SOLUTION MANUAL FOR g g
InternationalgFinancialgManagement,g10thgEditiongEUNgChapt
erg1-21
CHAPTERg1
GLOBALIZATIONgANDgTHEgMULTINATIONALgFIRM
ANSWERSg&gSOLUTIONSgTOgEND-OF-CHAPTERgQUESTIONSgANDgPROBLEMS
QUESTIONS
1. Whygisgitgimportantgtogstudyginternationalgfinancialgmanagement?
Answer:g Wegaregnowglivinggingagworldgwheregallgthegmajorgeconomicgfunctions,gsuchgasgconsu
mption,gproduction,ginvestment,gandgfinancing,gareghighlygglobalized.g Itgisgthusgessentialg forgfi
nancialgmanagersgtogfullygunderstandgvitalginternationalgdimensionsgofgfinancialgmanagement.g
Thisgglobalgshiftgisgingmarkedgcontrastgtogagsituationgthatgexistedgwhengthegauthorsgofgthisgbook
gwereglearninggfinancegagfewgdecadesgago.g Atgthatgtime,gmostgprofessorsgcustomarilyg(andgsaf
ely,gtogsomegextent)gignoredginternationalgaspectsgofgfinance.g Thisgmodegofgoperationghasgbec
omeguntenablegsincegthen.
2. Howgisginternationalgfinancialgmanagementgdifferentgfromgdomesticgfinancialgmanagement?
Answer:g Theregaregthreegmajorgdimensionsgthatgsetgapartginternationalgfinancegfromgdomestic
gfinance.gTheygare:
1. foreigngexchangegandgpoliticalgrisks,
2. marketgimperfections,gand
3. expandedgopportunitygset.
3. Discussgthegmajorgtrendsgthatghavegprevailedginginternationalgbusinessgduringgtheglastgt
wogdecades.
Answer:g Theg2000sgbroughtgagrapidgintegrationgofginternationalgcapitalgandgfinancialgmarkets.
gImpetusgforgglobalizedgfinancialgmarketsginitiallygcamegfromgtheggovernmentsgofgmajorgcountri
esgthatghadgbegungtogderegulategtheirgforeigngexchangegandgcapitalgmarkets.g Thegeconomic
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
,integrationgandgglobalizationgthatgbegangingthegeightiesgandgninetiesgaregpickinggupgspeedgingt
heg2000s.gTradegliberalizationgandgeconomicgintegrationgcontinuedgtogproceedgatgbothgthegreg
ionalgandgglobalglevels.gDespitegsovereigngdebtgcrisisgingEurope,gmoregEUgmembergcountriesg
havegadoptedgthegcommongcurrency,gthegeuro,gthatgeffectivelygbecamegthegsecondgglobalgcur
rencygaftergthegU.S.gdollar.gIngtheglastgfewgyears,ghowever,geconomicgnationalismghasgbeengg
aininggsomegpopularity,gasgexemplifiedgbygthegBrexitgdecisiongofgthegUnitedgKingdomgandgtheg
so-called
―AmericagFirst‖gpoliciesgofgthegTrumpgAdministration.gTogthegextentgthatgeconomicgnationalism
gisgagpopulistgresponsegtogthegglobalgfinancialgcrisisgandgGreatgRecession,gitgmaygsubsidegasg
thegworldgeconomygcontinuesgtogrecover.
4. Howgisgagcountry‘sgeconomicgwell-
beinggenhancedgthroughgfreeginternationalgtradeginggoodsgandgservices?
Answer:g AccordinggtogDavidgRicardo,gwithgfreeginternationalgtrade,gitgisgmutuallygbeneficialgfor
gtwogcountriesgtogeachgspecializegingthegproductiongofgtheggoodsgthatgitgcangproducegrelatively
gmostgefficientlygandgthengtradegthoseggoods.g Bygdoinggso,gthegtwogcountriesgcangincreasegth
eirgcombinedgproduction,gwhichgallowsgbothgcountriesgtogconsumegmoregofgbothggoods.gThisg
argumentgremainsgvalidgevengifgagcountrygcangproducegbothggoodsgmoregefficientlygingabsolut
egtermsgthangthegothergcountry.g Internationalgtradegisgnotgag‗zero-
sum‘ggamegingwhichgonegcountrygbenefitsgatgthegexpensegofganothergcountry.gRather,ginternati
onalgtradegcouldgbegang‗increasing-gsum‘ggamegfromgwhichgallgplayersgbecomegwinners.
5. Whatgconsiderationsgmightglimitgthegextentgtogwhichgthegtheorygofgcomparativegadvantage
gisgrealistic?
Answer:g Thegtheorygofgcomparativegadvantagegwasgoriginallygadvancedgbygthegnineteenthgce
nturygeconomistgDavidgRicardogasgangexplanationgforgwhygnationsgtradegwithgoneganother.gTh
egtheorygclaimsgthatgeconomicgwell-
beinggisgenhancedgifgeachgcountrygproducesgwhatgitghasgagcomparativegadvantagegingproduci
nggrelativegtogothergcountries,gandgthengtradegproducts.
Underlyinggthegtheorygaregthegassumptionsgofgfreegtradegbetweengnationsgandgthatgthegfactors
gofgproductiong(labor,gtechnologicalgknow-
how,gandgcapital)garegrelativelygimmobile.g Togthegextentgthatgthesegassumptionsgdognotghold,g
thegtheorygofgcomparativegadvantagegmaygnotgrealisticallygdescribeginternationalgtrade.g Ingad
dition,gfreegtradegproducesgwinnersgandglosersgandgifgtheglosersgaregnotgcompensated,gfreegtr
adegmaygfacesgpoliticalgoppositiongfromgthem.
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
,6. Whatgaregmultinationalgcorporationsg(MNCs)gandgwhatgeconomicgrolesgdogtheygplay?
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
, Answer:g Agmultinationalgcorporationg(MNC)gcangbegdefinedgasgagbusinessgfirmgincorporatedgin
gonegcountrygthatghasgproductiongandgsalesgoperationsgingmanygothergcountries.gIndeed,gsome
gMNCsghavegoperationsgingagfewgdozensgofgdifferentgcountries.g MNCsgobtaingfinancinggfromg
majorgmoneygcentersgaroundgthegworldgingmanygdifferentgcurrenciesgtogfinancegtheirgoperation
s.gGlobalgoperationsgforcegthegtreasurer‘sgofficegtogestablishginternationalgbankinggrelationship
s,gtogplacegshort-
termgfundsgingseveralgcurrencygdenominations,gandgtogeffectivelygmanagegforeigngexchangegri
sk.g Bygcircumventinggandgalsogtakinggadvantagegofgvariousgmarketgimperfections,gsuchgasgbar
riersgtogtradegandgbarriersgtogflowgofgpeoplegandgcapitalgacrossgcountries,gMNCsgcontributegtog
greatergintegrationgofgthegworldgeconomygandginggmoregperfectgfunctioninggofgglobalgmarkets.
7. RossgPerot,gagformergPresidentialgcandidategofgthegReformgParty,gwhichgwasgagthirdgpoliti
calgpartygingthegUnitedgStates,ghadgstronglygobjectedgtogthegcreationgofgthegNorthgAmericangTr
adegAgreementg(NAFTA),gwhichgnonethelessgwasginauguratedging1994.gPerotgfearedgtheglossg
ofgAmericangjobsgtogMexicogwheregitgisgmuchgcheapergtoghiregworkers.gWhatgaregthegmeritsga
ndgdemeritsgofgPerot‘sgpositiongongNAFTA?gConsideringgthegrecentgeconomicgdevelopmentsgi
ngNorthgAmerica,ghowgwouldgyougassessgPerot‘sgpositiongongNAFTA?
Answer:gSincegtheginceptiongofgNAFTA,gmanygAmericangcompaniesgindeedghaveginvestedghe
avilygingMexico,gsometimesgrelocatinggproductiongfromgthegUnitedgStatesgtogMexico.gAlthoughg
thisgmightghavegtemporarilygcausedgunemploymentgofgsomegAmericangworkers,gtheygweregev
entuallygrehiredgbygothergindustriesgoftengforghighergwages.gAtgthegsamegtime,gMexicoghasgbe
engexperiencinggagmajorgeconomicgboom.gItgseemsgcleargthatgbothgMexicogandgthegU.S.ghave
gbenefitedgfromgNAFTA.gPerot‘sgconcerngappearsgtoghavegbeengillgfounded.
8. Ing1995,gagworkingggroupgofgFrenchgchiefgexecutivegofficersgwasgsetgupgbygthegConfederati
ongofgFrenchgIndustryg(CNPF)gandgthegFrenchgAssociationgofgPrivategCompaniesg(AFEP)gtogst
udygthegFrenchgcorporateggovernancegstructure.gTheggroupgreportedgthegfollowing,gamonggoth
ergthings:g ―Thegboardgofgdirectorsgshouldgnotgsimplygaimgatgmaximizinggsharegvaluesgasgingthe
gU.K.gandgthegU.S.gRather,gitsggoalgshouldgbegtogservegthegcompany,gwhoseginterestsgshouldgb
egclearlygdistinguishedgfromgthosegofgitsgshareholders,gemployees,gcreditors,gsuppliersgandgclie
ntsgbutgstillgequatedgwithgtheirggeneralgcommonginterest,gwhichgisgtogsafeguardgthegprosperityg
andgcontinuitygofgthegcompany‖.gEvaluategthegabovegrecommendationgofgthegworkingggroup.
Answer:gThegrecommendationsgofgthegFrenchgworkingggroupgclearlygshowgthatgshareholdergw
ealthgmaximizationgisgnotgaguniversallygacceptedggoalgofgcorporategmanagement,gespecially
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
InternationalgFinancialgManagement,g10thgEditiongEUNgChapt
erg1-21
CHAPTERg1
GLOBALIZATIONgANDgTHEgMULTINATIONALgFIRM
ANSWERSg&gSOLUTIONSgTOgEND-OF-CHAPTERgQUESTIONSgANDgPROBLEMS
QUESTIONS
1. Whygisgitgimportantgtogstudyginternationalgfinancialgmanagement?
Answer:g Wegaregnowglivinggingagworldgwheregallgthegmajorgeconomicgfunctions,gsuchgasgconsu
mption,gproduction,ginvestment,gandgfinancing,gareghighlygglobalized.g Itgisgthusgessentialg forgfi
nancialgmanagersgtogfullygunderstandgvitalginternationalgdimensionsgofgfinancialgmanagement.g
Thisgglobalgshiftgisgingmarkedgcontrastgtogagsituationgthatgexistedgwhengthegauthorsgofgthisgbook
gwereglearninggfinancegagfewgdecadesgago.g Atgthatgtime,gmostgprofessorsgcustomarilyg(andgsaf
ely,gtogsomegextent)gignoredginternationalgaspectsgofgfinance.g Thisgmodegofgoperationghasgbec
omeguntenablegsincegthen.
2. Howgisginternationalgfinancialgmanagementgdifferentgfromgdomesticgfinancialgmanagement?
Answer:g Theregaregthreegmajorgdimensionsgthatgsetgapartginternationalgfinancegfromgdomestic
gfinance.gTheygare:
1. foreigngexchangegandgpoliticalgrisks,
2. marketgimperfections,gand
3. expandedgopportunitygset.
3. Discussgthegmajorgtrendsgthatghavegprevailedginginternationalgbusinessgduringgtheglastgt
wogdecades.
Answer:g Theg2000sgbroughtgagrapidgintegrationgofginternationalgcapitalgandgfinancialgmarkets.
gImpetusgforgglobalizedgfinancialgmarketsginitiallygcamegfromgtheggovernmentsgofgmajorgcountri
esgthatghadgbegungtogderegulategtheirgforeigngexchangegandgcapitalgmarkets.g Thegeconomic
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
,integrationgandgglobalizationgthatgbegangingthegeightiesgandgninetiesgaregpickinggupgspeedgingt
heg2000s.gTradegliberalizationgandgeconomicgintegrationgcontinuedgtogproceedgatgbothgthegreg
ionalgandgglobalglevels.gDespitegsovereigngdebtgcrisisgingEurope,gmoregEUgmembergcountriesg
havegadoptedgthegcommongcurrency,gthegeuro,gthatgeffectivelygbecamegthegsecondgglobalgcur
rencygaftergthegU.S.gdollar.gIngtheglastgfewgyears,ghowever,geconomicgnationalismghasgbeengg
aininggsomegpopularity,gasgexemplifiedgbygthegBrexitgdecisiongofgthegUnitedgKingdomgandgtheg
so-called
―AmericagFirst‖gpoliciesgofgthegTrumpgAdministration.gTogthegextentgthatgeconomicgnationalism
gisgagpopulistgresponsegtogthegglobalgfinancialgcrisisgandgGreatgRecession,gitgmaygsubsidegasg
thegworldgeconomygcontinuesgtogrecover.
4. Howgisgagcountry‘sgeconomicgwell-
beinggenhancedgthroughgfreeginternationalgtradeginggoodsgandgservices?
Answer:g AccordinggtogDavidgRicardo,gwithgfreeginternationalgtrade,gitgisgmutuallygbeneficialgfor
gtwogcountriesgtogeachgspecializegingthegproductiongofgtheggoodsgthatgitgcangproducegrelatively
gmostgefficientlygandgthengtradegthoseggoods.g Bygdoinggso,gthegtwogcountriesgcangincreasegth
eirgcombinedgproduction,gwhichgallowsgbothgcountriesgtogconsumegmoregofgbothggoods.gThisg
argumentgremainsgvalidgevengifgagcountrygcangproducegbothggoodsgmoregefficientlygingabsolut
egtermsgthangthegothergcountry.g Internationalgtradegisgnotgag‗zero-
sum‘ggamegingwhichgonegcountrygbenefitsgatgthegexpensegofganothergcountry.gRather,ginternati
onalgtradegcouldgbegang‗increasing-gsum‘ggamegfromgwhichgallgplayersgbecomegwinners.
5. Whatgconsiderationsgmightglimitgthegextentgtogwhichgthegtheorygofgcomparativegadvantage
gisgrealistic?
Answer:g Thegtheorygofgcomparativegadvantagegwasgoriginallygadvancedgbygthegnineteenthgce
nturygeconomistgDavidgRicardogasgangexplanationgforgwhygnationsgtradegwithgoneganother.gTh
egtheorygclaimsgthatgeconomicgwell-
beinggisgenhancedgifgeachgcountrygproducesgwhatgitghasgagcomparativegadvantagegingproduci
nggrelativegtogothergcountries,gandgthengtradegproducts.
Underlyinggthegtheorygaregthegassumptionsgofgfreegtradegbetweengnationsgandgthatgthegfactors
gofgproductiong(labor,gtechnologicalgknow-
how,gandgcapital)garegrelativelygimmobile.g Togthegextentgthatgthesegassumptionsgdognotghold,g
thegtheorygofgcomparativegadvantagegmaygnotgrealisticallygdescribeginternationalgtrade.g Ingad
dition,gfreegtradegproducesgwinnersgandglosersgandgifgtheglosersgaregnotgcompensated,gfreegtr
adegmaygfacesgpoliticalgoppositiongfromgthem.
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
,6. Whatgaregmultinationalgcorporationsg(MNCs)gandgwhatgeconomicgrolesgdogtheygplay?
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
, Answer:g Agmultinationalgcorporationg(MNC)gcangbegdefinedgasgagbusinessgfirmgincorporatedgin
gonegcountrygthatghasgproductiongandgsalesgoperationsgingmanygothergcountries.gIndeed,gsome
gMNCsghavegoperationsgingagfewgdozensgofgdifferentgcountries.g MNCsgobtaingfinancinggfromg
majorgmoneygcentersgaroundgthegworldgingmanygdifferentgcurrenciesgtogfinancegtheirgoperation
s.gGlobalgoperationsgforcegthegtreasurer‘sgofficegtogestablishginternationalgbankinggrelationship
s,gtogplacegshort-
termgfundsgingseveralgcurrencygdenominations,gandgtogeffectivelygmanagegforeigngexchangegri
sk.g Bygcircumventinggandgalsogtakinggadvantagegofgvariousgmarketgimperfections,gsuchgasgbar
riersgtogtradegandgbarriersgtogflowgofgpeoplegandgcapitalgacrossgcountries,gMNCsgcontributegtog
greatergintegrationgofgthegworldgeconomygandginggmoregperfectgfunctioninggofgglobalgmarkets.
7. RossgPerot,gagformergPresidentialgcandidategofgthegReformgParty,gwhichgwasgagthirdgpoliti
calgpartygingthegUnitedgStates,ghadgstronglygobjectedgtogthegcreationgofgthegNorthgAmericangTr
adegAgreementg(NAFTA),gwhichgnonethelessgwasginauguratedging1994.gPerotgfearedgtheglossg
ofgAmericangjobsgtogMexicogwheregitgisgmuchgcheapergtoghiregworkers.gWhatgaregthegmeritsga
ndgdemeritsgofgPerot‘sgpositiongongNAFTA?gConsideringgthegrecentgeconomicgdevelopmentsgi
ngNorthgAmerica,ghowgwouldgyougassessgPerot‘sgpositiongongNAFTA?
Answer:gSincegtheginceptiongofgNAFTA,gmanygAmericangcompaniesgindeedghaveginvestedghe
avilygingMexico,gsometimesgrelocatinggproductiongfromgthegUnitedgStatesgtogMexico.gAlthoughg
thisgmightghavegtemporarilygcausedgunemploymentgofgsomegAmericangworkers,gtheygweregev
entuallygrehiredgbygothergindustriesgoftengforghighergwages.gAtgthegsamegtime,gMexicoghasgbe
engexperiencinggagmajorgeconomicgboom.gItgseemsgcleargthatgbothgMexicogandgthegU.S.ghave
gbenefitedgfromgNAFTA.gPerot‘sgconcerngappearsgtoghavegbeengillgfounded.
8. Ing1995,gagworkingggroupgofgFrenchgchiefgexecutivegofficersgwasgsetgupgbygthegConfederati
ongofgFrenchgIndustryg(CNPF)gandgthegFrenchgAssociationgofgPrivategCompaniesg(AFEP)gtogst
udygthegFrenchgcorporateggovernancegstructure.gTheggroupgreportedgthegfollowing,gamonggoth
ergthings:g ―Thegboardgofgdirectorsgshouldgnotgsimplygaimgatgmaximizinggsharegvaluesgasgingthe
gU.K.gandgthegU.S.gRather,gitsggoalgshouldgbegtogservegthegcompany,gwhoseginterestsgshouldgb
egclearlygdistinguishedgfromgthosegofgitsgshareholders,gemployees,gcreditors,gsuppliersgandgclie
ntsgbutgstillgequatedgwithgtheirggeneralgcommonginterest,gwhichgisgtogsafeguardgthegprosperityg
andgcontinuitygofgthegcompany‖.gEvaluategthegabovegrecommendationgofgthegworkingggroup.
Answer:gThegrecommendationsgofgthegFrenchgworkingggroupgclearlygshowgthatgshareholdergw
ealthgmaximizationgisgnotgaguniversallygacceptedggoalgofgcorporategmanagement,gespecially
©MCGRAWgHILLgLLC.gALLgRIGHTSgRESERVED.gNOgREPRODUCTIONgORgDISTRIBUTIONgWITHOUTgTHEgPRIORgWRITTENgCONSENTgOFgMCGR
AWgHILLgLLC
