Solution Manual for International Financial Management,
M M M M M M
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
M M M M M M M M M M
MM Chapter 1-21
M
M
, SOLUTION MANUAL FOR
M M
InternationalMFinancialMManagement,M10thMEditionMEUNMChapterM1-21
CHAPTERM1
GLOBALIZATIONMANDMTHEMMULTINATIONALMFIRM
ANSWERSM&MSOLUTIONSMTOMEND-OF-CHAPTERMQUESTIONSMANDMPROBLEMS
QUESTIONS
1. WhyMisMitMimportantMtoMstudyMinternationalMfinancialMmanagement?
Answer:M WeMareM nowM livingMinMaMworldMwhereMallMtheMMmajorMeconomicMfunctions,MsuchM asMconsumption,
M production,M investment,MandM financing,MareMhighlyMglobalized.M ItMisM thusMessentialM forMfinancialM manage
rsMtoMfullyM understandMvitalMinternationalMdimensionsMofMfinancialMmanagement.M ThisMglobalMshiftMisMinMm
arkedMcontrastMtoMaM situationMthatMexistedMwhenMtheMauthorsMofMthisMbookMwereMlearningMfinanceMaM fewM
decadesMago.M AtMthatMtime,MmostM professorsM customarilyM (andM safely,M toM someM extent)M ignoredM intern
ationalM aspectsM ofM finance.M ThisM modeM ofM operationMhasMbecomeMuntenableMsinceMthen.
2. HowMisMinternationalMfinancialMmanagementMdifferentMfromMdomesticMfinancialMmanagement?
Answer:M ThereMareMthreeMmajorMdimensionsMthatMsetMapartMinternationalMfinanceMfromMdomesticMfinance.
MTheyM are:
1. foreignMexchangeMandMpoliticalMrisks,
2. marketMimperfections,Mand
3. expandedMopportunityMset.
3. DiscussMtheMmajorMtrendsMthatMhaveMprevailedMinMinternationalMbusinessMduringMtheMlastMtwoMdecades.
Answer:M TheM2000sMbroughtMaMrapidMintegrationMofMinternationalMcapitalMandMfinancialMmarkets.MImpet
usMforM globalizedMfinancialMmarketsMinitiallyMcameMfromMtheMgovernmentsMofMmajorMcountriesMthatMhadM
begunMtoM deregulateMtheirMforeignMexchangeMandMcapitalMmarkets.M TheMeconomic
M
, integrationMandMglobalizationMthatMbeganMinMtheMeightiesMandMninetiesMareMpickingMupMspeedMinMtheM2
000s.MTradeM liberalizationMandMeconomicMintegrationMcontinuedMtoMproceedMatMbothMtheMregionalMand
MglobalMlevels.MDespiteM sovereignMdebtMcrisisMinMEurope,MmoreMEUMmemberMcountriesMhaveMadoptedMth
eMcommonMcurrency,MtheMeuro,M thatMeffectivelyMbecameMtheMsecondMglobalMcurrencyMafterMtheMU.S.Mdol
lar.MInMtheMlastMfewMyears,Mhowever,M economicMnationalismMhasMbeenMgainingMsomeMpopularity,MasMexe
mplifiedMbyMtheMBrexitMdecisionMofMtheMUnitedM KingdomMandMtheMso-called
―AmericaMFirst‖MpoliciesMofMtheMTrumpMAdministration.MToMtheMextentMthatMeconomicMnationalismMisMaMp
opulistM responseMtoMtheMglobalMfinancialMcrisisMandMGreatMRecession,MitMmayMsubsideMasMtheMworldMeco
nomyMcontinuesMtoM recover.
4. HowMisMaMcountry‘sMeconomicMwell-
beingMenhancedMthroughMfreeMinternationalMtradeMinMgoodsMandMservices?
Answer:M AccordingMtoMDavidMRicardo,MwithMfreeMinternationalMtrade,MitMisMmutuallyMbeneficialMforMtwoMc
ountriesM toMeachMspecializeMinMtheMproductionMofMtheMgoodsMthatMitMcanMproduceMrelativelyMmostMefficie
ntlyMandMthenMtradeM thoseMgoods.M ByMdoingMso,MtheMtwoMcountriesMcanMincreaseMtheirMcombinedMprodu
ction,MwhichMallowsMbothM countriesMtoMconsumeMmoreMofMbothMgoods.MThisMargumentMremainsMvalidMeve
nMifMaMcountryMcanMproduceMbothM goodsMmoreMefficientlyMinMabsoluteMtermsMthanMtheMotherMcountry.M Int
ernationalMtradeMisMnotMaM‗zero-
sum‘MgameM inMwhichMoneMcountryMbenefitsMatMtheMexpenseMofManotherMcountry.MRather,MinternationalMtr
adeMcouldMbeMan
‗increasing-Msum‘MgameMfromMwhichMallMplayersMbecomeMwinners.
5. WhatMconsiderationsMmightMlimitMtheMextentMtoMwhichMtheMtheoryMofMcomparativeMadvantageMisMrealis
tic?
Answer:M TheMtheoryMofMcomparativeMadvantageMwasMoriginallyMadvancedMbyMtheMnineteenthMcenturyMe
conomistM DavidMRicardoMasManMexplanationMforMwhyMnationsMtradeMwithMoneManother.MTheMtheoryMclai
msMthatMeconomicM well-
beingMisMenhancedMifMeachMcountryMproducesMwhatMitMhasMaMcomparativeMadvantageMinMproducingMrela
tiveMtoM otherMcountries,MandMthenMtradeMproducts.
UnderlyingMtheMtheoryMareMtheMassumptionsMofMfreeMtradeMbetweenMnationsMandMthatMtheMfactorsMofMpr
oductionM (labor,MtechnologicalMknow-
how,MandMcapital)MareMrelativelyMimmobile.M ToMtheMextentMthatMtheseMassumptionsMdoM notMhold,MtheMth
eoryMofMcomparativeMadvantageMmayMnotMrealisticallyMdescribeMinternationalMtrade.M InMaddition,M free
MtradeMproducesMwinnersMandMlosersMandMifMtheMlosersMareMnotMcompensated,MfreeMtradeMmayMfacesMp
oliticalM oppositionMfromMthem.
6. WhatMareMmultinationalMcorporationsM(MNCs)MandMwhatMeconomicMrolesMdoMtheyMplay?
M
, Answer:M AMmultinationalMcorporationM(MNC)McanMbeMdefinedMasMaMbusinessMfirmMincorporatedMinMoneMco
untryMthatM hasMproductionMandMsalesMoperationsMinMmanyMotherMcountries.MIndeed,MsomeMMNCsMhaveMop
erationsMinMaMfewM dozensMofMdifferentMcountries.MM MNCsMobtainMfinancingMfromMmajorMmoneyMcentersMa
roundMtheMworldMinMmanyM differentMcurrenciesMtoMfinanceMtheirMoperations.MGlobalMoperationsMforceMthe
Mtreasurer‘sMofficeMtoMestablishM internationalMbankingMrelationships,MtoMplaceMshort-
termMfundsMinMseveralMcurrencyMdenominations,MandMtoM effectivelyMmanageMforeignMexchangeMrisk.M ByMc
ircumventingMandMalsoMtakingMadvantageMofMvariousMmarketM imperfections,MsuchMasMbarriersMtoMtradeMa
ndMbarriersMtoMflowMofMpeopleMandMcapitalMacrossMcountries,MMNCsM contributeMtoMgreaterMintegrationMof
MtheMworldMeconomyMandMingMmoreMperfectMfunctioningMofMglobalMmarkets.
7. RossMPerot,MaMformerMPresidentialMcandidateMofMtheMReformMParty,MwhichMwasMaMthirdMpoliticalMp
artyMinMtheM UnitedMStates,MhadMstronglyMobjectedMtoMtheMcreationMofMtheMNorthMAmericanMTradeMAgre
ementM(NAFTA),MwhichM nonethelessMwasMinauguratedMinM1994.MPerotMfearedMtheMlossMofMAmericanMjo
bsMtoMMexicoMwhereMitMisMmuchM cheaperMtoMhireMworkers.MWhatMareMtheMmeritsMandMdemeritsMofMPero
t‘sMpositionMonMNAFTA?MConsideringMtheM recentMeconomicMdevelopmentsMinMNorthMAmerica,MhowMwould
MyouMassessMPerot‘sMpositionMonMNAFTA?
Answer:MSinceMtheMinceptionMofMNAFTA,MmanyMAmericanMcompaniesMindeedMhaveMinvestedMheavilyMinM
Mexico,M sometimesMrelocatingMproductionMfromMtheMUnitedMStatesMtoMMexico.MAlthoughMthisMmightMhav
eMtemporarilyM causedMunemploymentMofMsomeMAmericanMworkers,MtheyMwereMeventuallyMrehiredMbyM
otherMindustriesMoftenMforM higherMwages.MAtMtheMsameMtime,MMexicoMhasMbeenMexperiencingMaMmajorM
economicMboom.MItMseemsMclearMthatM bothMMexicoMandMtheMU.S.MhaveMbenefitedMfromMNAFTA.MPerot‘s
MconcernMappearsMtoMhaveMbeenMillMfounded.
8. InM1995,MaMworkingMgroupMofMFrenchMchiefMexecutiveMofficersMwasMsetMupMbyMtheMConfederationMof
MFrenchM IndustryM(CNPF)MandMtheMFrenchMAssociationMofMPrivateMCompaniesM(AFEP)MtoMstudyMtheMFrenchM
corporateM governanceMstructure.MTheMgroupMreportedMtheMfollowing,MamongMotherMthings:M ―TheMboard
MofMdirectorsMshouldM notMsimplyMaimMatMmaximizingMshareMvaluesMasMinMtheMU.K.MandMtheMU.S.MRather,Mits
MgoalMshouldMbeMtoMserveMtheM company,MwhoseMinterestsMshouldMbeMclearlyMdistinguishedMfromMthoseMofM
itsMshareholders,Memployees,Mcreditors,M suppliersMandMclientsMbutMstillMequatedMwithMtheirMgeneralMcomm
onMinterest,MwhichMisMtoMsafeguardMtheMprosperityM andMcontinuityMofMtheMcompany‖.MEvaluateMtheMabove
MrecommendationMofMtheMworkingMgroup.
Answer:MTheMrecommendationsMofMtheMFrenchMworkingMgroupMclearlyMshowMthatMshareholderMwealthM ma
ximizationMisMnotMaMuniversallyMacceptedMgoalMofMcorporateMmanagement,Mespecially
M
M M M M M M
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
M M M M M M M M M M
MM Chapter 1-21
M
M
, SOLUTION MANUAL FOR
M M
InternationalMFinancialMManagement,M10thMEditionMEUNMChapterM1-21
CHAPTERM1
GLOBALIZATIONMANDMTHEMMULTINATIONALMFIRM
ANSWERSM&MSOLUTIONSMTOMEND-OF-CHAPTERMQUESTIONSMANDMPROBLEMS
QUESTIONS
1. WhyMisMitMimportantMtoMstudyMinternationalMfinancialMmanagement?
Answer:M WeMareM nowM livingMinMaMworldMwhereMallMtheMMmajorMeconomicMfunctions,MsuchM asMconsumption,
M production,M investment,MandM financing,MareMhighlyMglobalized.M ItMisM thusMessentialM forMfinancialM manage
rsMtoMfullyM understandMvitalMinternationalMdimensionsMofMfinancialMmanagement.M ThisMglobalMshiftMisMinMm
arkedMcontrastMtoMaM situationMthatMexistedMwhenMtheMauthorsMofMthisMbookMwereMlearningMfinanceMaM fewM
decadesMago.M AtMthatMtime,MmostM professorsM customarilyM (andM safely,M toM someM extent)M ignoredM intern
ationalM aspectsM ofM finance.M ThisM modeM ofM operationMhasMbecomeMuntenableMsinceMthen.
2. HowMisMinternationalMfinancialMmanagementMdifferentMfromMdomesticMfinancialMmanagement?
Answer:M ThereMareMthreeMmajorMdimensionsMthatMsetMapartMinternationalMfinanceMfromMdomesticMfinance.
MTheyM are:
1. foreignMexchangeMandMpoliticalMrisks,
2. marketMimperfections,Mand
3. expandedMopportunityMset.
3. DiscussMtheMmajorMtrendsMthatMhaveMprevailedMinMinternationalMbusinessMduringMtheMlastMtwoMdecades.
Answer:M TheM2000sMbroughtMaMrapidMintegrationMofMinternationalMcapitalMandMfinancialMmarkets.MImpet
usMforM globalizedMfinancialMmarketsMinitiallyMcameMfromMtheMgovernmentsMofMmajorMcountriesMthatMhadM
begunMtoM deregulateMtheirMforeignMexchangeMandMcapitalMmarkets.M TheMeconomic
M
, integrationMandMglobalizationMthatMbeganMinMtheMeightiesMandMninetiesMareMpickingMupMspeedMinMtheM2
000s.MTradeM liberalizationMandMeconomicMintegrationMcontinuedMtoMproceedMatMbothMtheMregionalMand
MglobalMlevels.MDespiteM sovereignMdebtMcrisisMinMEurope,MmoreMEUMmemberMcountriesMhaveMadoptedMth
eMcommonMcurrency,MtheMeuro,M thatMeffectivelyMbecameMtheMsecondMglobalMcurrencyMafterMtheMU.S.Mdol
lar.MInMtheMlastMfewMyears,Mhowever,M economicMnationalismMhasMbeenMgainingMsomeMpopularity,MasMexe
mplifiedMbyMtheMBrexitMdecisionMofMtheMUnitedM KingdomMandMtheMso-called
―AmericaMFirst‖MpoliciesMofMtheMTrumpMAdministration.MToMtheMextentMthatMeconomicMnationalismMisMaMp
opulistM responseMtoMtheMglobalMfinancialMcrisisMandMGreatMRecession,MitMmayMsubsideMasMtheMworldMeco
nomyMcontinuesMtoM recover.
4. HowMisMaMcountry‘sMeconomicMwell-
beingMenhancedMthroughMfreeMinternationalMtradeMinMgoodsMandMservices?
Answer:M AccordingMtoMDavidMRicardo,MwithMfreeMinternationalMtrade,MitMisMmutuallyMbeneficialMforMtwoMc
ountriesM toMeachMspecializeMinMtheMproductionMofMtheMgoodsMthatMitMcanMproduceMrelativelyMmostMefficie
ntlyMandMthenMtradeM thoseMgoods.M ByMdoingMso,MtheMtwoMcountriesMcanMincreaseMtheirMcombinedMprodu
ction,MwhichMallowsMbothM countriesMtoMconsumeMmoreMofMbothMgoods.MThisMargumentMremainsMvalidMeve
nMifMaMcountryMcanMproduceMbothM goodsMmoreMefficientlyMinMabsoluteMtermsMthanMtheMotherMcountry.M Int
ernationalMtradeMisMnotMaM‗zero-
sum‘MgameM inMwhichMoneMcountryMbenefitsMatMtheMexpenseMofManotherMcountry.MRather,MinternationalMtr
adeMcouldMbeMan
‗increasing-Msum‘MgameMfromMwhichMallMplayersMbecomeMwinners.
5. WhatMconsiderationsMmightMlimitMtheMextentMtoMwhichMtheMtheoryMofMcomparativeMadvantageMisMrealis
tic?
Answer:M TheMtheoryMofMcomparativeMadvantageMwasMoriginallyMadvancedMbyMtheMnineteenthMcenturyMe
conomistM DavidMRicardoMasManMexplanationMforMwhyMnationsMtradeMwithMoneManother.MTheMtheoryMclai
msMthatMeconomicM well-
beingMisMenhancedMifMeachMcountryMproducesMwhatMitMhasMaMcomparativeMadvantageMinMproducingMrela
tiveMtoM otherMcountries,MandMthenMtradeMproducts.
UnderlyingMtheMtheoryMareMtheMassumptionsMofMfreeMtradeMbetweenMnationsMandMthatMtheMfactorsMofMpr
oductionM (labor,MtechnologicalMknow-
how,MandMcapital)MareMrelativelyMimmobile.M ToMtheMextentMthatMtheseMassumptionsMdoM notMhold,MtheMth
eoryMofMcomparativeMadvantageMmayMnotMrealisticallyMdescribeMinternationalMtrade.M InMaddition,M free
MtradeMproducesMwinnersMandMlosersMandMifMtheMlosersMareMnotMcompensated,MfreeMtradeMmayMfacesMp
oliticalM oppositionMfromMthem.
6. WhatMareMmultinationalMcorporationsM(MNCs)MandMwhatMeconomicMrolesMdoMtheyMplay?
M
, Answer:M AMmultinationalMcorporationM(MNC)McanMbeMdefinedMasMaMbusinessMfirmMincorporatedMinMoneMco
untryMthatM hasMproductionMandMsalesMoperationsMinMmanyMotherMcountries.MIndeed,MsomeMMNCsMhaveMop
erationsMinMaMfewM dozensMofMdifferentMcountries.MM MNCsMobtainMfinancingMfromMmajorMmoneyMcentersMa
roundMtheMworldMinMmanyM differentMcurrenciesMtoMfinanceMtheirMoperations.MGlobalMoperationsMforceMthe
Mtreasurer‘sMofficeMtoMestablishM internationalMbankingMrelationships,MtoMplaceMshort-
termMfundsMinMseveralMcurrencyMdenominations,MandMtoM effectivelyMmanageMforeignMexchangeMrisk.M ByMc
ircumventingMandMalsoMtakingMadvantageMofMvariousMmarketM imperfections,MsuchMasMbarriersMtoMtradeMa
ndMbarriersMtoMflowMofMpeopleMandMcapitalMacrossMcountries,MMNCsM contributeMtoMgreaterMintegrationMof
MtheMworldMeconomyMandMingMmoreMperfectMfunctioningMofMglobalMmarkets.
7. RossMPerot,MaMformerMPresidentialMcandidateMofMtheMReformMParty,MwhichMwasMaMthirdMpoliticalMp
artyMinMtheM UnitedMStates,MhadMstronglyMobjectedMtoMtheMcreationMofMtheMNorthMAmericanMTradeMAgre
ementM(NAFTA),MwhichM nonethelessMwasMinauguratedMinM1994.MPerotMfearedMtheMlossMofMAmericanMjo
bsMtoMMexicoMwhereMitMisMmuchM cheaperMtoMhireMworkers.MWhatMareMtheMmeritsMandMdemeritsMofMPero
t‘sMpositionMonMNAFTA?MConsideringMtheM recentMeconomicMdevelopmentsMinMNorthMAmerica,MhowMwould
MyouMassessMPerot‘sMpositionMonMNAFTA?
Answer:MSinceMtheMinceptionMofMNAFTA,MmanyMAmericanMcompaniesMindeedMhaveMinvestedMheavilyMinM
Mexico,M sometimesMrelocatingMproductionMfromMtheMUnitedMStatesMtoMMexico.MAlthoughMthisMmightMhav
eMtemporarilyM causedMunemploymentMofMsomeMAmericanMworkers,MtheyMwereMeventuallyMrehiredMbyM
otherMindustriesMoftenMforM higherMwages.MAtMtheMsameMtime,MMexicoMhasMbeenMexperiencingMaMmajorM
economicMboom.MItMseemsMclearMthatM bothMMexicoMandMtheMU.S.MhaveMbenefitedMfromMNAFTA.MPerot‘s
MconcernMappearsMtoMhaveMbeenMillMfounded.
8. InM1995,MaMworkingMgroupMofMFrenchMchiefMexecutiveMofficersMwasMsetMupMbyMtheMConfederationMof
MFrenchM IndustryM(CNPF)MandMtheMFrenchMAssociationMofMPrivateMCompaniesM(AFEP)MtoMstudyMtheMFrenchM
corporateM governanceMstructure.MTheMgroupMreportedMtheMfollowing,MamongMotherMthings:M ―TheMboard
MofMdirectorsMshouldM notMsimplyMaimMatMmaximizingMshareMvaluesMasMinMtheMU.K.MandMtheMU.S.MRather,Mits
MgoalMshouldMbeMtoMserveMtheM company,MwhoseMinterestsMshouldMbeMclearlyMdistinguishedMfromMthoseMofM
itsMshareholders,Memployees,Mcreditors,M suppliersMandMclientsMbutMstillMequatedMwithMtheirMgeneralMcomm
onMinterest,MwhichMisMtoMsafeguardMtheMprosperityM andMcontinuityMofMtheMcompany‖.MEvaluateMtheMabove
MrecommendationMofMtheMworkingMgroup.
Answer:MTheMrecommendationsMofMtheMFrenchMworkingMgroupMclearlyMshowMthatMshareholderMwealthM ma
ximizationMisMnotMaMuniversallyMacceptedMgoalMofMcorporateMmanagement,Mespecially
M
