Solution Manual for International Financial Management,
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
Chapter 1-21
,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 managers 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 decades ago. At that time, most professors customarily (and safely, to some
extent) ignored international 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
finance. 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
decades.
Answer: The 2000s 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 and nineties are picking up speed in the
2000s. 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, the euro, that effectively became the second global currency after
the U.S. dollar. In the last few years, however, economic nationalism has been gaining some
popularity, as exemplified 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 populist response to the global financial crisis and Great Recession, it may subside as the world
economy 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 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
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.
5. 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 produces what it has a comparative
advantage in producing relative to other countries, and then trade products.
Underlying the theory are the assumptions of free trade between nations and that the factors of
production (labor, technological know-how, 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. In addition, free trade 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?
, 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 a few 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, 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
party 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 Mexico where it is much cheaper to hire workers. What are the merits and
demerits of Perot‘s position on NAFTA? Considering the recent economic developments in North
America, how would you assess 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 have temporarily caused unemployment of some American workers, they were eventually
rehired by other industries often for higher wages. At the same time, Mexico has been
experiencing a major economic boom. It seems clear that both Mexico and the U.S. have
benefited from NAFTA. Perot‘s concern appears to have been ill founded.
8. 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 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
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
Chapter 1-21
,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 managers 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 decades ago. At that time, most professors customarily (and safely, to some
extent) ignored international 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
finance. 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
decades.
Answer: The 2000s 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 and nineties are picking up speed in the
2000s. 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, the euro, that effectively became the second global currency after
the U.S. dollar. In the last few years, however, economic nationalism has been gaining some
popularity, as exemplified 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 populist response to the global financial crisis and Great Recession, it may subside as the world
economy 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 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
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.
5. 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 produces what it has a comparative
advantage in producing relative to other countries, and then trade products.
Underlying the theory are the assumptions of free trade between nations and that the factors of
production (labor, technological know-how, 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. In addition, free trade 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?
, 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 a few 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, 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
party 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 Mexico where it is much cheaper to hire workers. What are the merits and
demerits of Perot‘s position on NAFTA? Considering the recent economic developments in North
America, how would you assess 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 have temporarily caused unemployment of some American workers, they were eventually
rehired by other industries often for higher wages. At the same time, Mexico has been
experiencing a major economic boom. It seems clear that both Mexico and the U.S. have
benefited from NAFTA. Perot‘s concern appears to have been ill founded.
8. 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 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
