SOLUTION MANUAL FOR
INTERNATIONAL FINANCIAL MANAGEMENT
CHEOL S. EUN. BRUCE G. RESNICK
9th EDITON
IM-1
, TABLE OF CONTENTS
PART ONE Foundations of International Financial Management
Chapter 1: Globalization and the Multinational Firm,
Chapter 2: International Monetary System,
Chapter 3: Balance of Payments,
Chapter 4: Corporate Governance Around the World,
PART TWO The Foreign Exchange Market, Exchange Rate Determination, and
Currency Derivatives
Chapter 5: The Market for Foreign Exchange,
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates,
Chapter 7: Futures and Options on Foreign Exchange,
PART THREE Foreign Exchange Exposure and Management
Chapter 8: Management of Transaction Exposure,
Chapter 9: Management of Economic Exposure,
Chapter 10: Management of Translation Exposure,
PART FOUR World Financial Markets and Institutions
Chapter 11: International Banking and Money Market,
Chapter 12: International Bond Market,
Chapter 13: International Equity Markets,
Chapter 14: Interest Rate and Currency Swaps,
Chapter 15: International Portfolio Investment,
PART FIVE Financial Management of the Multinational Firm
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions,
Chapter 17: International Capital Structure and the Cost of Capital,
Chapter 18: International Capital Budgeting,
Chapter 19: Multinational Cash Management,
Chapter 20: International Trade Finance
IM-2
, CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM
SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS
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, I.E.,
Consumption, Production, And Investment, 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 Some Twenty Years 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 three major trends that have prevailed in international business during the last two
decades.
ANSWER: The 1980s 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. Lastly, Trade
Liberalization And Economic Integration Continued To Proceed At Both The Regional And Global
Levels.
IM-3
, 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 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
At 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’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 Will Not Realistically Describe International Trade.
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 Several 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.
IM-4
INTERNATIONAL FINANCIAL MANAGEMENT
CHEOL S. EUN. BRUCE G. RESNICK
9th EDITON
IM-1
, TABLE OF CONTENTS
PART ONE Foundations of International Financial Management
Chapter 1: Globalization and the Multinational Firm,
Chapter 2: International Monetary System,
Chapter 3: Balance of Payments,
Chapter 4: Corporate Governance Around the World,
PART TWO The Foreign Exchange Market, Exchange Rate Determination, and
Currency Derivatives
Chapter 5: The Market for Foreign Exchange,
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates,
Chapter 7: Futures and Options on Foreign Exchange,
PART THREE Foreign Exchange Exposure and Management
Chapter 8: Management of Transaction Exposure,
Chapter 9: Management of Economic Exposure,
Chapter 10: Management of Translation Exposure,
PART FOUR World Financial Markets and Institutions
Chapter 11: International Banking and Money Market,
Chapter 12: International Bond Market,
Chapter 13: International Equity Markets,
Chapter 14: Interest Rate and Currency Swaps,
Chapter 15: International Portfolio Investment,
PART FIVE Financial Management of the Multinational Firm
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions,
Chapter 17: International Capital Structure and the Cost of Capital,
Chapter 18: International Capital Budgeting,
Chapter 19: Multinational Cash Management,
Chapter 20: International Trade Finance
IM-2
, CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRM
SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS
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, I.E.,
Consumption, Production, And Investment, 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 Some Twenty Years 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 three major trends that have prevailed in international business during the last two
decades.
ANSWER: The 1980s 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. Lastly, Trade
Liberalization And Economic Integration Continued To Proceed At Both The Regional And Global
Levels.
IM-3
, 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 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
At 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’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 Will Not Realistically Describe International Trade.
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 Several 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.
IM-4
