INTERNATIONAL FINANCE – STUDY MATERIALS & NOTES, SEPTEMBER 2020
1. In the study of agency problem affecting MNCs elaborate the agency problem of MNCs.
It refers to the conflict of interest between the manager and the subsidiary. The
manager creates a subsidiary for the purpose of making decisions that increase the
expectations of the shareholders, the subsidiary making the decisions for the purpose of
increasing their own profits, they have forgotten the purpose of the manager who has to
create incentives or compensation to guide the subsidiary and together achieve the goals.
2. Establish 3 reasons why might agency costs be larger for an MNC than for purely
domestic firm?
The agency costs are normally larger for MNCs than purely domestic firms for
the following reasons. First, MNCs incur larger agency costs in monitoring managers of
distant foreign subsidiaries. Second, foreign subsidiary managers raised in different
cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would
also create large agency problems.
3. How does the trade related factor affect the exchange rate of a country? Explain
Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country
with a lower inflation rate than another country will see an appreciation in the value of
its currency. While a country with higher inflation typically sees depreciation in its
currency and is usually accompanied by higher interest rates
1. In the study of agency problem affecting MNCs elaborate the agency problem of MNCs.
It refers to the conflict of interest between the manager and the subsidiary. The
manager creates a subsidiary for the purpose of making decisions that increase the
expectations of the shareholders, the subsidiary making the decisions for the purpose of
increasing their own profits, they have forgotten the purpose of the manager who has to
create incentives or compensation to guide the subsidiary and together achieve the goals.
2. Establish 3 reasons why might agency costs be larger for an MNC than for purely
domestic firm?
The agency costs are normally larger for MNCs than purely domestic firms for
the following reasons. First, MNCs incur larger agency costs in monitoring managers of
distant foreign subsidiaries. Second, foreign subsidiary managers raised in different
cultures may not follow uniform goals. Third, the sheer size of the larger MNCs would
also create large agency problems.
3. How does the trade related factor affect the exchange rate of a country? Explain
Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country
with a lower inflation rate than another country will see an appreciation in the value of
its currency. While a country with higher inflation typically sees depreciation in its
currency and is usually accompanied by higher interest rates
