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,SOLUTION MANUAL FOR ea ea
International Financial Management, 10th Edition EUN Chapt ea ea ea ea ea ea
er 1-21
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CHAPTER 1 ea
GLOBALIZATION AND THE MULTINATIONAL FIRM ea ea ea ea
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
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QUESTIONS
1. Why is it important to study international financial management?
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Answer: We are now living in a world where all the major economic functions, such as con
e a ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
sumption, production, investment, and financing, are highly globalized.
ea ea ea ea ea ea ea e a It is thus essential
ea ea ea e a
for financial managers to fully understand vital international dimensions of financial manage
ea ea ea ea ea ea ea ea ea ea ea
ment. This global shift is in marked contrast to a situation that existed when the authors of
e a ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
this book were learning finance a few decades ago. At that time, most professors customari
ea ea ea ea ea ea ea ea e a ea ea ea ea ea
ly (and safely, to some extent) ignored international aspects of finance.
ea ea ea ea ea ea ea ea ea ea e a This mode of oper
ea ea ea
ation has become untenable since then.
ea ea ea ea ea
2. How is international financial management different from domestic financial management?
ea ea ea ea ea ea ea ea ea
Answer: There are three major dimensions that set apart international finance from domest
e a ea ea ea ea ea ea ea ea ea ea ea
ic finance. They are:
ea ea ea
1. foreign exchange and political risks, ea ea ea ea
2. market imperfections, and ea ea
3. expanded opportunity set. ea ea
3. Discuss the major trends that have prevailed in international business during the last
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two decades.
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Answer: The 2000s brought a rapid integration of international capital and financial market
e a ea ea ea ea ea ea ea ea ea ea ea
s. Impetus for globalized financial markets initially came from the governments of major cou
ea ea ea ea ea ea ea ea ea ea ea ea ea
ntries that had begun to deregulate their foreign exchange and capital markets. The econo
ea ea ea ea ea ea ea ea ea ea ea e a ea
mic
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RAWeaHILLeaLLC
,integration and globalization that began in the eighties and nineties are picking up speed in
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
ea the 2000s. Trade liberalization and economic integration continued to proceed at both the
ea ea ea ea ea ea ea ea ea ea ea ea ea
regional and global levels. Despite sovereign debt crisis in Europe, more EU member coun
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tries have adopted the common currency, the euro, that effectively became the second glo
ea ea ea ea ea ea ea ea ea ea ea ea ea
bal currency after the U.S. dollar. In the last few years, however, economic nationalism has
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
ea been gaining some popularity, as exemplified by the Brexit decision of the United Kingdom
ea ea ea ea ea ea ea ea ea ea ea ea ea e
and the so-called
a ea ea
―America First‖ policies of the Trump Administration. To the extent that economic nationalis
ea ea ea ea ea ea ea ea ea ea ea ea
m is a populist response to the global financial crisis and Great Recession, it may subside
ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
as the world economy continues to recover.
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4. How is a country‘s economic well-
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being enhanced through free international trade in goods and services?
ea ea ea ea ea ea ea ea ea
Answer: According to David Ricardo, with free international trade, it is mutually beneficial f
e a ea ea ea ea ea ea ea ea ea ea ea ea
or two countries to each specialize in the production of the goods that it can produce relati
ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
vely most efficiently and then trade those goods. By doing so, the two countries can incre
ea ea ea ea ea ea ea e a ea ea ea ea ea ea ea
ase their combined production, which allows both countries to consume more of both good
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s. This argument remains valid even if a country can produce both goods more efficiently i
ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
n absolute terms than the other country. International trade is not a ‗zero-
ea ea ea ea ea ea e a ea ea ea ea ea
sum‘ game in which one country benefits at the expense of another country. Rather, interna
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
tional trade could be an ‗increasing- sum‘ game from which all players become winners.
ea ea ea ea ea ea ea ea ea ea ea ea ea
5. What considerations might limit the extent to which the theory of comparative advantag
ea ea ea ea ea ea ea ea ea ea ea ea
e is realistic?
ea ea
Answer: The theory of comparative advantage was originally advanced by the nineteenth
e a ea ea ea ea ea ea ea ea ea ea ea
century economist David Ricardo as an explanation for why nations trade with one another
ea ea ea ea ea ea ea ea ea ea ea ea ea
. The theory claims that economic well-
ea ea ea ea ea ea
being is enhanced if each country produces what it has a comparative advantage in produ
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
cing relative to other countries, and then trade products.
ea ea ea ea ea ea ea ea
Underlying the theory are the assumptions of free trade between nations and that the facto
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rs of production (labor, technological know-
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how, and capital) are relatively immobile. To the extent that these assumptions do not hol
ea ea ea ea ea e a ea ea ea ea ea ea ea ea
d, the theory of comparative advantage may not realistically describe international trade. In
ea ea ea ea ea ea ea ea ea ea ea e a
ea addition, free trade produces winners and losers and if the losers are not compensated, fr
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
ee trade may faces political opposition from them.
ea ea ea ea ea ea ea
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, 6. What are multinational corporations (MNCs) and what economic roles do they play?
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©MCGRAWeaHILLeaLLC.eaALLeaRIGHTSeaRESERVED.eaNOeaREPRODUCTIONeaOReaDISTRIBUTIONeaWITHOUTeaTHEeaPRIOReaWRITTENeaCONSENTeaOFeaMCG
RAWeaHILLeaLLC
RAWeaHILLeaLLC
,SOLUTION MANUAL FOR ea ea
International Financial Management, 10th Edition EUN Chapt ea ea ea ea ea ea
er 1-21
ea
CHAPTER 1 ea
GLOBALIZATION AND THE MULTINATIONAL FIRM ea ea ea ea
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
ea ea ea ea ea ea ea
QUESTIONS
1. Why is it important to study international financial management?
ea ea ea ea ea ea ea ea
Answer: We are now living in a world where all the major economic functions, such as con
e a ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
sumption, production, investment, and financing, are highly globalized.
ea ea ea ea ea ea ea e a It is thus essential
ea ea ea e a
for financial managers to fully understand vital international dimensions of financial manage
ea ea ea ea ea ea ea ea ea ea ea
ment. This global shift is in marked contrast to a situation that existed when the authors of
e a ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
this book were learning finance a few decades ago. At that time, most professors customari
ea ea ea ea ea ea ea ea e a ea ea ea ea ea
ly (and safely, to some extent) ignored international aspects of finance.
ea ea ea ea ea ea ea ea ea ea e a This mode of oper
ea ea ea
ation has become untenable since then.
ea ea ea ea ea
2. How is international financial management different from domestic financial management?
ea ea ea ea ea ea ea ea ea
Answer: There are three major dimensions that set apart international finance from domest
e a ea ea ea ea ea ea ea ea ea ea ea
ic finance. They are:
ea ea ea
1. foreign exchange and political risks, ea ea ea ea
2. market imperfections, and ea ea
3. expanded opportunity set. ea ea
3. Discuss the major trends that have prevailed in international business during the last
ea ea ea ea ea ea ea ea ea ea ea ea ea
two decades.
ea
Answer: The 2000s brought a rapid integration of international capital and financial market
e a ea ea ea ea ea ea ea ea ea ea ea
s. Impetus for globalized financial markets initially came from the governments of major cou
ea ea ea ea ea ea ea ea ea ea ea ea ea
ntries that had begun to deregulate their foreign exchange and capital markets. The econo
ea ea ea ea ea ea ea ea ea ea ea e a ea
mic
©MCGRAWeaHILLeaLLC.eaALLeaRIGHTSeaRESERVED.eaNOeaREPRODUCTIONeaOReaDISTRIBUTIONeaWITHOUTeaTHEeaPRIOReaWRITTENeaCONSENTeaOFeaMCG
RAWeaHILLeaLLC
,integration and globalization that began in the eighties and nineties are picking up speed in
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
ea the 2000s. Trade liberalization and economic integration continued to proceed at both the
ea ea ea ea ea ea ea ea ea ea ea ea ea
regional and global levels. Despite sovereign debt crisis in Europe, more EU member coun
ea ea ea ea ea ea ea ea ea ea ea ea ea
tries have adopted the common currency, the euro, that effectively became the second glo
ea ea ea ea ea ea ea ea ea ea ea ea ea
bal currency after the U.S. dollar. In the last few years, however, economic nationalism has
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
ea been gaining some popularity, as exemplified by the Brexit decision of the United Kingdom
ea ea ea ea ea ea ea ea ea ea ea ea ea e
and the so-called
a ea ea
―America First‖ policies of the Trump Administration. To the extent that economic nationalis
ea ea ea ea ea ea ea ea ea ea ea ea
m is a populist response to the global financial crisis and Great Recession, it may subside
ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
as the world economy continues to recover.
ea ea ea ea ea ea
4. How is a country‘s economic well-
ea ea ea ea ea
being enhanced through free international trade in goods and services?
ea ea ea ea ea ea ea ea ea
Answer: According to David Ricardo, with free international trade, it is mutually beneficial f
e a ea ea ea ea ea ea ea ea ea ea ea ea
or two countries to each specialize in the production of the goods that it can produce relati
ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
vely most efficiently and then trade those goods. By doing so, the two countries can incre
ea ea ea ea ea ea ea e a ea ea ea ea ea ea ea
ase their combined production, which allows both countries to consume more of both good
ea ea ea ea ea ea ea ea ea ea ea ea ea
s. This argument remains valid even if a country can produce both goods more efficiently i
ea ea ea ea ea ea ea ea ea ea ea ea ea ea ea
n absolute terms than the other country. International trade is not a ‗zero-
ea ea ea ea ea ea e a ea ea ea ea ea
sum‘ game in which one country benefits at the expense of another country. Rather, interna
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
tional trade could be an ‗increasing- sum‘ game from which all players become winners.
ea ea ea ea ea ea ea ea ea ea ea ea ea
5. What considerations might limit the extent to which the theory of comparative advantag
ea ea ea ea ea ea ea ea ea ea ea ea
e is realistic?
ea ea
Answer: The theory of comparative advantage was originally advanced by the nineteenth
e a ea ea ea ea ea ea ea ea ea ea ea
century economist David Ricardo as an explanation for why nations trade with one another
ea ea ea ea ea ea ea ea ea ea ea ea ea
. The theory claims that economic well-
ea ea ea ea ea ea
being is enhanced if each country produces what it has a comparative advantage in produ
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
cing relative to other countries, and then trade products.
ea ea ea ea ea ea ea ea
Underlying the theory are the assumptions of free trade between nations and that the facto
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
rs of production (labor, technological know-
ea ea ea ea ea
how, and capital) are relatively immobile. To the extent that these assumptions do not hol
ea ea ea ea ea e a ea ea ea ea ea ea ea ea
d, the theory of comparative advantage may not realistically describe international trade. In
ea ea ea ea ea ea ea ea ea ea ea e a
ea addition, free trade produces winners and losers and if the losers are not compensated, fr
ea ea ea ea ea ea ea ea ea ea ea ea ea ea
ee trade may faces political opposition from them.
ea ea ea ea ea ea ea
©MCGRAWeaHILLeaLLC.eaALLeaRIGHTSeaRESERVED.eaNOeaREPRODUCTIONeaOReaDISTRIBUTIONeaWITHOUTeaTHEeaPRIOReaWRITTENeaCONSENTeaOFeaMCG
RAWeaHILLeaLLC
, 6. What are multinational corporations (MNCs) and what economic roles do they play?
ea ea ea ea ea ea ea ea ea ea ea
©MCGRAWeaHILLeaLLC.eaALLeaRIGHTSeaRESERVED.eaNOeaREPRODUCTIONeaOReaDISTRIBUTIONeaWITHOUTeaTHEeaPRIOReaWRITTENeaCONSENTeaOFeaMCG
RAWeaHILLeaLLC
