SOLUTION MANUAL FOR el el
International Financial Management, 10th Edition EUN
el el el el el
el Chapter 1-21 el
CHAPTER 1 el
GLOBALIZATION elAND elTHE elMULTINATIONAL elFIRM
ANSWERS el& elSOLUTIONS elTO elEND-OF-CHAPTER elQUESTIONS elAND elPROBLEMS
QUESTIONS
1. Why elis elit elimportant elto elstudy elinternational elfinancial elmanagement?
Answer: el We elare elnow elliving elin ela elworld elwhere elall elthe elmajor eleconomic elfunctions, elsuch elas
el consumption, elproduction, elinvestment, eland elfinancing, elare elhighly elglobalized. e l It elis elthus
el essential el for elfinancial elmanagers elto elfully elunderstand elvital elinternational eldimensions elof
el financial elmanagement. e l This elglobal elshift elis elin elmarked elcontrast elto ela elsituation elthat elexisted
el when elthe elauthors elof elthis elbook elwere ellearning elfinance ela elfew eldecades elago. el At elthat eltime,
el most elprofessors elcustomarily el(and elsafely, elto elsome elextent) elignored elinternational elaspects elof
el finance. e l This elmode elof eloperation elhas elbecome eluntenable elsince elthen.
2. How elis elinternational elfinancial elmanagement eldifferent elfrom eldomestic elfinancial elmanagement?
Answer: el There elare elthree elmajor eldimensions elthat elset elapart elinternational elfinance elfrom
el domestic elfinance. elThey elare:
1. foreign elexchange eland elpolitical elrisks,
2. market elimperfections, eland
3. expanded elopportunity elset.
3. Discuss elthe elmajor eltrends elthat elhave elprevailed elin elinternational elbusiness elduring elthe
last eltwo eldecades.
el
Answer: el The el2000s elbrought ela elrapid elintegration elof elinternational elcapital eland elfinancial
el markets. elImpetus elfor elglobalized elfinancial elmarkets elinitially elcame elfrom elthe elgovernments elof
el major elcountries elthat elhad elbegun elto elderegulate eltheir elforeign elexchange eland elcapital
el markets. el The eleconomic
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
,integration eland elglobalization elthat elbegan elin elthe eleighties eland elnineties elare elpicking elup elspeed
el in elthe el2000s. elTrade elliberalization eland eleconomic elintegration elcontinued elto elproceed elat elboth
el the elregional eland elglobal ellevels. elDespite elsovereign eldebt elcrisis elin elEurope, elmore elEU
el member elcountries elhave eladopted elthe elcommon elcurrency, elthe eleuro, elthat eleffectively elbecame
el the elsecond elglobal elcurrency elafter elthe elU.S. eldollar. elIn elthe ellast elfew elyears, elhowever,
el economic elnationalism elhas elbeen elgaining elsome elpopularity, elas elexemplified elby elthe elBrexit
el decision elof elthe elUnited elKingdom eland elthe elso-called
―America elFirst‖ elpolicies elof elthe elTrump elAdministration. elTo elthe elextent elthat eleconomic
nationalism elis ela elpopulist elresponse elto elthe elglobal elfinancial elcrisis eland elGreat elRecession, elit
el
el may elsubside elas elthe elworld eleconomy elcontinues elto elrecover.
4. How elis ela elcountry‘s eleconomic elwell-being elenhanced elthrough elfree elinternational eltrade elin
el goods eland elservices?
Answer: el According elto elDavid elRicardo, elwith elfree elinternational eltrade, elit elis elmutually
el beneficial elfor eltwo elcountries elto eleach elspecialize elin elthe elproduction elof elthe elgoods elthat elit elcan
el produce elrelatively elmost elefficiently eland elthen eltrade elthose elgoods. el By eldoing elso, elthe eltwo
el countries elcan elincrease eltheir elcombined elproduction, elwhich elallows elboth elcountries elto
el consume elmore elof elboth elgoods. elThis elargument elremains elvalid eleven elif ela elcountry elcan
el produce elboth elgoods elmore elefficiently elin elabsolute elterms elthan elthe elother elcountry.
el International eltrade elis elnot ela el‗zero-sum‘ elgame elin elwhich elone elcountry elbenefits elat elthe
el expense elof elanother elcountry. elRather, elinternational eltrade elcould elbe elan el‗increasing- elsum‘
el game elfrom elwhich elall elplayers elbecome elwinners.
5. What elconsiderations elmight ellimit elthe elextent elto elwhich elthe eltheory elof elcomparative
el advantage elis elrealistic?
Answer: el The eltheory elof elcomparative eladvantage elwas eloriginally eladvanced elby elthe
el nineteenth elcentury eleconomist elDavid elRicardo elas elan elexplanation elfor elwhy elnations eltrade
el with elone elanother. elThe eltheory elclaims elthat eleconomic elwell-being elis elenhanced elif eleach
el country elproduces elwhat elit elhas ela elcomparative eladvantage elin elproducing elrelative elto elother
el countries, eland elthen eltrade elproducts.
Underlying elthe eltheory elare elthe elassumptions elof elfree eltrade elbetween elnations eland elthat elthe
el factors elof elproduction el(labor, eltechnological elknow-how, eland elcapital) elare elrelatively elimmobile.
el To elthe elextent elthat elthese elassumptions eldo elnot elhold, elthe eltheory elof elcomparative eladvantage
el may elnot elrealistically eldescribe elinternational eltrade. el In eladdition, elfree eltrade elproduces
el winners eland ellosers eland elif elthe ellosers elare elnot elcompensated, elfree eltrade elmay elfaces elpolitical
el opposition elfrom elthem.
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
,6. What elare elmultinational elcorporations el(MNCs) eland elwhat eleconomic elroles eldo elthey elplay?
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
, Answer: el A elmultinational elcorporation el(MNC) elcan elbe eldefined elas ela elbusiness elfirm
el incorporated elin elone elcountry elthat elhas elproduction eland elsales eloperations elin elmany elother
el countries. elIndeed, elsome elMNCs elhave eloperations elin ela elfew eldozens elof eldifferent elcountries.
e l MNCs elobtain elfinancing elfrom elmajor elmoney elcenters elaround elthe elworld elin elmany eldifferent
el currencies elto elfinance eltheir eloperations. elGlobal eloperations elforce elthe eltreasurer‘s eloffice elto
el establish elinternational elbanking elrelationships, elto elplace elshort-term elfunds elin elseveral elcurrency
el denominations, eland elto eleffectively elmanage elforeign elexchange elrisk. e l By elcircumventing eland
el also eltaking eladvantage elof elvarious elmarket elimperfections, elsuch elas elbarriers elto eltrade eland
el barriers elto elflow elof elpeople eland elcapital elacross elcountries, elMNCs elcontribute elto elgreater
el integration elof elthe elworld eleconomy eland eling elmore elperfect elfunctioning elof elglobal elmarkets.
7. Ross elPerot, ela elformer elPresidential elcandidate elof elthe elReform elParty, elwhich elwas ela elthird
el political elparty elin elthe elUnited elStates, elhad elstrongly elobjected elto elthe elcreation elof elthe elNorth
el American elTrade elAgreement el(NAFTA), elwhich elnonetheless elwas elinaugurated elin el1994. elPerot
el feared elthe elloss elof elAmerican eljobs elto elMexico elwhere elit elis elmuch elcheaper elto elhire elworkers.
el What elare elthe elmerits eland eldemerits elof elPerot‘s elposition elon elNAFTA? elConsidering elthe elrecent
el economic eldevelopments elin elNorth elAmerica, elhow elwould elyou elassess elPerot‘s elposition elon
el NAFTA?
Answer: elSince elthe elinception elof elNAFTA, elmany elAmerican elcompanies elindeed elhave elinvested
el heavily elin elMexico, elsometimes elrelocating elproduction elfrom elthe elUnited elStates elto elMexico.
el Although elthis elmight elhave eltemporarily elcaused elunemployment elof elsome elAmerican elworkers,
el they elwere eleventually elrehired elby elother elindustries eloften elfor elhigher elwages. elAt elthe elsame
el time, elMexico elhas elbeen elexperiencing ela elmajor eleconomic elboom. elIt elseems elclear elthat elboth
Mexico eland elthe elU.S. elhave elbenefited elfrom elNAFTA. elPerot‘s elconcern elappears elto elhave
el
el been elill elfounded.
8. In el1995, ela elworking elgroup elof elFrench elchief elexecutive elofficers elwas elset elup elby elthe
el Confederation elof elFrench elIndustry el(CNPF) eland elthe elFrench elAssociation elof elPrivate
el Companies el(AFEP) elto elstudy elthe elFrench elcorporate elgovernance elstructure. elThe elgroup
el reported elthe elfollowing, elamong elother elthings: el ―The elboard elof eldirectors elshould elnot elsimply
el aim elat elmaximizing elshare elvalues elas elin elthe elU.K. eland elthe elU.S. elRather, elits elgoal elshould elbe
el to elserve elthe elcompany, elwhose elinterests elshould elbe elclearly eldistinguished elfrom elthose elof elits
el shareholders, elemployees, elcreditors, elsuppliers eland elclients elbut elstill elequated elwith eltheir
el general elcommon elinterest, elwhich elis elto elsafeguard elthe elprosperity eland elcontinuity elof elthe
el company‖. elEvaluate elthe elabove elrecommendation elof elthe elworking elgroup.
Answer: elThe elrecommendations elof elthe elFrench elworking elgroup elclearly elshow elthat
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
International Financial Management, 10th Edition EUN
el el el el el
el Chapter 1-21 el
CHAPTER 1 el
GLOBALIZATION elAND elTHE elMULTINATIONAL elFIRM
ANSWERS el& elSOLUTIONS elTO elEND-OF-CHAPTER elQUESTIONS elAND elPROBLEMS
QUESTIONS
1. Why elis elit elimportant elto elstudy elinternational elfinancial elmanagement?
Answer: el We elare elnow elliving elin ela elworld elwhere elall elthe elmajor eleconomic elfunctions, elsuch elas
el consumption, elproduction, elinvestment, eland elfinancing, elare elhighly elglobalized. e l It elis elthus
el essential el for elfinancial elmanagers elto elfully elunderstand elvital elinternational eldimensions elof
el financial elmanagement. e l This elglobal elshift elis elin elmarked elcontrast elto ela elsituation elthat elexisted
el when elthe elauthors elof elthis elbook elwere ellearning elfinance ela elfew eldecades elago. el At elthat eltime,
el most elprofessors elcustomarily el(and elsafely, elto elsome elextent) elignored elinternational elaspects elof
el finance. e l This elmode elof eloperation elhas elbecome eluntenable elsince elthen.
2. How elis elinternational elfinancial elmanagement eldifferent elfrom eldomestic elfinancial elmanagement?
Answer: el There elare elthree elmajor eldimensions elthat elset elapart elinternational elfinance elfrom
el domestic elfinance. elThey elare:
1. foreign elexchange eland elpolitical elrisks,
2. market elimperfections, eland
3. expanded elopportunity elset.
3. Discuss elthe elmajor eltrends elthat elhave elprevailed elin elinternational elbusiness elduring elthe
last eltwo eldecades.
el
Answer: el The el2000s elbrought ela elrapid elintegration elof elinternational elcapital eland elfinancial
el markets. elImpetus elfor elglobalized elfinancial elmarkets elinitially elcame elfrom elthe elgovernments elof
el major elcountries elthat elhad elbegun elto elderegulate eltheir elforeign elexchange eland elcapital
el markets. el The eleconomic
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
,integration eland elglobalization elthat elbegan elin elthe eleighties eland elnineties elare elpicking elup elspeed
el in elthe el2000s. elTrade elliberalization eland eleconomic elintegration elcontinued elto elproceed elat elboth
el the elregional eland elglobal ellevels. elDespite elsovereign eldebt elcrisis elin elEurope, elmore elEU
el member elcountries elhave eladopted elthe elcommon elcurrency, elthe eleuro, elthat eleffectively elbecame
el the elsecond elglobal elcurrency elafter elthe elU.S. eldollar. elIn elthe ellast elfew elyears, elhowever,
el economic elnationalism elhas elbeen elgaining elsome elpopularity, elas elexemplified elby elthe elBrexit
el decision elof elthe elUnited elKingdom eland elthe elso-called
―America elFirst‖ elpolicies elof elthe elTrump elAdministration. elTo elthe elextent elthat eleconomic
nationalism elis ela elpopulist elresponse elto elthe elglobal elfinancial elcrisis eland elGreat elRecession, elit
el
el may elsubside elas elthe elworld eleconomy elcontinues elto elrecover.
4. How elis ela elcountry‘s eleconomic elwell-being elenhanced elthrough elfree elinternational eltrade elin
el goods eland elservices?
Answer: el According elto elDavid elRicardo, elwith elfree elinternational eltrade, elit elis elmutually
el beneficial elfor eltwo elcountries elto eleach elspecialize elin elthe elproduction elof elthe elgoods elthat elit elcan
el produce elrelatively elmost elefficiently eland elthen eltrade elthose elgoods. el By eldoing elso, elthe eltwo
el countries elcan elincrease eltheir elcombined elproduction, elwhich elallows elboth elcountries elto
el consume elmore elof elboth elgoods. elThis elargument elremains elvalid eleven elif ela elcountry elcan
el produce elboth elgoods elmore elefficiently elin elabsolute elterms elthan elthe elother elcountry.
el International eltrade elis elnot ela el‗zero-sum‘ elgame elin elwhich elone elcountry elbenefits elat elthe
el expense elof elanother elcountry. elRather, elinternational eltrade elcould elbe elan el‗increasing- elsum‘
el game elfrom elwhich elall elplayers elbecome elwinners.
5. What elconsiderations elmight ellimit elthe elextent elto elwhich elthe eltheory elof elcomparative
el advantage elis elrealistic?
Answer: el The eltheory elof elcomparative eladvantage elwas eloriginally eladvanced elby elthe
el nineteenth elcentury eleconomist elDavid elRicardo elas elan elexplanation elfor elwhy elnations eltrade
el with elone elanother. elThe eltheory elclaims elthat eleconomic elwell-being elis elenhanced elif eleach
el country elproduces elwhat elit elhas ela elcomparative eladvantage elin elproducing elrelative elto elother
el countries, eland elthen eltrade elproducts.
Underlying elthe eltheory elare elthe elassumptions elof elfree eltrade elbetween elnations eland elthat elthe
el factors elof elproduction el(labor, eltechnological elknow-how, eland elcapital) elare elrelatively elimmobile.
el To elthe elextent elthat elthese elassumptions eldo elnot elhold, elthe eltheory elof elcomparative eladvantage
el may elnot elrealistically eldescribe elinternational eltrade. el In eladdition, elfree eltrade elproduces
el winners eland ellosers eland elif elthe ellosers elare elnot elcompensated, elfree eltrade elmay elfaces elpolitical
el opposition elfrom elthem.
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
,6. What elare elmultinational elcorporations el(MNCs) eland elwhat eleconomic elroles eldo elthey elplay?
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
, Answer: el A elmultinational elcorporation el(MNC) elcan elbe eldefined elas ela elbusiness elfirm
el incorporated elin elone elcountry elthat elhas elproduction eland elsales eloperations elin elmany elother
el countries. elIndeed, elsome elMNCs elhave eloperations elin ela elfew eldozens elof eldifferent elcountries.
e l MNCs elobtain elfinancing elfrom elmajor elmoney elcenters elaround elthe elworld elin elmany eldifferent
el currencies elto elfinance eltheir eloperations. elGlobal eloperations elforce elthe eltreasurer‘s eloffice elto
el establish elinternational elbanking elrelationships, elto elplace elshort-term elfunds elin elseveral elcurrency
el denominations, eland elto eleffectively elmanage elforeign elexchange elrisk. e l By elcircumventing eland
el also eltaking eladvantage elof elvarious elmarket elimperfections, elsuch elas elbarriers elto eltrade eland
el barriers elto elflow elof elpeople eland elcapital elacross elcountries, elMNCs elcontribute elto elgreater
el integration elof elthe elworld eleconomy eland eling elmore elperfect elfunctioning elof elglobal elmarkets.
7. Ross elPerot, ela elformer elPresidential elcandidate elof elthe elReform elParty, elwhich elwas ela elthird
el political elparty elin elthe elUnited elStates, elhad elstrongly elobjected elto elthe elcreation elof elthe elNorth
el American elTrade elAgreement el(NAFTA), elwhich elnonetheless elwas elinaugurated elin el1994. elPerot
el feared elthe elloss elof elAmerican eljobs elto elMexico elwhere elit elis elmuch elcheaper elto elhire elworkers.
el What elare elthe elmerits eland eldemerits elof elPerot‘s elposition elon elNAFTA? elConsidering elthe elrecent
el economic eldevelopments elin elNorth elAmerica, elhow elwould elyou elassess elPerot‘s elposition elon
el NAFTA?
Answer: elSince elthe elinception elof elNAFTA, elmany elAmerican elcompanies elindeed elhave elinvested
el heavily elin elMexico, elsometimes elrelocating elproduction elfrom elthe elUnited elStates elto elMexico.
el Although elthis elmight elhave eltemporarily elcaused elunemployment elof elsome elAmerican elworkers,
el they elwere eleventually elrehired elby elother elindustries eloften elfor elhigher elwages. elAt elthe elsame
el time, elMexico elhas elbeen elexperiencing ela elmajor eleconomic elboom. elIt elseems elclear elthat elboth
Mexico eland elthe elU.S. elhave elbenefited elfrom elNAFTA. elPerot‘s elconcern elappears elto elhave
el
el been elill elfounded.
8. In el1995, ela elworking elgroup elof elFrench elchief elexecutive elofficers elwas elset elup elby elthe
el Confederation elof elFrench elIndustry el(CNPF) eland elthe elFrench elAssociation elof elPrivate
el Companies el(AFEP) elto elstudy elthe elFrench elcorporate elgovernance elstructure. elThe elgroup
el reported elthe elfollowing, elamong elother elthings: el ―The elboard elof eldirectors elshould elnot elsimply
el aim elat elmaximizing elshare elvalues elas elin elthe elU.K. eland elthe elU.S. elRather, elits elgoal elshould elbe
el to elserve elthe elcompany, elwhose elinterests elshould elbe elclearly eldistinguished elfrom elthose elof elits
el shareholders, elemployees, elcreditors, elsuppliers eland elclients elbut elstill elequated elwith eltheir
el general elcommon elinterest, elwhich elis elto elsafeguard elthe elprosperity eland elcontinuity elof elthe
el company‖. elEvaluate elthe elabove elrecommendation elof elthe elworking elgroup.
Answer: elThe elrecommendations elof elthe elFrench elworking elgroup elclearly elshow elthat
©MCGRAW elHILL elLLC. elALL elRIGHTS elRESERVED. elNO elREPRODUCTION elOR elDISTRIBUTION elWITHOUT elTHE elPRIOR elWRITTEN elCONSENT elOF
elMCGRAW elHILL elLLC
