Clemson University FIN 4110 Exam 1 with complete
solution
3 Functions of Money
1. Medium of exchange
2. Unit of account
3. Store of value
Multinational Corporation
a company with production and distribution facilities in more than 1 country
Reasons to globalize
find new markets; lower costs; utilize different resources/materials
Raw Material Seekers
the earliest multinationals; exploit markets in other countries
Market Seekers
produce and sell in foreign markets (ex. IBM, McDonald's, Nestle)
Cost Minimizers
seek lower cost production abroad in order to remain cost competitive
2 Types of Cost Minimization
1. Offshoring: production by foreign affiliate
2. Outsourcing: production by foreign 3rd party
Costs of Globalization
1. lost manufacturing jobs in U.S.
2. major plant closings
3. high paying union jobs replaced with low paying service jobs
3 Requirements for Arbitrage
1. no risk
2. can't use any personal money
3. instantaneous return
Market Efficiency
prices reflect all relevant information
Capital Asset Pricing
equates risk and return; investors expect compensation for systematic risk
2 Types of Risk
1. Systematic: undiversifiable (risk premium)
2. Unsystematic: diversifiable (no risk premium)
Exchange Rate
price of one unit of currency expressed as a certain price in local currency
Factors that impact exchange rates
1. Interest Rates
2. Inflation
3. Political Uncertainty
4. GDP Growth
Asset Market Model
the exchange rate between 2 currencies represents the price that just balances the
relative supplies and demands for assets denominated in the 2 currencies
2 Characteristics of Money
1. Store of Value
2. Store of Liquidity
solution
3 Functions of Money
1. Medium of exchange
2. Unit of account
3. Store of value
Multinational Corporation
a company with production and distribution facilities in more than 1 country
Reasons to globalize
find new markets; lower costs; utilize different resources/materials
Raw Material Seekers
the earliest multinationals; exploit markets in other countries
Market Seekers
produce and sell in foreign markets (ex. IBM, McDonald's, Nestle)
Cost Minimizers
seek lower cost production abroad in order to remain cost competitive
2 Types of Cost Minimization
1. Offshoring: production by foreign affiliate
2. Outsourcing: production by foreign 3rd party
Costs of Globalization
1. lost manufacturing jobs in U.S.
2. major plant closings
3. high paying union jobs replaced with low paying service jobs
3 Requirements for Arbitrage
1. no risk
2. can't use any personal money
3. instantaneous return
Market Efficiency
prices reflect all relevant information
Capital Asset Pricing
equates risk and return; investors expect compensation for systematic risk
2 Types of Risk
1. Systematic: undiversifiable (risk premium)
2. Unsystematic: diversifiable (no risk premium)
Exchange Rate
price of one unit of currency expressed as a certain price in local currency
Factors that impact exchange rates
1. Interest Rates
2. Inflation
3. Political Uncertainty
4. GDP Growth
Asset Market Model
the exchange rate between 2 currencies represents the price that just balances the
relative supplies and demands for assets denominated in the 2 currencies
2 Characteristics of Money
1. Store of Value
2. Store of Liquidity
