International Finance (Exam 1) Test Questions with Verified
Answers Rated A
Multinational Corporations (MNC's) - -firms International Trade - -- exporting to
that engage in some form of international penetrate foreign markets
business - importing to obtain material from low cost
- Goal: Maximize shareholder wealth suppliers
Agency Problems - -conflict of goals Licensing - -obligates a firm to provide its
between a firm's managers and its shareholders technology in exchange for fees or other benefits
(Ex. Starbucks technology in trains)
Agency Costs - -costs of ensuring that
managers maximize shareholder wealth (larger Franchising - -obligates a firm to provide a
for multinational corporations due to difficulty of sales/service strategy, support assistance, and
monitoring over long distances) an initial investment in return for periodic fees
International Business Theories - -1. Acquisitions - -acquiring other firms as a
Theory of Comparative Advantage means of penetrating foreign markets (quickly
2. Imperfect Markets Theory obtain a large portion of foreign market share;
3. Product Cycle Theory subject to risk of substantial losses)
Theory of Comparative Advantage - - Establish Subsidiaries - -establishing new
countries specialize in certain products and rely operations in foreign countries to produce and
on trade for others that they can't produce as sell their products (preferred to acquisitions
efficiently (due to climate or other restrictions) because it is more tailored to firm's needs)
Imperfect Markets Theory - -factors of Direct Foreign Investment (DFI) - -any
production are somewhat immobile (costs and method of increasing international business
restrictions related to transfer of labor and other operations that requires a direct investment in
resources used for production) foreign markets (DOES NOT include international
- provides incentive to seek out foreign trade and licensing)
opportunity
Factors of International Risk/Uncertainty - -
Product Cycle Theory - -- firms first 1. International economic conditions
become established in their home market as a 2. International political risk
result of some perceived advantage 3. Exchange rate risk
- foreign demand accommodated by exporting
and potentially moving production to foreign
countries to reduce transportation costs Effect of International Economic Conditions -
-weakened economic conditions causes
income earned by consumers of foreign country
1/5
, International Finance (Exam 1) Test Questions with Verified
Answers Rated A
to drop, which decreases sales and causes a - stabilize exchange rates
reduction of firms cash flows in that country - provide temporary funds for countries
attempting to correct imbalances
- promote free trade
Effect of International Political Risk - -
foreign government may increase taxes or
impose trade barriers on imported goods, which World Bank (IBRD) - -makes loans to
would have a negative impact on a firm's cash countries to enhance economic development
flows (SAL- structural adjustment loans; long-term
stability)
Effect of Exchange Rate Risk - -if foreign
currency of subsidiary weakens against the World Trade Organization (WTO) - -provide
dollar, the MNC will receive a lower dollar forum for multinational trade negotiations and to
amount cash flow for exports (opposite risk for settle trade disputes
imports: if foreign currency appreciates against
the dollar, the MNC pays a larger cash outflow)
International Financial Corporation (IFC) - -
promote private enterprise within countries
Balance of Payments - -summary of (promote economic activity through the private
transactions between domestic and foreign sector)
residents for a specific country over a specific
period of time
Exchange Rate Systems classified by: - -
degree to which they are controlled by the
Current Account - -flow of funds between a government
country and all other countries due to
PURCHASES of goods or services (IMPORTS;
cash outflows) Fixed Exchange Rate System - -exchange
rates are either held constant or allowed to
fluctuate only within narrow boundaries (high
Capital Account - -flow of funds between a degree of government intervention;
country and all other countries resulting from the devalue/revalue currency)
SALE of assets (EXPORTS; cash inflows)
Bretton Woods (1944-1971) - -each
Trade Deficit - -economic measure of a currency was valued in terms of gold (currencies
negative balance of payments/trade (IMPORTS were fixed relative to each other)
> EXPORTS)
Smithsonian Agreement (1971-1973) - -
International Monetary Fund (IMF) - -- called for devaluation of US dollar against other
promote cooperation among countries on currencies (<8%)
international monetary issues
2/5
Answers Rated A
Multinational Corporations (MNC's) - -firms International Trade - -- exporting to
that engage in some form of international penetrate foreign markets
business - importing to obtain material from low cost
- Goal: Maximize shareholder wealth suppliers
Agency Problems - -conflict of goals Licensing - -obligates a firm to provide its
between a firm's managers and its shareholders technology in exchange for fees or other benefits
(Ex. Starbucks technology in trains)
Agency Costs - -costs of ensuring that
managers maximize shareholder wealth (larger Franchising - -obligates a firm to provide a
for multinational corporations due to difficulty of sales/service strategy, support assistance, and
monitoring over long distances) an initial investment in return for periodic fees
International Business Theories - -1. Acquisitions - -acquiring other firms as a
Theory of Comparative Advantage means of penetrating foreign markets (quickly
2. Imperfect Markets Theory obtain a large portion of foreign market share;
3. Product Cycle Theory subject to risk of substantial losses)
Theory of Comparative Advantage - - Establish Subsidiaries - -establishing new
countries specialize in certain products and rely operations in foreign countries to produce and
on trade for others that they can't produce as sell their products (preferred to acquisitions
efficiently (due to climate or other restrictions) because it is more tailored to firm's needs)
Imperfect Markets Theory - -factors of Direct Foreign Investment (DFI) - -any
production are somewhat immobile (costs and method of increasing international business
restrictions related to transfer of labor and other operations that requires a direct investment in
resources used for production) foreign markets (DOES NOT include international
- provides incentive to seek out foreign trade and licensing)
opportunity
Factors of International Risk/Uncertainty - -
Product Cycle Theory - -- firms first 1. International economic conditions
become established in their home market as a 2. International political risk
result of some perceived advantage 3. Exchange rate risk
- foreign demand accommodated by exporting
and potentially moving production to foreign
countries to reduce transportation costs Effect of International Economic Conditions -
-weakened economic conditions causes
income earned by consumers of foreign country
1/5
, International Finance (Exam 1) Test Questions with Verified
Answers Rated A
to drop, which decreases sales and causes a - stabilize exchange rates
reduction of firms cash flows in that country - provide temporary funds for countries
attempting to correct imbalances
- promote free trade
Effect of International Political Risk - -
foreign government may increase taxes or
impose trade barriers on imported goods, which World Bank (IBRD) - -makes loans to
would have a negative impact on a firm's cash countries to enhance economic development
flows (SAL- structural adjustment loans; long-term
stability)
Effect of Exchange Rate Risk - -if foreign
currency of subsidiary weakens against the World Trade Organization (WTO) - -provide
dollar, the MNC will receive a lower dollar forum for multinational trade negotiations and to
amount cash flow for exports (opposite risk for settle trade disputes
imports: if foreign currency appreciates against
the dollar, the MNC pays a larger cash outflow)
International Financial Corporation (IFC) - -
promote private enterprise within countries
Balance of Payments - -summary of (promote economic activity through the private
transactions between domestic and foreign sector)
residents for a specific country over a specific
period of time
Exchange Rate Systems classified by: - -
degree to which they are controlled by the
Current Account - -flow of funds between a government
country and all other countries due to
PURCHASES of goods or services (IMPORTS;
cash outflows) Fixed Exchange Rate System - -exchange
rates are either held constant or allowed to
fluctuate only within narrow boundaries (high
Capital Account - -flow of funds between a degree of government intervention;
country and all other countries resulting from the devalue/revalue currency)
SALE of assets (EXPORTS; cash inflows)
Bretton Woods (1944-1971) - -each
Trade Deficit - -economic measure of a currency was valued in terms of gold (currencies
negative balance of payments/trade (IMPORTS were fixed relative to each other)
> EXPORTS)
Smithsonian Agreement (1971-1973) - -
International Monetary Fund (IMF) - -- called for devaluation of US dollar against other
promote cooperation among countries on currencies (<8%)
international monetary issues
2/5
