INTERNATIONAL FINANCE
INTERNATIONAL FINANCE EXAM QUESTIONS AND ANSWERS % GUARANTEED
SUCCESS.
How is international financial management different from domestic financial
management? Answer >>>There are three major dimensions that set apart
international finance from domestic finance. They are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
Discuss the major trends that have prevailed in international business during the
last two decades. Answer >>>The 1990s brought a rapid integration of
international capital and financial markets. Impetus for globalized financial
markets initially came from the governments of major countries that had begun
to deregulate their foreign exchange and capital markets. The economic
integration and globalization that began in the eighties is picking up speed in the
1990s via privatization. Privatization is the process by which a country divests
itself of the ownership and operation of a business venture by turning it over to
the free market system. Trade liberalization and economic integration continued
to proceed at both the regional and global levels. Despite sovereign debt crisis in
Europe, more EU member countries have adopted the common currency, euro,
that effectively became the second global currency after the U.S. dollar.
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 countries 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
,INTERNATIONAL FINANCE
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. International trade is
not a 'zero-sum' game in which one country benefits at the expense of another
country. Rather, international trade could be an 'increasing-sum' game from
which all players become winners.
What considerations might limit the extent to which the theory of comparative
advantage is realistic? 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 claims that
economic well-being is enhanced if each country's citizens produce what they
have a comparative advantage in producing relative to the citizens of other
countries, and then trade products. Underlying the theory are the assumptions of
free trade between nations and that the factors of production (land, buildings,
labor, technology, and capital) are relatively immobile. To the extent that these
assumptions do not hold, the theory of comparative advantage may not
realistically describe international trade.
What are multinational corporations (MNCs) and what economic roles do they
play? Answer >>>A multinational corporation (MNC) can be defined as a business
firm incorporated in one country that has production and sales operations in
many other countries. Indeed, some MNCs have operations in dozens of different
countries. MNCs obtain financing from major money centers around the world in
many different currencies to finance their operations. Global operations force the
treasurer'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, MNCs contribute to greater integration of world economy.
In 1995, a working group of French chief executive officers was set up by the
Confederation of French Industry (CNPF) and the French Association of Private
, INTERNATIONAL FINANCE
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 goal
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 common interest, which is to safeguard the prosperity
and continuity of the company". Evaluate the above recommendation 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 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. In France, about 15% of households own shares.
Explain the mechanism which restores the balance of payments equilibrium when
it is disturbed under the gold standard. Answer >>>The adjustment mechanism
under the gold standard is referred to as the price-specie-flow mechanism
expounded by David Hume. Under the gold standard, a balance of payment
disequilibrium will be corrected by a counter-flow of gold. Suppose that the U.S.
imports more from the U.K. than it exports to the latter. Under the classical gold
standard, gold, which is the only means of international payments, will flow from
the U.S. to the U.K. As a result, the U.S. (U.K.) will experience a decrease
(increase) in money supply. This means that the price level will tend to fall in the
U.S. and rise in the U.K. Consequently, the U.S. products become more
competitive in the export market, while U.K. products become less competitive.
This change will improve U.S. balance of payments and at the same time hurt the
U.K. balance of payments, eventually eliminating the initial BOP disequilibrium.
Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the
franc is pegged to gold at 12 francs per ounce. This, of course, implies that the
equilibrium exchange rate should be two francs per pound. If the current market
exchange rate is 2.2 francs per pound, how would you take advantage of this
situation? What would be the effect of shipping costs? Answer >>>Suppose that
INTERNATIONAL FINANCE EXAM QUESTIONS AND ANSWERS % GUARANTEED
SUCCESS.
How is international financial management different from domestic financial
management? Answer >>>There are three major dimensions that set apart
international finance from domestic finance. They are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
Discuss the major trends that have prevailed in international business during the
last two decades. Answer >>>The 1990s brought a rapid integration of
international capital and financial markets. Impetus for globalized financial
markets initially came from the governments of major countries that had begun
to deregulate their foreign exchange and capital markets. The economic
integration and globalization that began in the eighties is picking up speed in the
1990s via privatization. Privatization is the process by which a country divests
itself of the ownership and operation of a business venture by turning it over to
the free market system. Trade liberalization and economic integration continued
to proceed at both the regional and global levels. Despite sovereign debt crisis in
Europe, more EU member countries have adopted the common currency, euro,
that effectively became the second global currency after the U.S. dollar.
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 countries 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
,INTERNATIONAL FINANCE
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. International trade is
not a 'zero-sum' game in which one country benefits at the expense of another
country. Rather, international trade could be an 'increasing-sum' game from
which all players become winners.
What considerations might limit the extent to which the theory of comparative
advantage is realistic? 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 claims that
economic well-being is enhanced if each country's citizens produce what they
have a comparative advantage in producing relative to the citizens of other
countries, and then trade products. Underlying the theory are the assumptions of
free trade between nations and that the factors of production (land, buildings,
labor, technology, and capital) are relatively immobile. To the extent that these
assumptions do not hold, the theory of comparative advantage may not
realistically describe international trade.
What are multinational corporations (MNCs) and what economic roles do they
play? Answer >>>A multinational corporation (MNC) can be defined as a business
firm incorporated in one country that has production and sales operations in
many other countries. Indeed, some MNCs have operations in dozens of different
countries. MNCs obtain financing from major money centers around the world in
many different currencies to finance their operations. Global operations force the
treasurer'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, MNCs contribute to greater integration of world economy.
In 1995, a working group of French chief executive officers was set up by the
Confederation of French Industry (CNPF) and the French Association of Private
, INTERNATIONAL FINANCE
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 goal
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 common interest, which is to safeguard the prosperity
and continuity of the company". Evaluate the above recommendation 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 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. In France, about 15% of households own shares.
Explain the mechanism which restores the balance of payments equilibrium when
it is disturbed under the gold standard. Answer >>>The adjustment mechanism
under the gold standard is referred to as the price-specie-flow mechanism
expounded by David Hume. Under the gold standard, a balance of payment
disequilibrium will be corrected by a counter-flow of gold. Suppose that the U.S.
imports more from the U.K. than it exports to the latter. Under the classical gold
standard, gold, which is the only means of international payments, will flow from
the U.S. to the U.K. As a result, the U.S. (U.K.) will experience a decrease
(increase) in money supply. This means that the price level will tend to fall in the
U.S. and rise in the U.K. Consequently, the U.S. products become more
competitive in the export market, while U.K. products become less competitive.
This change will improve U.S. balance of payments and at the same time hurt the
U.K. balance of payments, eventually eliminating the initial BOP disequilibrium.
Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the
franc is pegged to gold at 12 francs per ounce. This, of course, implies that the
equilibrium exchange rate should be two francs per pound. If the current market
exchange rate is 2.2 francs per pound, how would you take advantage of this
situation? What would be the effect of shipping costs? Answer >>>Suppose that
