Solution Manual for International Financial Management, 10th Edition, By Cheol Eun, Bruce G. Resnick, All Chapters // complete Verified editon //ISBN:9781264413096

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,SOLUTION MANUAL FOR t t




International Financial Management, 10th Edition EUN Chapter t t t t t t




1-21
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CHAPTER 1 t




GLOBALIZATION AND THE MULTINATIONAL FIRM t t t t




ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
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QUESTIONS

1. Why is it important to study international financial management?
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Answer: We are now living in a world where all the major economic functions, such as
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consumption, production, investment, and financing, are highly globalized.
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t for financial managers to fully understand vital international dimensions of financial management.
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t This global shift is in marked contrast to a situation that existed when the authors of this book were
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learning finance a few decades ago. At that time, most professors customarily (and safely, to
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some extent) ignored international aspects of finance.
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untenable since then.
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2. How is international financial management different from domestic financial management?
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Answer: There are three major dimensions that set apart international finance from domestic
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finance. They are:
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1. foreign exchange and political risks, t t t t



2. market imperfections, and t t



3. expanded opportunity set. t t




3. Discuss the major trends that have prevailed in international business during the last two
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decades.
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Answer: The 2000s brought a rapid integration of international capital and financial markets.
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Impetus for globalized financial markets initially came from the governments of major countries
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that had begun to deregulate their foreign exchange and capital markets. The economic
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,integration and globalization that began in the eighties and nineties are picking up speed in the
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2000s. Trade liberalization and economic integration continued to proceed at both the regional
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and global levels. Despite sovereign debt crisis in Europe, more EU member countries have
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adopted the common currency, the euro, that effectively became the second global currency
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after the U.S. dollar. In the last few years, however, economic nationalism has been gaining
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some popularity, as exemplified by the Brexit decision of the United Kingdom and the so-called
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―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a
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populist response to the global financial crisis and Great Recession, it may subside as the world
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economy continues to recover.
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4. How is a country‘s economic well-being enhanced through free international trade in goods
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and services?
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Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two
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countries to each specialize in the production of the goods that it can produce relatively most
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efficiently and then trade those goods. By doing so, the two countries can increase their
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combined production, which allows both countries to consume more of both goods. This
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argument remains valid even if a country can produce both goods more efficiently in absolute
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terms than the other country. International trade is not a ‗zero-sum‘ game in which one country
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benefits at the expense of another country. Rather, international trade could be an ‗increasing-
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sum‘ game from which all players become winners.
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5. What considerations might limit the extent to which the theory of comparative advantage is
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realistic?
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Answer: The theory of comparative advantage was originally advanced by the nineteenth
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century economist David Ricardo as an explanation for why nations trade with one another. The
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theory claims that economic well-being is enhanced if each country produces what it has a
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comparative advantage in producing relative to other countries, and then trade products.
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Underlying the theory are the assumptions of free trade between nations and that the factors of
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production (labor, technological know-how, and capital) are relatively immobile. To the extent
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that these assumptions do not hold, the theory of comparative advantage may not realistically
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describe international trade. In addition, free trade produces winners and losers and if the losers
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are not compensated, free trade may faces political opposition from them.
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6. What are multinational corporations (MNCs) and what economic roles do they play?
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, Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
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country that has production and sales operations in many other countries. Indeed, some MNCs
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have operations in a few dozens of different countries. MNCs obtain financing from major
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money centers around the world in many different currencies to finance their operations. Global
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operations force the treasurer‘s office to establish international banking relationships, to place
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short-term funds in several currency denominations, and to effectively manage foreign exchange
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risk. By circumventing and also taking advantage of various market imperfections, such as
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barriers to trade and barriers to flow of people and capital across countries, MNCs contribute to
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greater integration of the world economy and ing more perfect functioning of global markets.
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7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political
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party in the United States, had strongly objected to the creation of the North American Trade
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Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of
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American jobs to Mexico where it is much cheaper to hire workers. What are the merits and
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demerits of Perot‘s position on NAFTA? Considering the recent economic developments in North
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America, how would you assess Perot‘s position on NAFTA?
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Answer: Since the inception of NAFTA, many American companies indeed have invested heavily
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in Mexico, sometimes relocating production from the United States to Mexico. Although this might
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have temporarily caused unemployment of some American workers, they were eventually
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rehired by other industries often for higher wages. At the same time, Mexico has been
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experiencing a major economic boom. It seems clear that both Mexico and the U.S. have
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benefited from NAFTA. Perot‘s concern appears to have been ill founded.
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8. In 1995, a working group of French chief executive officers was set up by the Confederation of
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French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the
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French corporate governance structure. The group reported the following, among other things:
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t ―The board of directors should not simply aim at maximizing share values as in the U.K. and the
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U.S. Rather, its goal should be to serve the company, whose interests should be clearly
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distinguished from those of its shareholders, employees, creditors, suppliers and clients but still
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equated with their general common interest, which is to safeguard the prosperity and continuity of
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the company‖. Evaluate the above recommendation of the working group.
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Answer: The recommendations of the French working group clearly show that shareholder
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wealth maximization is not a universally accepted goal of corporate management, especially
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