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
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.
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of
such corporate scandals as those involving Enron and WorldCom, U.S. President George W. Bush stated that
while tougher laws might help, ―ultimately, the ethics of American business depends on the conscience of
America‘s business leaders.‖ Describe your view on this statement.
Answer: There can be different answers to this question. If business leaders always behave with a high ethical
standard, many of the corporate scandals we have seen lately might not have happened. Since we cannot fully
depend on the ethical behavior on the part of individual business leaders, the society should protect itself by
adopting the rules/regulations and governance structure that would induce business leaders to behave in the
interest of the society at large. But at the same time, we need to make sure that excessive regulations do not
stymy free enterprises, an important engine of economic growth. It is important to strike the right balance.
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a world
leader in mobile phones, TVs, and home appliances. But before you make investment decision, you would like
to learn about the company. Visit the website of Yahoo (http://finance.yahoo.com) and collect information
about Samsung Electronics, including the recent stock price history and analysts‘ views of the company. Discuss
what you learn about the company. Also discuss how the instantaneous access to information via internet
would affect the nature and workings of financial markets.
Answer: As students might have learned from visiting the website, information is readily available even for
foreign companies like Samsung Electronics. Ready access to international information helps integrate
financial markets, dismantling barriers to international investment and financing. Integration, however, may
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
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.
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of
such corporate scandals as those involving Enron and WorldCom, U.S. President George W. Bush stated that
while tougher laws might help, ―ultimately, the ethics of American business depends on the conscience of
America‘s business leaders.‖ Describe your view on this statement.
Answer: There can be different answers to this question. If business leaders always behave with a high ethical
standard, many of the corporate scandals we have seen lately might not have happened. Since we cannot fully
depend on the ethical behavior on the part of individual business leaders, the society should protect itself by
adopting the rules/regulations and governance structure that would induce business leaders to behave in the
interest of the society at large. But at the same time, we need to make sure that excessive regulations do not
stymy free enterprises, an important engine of economic growth. It is important to strike the right balance.
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a world
leader in mobile phones, TVs, and home appliances. But before you make investment decision, you would like
to learn about the company. Visit the website of Yahoo (http://finance.yahoo.com) and collect information
about Samsung Electronics, including the recent stock price history and analysts‘ views of the company. Discuss
what you learn about the company. Also discuss how the instantaneous access to information via internet
would affect the nature and workings of financial markets.
Answer: As students might have learned from visiting the website, information is readily available even for
foreign companies like Samsung Electronics. Ready access to international information helps integrate
financial markets, dismantling barriers to international investment and financing. Integration, however, may
