Exam (elaborations) 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 x@ x@




International Financial Management, 10th Edition EUN Cha
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pter 1-21 x@




CHAPTER 1 x@




GLOBALIZATION AND THE MULTINATIONAL FIRM x@ x@ x@ x@




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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x@ consumption, production, investment, and financing, are highly globalized.
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sential for financial managers to fully understand vital international dimensions of financi
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al management. This global shift is in marked contrast to a situation that existed when
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@ the authors of this book were learning finance a few decades ago. At that time, most
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professors customarily (and safely, to some extent) ignored international aspects of finan
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ce. x @ This mode of operation 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 do
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mestic finance. They are:
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1. foreign exchange and political risks,
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2. market imperfections, and x@ x@



3. expanded opportunity set. x@ x@




3. Discuss the major trends that have prevailed in international business during the l
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ast two decades.
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Answer: The 2000s brought a rapid integration of international capital and financial ma
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rkets. Impetus for globalized financial markets initially came from the governments of m
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ajor countries that had begun to deregulate their foreign exchange and capital markets.
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x @ The economic x@




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,integration and globalization that began in the eighties and nineties are picking up spe
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ed in the 2000s. Trade liberalization and economic integration continued to proceed at
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both the regional and global levels. Despite sovereign debt crisis in Europe, more EU
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member countries have adopted the common currency, the euro, that effectively becam
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e the second global currency after the U.S. dollar. In the last few years, however, eco
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nomic nationalism has been gaining some popularity, as exemplified by the Brexit decisi
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on of the United Kingdom and the so-called
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―America First‖ policies of the Trump Administration. To the extent that economic nation
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alism is a populist response to the global financial crisis and Great Recession, it may
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subside 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 benefic
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ial for two countries to each specialize in the production of the goods that it can prod
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uce relatively most efficiently and then trade those goods. By doing so, the two countr
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ies can increase their combined production, which allows both countries to consume m
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ore of both goods. This argument remains valid even if a country can produce both go
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ods more efficiently in absolute terms than the other country. International trade is not
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a ‗zero-
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sum‘ game in which one country benefits at the expense of another country. Rather, int
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ernational trade could be an ‗increasing-
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x@ 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 adva
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ntage is realistic? x@ x@




Answer: The theory of comparative advantage was originally advanced by the nineteen
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th century economist David Ricardo as an explanation for why nations trade with one
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another. The theory claims that economic well-
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being is enhanced if each country produces what it has a comparative advantage in pr
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oducing 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 f
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actors of production (labor, technological know-
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how, and capital) are relatively immobile. To the extent that these assumptions do not
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@ hold, the theory of comparative advantage may not realistically describe international tr
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ade. In addition, free trade produces winners and losers and if the losers are not co
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, mpensated, 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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