign exchange or uses
other means to control the price of the currency
Stabilized Arrangements - ANSWER✔️a spot market exchange rate that remains
within a margin of 2 percent for six months or more and is not floating
, Crawling Peg - ANSWER✔️like the conventional peg, but the crawling peg is
adjusted in small amounts at a fixed rate of change or in response to changes in
macro indicators
Costs of Monetary Union - ANSWER✔️the loss of national monetary and
exchange rate policy independence
The Mexican Peso Crisis - ANSWER✔️December 20, 1994; Mexican
government announced a plan to devalue the peso against the dollar by 14%
The Asian Currency Crisis - ANSWER✔️Fixed exchange rates encouraged
unhedged financial transaction and excessive risk-taking by both borrowers and
lenders. the real rate rose, which led to a slowdown in export growth
The Argentinean Peso Crisis - ANSWER✔️1991, Argentine government passed a
convertibility law that linked peso to the U.S. dollar at parity.
Balance of Payments Accounting - ANSWER✔️the statistical record of a
country's international transactions over a certain period of time presented in the
form of double-entry bookkeeping
The Current Account - ANSWER✔️includes all imports and exports of goods and
services
The Capital Account - ANSWER✔️measures the difference between U.S. sales of
assets to foreigners and U.S. purchases of foreign assets
The Official Reserves Account - ANSWER✔️include gold, foreign currencies,
SDRs, and reserve positions in the IMF
Statistical Discrepancy - ANSWER✔️there are some on going omissions and
misrecorded transactions, so we used a "plug" figure to get things to balance out
Balance of Payment Identity - ANSWER✔️BCA+BKA+BRA=0
Sovereign Wealth Funds - ANSWER✔️government-controlled investment funds
are playing an increasingly visible role in international investments
MANAGEMENT FINAL EXAM QUESTIONS
WITH CORRECT DETAILED ANSWERS ||
ALREADY GRADED A+RECENT VERSION
Suppose that you are a U.S. producer of a commodity good competing with foreign
producers. Your inputs of production are priced in dollars and you sell your output
in dollars. If the U.S. currency depreciates against the currencies of our trading
partners, -ANSWER✔️your competitive position is likely improved.
Suppose Mexico is a major export market for your U.S.-based company and the
Mexican peso depreciates drastically against the U.S. dollar, as it did in December
1994. This means that -ANSWER✔️your company's products can be priced out of
the Mexican market, as the peso price of American imports will rise following the
peso's fall.
Although the world economy is much more integrated today than was the case 10
or 20 years ago, a variety of barriers still hamper free movements of people, goods,
services, and capital across national boundaries. These barriers include -
ANSWER✔️information asymmetry.
excessive transportation costs.
legal restrictions.
What major dimension sets apart international finance from domestic finance? -
ANSWER✔️Expanded opportunity set
Foreign exchange and political risks
Market imperfections
,Foreign Exchange Risk - ANSWER✔️risk that foreign currency profits may
evaporate in dollar terms due to unanticipated unfavorable exchange rate
movements
Political Risk - ANSWER✔️sovereign governments have the right to regulate the
movement of goods, capital, and people across their borders
Market Imperfections - ANSWER✔️Legal restrictions on the movement of
goods, people, and money; transaction costs; shipping costs; tax arbitrage
Expanded Opportunity Set - ANSWER✔️Doesn't make sense to play in only one
corner of the sandbox
Europe's Sovereign-Debt Crisis of 2010 - ANSWER✔️Greek government
revealed its budget deficit for the year; investors downgraded Greek bonds to junk
GATT(General Agreement on Tariffs and Trade) - ANSWER✔️a mutual
agreement among member countries that has reduced many barriers to trade
NAFTA(The North American Free Trade Agreement) - ANSWER✔️calls for
phasing out impediments to trade between Canada, Mexico, and the United States
over a 15-year period beginning in 1994
Privatization - ANSWER✔️the selling of state-run enterprises to investors; also
known as "denationalization"
Chinese Privatization - ANSWER✔️Chinese citizens can buy "A" shares,
foreigners are limited to "B" shares
Global Financial Crisis of 2008-2009 - ANSWER✔️Households and financial
institutions borrowed too much and took too much risk
Multinational Corporations(MNC) - ANSWER✔️a firm that has been
incorporated in one country and has production and sales operations in other
countries
Comparative Advantage - ANSWER✔️exists when one party can produce a good
or service as a lower opportunity cost than another party
,Bimetallism(before 1875) - ANSWER✔️double standards in the sense that both
gold and silver were used as money
Classical Gold Standard(1875-1914) - ANSWER✔️The exchange rate between
two countries currencies would be determined by their relative gold contents
Interwar Period(1915-1944) - ANSWER✔️exchange rates fluctuated as countries
widely used "predatory" depreciations of their currencies as a means of gaining
advantage in the world export market
Bretton Woods System(1945-1972) - ANSWER✔️goal was exchange rate
stability without the gold standard; result was created of the IMF and the World
Bank
The Flexible Exchange Rate Regime(1973-present) - ANSWER✔️central banks
were allowed to intervene in the exchange rate markets to iron out unwarranted
volatilities(gold was abandoned as an international reserve asset)
Free Float - ANSWER✔️the largest number of countries, about 33, allow market
forces to determine their currency's value
Managed Float - ANSWER✔️About 46 countries combine government
intervention with market forces to set exchange rates
Pegged to Another Currency - ANSWER✔️such as the U.S. dollar or euro
No National Currency - ANSWER✔️some countries do not bother printing their
own currency(some of bin dollarized, other use the euro)
Currency Board - ANSWER✔️fixed exchange rates combined with restrictions
on the issuing government
Conventional Peg - ANSWER✔️country buys or sells foreign exchange or uses
other means to control the price of the currency
Stabilized Arrangements - ANSWER✔️a spot market exchange rate that remains
within a margin of 2 percent for six months or more and is not floating
, Crawling Peg - ANSWER✔️like the conventional peg, but the crawling peg is
adjusted in small amounts at a fixed rate of change or in response to changes in
macro indicators
Costs of Monetary Union - ANSWER✔️the loss of national monetary and
exchange rate policy independence
The Mexican Peso Crisis - ANSWER✔️December 20, 1994; Mexican
government announced a plan to devalue the peso against the dollar by 14%
The Asian Currency Crisis - ANSWER✔️Fixed exchange rates encouraged
unhedged financial transaction and excessive risk-taking by both borrowers and
lenders. the real rate rose, which led to a slowdown in export growth
The Argentinean Peso Crisis - ANSWER✔️1991, Argentine government passed a
convertibility law that linked peso to the U.S. dollar at parity.
Balance of Payments Accounting - ANSWER✔️the statistical record of a
country's international transactions over a certain period of time presented in the
form of double-entry bookkeeping
The Current Account - ANSWER✔️includes all imports and exports of goods and
services
The Capital Account - ANSWER✔️measures the difference between U.S. sales of
assets to foreigners and U.S. purchases of foreign assets
The Official Reserves Account - ANSWER✔️include gold, foreign currencies,
SDRs, and reserve positions in the IMF
Statistical Discrepancy - ANSWER✔️there are some on going omissions and
misrecorded transactions, so we used a "plug" figure to get things to balance out
Balance of Payment Identity - ANSWER✔️BCA+BKA+BRA=0
Sovereign Wealth Funds - ANSWER✔️government-controlled investment funds
are playing an increasingly visible role in international investments
