©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
,SOLUTION MANUAL FOR s s s s
International Financial Management, 10th Edition EUN
ss ss ss ss ss
ss Chapter 1-21 s s
CHAPTER 1 s s
GLOBALIZATION s s AND s s THE s s MULTINATIONAL s s FIRM
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
ssss ssss ssss ssss ssss ssss ssss
QUESTIONS
1. Why s s is s s it s s important s s to s s study s s international s s financial s s management?
Answer: s s s s We s s are s s now s s living s s in s s a s s world s s where s s all s s the s s major
s s economic s s functions, s s such ssas s s consumption, s s production, s s investment, s s and
s s financing, s s are s s highly s s globalized. s s s s s s It s s is ssthus s s essential s s s s for
s s financial s s managers s s to s s fully s s understand s s vital s s international ssdimensions
s s of s s financial s s management. s s s s This s s global s s shift s s is s s in s s marked
s s contrast s s to s s a sssituation s s that s s existed s s when s s the s s authors s s of s s this
s s book s s were s s learning s s finance s s a s s few ssdecades s s ago. ss s s At ss that ss time,
s s most s s professors ss customarily s s (and ss safely, s s to ss some s s extent) ss ignored
s s international s s aspects s s of s s finance. s s s s This s s mode s s of s s operation s s has
s s become ssuntenable ss since s s then.
2. How s s is s s international s s financial s s management s s different s s from ss domestic s s financial s s management?
Answer: s s There ssare ssthree ssmajor ssdimensions ssthat ssset ssapart ssinternational ssfinance ssfrom
s s domestic ss finance. s s They s s are:
1. foreign s s exchange s s and s s political s s risks,
2. market s s imperfections, ss and
3. expanded s s opportunity s s set.
3. Discuss s s the s s major s s trends ss that s s have s s prevailed s s in s s international
s s business s s during ss the sslast s s two ss decades.
Answer: s s The s s 2000s ssbrought ss a s s rapid s s integration ss of ss international s s capital
s s and ss financial ssmarkets. s s Impetus s s for ss globalized s s financial s s markets ss initially
©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
,s s came ss from s s the s s governments ssof ss major s s countries s s that s s had ss begun s s to
s s deregulate s s their ss foreign s s exchange s s and s s capital ssmarkets. s s s s The s s economic
©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
, integration s s and s s globalization s s that s s began s s in s s the s s eighties s s and s s nineties
s s are s s picking s s up ssspeed s s in s s the s s 2000s. s s Trade s s liberalization s s and
s s economic s s integration s s continued s s to ssproceed s s at s s both s s the s s regional
s s and s s global s s levels. s s Despite s s sovereign s s debt s s crisis s s in ssEurope, s s more
s s EU s s member s s countries s s have s s adopted s s the s s common s s currency, s s the
s s euro, ssthat s s effectively s s became s s the s s second s s global s s currency s s after s s the
s s U.S. s s dollar. s s In s s the s s last ssfew s s years, s s however, s s economic s s nationalism
s s has s s been s s gaining s s some s s popularity, s s as ssexemplified s s by s s the s s Brexit
s s decision s s of s s the s s United s s Kingdom s s and s s the s s so-called
―America ss First‖ s s policies s s of s s the s s Trump s s Administration. s s To s s the s s extent ss that
s s economic ssnationalism s s is s s a s s populist s s response s s to s s the s s global s s financial
s s crisis s s and s s Great s s Recession, ssit s s may s s subside s s as s s the s s world
s s economy s s continues s s to s s recover.
4. How s s is s s a s s country‘s s s economic s s well-being s s enhanced ss through s s free
s s international s s trade ssin s s goods s s and s s services?
Answer: According s s to s s David s s Ricardo, s s with s s free s s international s s trade, ss it
s s is s s mutually ssbeneficial s s for s s two s s countries s s to s s each s s specialize s s in
s s the s s production s s of s s the s s goods s s that s s it sscan s s produce s s relatively ss most
s s efficiently s s and ss then s s trade s s those s s goods. By s s doing
s s so, ssthe s s two s s countries s s can s s increase s s their s s combined s s production,
s s which s s allows s s both sscountries s s to s s consume s s more s s of s s both s s goods.
s s This s s argument s s remains s s valid s s even s s if s s a sscountry s s can s s produce
s s both s s goods s s more s s efficiently s s in s s absolute s s terms s s than s s the ss other
ss country. International s s trade s s is s s not s s a s s ‗zero-sum‘ ss game s s in s s which s s one
s s country s s benefits ssat s s the s s expense s s of s s another s s country. s s Rather,
s s international s s trade s s could s s be s s an
‗increasing- s s sum‘ s s game s s from s s which s s all s s players s s become s s winners.
5. What s s considerations s s might s s limit s s the s s extent s s to s s which s s the s s theory
s s of s s comparative ssadvantage ss is s s realistic?
Answer: The s s theory ss of s s comparative s s advantage s s was s s originally s s advanced
s s by s s the ssnineteenth s s century s s economist s s David s s Ricardo s s as s s an
s s explanation s s for s s why s s nations s s trade sswith s s one s s another. s s The s s theory
s s claims s s that s s economic s s well-being s s is s s enhanced s s if s s each sscountry
s s produces s s what s s it s s has s s a s s comparative s s advantage s s in s s producing
©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
,SOLUTION MANUAL FOR s s s s
International Financial Management, 10th Edition EUN
ss ss ss ss ss
ss Chapter 1-21 s s
CHAPTER 1 s s
GLOBALIZATION s s AND s s THE s s MULTINATIONAL s s FIRM
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
ssss ssss ssss ssss ssss ssss ssss
QUESTIONS
1. Why s s is s s it s s important s s to s s study s s international s s financial s s management?
Answer: s s s s We s s are s s now s s living s s in s s a s s world s s where s s all s s the s s major
s s economic s s functions, s s such ssas s s consumption, s s production, s s investment, s s and
s s financing, s s are s s highly s s globalized. s s s s s s It s s is ssthus s s essential s s s s for
s s financial s s managers s s to s s fully s s understand s s vital s s international ssdimensions
s s of s s financial s s management. s s s s This s s global s s shift s s is s s in s s marked
s s contrast s s to s s a sssituation s s that s s existed s s when s s the s s authors s s of s s this
s s book s s were s s learning s s finance s s a s s few ssdecades s s ago. ss s s At ss that ss time,
s s most s s professors ss customarily s s (and ss safely, s s to ss some s s extent) ss ignored
s s international s s aspects s s of s s finance. s s s s This s s mode s s of s s operation s s has
s s become ssuntenable ss since s s then.
2. How s s is s s international s s financial s s management s s different s s from ss domestic s s financial s s management?
Answer: s s There ssare ssthree ssmajor ssdimensions ssthat ssset ssapart ssinternational ssfinance ssfrom
s s domestic ss finance. s s They s s are:
1. foreign s s exchange s s and s s political s s risks,
2. market s s imperfections, ss and
3. expanded s s opportunity s s set.
3. Discuss s s the s s major s s trends ss that s s have s s prevailed s s in s s international
s s business s s during ss the sslast s s two ss decades.
Answer: s s The s s 2000s ssbrought ss a s s rapid s s integration ss of ss international s s capital
s s and ss financial ssmarkets. s s Impetus s s for ss globalized s s financial s s markets ss initially
©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
,s s came ss from s s the s s governments ssof ss major s s countries s s that s s had ss begun s s to
s s deregulate s s their ss foreign s s exchange s s and s s capital ssmarkets. s s s s The s s economic
©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
, integration s s and s s globalization s s that s s began s s in s s the s s eighties s s and s s nineties
s s are s s picking s s up ssspeed s s in s s the s s 2000s. s s Trade s s liberalization s s and
s s economic s s integration s s continued s s to ssproceed s s at s s both s s the s s regional
s s and s s global s s levels. s s Despite s s sovereign s s debt s s crisis s s in ssEurope, s s more
s s EU s s member s s countries s s have s s adopted s s the s s common s s currency, s s the
s s euro, ssthat s s effectively s s became s s the s s second s s global s s currency s s after s s the
s s U.S. s s dollar. s s In s s the s s last ssfew s s years, s s however, s s economic s s nationalism
s s has s s been s s gaining s s some s s popularity, s s as ssexemplified s s by s s the s s Brexit
s s decision s s of s s the s s United s s Kingdom s s and s s the s s so-called
―America ss First‖ s s policies s s of s s the s s Trump s s Administration. s s To s s the s s extent ss that
s s economic ssnationalism s s is s s a s s populist s s response s s to s s the s s global s s financial
s s crisis s s and s s Great s s Recession, ssit s s may s s subside s s as s s the s s world
s s economy s s continues s s to s s recover.
4. How s s is s s a s s country‘s s s economic s s well-being s s enhanced ss through s s free
s s international s s trade ssin s s goods s s and s s services?
Answer: According s s to s s David s s Ricardo, s s with s s free s s international s s trade, ss it
s s is s s mutually ssbeneficial s s for s s two s s countries s s to s s each s s specialize s s in
s s the s s production s s of s s the s s goods s s that s s it sscan s s produce s s relatively ss most
s s efficiently s s and ss then s s trade s s those s s goods. By s s doing
s s so, ssthe s s two s s countries s s can s s increase s s their s s combined s s production,
s s which s s allows s s both sscountries s s to s s consume s s more s s of s s both s s goods.
s s This s s argument s s remains s s valid s s even s s if s s a sscountry s s can s s produce
s s both s s goods s s more s s efficiently s s in s s absolute s s terms s s than s s the ss other
ss country. International s s trade s s is s s not s s a s s ‗zero-sum‘ ss game s s in s s which s s one
s s country s s benefits ssat s s the s s expense s s of s s another s s country. s s Rather,
s s international s s trade s s could s s be s s an
‗increasing- s s sum‘ s s game s s from s s which s s all s s players s s become s s winners.
5. What s s considerations s s might s s limit s s the s s extent s s to s s which s s the s s theory
s s of s s comparative ssadvantage ss is s s realistic?
Answer: The s s theory ss of s s comparative s s advantage s s was s s originally s s advanced
s s by s s the ssnineteenth s s century s s economist s s David s s Ricardo s s as s s an
s s explanation s s for s s why s s nations s s trade sswith s s one s s another. s s The s s theory
s s claims s s that s s economic s s well-being s s is s s enhanced s s if s s each sscountry
s s produces s s what s s it s s has s s a s s comparative s s advantage s s in s s producing
©MCGRAW s s s s HILL LLC. s s s s ALL s s s s RIGHTS RESERVED. NO REPRODUCTION s s s s OR s s s s DISTRIBUTION
WITHOUT THE PRIOR WRITTEN s s s s CONSENT
