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,
br br br br br br




10th Edition by Cheol Eun, Bruce Resnick and Tuugi Chuluun
br br br br br br br br br br




br br Chapter 1-21
b r




br

, SOLUTION MANUAL FOR br br




InternationalFinancialManagement,10thEditionEUNChapter1-21 rb rb br br br br br




CHAPTER1 br




GLOBALIZATION AND THE MULTINATIONAL FIRM br br br br




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




QUESTIONS

1. Why is it important to study international financial management?
br br br br br br br br




Answer: We are now living in a world where all the major economic functions, such as consumption,
b r br br br br br br br br br br br br br br br br




b r production, investment, and financing, are highly globalized. It is thus essential for financial managers to
br br br br br br b r br br br b r br br br




br fully b r understand vital international dimensions of financial management. This global shift is in marked
br br br br br br b r br br br br br




br contrast to a br br b r situation that existed when the authors of this book were learning finance a few decades ago. At
br br br br br br br br br br br br br br br b r




br that time, most br br b r professors customarily (and safely, to some extent) ignored international aspects of
b r b r b r b r b r b r b r b r b r b r




b r finance. This mode of b r b r b r b r operation has become untenable since then. br br br br br




2. How is international financial management different from domesticfinancial management?
br br br br br br br br br




Answer: There are three major dimensions that set apart international finance from domestic finance. They
b r br br br br br br br br br br br br br




b r are:
1. foreignexchange and political risks, br br br br




2. market imperfections, and br br




3. expanded opportunity set. br br




3. Discuss the major trends that have prevailed in international business during the last two decades.
br br br br br br br br br br br br br br




Answer: The 2000s brought a rapid integration of international capital and financial markets. Impetus for
b r br br br br br br br br br br br br br




b r globalized financial markets initially came from the governments of major countries that had begun to
br br br br br br br br br br br br br br




b r deregulate their foreign exchange and capital markets. The economic
br br br br br br b r br




br

, integration and globalization that began in the eighties and nineties are picking up speed in the 2000s. Trade
br br br br br br br br br br br br br br br br br




b r liberalization and economic integration continued to proceed at both the regional and global levels. Despite
br br br br br br br br br br br br br br




b r sovereign debt crisis in Europe, more EU member countries have adopted the common currency, the euro,
br br br br br br br br br br br br br br br




b r that effectively became the second global currency after the U.S. dollar. In the last few years, however,
br br br br br br br br br br br br br br br br




b r economic nationalism has been gaining some popularity, as exemplified by the Brexit decision of the United
br br br br br br br br br br br br br br br




b r Kingdom and the so-called br br br




―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a populist
br br br br br br br br br br br br br br br




b r response to the global financial crisis and Great Recession, it may subside as the world economy continues to
br br br br br br br br br br br br br br br br br




b r recover.

4. How is a country‘s economic well-being enhanced through free international trade in goods and services?
br br br br br br br br br br br br br br




Answer: According to David Ricardo, with free international trade, it is mutually beneficial for two countries
b r br br br br br br br br br br br br br br




b r to each specialize in the production of the goods that it can produce relatively most efficiently and then trade
br br br br br br br br br br br br br br br br br br




b r those goods. By doing so, the two countries can increase their combined production, which allows both
br b r br br br br br br br br br br br br br




b r countries to consume more of both goods. This argument remains valid even if a country can produce both
br br br br br br br br br br br br br br br br br




b r goods more efficiently in absolute terms than the other country. International trade is not a ‗zero-sum‘ game
br br br br br br br br br b r br br br br br br




b r in which one country benefits at the expense of another country. Rather, international trade could be an
br br br br br br br br br br br br br br br br




‗increasing- sum‘ game from which all players become winners. br br br br br br br br




5. What considerations might limit the extent to which the theory of comparative advantage is realistic?
br br br br br br br br br br br br br br




Answer: The theory of comparative advantage was originally advanced by the nineteenth century economist
b r br br br br br br br br br br br br




b r David Ricardo as an explanation for why nations trade with one another. The theory claims that economic
br br br br br br br br br br br br br br br br




b r well-being is enhanced if each country produces what it has a comparative advantage in producing relative to
br br br br br br br br br br br br br br br br




b r other countries, and then trade products.
br br br br br




Underlying the theory are the assumptions of free trade between nations and that the factors of production
br br br br br br br br br br br br br br br br




b r (labor, technological know-how, and capital) are relatively immobile. To the extent that these assumptions
br br br br br br br b r br br br br br




br do b r not hold, the theory of comparative advantage may not realistically describe international trade. In
br br br br br br br br br br br br b r




br addition, b r free trade produces winners and losers and if the losers are not compensated, free trade may faces
br br br br br br br br br br br br br br br br




br political opposition from them. b r br br




6. What are multinational corporations (MNCs) and what economic roles do they play?
br br br br br br br br br br br




br

, Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one country that
b r br br br br br br br br br br br br br br br




b r has production and sales operations in many other countries. Indeed, some MNCs have operations in a few
br br br br br br br br br br br br br br br br




b r dozens of different countries. MNCs obtain financing from major money centers around the world in many
br br br br b r br br br br br br br br br br br




b r different currencies to finance their operations. Global operations force the treasurer‘s office to establish
br br br br br br br br br br br br br




b r international banking relationships, to place short-term funds in several currency denominations, and to
br br br br br br br br br br br br




b r effectively manage foreign exchange risk. By circumventing and also taking advantage of various market
br br br br b r br br br br br br br br




b r imperfections, such as barriers to trade and barriers to flow of people and capital across countries, MNCs
br br br br br br br br br br br br br br br br




b r contribute to greater integration of the world economy and ing more perfect functioning of global markets.
br br br br br br br br br br br br br br br




7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political party in the
br br br br br br br br br br br br br br br br br




b r United States, had strongly objected to the creation of the North American Trade Agreement (NAFTA), which
br br br br br br br br br br br br br br br




b r nonetheless was inaugurated in 1994. Perot feared the loss of American jobs to Mexico where it is much
br br br br br br br br br br br br br br br br br




b r cheaper to hire workers. What are the merits and demerits of Perot‘s position on NAFTA? Considering the
br br br br br br br br br br br br br br br br




b r recent economic developments in North America, how would you assess Perot‘s position on NAFTA?
br br br br br br br br br br br br br




Answer: Since the inception of NAFTA, many American companies indeed have invested heavily in Mexico,
br br br br br br br br br br br br br br




b r sometimes relocating production from the United States to Mexico. Although this might have temporarily
br br br br br br br br br br br br br




b r caused unemployment of some American workers, they were eventually rehired by other industries often for
br br br br br br br br br br br br br br




b r higher wages. At the same time, Mexico has been experiencing a major economic boom. It seems clear that
br br br br br br br br br br br br br br br br br




b r both Mexico and the U.S. have benefited from NAFTA. Perot‘s concern appears to have been ill founded.
br br br br br br br br br br br br br br br br




8. In 1995, a working group of French chief executive officers was set up by the Confederation of French
br br br br br br br br br br br br br br br br br




b r Industry (CNPF) and the French Association of Private Companies (AFEP) to study the French corporate
br br br br br br br br br br br br br br




b r governance structure. The group reported the following, among other things: ―The board of directors should
br br br br br br br br br b r br br br br




b r not simply aim at maximizing share values as in the U.K. and the U.S. Rather, its goal should be to serve the
br br br br br br br br br br br br br br br br br br br br br




b r company, whose interests should be clearly distinguished from those of its shareholders, employees, creditors,
br br br br br br br br br br br br br




b r suppliers and clients but still equated with their general common interest, which is to safeguard the prosperity
br br br br br br br br br br br br br br br br




b r and continuity of the company‖. Evaluate the above recommendation of the working group.
br br br br br br br br br br br br




Answer: The recommendations of the French working group clearly show that shareholder wealth
br br br br br br br br br br br br




b r maximization is not a universally accepted goal of corporate management, especially br br br br br br br br br br




br