FIN 565 Week 1 Homework

1. Question: Imperfect Markets a. Explain how the existence of imperfect markets has led to the establishment of subsidiaries in foreign markets. b. If perfect markets existed, would wages, prices, and interest rates among countries be more similar or less similar than under conditions of imperfect markets? Why? 2. Question: Benefits and Risks of International Business. As an overall review of this chapter, identify possible reasons for growth in international business. Then list the various disadvantages that may discourage international business 3. Question: Exposure to Exchange Rates. McCanna Corp., a U.S. firm, has a French subsidiary that produceswineandexportstovariousEuropeancountries.Allofthecountrieswhereitsells its wine use the euro as their currency, which is the same currency used in France. Is McCanna Corp. exposed to exchange rate risk? 4. Question: Methods Used to Conduct International Business Duve, Inc., desires to penetrate a foreign market with either a licensing agreement with a foreign firm or by acquiring a foreign firm. Explain the differences in potential risk and return between a licensing agreement with a foreign firm and the acquisition of a foreign firm. 5. Question: Balance of Payments a. What are the main components of the current account? b. What are the main components of the capital account? 6. Question: Exchange Rate Effect on Trade Balance Would the U.S. balance-of-trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but appreciating against others? Explain. 7. Question: International Investments U.S.-based MNCs commonly invest in foreignsecurities. Assumethatthedollarispresentlyweakandisexpectedtostrengthenovertime.How will these expectations affect the tendency of U.S. investors to invest in foreign securities? Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad In general terms, what is the attraction of foreign investments to U.S. investors? 8. Question: Income Effects on Exchange Rates Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 9. Question: Co movements of Exchange Rates Explain why the value of the British pound against the dollar will not always move in tandem with the value of the euro against the dollar. 10. Question: Relative Importance of Factors Affecting Exchange Rate Risk Assume that the level of capital flows between the United States and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the United States and the country of Krendo and no capital flows. How will high inflation and high interest rates affect the value of the kren (Krendo’s currency)? Explain.