Solution Manual for International Financial Management,
j j j j j j
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
j j j j j j j j j j
Chapter 1-21
jj j
j
, SOLUTIONj MANUALj FOR
InternationaljFinancialjManagement,j10thjEditionjEUNjChapterj1-21
CHAPTERj1
GLOBALIZATIONjANDjTHEjMULTINATIONALjFIRM
ANSWERSj&jSOLUTIONSjTOjEND-OF-CHAPTERjQUESTIONSjANDjPROBLEMS
QUESTIONS
1. Whyjisjitjimportantjtojstudyjinternationaljfinancialjmanagement?
Answer:j Wejarejnowjlivingjinjajworldj wherejalljthejjmajorjeconomicjfunctions,jsuchj asjconsumption,j production,j
investment,jandjfinancing,jarejhighlyjglobalized.j Itjisj thusjessentialj forjfinancialjmanagersjtojfullyj understandj
vitaljinternationaljdimensionsjofjfinancialjmanagement.j Thisjglobaljshiftjisjinjmarkedjcontrastjtojaj situationjthatj
existedjwhenjthejauthorsjofjthisjbookjwerejlearningjfinancejaj fewjdecadesjago.j Atjthatjtime,jmostj professorsj c
ustomarilyj (andj safely,j toj somej extent)j ignoredj internationalj aspectsj ofj finance.j Thisj modej ofj operationjha
sjbecomejuntenablejsincejthen.
2. Howjisjinternationaljfinancialjmanagementjdifferentjfromjdomesticjfinancialjmanagement?
Answer:j Therejarejthreejmajorjdimensionsjthatjsetjapartjinternationaljfinancejfromjdomesticjfinance.jTheyj ar
e:
1. foreignjexchangejandjpoliticaljrisks,
2. marketjimperfections,jand
3. expandedjopportunityjset.
3. Discussjthejmajorjtrendsjthatjhavejprevailedjinjinternationaljbusinessjduringjthejlastjtwojdecades.
Answer:j Thej2000sjbroughtjajrapidjintegrationjofjinternationaljcapitaljandjfinancialjmarkets.jImpetusjforj gl
obalizedjfinancialjmarketsjinitiallyjcamejfromjthejgovernmentsjofjmajorjcountriesjthatjhadjbegunjtoj deregula
tejtheirjforeignjexchangejandjcapitaljmarkets.j Thejeconomic
j
, integrationjandjglobalizationjthatjbeganjinjthejeightiesjandjninetiesjarejpickingjupjspeedjinjthej2000s.jTrade
j liberalizationjandjeconomicjintegrationjcontinuedjtojproceedjatjbothjthejregionaljandjglobaljlevels.jDespite
j sovereignjdebtjcrisisjinjEurope,jmorejEUjmemberjcountriesjhavejadoptedjthejcommonjcurrency,jthejeuro,j th
atjeffectivelyjbecamejthejsecondjglobaljcurrencyjafterjthejU.S.jdollar.jInjthejlastjfewjyears,jhowever,j econo
micjnationalismjhasjbeenjgainingjsomejpopularity,jasjexemplifiedjbyjthejBrexitjdecisionjofjthejUnitedj Kingd
omjandjthejso-called
―AmericajFirst‖jpoliciesjofjthejTrumpjAdministration.jTojthejextentjthatjeconomicjnationalismjisjajpopulistj res
ponsejtojthejglobaljfinancialjcrisisjandjGreatjRecession,jitjmayjsubsidejasjthejworldjeconomyjcontinuesjtoj rec
over.
4. Howjisjajcountry‘sjeconomicjwell-beingjenhancedjthroughjfreejinternationaljtradejinjgoodsjandjservices?
Answer:j AccordingjtojDavidjRicardo,jwithjfreejinternationaljtrade,jitjisjmutuallyjbeneficialjforjtwojcountriesj t
ojeachjspecializejinjthejproductionjofjthejgoodsjthatjitjcanjproducejrelativelyjmostjefficientlyjandjthenjtradej t
hosejgoods.j Byjdoingjso,jthejtwojcountriesjcanjincreasejtheirjcombinedjproduction,jwhichjallowsjbothj countri
esjtojconsumejmorejofjbothjgoods.jThisjargumentjremainsjvalidjevenjifjajcountryjcanjproducejbothj goodsjmor
ejefficientlyjinjabsolutejtermsjthanjthejotherjcountry.j Internationaljtradejisjnotjaj‗zero-
sum‘jgamej injwhichjonejcountryjbenefitsjatjthejexpensejofjanotherjcountry.jRather,jinternationaljtradejcouldj
bejan
‗increasing-jsum‘jgamejfromjwhichjalljplayersjbecomejwinners.
5. Whatjconsiderationsjmightjlimitjthejextentjtojwhichjthejtheoryjofjcomparativejadvantagejisjrealistic?
Answer:j Thejtheoryjofjcomparativejadvantagejwasjoriginallyjadvancedjbyjthejnineteenthjcenturyjeconomist
j DavidjRicardojasjanjexplanationjforjwhyjnationsjtradejwithjonejanother.jThejtheoryjclaimsjthatjeconomicj w
ell-
beingjisjenhancedjifjeachjcountryjproducesjwhatjitjhasjajcomparativejadvantagejinjproducingjrelativejtoj oth
erjcountries,jandjthenjtradejproducts.
Underlyingjthejtheoryjarejthejassumptionsjofjfreejtradejbetweenjnationsjandjthatjthejfactorsjofjproductionj (l
abor,jtechnologicaljknow-
how,jandjcapital)jarejrelativelyjimmobile.j Tojthejextentjthatjthesejassumptionsjdoj notjhold,jthejtheoryjofjcom
parativejadvantagejmayjnotjrealisticallyjdescribejinternationaljtrade.j Injaddition,j freejtradejproducesjwin
nersjandjlosersjandjifjthejlosersjarejnotjcompensated,jfreejtradejmayjfacesjpoliticalj oppositionjfromjthem.
6. Whatjarejmultinationaljcorporationsj(MNCs)jandjwhatjeconomicjrolesjdojtheyjplay?
j
, Answer:j Ajmultinationaljcorporationj(MNC)jcanjbejdefinedjasjajbusinessjfirmjincorporatedjinjonejcountryjthatj
hasjproductionjandjsalesjoperationsjinjmanyjotherjcountries.jIndeed,jsomejMNCsjhavejoperationsjinjajfewj doz
ensjofjdifferentjcountries.jj MNCsjobtainjfinancingjfromjmajorjmoneyjcentersjaroundjthejworldjinjmanyj differe
ntjcurrenciesjtojfinancejtheirjoperations.jGlobaljoperationsjforcejthejtreasurer‘sjofficejtojestablishj internation
aljbankingjrelationships,jtojplacejshort-
termjfundsjinjseveraljcurrencyjdenominations,jandjtoj effectivelyjmanagejforeignjexchangejrisk.j Byjcircumvent
ingjandjalsojtakingjadvantagejofjvariousjmarketj imperfections,jsuchjasjbarriersjtojtradejandjbarriersjtojflowj
ofjpeoplejandjcapitaljacrossjcountries,jMNCsj contributejtojgreaterjintegrationjofjthejworldjeconomyjandjingj
morejperfectjfunctioningjofjglobaljmarkets.
7. RossjPerot,jajformerjPresidentialjcandidatejofjthejReformjParty,jwhichjwasjajthirdjpoliticaljpartyjinjthej
UnitedjStates,jhadjstronglyjobjectedjtojthejcreationjofjthejNorthjAmericanjTradejAgreementj(NAFTA),jwhich
j nonethelessjwasjinauguratedjinj1994.jPerotjfearedjthejlossjofjAmericanjjobsjtojMexicojwherejitjisjmuchj ch
eaperjtojhirejworkers.jWhatjarejthejmeritsjandjdemeritsjofjPerot‘sjpositionjonjNAFTA?jConsideringjthej rece
ntjeconomicjdevelopmentsjinjNorthjAmerica,jhowjwouldjyoujassessjPerot‘sjpositionjonjNAFTA?
Answer:jSincejthejinceptionjofjNAFTA,jmanyjAmericanjcompaniesjindeedjhavejinvestedjheavilyjinjMexico,j s
ometimesjrelocatingjproductionjfromjthejUnitedjStatesjtojMexico.jAlthoughjthisjmightjhavejtemporarilyj caus
edjunemploymentjofjsomejAmericanjworkers,jtheyjwerejeventuallyjrehiredjbyjotherjindustriesjoftenjforj high
erjwages.jAtjthejsamejtime,jMexicojhasjbeenjexperiencingjajmajorjeconomicjboom.jItjseemsjclearjthatj bothj
MexicojandjthejU.S.jhavejbenefitedjfromjNAFTA.jPerot‘sjconcernjappearsjtojhavejbeenjilljfounded.
8. Inj1995,jajworkingjgroupjofjFrenchjchiefjexecutivejofficersjwasjsetjupjbyjthejConfederationjofjFrenchj Ind
ustryj(CNPF)jandjthejFrenchjAssociationjofjPrivatejCompaniesj(AFEP)jtojstudyjthejFrenchjcorporatej governanc
ejstructure.jThejgroupjreportedjthejfollowing,jamongjotherjthings:j ―Thejboardjofjdirectorsjshouldj notjsimplyj
aimjatjmaximizingjsharejvaluesjasjinjthejU.K.jandjthejU.S.jRather,jitsjgoaljshouldjbejtojservejthej company,jwhos
ejinterestsjshouldjbejclearlyjdistinguishedjfromjthosejofjitsjshareholders,jemployees,jcreditors,j suppliersjandjcl
ientsjbutjstilljequatedjwithjtheirjgeneraljcommonjinterest,jwhichjisjtojsafeguardjthejprosperityj andjcontinuityjof
jthejcompany‖.jEvaluatejthejabovejrecommendationjofjthejworkingjgroup.
Answer:jThejrecommendationsjofjthejFrenchjworkingjgroupjclearlyjshowjthatjshareholderjwealthj maximizatio
njisjnotjajuniversallyjacceptedjgoaljofjcorporatejmanagement,jespecially
j
j j j j j j
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
j j j j j j j j j j
Chapter 1-21
jj j
j
, SOLUTIONj MANUALj FOR
InternationaljFinancialjManagement,j10thjEditionjEUNjChapterj1-21
CHAPTERj1
GLOBALIZATIONjANDjTHEjMULTINATIONALjFIRM
ANSWERSj&jSOLUTIONSjTOjEND-OF-CHAPTERjQUESTIONSjANDjPROBLEMS
QUESTIONS
1. Whyjisjitjimportantjtojstudyjinternationaljfinancialjmanagement?
Answer:j Wejarejnowjlivingjinjajworldj wherejalljthejjmajorjeconomicjfunctions,jsuchj asjconsumption,j production,j
investment,jandjfinancing,jarejhighlyjglobalized.j Itjisj thusjessentialj forjfinancialjmanagersjtojfullyj understandj
vitaljinternationaljdimensionsjofjfinancialjmanagement.j Thisjglobaljshiftjisjinjmarkedjcontrastjtojaj situationjthatj
existedjwhenjthejauthorsjofjthisjbookjwerejlearningjfinancejaj fewjdecadesjago.j Atjthatjtime,jmostj professorsj c
ustomarilyj (andj safely,j toj somej extent)j ignoredj internationalj aspectsj ofj finance.j Thisj modej ofj operationjha
sjbecomejuntenablejsincejthen.
2. Howjisjinternationaljfinancialjmanagementjdifferentjfromjdomesticjfinancialjmanagement?
Answer:j Therejarejthreejmajorjdimensionsjthatjsetjapartjinternationaljfinancejfromjdomesticjfinance.jTheyj ar
e:
1. foreignjexchangejandjpoliticaljrisks,
2. marketjimperfections,jand
3. expandedjopportunityjset.
3. Discussjthejmajorjtrendsjthatjhavejprevailedjinjinternationaljbusinessjduringjthejlastjtwojdecades.
Answer:j Thej2000sjbroughtjajrapidjintegrationjofjinternationaljcapitaljandjfinancialjmarkets.jImpetusjforj gl
obalizedjfinancialjmarketsjinitiallyjcamejfromjthejgovernmentsjofjmajorjcountriesjthatjhadjbegunjtoj deregula
tejtheirjforeignjexchangejandjcapitaljmarkets.j Thejeconomic
j
, integrationjandjglobalizationjthatjbeganjinjthejeightiesjandjninetiesjarejpickingjupjspeedjinjthej2000s.jTrade
j liberalizationjandjeconomicjintegrationjcontinuedjtojproceedjatjbothjthejregionaljandjglobaljlevels.jDespite
j sovereignjdebtjcrisisjinjEurope,jmorejEUjmemberjcountriesjhavejadoptedjthejcommonjcurrency,jthejeuro,j th
atjeffectivelyjbecamejthejsecondjglobaljcurrencyjafterjthejU.S.jdollar.jInjthejlastjfewjyears,jhowever,j econo
micjnationalismjhasjbeenjgainingjsomejpopularity,jasjexemplifiedjbyjthejBrexitjdecisionjofjthejUnitedj Kingd
omjandjthejso-called
―AmericajFirst‖jpoliciesjofjthejTrumpjAdministration.jTojthejextentjthatjeconomicjnationalismjisjajpopulistj res
ponsejtojthejglobaljfinancialjcrisisjandjGreatjRecession,jitjmayjsubsidejasjthejworldjeconomyjcontinuesjtoj rec
over.
4. Howjisjajcountry‘sjeconomicjwell-beingjenhancedjthroughjfreejinternationaljtradejinjgoodsjandjservices?
Answer:j AccordingjtojDavidjRicardo,jwithjfreejinternationaljtrade,jitjisjmutuallyjbeneficialjforjtwojcountriesj t
ojeachjspecializejinjthejproductionjofjthejgoodsjthatjitjcanjproducejrelativelyjmostjefficientlyjandjthenjtradej t
hosejgoods.j Byjdoingjso,jthejtwojcountriesjcanjincreasejtheirjcombinedjproduction,jwhichjallowsjbothj countri
esjtojconsumejmorejofjbothjgoods.jThisjargumentjremainsjvalidjevenjifjajcountryjcanjproducejbothj goodsjmor
ejefficientlyjinjabsolutejtermsjthanjthejotherjcountry.j Internationaljtradejisjnotjaj‗zero-
sum‘jgamej injwhichjonejcountryjbenefitsjatjthejexpensejofjanotherjcountry.jRather,jinternationaljtradejcouldj
bejan
‗increasing-jsum‘jgamejfromjwhichjalljplayersjbecomejwinners.
5. Whatjconsiderationsjmightjlimitjthejextentjtojwhichjthejtheoryjofjcomparativejadvantagejisjrealistic?
Answer:j Thejtheoryjofjcomparativejadvantagejwasjoriginallyjadvancedjbyjthejnineteenthjcenturyjeconomist
j DavidjRicardojasjanjexplanationjforjwhyjnationsjtradejwithjonejanother.jThejtheoryjclaimsjthatjeconomicj w
ell-
beingjisjenhancedjifjeachjcountryjproducesjwhatjitjhasjajcomparativejadvantagejinjproducingjrelativejtoj oth
erjcountries,jandjthenjtradejproducts.
Underlyingjthejtheoryjarejthejassumptionsjofjfreejtradejbetweenjnationsjandjthatjthejfactorsjofjproductionj (l
abor,jtechnologicaljknow-
how,jandjcapital)jarejrelativelyjimmobile.j Tojthejextentjthatjthesejassumptionsjdoj notjhold,jthejtheoryjofjcom
parativejadvantagejmayjnotjrealisticallyjdescribejinternationaljtrade.j Injaddition,j freejtradejproducesjwin
nersjandjlosersjandjifjthejlosersjarejnotjcompensated,jfreejtradejmayjfacesjpoliticalj oppositionjfromjthem.
6. Whatjarejmultinationaljcorporationsj(MNCs)jandjwhatjeconomicjrolesjdojtheyjplay?
j
, Answer:j Ajmultinationaljcorporationj(MNC)jcanjbejdefinedjasjajbusinessjfirmjincorporatedjinjonejcountryjthatj
hasjproductionjandjsalesjoperationsjinjmanyjotherjcountries.jIndeed,jsomejMNCsjhavejoperationsjinjajfewj doz
ensjofjdifferentjcountries.jj MNCsjobtainjfinancingjfromjmajorjmoneyjcentersjaroundjthejworldjinjmanyj differe
ntjcurrenciesjtojfinancejtheirjoperations.jGlobaljoperationsjforcejthejtreasurer‘sjofficejtojestablishj internation
aljbankingjrelationships,jtojplacejshort-
termjfundsjinjseveraljcurrencyjdenominations,jandjtoj effectivelyjmanagejforeignjexchangejrisk.j Byjcircumvent
ingjandjalsojtakingjadvantagejofjvariousjmarketj imperfections,jsuchjasjbarriersjtojtradejandjbarriersjtojflowj
ofjpeoplejandjcapitaljacrossjcountries,jMNCsj contributejtojgreaterjintegrationjofjthejworldjeconomyjandjingj
morejperfectjfunctioningjofjglobaljmarkets.
7. RossjPerot,jajformerjPresidentialjcandidatejofjthejReformjParty,jwhichjwasjajthirdjpoliticaljpartyjinjthej
UnitedjStates,jhadjstronglyjobjectedjtojthejcreationjofjthejNorthjAmericanjTradejAgreementj(NAFTA),jwhich
j nonethelessjwasjinauguratedjinj1994.jPerotjfearedjthejlossjofjAmericanjjobsjtojMexicojwherejitjisjmuchj ch
eaperjtojhirejworkers.jWhatjarejthejmeritsjandjdemeritsjofjPerot‘sjpositionjonjNAFTA?jConsideringjthej rece
ntjeconomicjdevelopmentsjinjNorthjAmerica,jhowjwouldjyoujassessjPerot‘sjpositionjonjNAFTA?
Answer:jSincejthejinceptionjofjNAFTA,jmanyjAmericanjcompaniesjindeedjhavejinvestedjheavilyjinjMexico,j s
ometimesjrelocatingjproductionjfromjthejUnitedjStatesjtojMexico.jAlthoughjthisjmightjhavejtemporarilyj caus
edjunemploymentjofjsomejAmericanjworkers,jtheyjwerejeventuallyjrehiredjbyjotherjindustriesjoftenjforj high
erjwages.jAtjthejsamejtime,jMexicojhasjbeenjexperiencingjajmajorjeconomicjboom.jItjseemsjclearjthatj bothj
MexicojandjthejU.S.jhavejbenefitedjfromjNAFTA.jPerot‘sjconcernjappearsjtojhavejbeenjilljfounded.
8. Inj1995,jajworkingjgroupjofjFrenchjchiefjexecutivejofficersjwasjsetjupjbyjthejConfederationjofjFrenchj Ind
ustryj(CNPF)jandjthejFrenchjAssociationjofjPrivatejCompaniesj(AFEP)jtojstudyjthejFrenchjcorporatej governanc
ejstructure.jThejgroupjreportedjthejfollowing,jamongjotherjthings:j ―Thejboardjofjdirectorsjshouldj notjsimplyj
aimjatjmaximizingjsharejvaluesjasjinjthejU.K.jandjthejU.S.jRather,jitsjgoaljshouldjbejtojservejthej company,jwhos
ejinterestsjshouldjbejclearlyjdistinguishedjfromjthosejofjitsjshareholders,jemployees,jcreditors,j suppliersjandjcl
ientsjbutjstilljequatedjwithjtheirjgeneraljcommonjinterest,jwhichjisjtojsafeguardjthejprosperityj andjcontinuityjof
jthejcompany‖.jEvaluatejthejabovejrecommendationjofjthejworkingjgroup.
Answer:jThejrecommendationsjofjthejFrenchjworkingjgroupjclearlyjshowjthatjshareholderjwealthj maximizatio
njisjnotjajuniversallyjacceptedjgoaljofjcorporatejmanagement,jespecially
j
