Solution Manual for International Financial Management,
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
Chapter 1-21
,SOLUTION MANUAL FOR
International Financial Management, 10th Edition EUN Chapter 1-21
CHAPTER 1
GLOBALIZATION AND THE MULTINATIONAL FIRM
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
QUESTIONS
1. Why is it important to study international financial management?
Answer: We are now living in a world where all the major economic functions, such as consumption,
production, investment, and financing, are highly globalized. It is thus essential for financial managers to fully
understand vital international dimensions of financial management. This global shift is in marked contrast to a
situation that existed when the authors of this book were learning finance a few decades ago. At that time, most
professors customarily (and safely, to some extent) ignored international aspects of finance. This mode of
operation has become untenable since then.
2. How is international financial management different from domestic financial management?
Answer: There are three major dimensions that set apart international finance from domestic finance. They
are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
3. Discuss the major trends that have prevailed in international business during the last two decades.
Answer: The 2000s brought a rapid integration of international capital and financial markets. Impetus for
globalized financial markets initially came from the governments of major countries that had begun to
deregulate their foreign exchange and capital markets. The economic
,integration Vand Vglobalization Vthat Vbegan Vin Vthe Veighties Vand Vnineties Vare Vpicking Vup Vspeed Vin Vthe V2000s.
Trade
V V liberalization Vand Veconomic Vintegration Vcontinued Vto Vproceed Vat Vboth Vthe Vregional Vand Vglobal
levels. VDespite
V V sovereign Vdebt Vcrisis Vin VEurope, Vmore VEU Vmember Vcountries Vhave Vadopted Vthe
V common Vcurrency, Vthe Veuro, V that Veffectively Vbecame Vthe Vsecond Vglobal Vcurrency Vafter Vthe VU.S. Vdollar.
In Vthe Vlast Vfew Vyears, Vhowever,
V V economic Vnationalism Vhas Vbeen Vgaining Vsome Vpopularity, Vas
exemplified Vby Vthe VBrexit Vdecision Vof Vthe VUnited
V V Kingdom Vand Vthe Vso-called
―America VFirst‖ Vpolicies Vof Vthe VTrump VAdministration. VTo Vthe Vextent Vthat Veconomic Vnationalism Vis Va
populist
V V response Vto Vthe Vglobal Vfinancial Vcrisis Vand VGreat VRecession, Vit Vmay Vsubside Vas Vthe Vworld
economy Vcontinues Vto
V V recover.
4. How Vis Va Vcountry‘s Veconomic Vwell-being Venhanced Vthrough Vfree Vinternational Vtrade Vin Vgoods Vand
Vservices?
Answer: V According Vto VDavid VRicardo, Vwith Vfree Vinternational Vtrade, Vit Vis Vmutually Vbeneficial Vfor Vtwo
countries
V V to Veach Vspecialize Vin Vthe Vproduction Vof Vthe Vgoods Vthat Vit Vcan Vproduce Vrelatively Vmost
efficiently Vand Vthen Vtrade
V V those Vgoods. V By Vdoing Vso, Vthe Vtwo Vcountries Vcan Vincrease Vtheir Vcombined
production, Vwhich Vallows Vboth
V V countries Vto Vconsume Vmore Vof Vboth Vgoods. VThis Vargument Vremains
valid Veven Vif Va Vcountry Vcan Vproduce Vboth
V V goods Vmore Vefficiently Vin Vabsolute Vterms Vthan Vthe Vother
country. V International Vtrade Vis Vnot Va V‗zero-sum‘ Vgame
V V in Vwhich Vone Vcountry Vbenefits Vat Vthe Vexpense
V of Vanother Vcountry. VRather, Vinternational Vtrade Vcould Vbe Van
‗increasing- Vsum‘ Vgame Vfrom Vwhich Vall Vplayers Vbecome Vwinners.
5. What Vconsiderations Vmight Vlimit Vthe Vextent Vto Vwhich Vthe Vtheory Vof Vcomparative Vadvantage Vis
Vrealistic?
Answer: V The Vtheory Vof Vcomparative Vadvantage Vwas Voriginally Vadvanced Vby Vthe Vnineteenth Vcentury
economist
V V David VRicardo Vas Van Vexplanation Vfor Vwhy Vnations Vtrade Vwith Vone Vanother. VThe Vtheory
V claims Vthat Veconomic V well-being Vis Venhanced Vif Veach Vcountry Vproduces Vwhat Vit Vhas Va Vcomparative
advantage Vin Vproducing Vrelative Vto
V V other Vcountries, Vand Vthen Vtrade Vproducts.
Underlying Vthe Vtheory Vare Vthe Vassumptions Vof Vfree Vtrade Vbetween Vnations Vand Vthat Vthe Vfactors Vof
production
V V (labor, Vtechnological Vknow-how, Vand Vcapital) Vare Vrelatively Vimmobile. V To Vthe Vextent Vthat
V these Vassumptions Vdo V not Vhold, Vthe Vtheory Vof Vcomparative Vadvantage Vmay Vnot Vrealistically Vdescribe
international Vtrade. V In Vaddition,
V V free Vtrade Vproduces Vwinners Vand Vlosers Vand Vif Vthe Vlosers Vare Vnot
V compensated, Vfree Vtrade Vmay Vfaces Vpolitical V opposition Vfrom Vthem.
6. What Vare Vmultinational Vcorporations V(MNCs) Vand Vwhat Veconomic Vroles Vdo Vthey Vplay?
, Answer: V A Vmultinational Vcorporation V(MNC) Vcan Vbe Vdefined Vas Va Vbusiness Vfirm Vincorporated Vin Vone
V country Vthat V has Vproduction Vand Vsales Voperations Vin Vmany Vother Vcountries. VIndeed, Vsome VMNCs Vhave
operations Vin Va Vfew V dozens Vof Vdifferent Vcountries. V V MNCs Vobtain Vfinancing Vfrom Vmajor Vmoney Vcenters
V
around Vthe Vworld Vin Vmany
V V different Vcurrencies Vto Vfinance Vtheir Voperations. VGlobal Voperations Vforce
the Vtreasurer‘s Voffice Vto Vestablish V international Vbanking Vrelationships, Vto Vplace Vshort-term Vfunds Vin
V
V several Vcurrency Vdenominations, Vand Vto V effectively Vmanage Vforeign Vexchange Vrisk. V By Vcircumventing
and Valso Vtaking Vadvantage Vof Vvarious Vmarket
V V imperfections, Vsuch Vas Vbarriers Vto Vtrade Vand Vbarriers Vto
flow Vof Vpeople Vand Vcapital Vacross Vcountries, VMNCs
V V contribute Vto Vgreater Vintegration Vof Vthe Vworld
economy Vand Ving Vmore Vperfect Vfunctioning Vof Vglobal Vmarkets.
V
7. Ross VPerot, Va Vformer VPresidential Vcandidate Vof Vthe VReform VParty, Vwhich Vwas Va Vthird Vpolitical Vparty
in Vthe
V V United VStates, Vhad Vstrongly Vobjected Vto Vthe Vcreation Vof Vthe VNorth VAmerican VTrade VAgreement
(NAFTA), Vwhich
V V nonetheless Vwas Vinaugurated Vin V1994. VPerot Vfeared Vthe Vloss Vof VAmerican Vjobs Vto
Mexico Vwhere Vit Vis Vmuch
V V cheaper Vto Vhire Vworkers. VWhat Vare Vthe Vmerits Vand Vdemerits Vof VPerot‘s
position Von VNAFTA? VConsidering Vthe V recent Veconomic Vdevelopments Vin VNorth VAmerica, Vhow Vwould
V
you Vassess VPerot‘s Vposition Von VNAFTA?
V
Answer: VSince Vthe Vinception Vof VNAFTA, Vmany VAmerican Vcompanies Vindeed Vhave Vinvested Vheavily Vin
Mexico,
V V sometimes Vrelocating Vproduction Vfrom Vthe VUnited VStates Vto VMexico. VAlthough Vthis Vmight
have Vtemporarily
V V caused Vunemployment Vof Vsome VAmerican Vworkers, Vthey Vwere Veventually Vrehired
by Vother Vindustries Voften Vfor
V V higher Vwages. VAt Vthe Vsame Vtime, VMexico Vhas Vbeen Vexperiencing Va
V major Veconomic Vboom. VIt Vseems Vclear Vthat V both VMexico Vand Vthe VU.S. Vhave Vbenefited Vfrom VNAFTA.
Perot‘s Vconcern Vappears Vto Vhave Vbeen Vill Vfounded.
V
8. In V1995, Va Vworking Vgroup Vof VFrench Vchief Vexecutive Vofficers Vwas Vset Vup Vby Vthe VConfederation Vof
V French V Industry V(CNPF) Vand Vthe VFrench VAssociation Vof VPrivate VCompanies V(AFEP) Vto Vstudy Vthe VFrench
V corporate V governance Vstructure. VThe Vgroup Vreported Vthe Vfollowing, Vamong Vother Vthings: V ―The Vboard
of Vdirectors Vshould V not Vsimply Vaim Vat Vmaximizing Vshare Vvalues Vas Vin Vthe VU.K. Vand Vthe VU.S. VRather, Vits
V
V goal Vshould Vbe Vto Vserve Vthe V company, Vwhose Vinterests Vshould Vbe Vclearly Vdistinguished Vfrom Vthose Vof Vits
shareholders, Vemployees, Vcreditors,
V V suppliers Vand Vclients Vbut Vstill Vequated Vwith Vtheir Vgeneral Vcommon
interest, Vwhich Vis Vto Vsafeguard Vthe Vprosperity
V V and Vcontinuity Vof Vthe Vcompany‖. VEvaluate Vthe Vabove
recommendation Vof Vthe Vworking Vgroup.
V
Answer: VThe Vrecommendations Vof Vthe VFrench Vworking Vgroup Vclearly Vshow Vthat Vshareholder Vwealth
V maximization Vis Vnot Va Vuniversally Vaccepted Vgoal Vof Vcorporate Vmanagement, Vespecially
10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
Chapter 1-21
,SOLUTION MANUAL FOR
International Financial Management, 10th Edition EUN Chapter 1-21
CHAPTER 1
GLOBALIZATION AND THE MULTINATIONAL FIRM
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
QUESTIONS
1. Why is it important to study international financial management?
Answer: We are now living in a world where all the major economic functions, such as consumption,
production, investment, and financing, are highly globalized. It is thus essential for financial managers to fully
understand vital international dimensions of financial management. This global shift is in marked contrast to a
situation that existed when the authors of this book were learning finance a few decades ago. At that time, most
professors customarily (and safely, to some extent) ignored international aspects of finance. This mode of
operation has become untenable since then.
2. How is international financial management different from domestic financial management?
Answer: There are three major dimensions that set apart international finance from domestic finance. They
are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
3. Discuss the major trends that have prevailed in international business during the last two decades.
Answer: The 2000s brought a rapid integration of international capital and financial markets. Impetus for
globalized financial markets initially came from the governments of major countries that had begun to
deregulate their foreign exchange and capital markets. The economic
,integration Vand Vglobalization Vthat Vbegan Vin Vthe Veighties Vand Vnineties Vare Vpicking Vup Vspeed Vin Vthe V2000s.
Trade
V V liberalization Vand Veconomic Vintegration Vcontinued Vto Vproceed Vat Vboth Vthe Vregional Vand Vglobal
levels. VDespite
V V sovereign Vdebt Vcrisis Vin VEurope, Vmore VEU Vmember Vcountries Vhave Vadopted Vthe
V common Vcurrency, Vthe Veuro, V that Veffectively Vbecame Vthe Vsecond Vglobal Vcurrency Vafter Vthe VU.S. Vdollar.
In Vthe Vlast Vfew Vyears, Vhowever,
V V economic Vnationalism Vhas Vbeen Vgaining Vsome Vpopularity, Vas
exemplified Vby Vthe VBrexit Vdecision Vof Vthe VUnited
V V Kingdom Vand Vthe Vso-called
―America VFirst‖ Vpolicies Vof Vthe VTrump VAdministration. VTo Vthe Vextent Vthat Veconomic Vnationalism Vis Va
populist
V V response Vto Vthe Vglobal Vfinancial Vcrisis Vand VGreat VRecession, Vit Vmay Vsubside Vas Vthe Vworld
economy Vcontinues Vto
V V recover.
4. How Vis Va Vcountry‘s Veconomic Vwell-being Venhanced Vthrough Vfree Vinternational Vtrade Vin Vgoods Vand
Vservices?
Answer: V According Vto VDavid VRicardo, Vwith Vfree Vinternational Vtrade, Vit Vis Vmutually Vbeneficial Vfor Vtwo
countries
V V to Veach Vspecialize Vin Vthe Vproduction Vof Vthe Vgoods Vthat Vit Vcan Vproduce Vrelatively Vmost
efficiently Vand Vthen Vtrade
V V those Vgoods. V By Vdoing Vso, Vthe Vtwo Vcountries Vcan Vincrease Vtheir Vcombined
production, Vwhich Vallows Vboth
V V countries Vto Vconsume Vmore Vof Vboth Vgoods. VThis Vargument Vremains
valid Veven Vif Va Vcountry Vcan Vproduce Vboth
V V goods Vmore Vefficiently Vin Vabsolute Vterms Vthan Vthe Vother
country. V International Vtrade Vis Vnot Va V‗zero-sum‘ Vgame
V V in Vwhich Vone Vcountry Vbenefits Vat Vthe Vexpense
V of Vanother Vcountry. VRather, Vinternational Vtrade Vcould Vbe Van
‗increasing- Vsum‘ Vgame Vfrom Vwhich Vall Vplayers Vbecome Vwinners.
5. What Vconsiderations Vmight Vlimit Vthe Vextent Vto Vwhich Vthe Vtheory Vof Vcomparative Vadvantage Vis
Vrealistic?
Answer: V The Vtheory Vof Vcomparative Vadvantage Vwas Voriginally Vadvanced Vby Vthe Vnineteenth Vcentury
economist
V V David VRicardo Vas Van Vexplanation Vfor Vwhy Vnations Vtrade Vwith Vone Vanother. VThe Vtheory
V claims Vthat Veconomic V well-being Vis Venhanced Vif Veach Vcountry Vproduces Vwhat Vit Vhas Va Vcomparative
advantage Vin Vproducing Vrelative Vto
V V other Vcountries, Vand Vthen Vtrade Vproducts.
Underlying Vthe Vtheory Vare Vthe Vassumptions Vof Vfree Vtrade Vbetween Vnations Vand Vthat Vthe Vfactors Vof
production
V V (labor, Vtechnological Vknow-how, Vand Vcapital) Vare Vrelatively Vimmobile. V To Vthe Vextent Vthat
V these Vassumptions Vdo V not Vhold, Vthe Vtheory Vof Vcomparative Vadvantage Vmay Vnot Vrealistically Vdescribe
international Vtrade. V In Vaddition,
V V free Vtrade Vproduces Vwinners Vand Vlosers Vand Vif Vthe Vlosers Vare Vnot
V compensated, Vfree Vtrade Vmay Vfaces Vpolitical V opposition Vfrom Vthem.
6. What Vare Vmultinational Vcorporations V(MNCs) Vand Vwhat Veconomic Vroles Vdo Vthey Vplay?
, Answer: V A Vmultinational Vcorporation V(MNC) Vcan Vbe Vdefined Vas Va Vbusiness Vfirm Vincorporated Vin Vone
V country Vthat V has Vproduction Vand Vsales Voperations Vin Vmany Vother Vcountries. VIndeed, Vsome VMNCs Vhave
operations Vin Va Vfew V dozens Vof Vdifferent Vcountries. V V MNCs Vobtain Vfinancing Vfrom Vmajor Vmoney Vcenters
V
around Vthe Vworld Vin Vmany
V V different Vcurrencies Vto Vfinance Vtheir Voperations. VGlobal Voperations Vforce
the Vtreasurer‘s Voffice Vto Vestablish V international Vbanking Vrelationships, Vto Vplace Vshort-term Vfunds Vin
V
V several Vcurrency Vdenominations, Vand Vto V effectively Vmanage Vforeign Vexchange Vrisk. V By Vcircumventing
and Valso Vtaking Vadvantage Vof Vvarious Vmarket
V V imperfections, Vsuch Vas Vbarriers Vto Vtrade Vand Vbarriers Vto
flow Vof Vpeople Vand Vcapital Vacross Vcountries, VMNCs
V V contribute Vto Vgreater Vintegration Vof Vthe Vworld
economy Vand Ving Vmore Vperfect Vfunctioning Vof Vglobal Vmarkets.
V
7. Ross VPerot, Va Vformer VPresidential Vcandidate Vof Vthe VReform VParty, Vwhich Vwas Va Vthird Vpolitical Vparty
in Vthe
V V United VStates, Vhad Vstrongly Vobjected Vto Vthe Vcreation Vof Vthe VNorth VAmerican VTrade VAgreement
(NAFTA), Vwhich
V V nonetheless Vwas Vinaugurated Vin V1994. VPerot Vfeared Vthe Vloss Vof VAmerican Vjobs Vto
Mexico Vwhere Vit Vis Vmuch
V V cheaper Vto Vhire Vworkers. VWhat Vare Vthe Vmerits Vand Vdemerits Vof VPerot‘s
position Von VNAFTA? VConsidering Vthe V recent Veconomic Vdevelopments Vin VNorth VAmerica, Vhow Vwould
V
you Vassess VPerot‘s Vposition Von VNAFTA?
V
Answer: VSince Vthe Vinception Vof VNAFTA, Vmany VAmerican Vcompanies Vindeed Vhave Vinvested Vheavily Vin
Mexico,
V V sometimes Vrelocating Vproduction Vfrom Vthe VUnited VStates Vto VMexico. VAlthough Vthis Vmight
have Vtemporarily
V V caused Vunemployment Vof Vsome VAmerican Vworkers, Vthey Vwere Veventually Vrehired
by Vother Vindustries Voften Vfor
V V higher Vwages. VAt Vthe Vsame Vtime, VMexico Vhas Vbeen Vexperiencing Va
V major Veconomic Vboom. VIt Vseems Vclear Vthat V both VMexico Vand Vthe VU.S. Vhave Vbenefited Vfrom VNAFTA.
Perot‘s Vconcern Vappears Vto Vhave Vbeen Vill Vfounded.
V
8. In V1995, Va Vworking Vgroup Vof VFrench Vchief Vexecutive Vofficers Vwas Vset Vup Vby Vthe VConfederation Vof
V French V Industry V(CNPF) Vand Vthe VFrench VAssociation Vof VPrivate VCompanies V(AFEP) Vto Vstudy Vthe VFrench
V corporate V governance Vstructure. VThe Vgroup Vreported Vthe Vfollowing, Vamong Vother Vthings: V ―The Vboard
of Vdirectors Vshould V not Vsimply Vaim Vat Vmaximizing Vshare Vvalues Vas Vin Vthe VU.K. Vand Vthe VU.S. VRather, Vits
V
V goal Vshould Vbe Vto Vserve Vthe V company, Vwhose Vinterests Vshould Vbe Vclearly Vdistinguished Vfrom Vthose Vof Vits
shareholders, Vemployees, Vcreditors,
V V suppliers Vand Vclients Vbut Vstill Vequated Vwith Vtheir Vgeneral Vcommon
interest, Vwhich Vis Vto Vsafeguard Vthe Vprosperity
V V and Vcontinuity Vof Vthe Vcompany‖. VEvaluate Vthe Vabove
recommendation Vof Vthe Vworking Vgroup.
V
Answer: VThe Vrecommendations Vof Vthe VFrench Vworking Vgroup Vclearly Vshow Vthat Vshareholder Vwealth
V maximization Vis Vnot Va Vuniversally Vaccepted Vgoal Vof Vcorporate Vmanagement, Vespecially
