International Finance Midterm Exam
3 What major dimensions set apart international finance from domestic finance? -
ANSWER...-Foreign exchange and political risks
Market imperfections
Expanded opportunity set
Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2.
One year later, the stock rises to £60. You are happy with your 20 percent return on the
stock, but when you sell the stock and exchange your £60 for dollars, you only get $45
since the pound has fallen to £1 = $0.75. This loss of value is an example of -
ANSWER...-exchange rate risk
3 A variety of barriers still hamper free movements of people, goods, services, and
capital across national boundaries. These barriers include - ANSWER...--legal
restrictions.
-excessive transportation costs.
-information asymmetry.
3 Deregulated financial markets and heightened competition in financial services
provided an environment for financial innovations that resulted in the introduction of
various instruments. Examples of these innovative instruments include - ANSWER...--
currency futures and options, foreign stock index futures and options.
-multicurrency bonds.
-international mutual funds, country funds, exchange traded funds.
In France and Germany, managers are - ANSWER...-Viewed as "Stakeholders" of the
firm
Privatization refers to the process of - ANSWER...-a country turning over business
venture to the free market system.
The theory of comparative advantage - ANSWER...-claims that economic well-being is
enhanced if each country produces that which they have a comparative advantage in
producing relative to the citizens of other countries, and then trade production.
3 An MNC (multinational corporation) may gain from its presence by - ANSWER...--
Spreading R&D expenditures
-Pooling global purchasing power
-utilizing their technology and management
3 The international monetary system can be defined as the institutional framework
within which - ANSWER...--international payments are made.
, -movement of capital is accommodated.
-exchange rates among currencies are determined.
5 International monetary system phases - ANSWER...--Bimetallism (double standard)
-Classical gold standard
-Interwar period
-Bretton Woods system (dollar based gold exchange standard)
-Flexible Exchange rate system
3 Under a gold standard, if Britain exports more to France than France exports to Great
Britain, - ANSWER...--such international imbalances of payment will be corrected
automatically.
-this type of imbalance will not be able to persist indefinitely.
-net export from Britain will be accompanied by a net flow of gold in the opposite
direction.
During the period between World War I and World War II, - ANSWER...-the U.S. dollar
emerged as the dominant world currency, gradually replacing the British pound for the
role.
3 Under the Bretton Woods system - ANSWER...--each country established a par value
for its currency in relation to the dollar.
-the U.S. dollar was pegged to gold at $35 per ounce.
-each country was responsible for maintaining its exchange rate within 1 percent of the
adopted par value by buying or selling foreign exchanges as necessary.
Under a purely flexible exchange rate system - ANSWER...--supply and demand set the
exchange rates
On January 1, 1999, an epochal event took place in the arena of international finance
when - ANSWER...--eleven of 15 EU countries adopted a common currency called the
euro.
3 Benefits from adopting a common European currency include - ANSWER...--reduced
transaction costs.
-elimination of exchange rate risk.
-increased price transparency, which promotes Europe-wide competition.
Monetary policy for the countries using the euro as a currency is now conducted by -
ANSWER...--European central bank
The Mexican Peso Crisis was touched off by - ANSWER...-an unexpected
announcement by the Mexican government to devalue the peso against the dollar by 14
percent.
3 What major dimensions set apart international finance from domestic finance? -
ANSWER...-Foreign exchange and political risks
Market imperfections
Expanded opportunity set
Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2.
One year later, the stock rises to £60. You are happy with your 20 percent return on the
stock, but when you sell the stock and exchange your £60 for dollars, you only get $45
since the pound has fallen to £1 = $0.75. This loss of value is an example of -
ANSWER...-exchange rate risk
3 A variety of barriers still hamper free movements of people, goods, services, and
capital across national boundaries. These barriers include - ANSWER...--legal
restrictions.
-excessive transportation costs.
-information asymmetry.
3 Deregulated financial markets and heightened competition in financial services
provided an environment for financial innovations that resulted in the introduction of
various instruments. Examples of these innovative instruments include - ANSWER...--
currency futures and options, foreign stock index futures and options.
-multicurrency bonds.
-international mutual funds, country funds, exchange traded funds.
In France and Germany, managers are - ANSWER...-Viewed as "Stakeholders" of the
firm
Privatization refers to the process of - ANSWER...-a country turning over business
venture to the free market system.
The theory of comparative advantage - ANSWER...-claims that economic well-being is
enhanced if each country produces that which they have a comparative advantage in
producing relative to the citizens of other countries, and then trade production.
3 An MNC (multinational corporation) may gain from its presence by - ANSWER...--
Spreading R&D expenditures
-Pooling global purchasing power
-utilizing their technology and management
3 The international monetary system can be defined as the institutional framework
within which - ANSWER...--international payments are made.
, -movement of capital is accommodated.
-exchange rates among currencies are determined.
5 International monetary system phases - ANSWER...--Bimetallism (double standard)
-Classical gold standard
-Interwar period
-Bretton Woods system (dollar based gold exchange standard)
-Flexible Exchange rate system
3 Under a gold standard, if Britain exports more to France than France exports to Great
Britain, - ANSWER...--such international imbalances of payment will be corrected
automatically.
-this type of imbalance will not be able to persist indefinitely.
-net export from Britain will be accompanied by a net flow of gold in the opposite
direction.
During the period between World War I and World War II, - ANSWER...-the U.S. dollar
emerged as the dominant world currency, gradually replacing the British pound for the
role.
3 Under the Bretton Woods system - ANSWER...--each country established a par value
for its currency in relation to the dollar.
-the U.S. dollar was pegged to gold at $35 per ounce.
-each country was responsible for maintaining its exchange rate within 1 percent of the
adopted par value by buying or selling foreign exchanges as necessary.
Under a purely flexible exchange rate system - ANSWER...--supply and demand set the
exchange rates
On January 1, 1999, an epochal event took place in the arena of international finance
when - ANSWER...--eleven of 15 EU countries adopted a common currency called the
euro.
3 Benefits from adopting a common European currency include - ANSWER...--reduced
transaction costs.
-elimination of exchange rate risk.
-increased price transparency, which promotes Europe-wide competition.
Monetary policy for the countries using the euro as a currency is now conducted by -
ANSWER...--European central bank
The Mexican Peso Crisis was touched off by - ANSWER...-an unexpected
announcement by the Mexican government to devalue the peso against the dollar by 14
percent.
