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 qy qy




International Financial Management, 10th Edition EUN Chaptqy qy qy qy qy qy




er 1-21 qy




CHAPTER 1 qy




GLOBALIZATION AND THE MULTINATIONAL FIRM qy qy qy qy




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 cons
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umption, production, investment, and financing, are highly globalized.
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r financial managers to fully understand vital international dimensions of financial manageme
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nt. This global shift is in marked contrast to a situation that existed when the authors of this
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y book were learning finance a few decades ago. At that time, most professors customarily (a
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nd safely, to some extent) ignored international aspects of finance.
qy qy qy qy qy qy qy qy qy q y This mode of operation
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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 domesti
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c finance. They are:
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1. foreign exchange and political risks,
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2. market imperfections, and qy qy



3. expanded opportunity set. qy qy




3. Discuss the major trends that have prevailed in international business during the last t
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wo 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 count
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ries that had begun to deregulate their foreign exchange and capital markets. The economi
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c


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,integration and globalization that began in the eighties and nineties are picking up speed in
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the 2000s. Trade liberalization and economic integration continued to proceed at both the r
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egional and global levels. Despite sovereign debt crisis in Europe, more EU member countri
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es have adopted the common currency, the euro, that effectively became the second global
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y currency after the U.S. dollar. In the last few years, however, economic nationalism has be
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en gaining some popularity, as exemplified by the Brexit decision of the United Kingdom and
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qy the so-called qy



―America First‖ policies of the Trump Administration. To the extent that economic nationalism
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qy is a populist response to the global financial crisis and Great Recession, it may subside as
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qy 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 relativ
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ely most efficiently and then trade those goods. By doing so, the two countries can increas
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e their combined production, which allows both countries to consume more of both goods.
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This argument remains valid even if a country can produce both goods more efficiently in a
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bsolute 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, internat
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ional 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 c
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entury 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 produc
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ing 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 factor
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s of production (labor, technological know-
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how, and capital) are relatively immobile. To the extent that these assumptions do not hold
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, the theory of comparative advantage may not realistically describe international trade. In
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addition, free trade produces winners and losers and if the losers are not compensated, fre
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e 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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