Solution Manual for International Financial Management, 10th Edition By Cheol Eun, Bruce Resnick and Tuugi Chuluun, Chapter 1-21

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,SOLUTION MANUAL FOR ea ea




International Financial Management, 10th Edition EUN Chapt ea ea ea ea ea ea




er 1-21
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CHAPTER 1 ea




GLOBALIZATION AND THE MULTINATIONAL FIRM ea ea ea ea




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 con
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sumption, production, investment, and financing, are highly globalized.
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for financial managers to fully understand vital international dimensions of financial manage
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ment. This global shift is in marked contrast to a situation that existed when the authors of
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this book were learning finance a few decades ago. At that time, most professors customari
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ly (and safely, to some extent) ignored international aspects of finance.
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ation has become 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 domest
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ic finance. They are:
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1. foreign exchange and political risks, ea ea ea ea



2. market imperfections, and ea ea



3. expanded opportunity set. ea ea




3. Discuss the major trends that have prevailed in international business during the last
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two decades.
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Answer: The 2000s brought a rapid integration of international capital and financial market
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s. Impetus for globalized financial markets initially came from the governments of major cou
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ntries that had begun to deregulate their foreign exchange and capital markets. The econo
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,integration and globalization that began in the eighties and nineties are picking up speed in
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ea the 2000s. Trade liberalization and economic integration continued to proceed at both the
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regional and global levels. Despite sovereign debt crisis in Europe, more EU member coun
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tries have adopted the common currency, the euro, that effectively became the second glo
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bal currency after the U.S. dollar. In the last few years, however, economic nationalism has
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ea been gaining some popularity, as exemplified by the Brexit decision of the United Kingdom
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and the so-called
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―America First‖ policies of the Trump Administration. To the extent that economic nationalis
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m is a populist response to the global financial crisis and Great Recession, it may subside
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as the world economy continues to recover.
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4. How is a country‘s economic well-
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being enhanced through free international trade in goods and services?
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Answer: According to David Ricardo, with free international trade, it is mutually beneficial f
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or two countries to each specialize in the production of the goods that it can produce relati
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vely most efficiently and then trade those goods. By doing so, the two countries can incre
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ase their combined production, which allows both countries to consume more of both good
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s. This argument remains valid even if a country can produce both goods more efficiently i
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n absolute terms than the other country. International trade is not a ‗zero-
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sum‘ game in which one country benefits at the expense of another country. Rather, interna
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tional trade could be an ‗increasing- 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 advantag
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e is 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
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. The theory claims that economic well-
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being is enhanced if each country produces what it has a comparative advantage in produ
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cing 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 facto
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rs of production (labor, technological know-
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how, and capital) are relatively immobile. To the extent that these assumptions do not hol
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d, the theory of comparative advantage may not realistically describe international trade. In
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ea addition, free trade produces winners and losers and if the losers are not compensated, fr
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ee 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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