,SOLUTION MANUAL FOR q q
International qFinancial qManagement, q10th qEdition qEUN
q Chapter q1-21
CHAPTER q1
GLOBALIZATION qAND qTHE qMULTINATIONAL qFIRM
ANSWERS q& qSOLUTIONS qTO qEND-OF-CHAPTER qQUESTIONS qAND qPROBLEMS
QUESTIONS
1. Why qis qit qimportant qto qstudy qinternational qfinancial qmanagement?
Answer: q We qare qnow qliving qin qa qworld qwhere qall qthe qmajor qeconomic qfunctions, qsuch qas
q consumption, qproduction, qinvestment, qand qfinancing, qare qhighly qglobalized. q It qis qthus
q essential q for qfinancial qmanagers qto qfully qunderstand qvital qinternational qdimensions qof
q financial qmanagement. q This qglobal qshift qis qin qmarked qcontrast qto qa qsituation qthat qexisted
q when qthe qauthors qof qthis qbook qwere qlearning qfinance qa qfew qdecades qago. q At qthat qtime,
q most qprofessors qcustomarily q(and qsafely, qto qsome qextent) qignored qinternational qaspects qof
q finance. q This qmode qof qoperation qhas qbecome quntenable qsince qthen.
2. How qis qinternational qfinancial qmanagement qdifferent qfrom qdomestic qfinancial qmanagement?
Answer: q There qare qthree qmajor qdimensions qthat qset qapart qinternational qfinance qfrom
q domestic qfinance. qThey qare:
1. foreign qexchange qand qpolitical qrisks,
2. market qimperfections, qand
3. expanded qopportunity qset.
3. Discuss qthe qmajor qtrends qthat qhave qprevailed qin qinternational qbusiness qduring qthe
last qtwo qdecades.
q
Answer: q The q2000s qbrought qa qrapid qintegration qof qinternational qcapital qand qfinancial
q markets. qImpetus qfor qglobalized qfinancial qmarkets qinitially qcame qfrom qthe qgovernments qof
q major qcountries qthat qhad qbegun qto qderegulate qtheir qforeign qexchange qand qcapital qmarkets.
q The qeconomic
,integration qand qglobalization qthat qbegan qin qthe qeighties qand qnineties qare qpicking qup qspeed
in qthe q2000s. qTrade qliberalization qand qeconomic qintegration qcontinued qto qproceed qat qboth
q
q the qregional qand qglobal qlevels. qDespite qsovereign qdebt qcrisis qin qEurope, qmore qEU qmember
q countries qhave qadopted qthe qcommon qcurrency, qthe qeuro, qthat qeffectively qbecame qthe
q second qglobal qcurrency qafter qthe qU.S. qdollar. qIn qthe qlast qfew qyears, qhowever, qeconomic
q nationalism qhas qbeen qgaining qsome qpopularity, qas qexemplified qby qthe qBrexit qdecision qof
the qUnited qKingdom qand qthe qso-called
q
―America qFirst‖ qpolicies qof qthe qTrump qAdministration. qTo qthe qextent qthat qeconomic
nationalism qis qa qpopulist qresponse qto qthe qglobal qfinancial qcrisis qand qGreat qRecession, qit
q
q may qsubside qas qthe qworld qeconomy qcontinues qto qrecover.
4. How qis qa qcountry‘s qeconomic qwell-being qenhanced qthrough qfree qinternational qtrade qin
goods qand qservices?
q
Answer: q According qto qDavid qRicardo, qwith qfree qinternational qtrade, qit qis qmutually qbeneficial
q for qtwo qcountries qto qeach qspecialize qin qthe qproduction qof qthe qgoods qthat qit qcan qproduce
q relatively qmost qefficiently qand qthen qtrade qthose qgoods. q By qdoing qso, qthe qtwo qcountries
q can qincrease qtheir qcombined qproduction, qwhich qallows qboth qcountries qto qconsume qmore qof
q both qgoods. qThis qargument qremains qvalid qeven qif qa qcountry qcan qproduce qboth qgoods qmore
q efficiently qin qabsolute qterms qthan qthe qother qcountry. q International qtrade qis qnot qa q‗zero-sum‘
game qin qwhich qone qcountry qbenefits qat qthe qexpense qof qanother qcountry. qRather,
q
q international qtrade qcould qbe qan q‗increasing- qsum‘ qgame qfrom qwhich qall qplayers qbecome
q winners.
5. What qconsiderations qmight qlimit qthe qextent qto qwhich qthe qtheory qof qcomparative
q advantage qis qrealistic?
Answer: q The qtheory qof qcomparative qadvantage qwas qoriginally qadvanced qby qthe qnineteenth
q century qeconomist qDavid qRicardo qas qan qexplanation qfor qwhy qnations qtrade qwith qone
q another. qThe qtheory qclaims qthat qeconomic qwell-being qis qenhanced qif qeach qcountry
produces qwhat qit qhas qa qcomparative qadvantage qin qproducing qrelative qto qother qcountries,
q
q and qthen qtrade qproducts.
Underlying qthe qtheory qare qthe qassumptions qof qfree qtrade qbetween qnations qand qthat qthe
factors qof qproduction q(labor, qtechnological qknow-how, qand qcapital) qare qrelatively qimmobile.
q
q To qthe qextent qthat qthese qassumptions qdo qnot qhold, qthe qtheory qof qcomparative qadvantage
q may qnot qrealistically qdescribe qinternational qtrade. q In qaddition, qfree qtrade qproduces qwinners
q and qlosers qand qif qthe qlosers qare qnot qcompensated, qfree qtrade qmay qfaces qpolitical
q opposition qfrom qthem.
, 6. What qare qmultinational qcorporations q(MNCs) qand qwhat qeconomic qroles qdo qthey qplay?
International qFinancial qManagement, q10th qEdition qEUN
q Chapter q1-21
CHAPTER q1
GLOBALIZATION qAND qTHE qMULTINATIONAL qFIRM
ANSWERS q& qSOLUTIONS qTO qEND-OF-CHAPTER qQUESTIONS qAND qPROBLEMS
QUESTIONS
1. Why qis qit qimportant qto qstudy qinternational qfinancial qmanagement?
Answer: q We qare qnow qliving qin qa qworld qwhere qall qthe qmajor qeconomic qfunctions, qsuch qas
q consumption, qproduction, qinvestment, qand qfinancing, qare qhighly qglobalized. q It qis qthus
q essential q for qfinancial qmanagers qto qfully qunderstand qvital qinternational qdimensions qof
q financial qmanagement. q This qglobal qshift qis qin qmarked qcontrast qto qa qsituation qthat qexisted
q when qthe qauthors qof qthis qbook qwere qlearning qfinance qa qfew qdecades qago. q At qthat qtime,
q most qprofessors qcustomarily q(and qsafely, qto qsome qextent) qignored qinternational qaspects qof
q finance. q This qmode qof qoperation qhas qbecome quntenable qsince qthen.
2. How qis qinternational qfinancial qmanagement qdifferent qfrom qdomestic qfinancial qmanagement?
Answer: q There qare qthree qmajor qdimensions qthat qset qapart qinternational qfinance qfrom
q domestic qfinance. qThey qare:
1. foreign qexchange qand qpolitical qrisks,
2. market qimperfections, qand
3. expanded qopportunity qset.
3. Discuss qthe qmajor qtrends qthat qhave qprevailed qin qinternational qbusiness qduring qthe
last qtwo qdecades.
q
Answer: q The q2000s qbrought qa qrapid qintegration qof qinternational qcapital qand qfinancial
q markets. qImpetus qfor qglobalized qfinancial qmarkets qinitially qcame qfrom qthe qgovernments qof
q major qcountries qthat qhad qbegun qto qderegulate qtheir qforeign qexchange qand qcapital qmarkets.
q The qeconomic
,integration qand qglobalization qthat qbegan qin qthe qeighties qand qnineties qare qpicking qup qspeed
in qthe q2000s. qTrade qliberalization qand qeconomic qintegration qcontinued qto qproceed qat qboth
q
q the qregional qand qglobal qlevels. qDespite qsovereign qdebt qcrisis qin qEurope, qmore qEU qmember
q countries qhave qadopted qthe qcommon qcurrency, qthe qeuro, qthat qeffectively qbecame qthe
q second qglobal qcurrency qafter qthe qU.S. qdollar. qIn qthe qlast qfew qyears, qhowever, qeconomic
q nationalism qhas qbeen qgaining qsome qpopularity, qas qexemplified qby qthe qBrexit qdecision qof
the qUnited qKingdom qand qthe qso-called
q
―America qFirst‖ qpolicies qof qthe qTrump qAdministration. qTo qthe qextent qthat qeconomic
nationalism qis qa qpopulist qresponse qto qthe qglobal qfinancial qcrisis qand qGreat qRecession, qit
q
q may qsubside qas qthe qworld qeconomy qcontinues qto qrecover.
4. How qis qa qcountry‘s qeconomic qwell-being qenhanced qthrough qfree qinternational qtrade qin
goods qand qservices?
q
Answer: q According qto qDavid qRicardo, qwith qfree qinternational qtrade, qit qis qmutually qbeneficial
q for qtwo qcountries qto qeach qspecialize qin qthe qproduction qof qthe qgoods qthat qit qcan qproduce
q relatively qmost qefficiently qand qthen qtrade qthose qgoods. q By qdoing qso, qthe qtwo qcountries
q can qincrease qtheir qcombined qproduction, qwhich qallows qboth qcountries qto qconsume qmore qof
q both qgoods. qThis qargument qremains qvalid qeven qif qa qcountry qcan qproduce qboth qgoods qmore
q efficiently qin qabsolute qterms qthan qthe qother qcountry. q International qtrade qis qnot qa q‗zero-sum‘
game qin qwhich qone qcountry qbenefits qat qthe qexpense qof qanother qcountry. qRather,
q
q international qtrade qcould qbe qan q‗increasing- qsum‘ qgame qfrom qwhich qall qplayers qbecome
q winners.
5. What qconsiderations qmight qlimit qthe qextent qto qwhich qthe qtheory qof qcomparative
q advantage qis qrealistic?
Answer: q The qtheory qof qcomparative qadvantage qwas qoriginally qadvanced qby qthe qnineteenth
q century qeconomist qDavid qRicardo qas qan qexplanation qfor qwhy qnations qtrade qwith qone
q another. qThe qtheory qclaims qthat qeconomic qwell-being qis qenhanced qif qeach qcountry
produces qwhat qit qhas qa qcomparative qadvantage qin qproducing qrelative qto qother qcountries,
q
q and qthen qtrade qproducts.
Underlying qthe qtheory qare qthe qassumptions qof qfree qtrade qbetween qnations qand qthat qthe
factors qof qproduction q(labor, qtechnological qknow-how, qand qcapital) qare qrelatively qimmobile.
q
q To qthe qextent qthat qthese qassumptions qdo qnot qhold, qthe qtheory qof qcomparative qadvantage
q may qnot qrealistically qdescribe qinternational qtrade. q In qaddition, qfree qtrade qproduces qwinners
q and qlosers qand qif qthe qlosers qare qnot qcompensated, qfree qtrade qmay qfaces qpolitical
q opposition qfrom qthem.
, 6. What qare qmultinational qcorporations q(MNCs) qand qwhat qeconomic qroles qdo qthey qplay?
