Multinational Financial Management Solution Manual: Complete Chapter-by-Chapter Q&A Guide

ChapterV1VMultinationalVFinancialVManagement:VOpportunitiesVandVChallengesV▪V
1




MULTINATIONALVFINANCIALVMANAGEMENT:VOPPORTUNITI
ESVANDVCHALLENGES

ALLVCHAPTERS



1. GlobalizationVRisksVforVMNEs.VWasVglobalizationVresponsibleVforVtheVslowdownVofVMNEVbu
sinessVduringVtheVfinancialVcrisisVofV2008?



InVtoday’sVglobalVeconomy,VtheVprocessVthatVintegratesVworldVtrade,VlinksVfinancialVmarkets,Va
ndVpropelsVcross-
borderVcapitalVflowsVisVcalledVfinancialVglobalization.VInVourVglobalizedVworld,V€4–
5VtrillionVinVforeignVexchangeVtransactionsVareVmadeVdaily,VandVaroundV€20VtrillionVofVgoodsV
andVservicesVareVtradedVglobally.VAsVmuchVasVfinancialVglobalizationVhasVproducedVmanyVoppo
rtunitiesVforVMNEs,VitVhasValsoVintroducedVnewVthreats.VIrresponsibleVbankVlendingVandVcredit
VexcessesVledVtoVfailuresVofVhighlyVleveragedVbanksVandVlargeVbusinesses.VTheVbustVcreditVand
VsharpVeconomicVdownturnVrapidlyVspreadVfromVtheVUnitedVStatesVandVEuropeVtoVtheVrestVofV
theVworld.VConsequently,VglobalVpurchasingVpowerVandVconsumerVconfidenceVdroppedVroundVt
heVworld,VseverelyVimpactingVsalesVrevenues.VMNEsVwereVespeciallyVhit,VnotVonlyVbecauseVthe
irVglobalVsalesVdropped,VbutValsoVbecauseVmuchVofVtheirVexcessVfundsVwereVinvestedVinVriskyV
assets.


2. MNEsVandVOperationVinVGlobalVMarkets.VWhatVareVtheVfactorsVthatVaffectVtheVdecisi
onsVofVmultinationalVenterprisesVtoVoperateVinVglobalVmarkets?



TheVmainVdeterminingVfactorVforVoperatingVinVaVnewVmarketVisVtheVcomparativeVadvantageVinVte
rmsVofVcostVandVrateVofVproductivityVofVfactorsVofVproduction,VbetterVregulations,VlowerVtaxatio
n,VprotectionistVtradeVbarriers,VstableVforeignVexchange,VandVlargerVmarkets.VOtherVfactorsVthat
VincentivizeVforeignVinvestorsVareVsavingsVonVtransportationVcostsVandVtheVneedVtoVregularlyVad
aptVtoVchangingVlocalVdemand.



3. EurocurrenciesVandVEurocurrencyVMarkets.VWhatVareVtheVmajorVeurocurrencies?VWhatVisVmean
tVbyVaVEurocurrencyVmarket?

, ChapterV1VMultinationalVFinancialVManagement:VOpportunitiesVandVChallengesV▪V
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AVeurocurrencyVisVaVfreelyVtradableVforeignVcurrencyVdepositedVinVaVdomesticVbankVofVaVnationV
thatVisVnotVtheVnativeVcountryVissuingVthisVcurrency.V TheVmainVeurocurrenciesVareVtheVUSVdollar,
VtheVeuro,VtheVBritishVpound,VandVtheVJapaneseVyen.VAVeurocurrencyVmarketVisVaVmoneyVmarke
tVwhereVfinancialVinstitutionsVprovideVbankingVservicesVtoVaVvarietyVofVindividual,Vcorporate,Vand
VsovereignVcustomersVinVeurocurrencies.




4. FragilityVofVtheVGlobalVFinancialVMarketplace.VHowVhasVtheVglobalVfinancialVcrisisVexposedVtheVf
ragilityVofVassetsVandVinstitutionsVofVtheVglobalVsystem?



InVtheVinterlockedVfinancialVglobalVsystem,VtheVfragilityVofVassetsVandVinstitutionsVledVtoVtheVerup
tionVofVtheVglobalVfinancialVsector.VHighVriskVassetsVsuchVasVderivativesVwereVtraded.VWhileViniti
allyVgeneratedVtoVhedgeVagainstVrisksVandVcreateVliquidity,VmanyVofVtheseVderivativesVwereVmult
i-
tieredVandVhighlyVopaque,VmakingVitVdifficultVtoVassessVtheVinherentVrisksVassociatedVwithVthem.
VTheVinstitutional
frameworkVforVderegulationVandVlapseVsupervisionVleftVmanyVfinancialVinstitutionsVandVinstrume
ntsVunregulated.VMoreover,VtheVlackVofVaVglobalVregulatoryVframeworkVleftVinterbankVtransaction
sVhighlyVunsupervised.VAllVofVtheseVfactors—
rangingVfromVirresponsibleVissuanceVandVtradingVinVhighVrisk
assets,VpoorVdomesticVsupervision,VandVtheVlackVofVglobalVregulationVofVinterbankVtransactions—
VexposedVtheVfragilityVofVtheVglobalVfinancialVframeworkVwhenVtheVglobalVfinancialVcrisisVerupted
.



5. MNEsVandVLIBOR.VMostVMNEsVeitherVtakeVloansVinVeurocurrenciesVorVissueVeurobondsVwithVaVf
loatingVcouponVrateVtiedVtoVtheVLIBOR.VExplainVhowVMNEsVwereVaffectedVbyVtheVLIBORVscanda
l.



AVfewVlargeVbanksVwereVfinedVandVpenalizedVforVriggingVtheVbenchmarkVLIBORVrate.VWhileVlarge
VbanksVborrowedVfundsV(asVwasVtheVcaseVduringVtheVglobalVfinancialVcrisis),VtheyVmadeVtheirVqu
otesVbelowVtheVfairVmarketVrate.VRegulatorsVoftenVassumedVthatVbanksVwereValsoVtryingVtoVben
efitVtheirVcorporateVcustomers,VallowingVMNEsVtoVissueVnewVeurobondsVatVlowerVrates,VhenceVs
ubstantiallyVreducingVtheVpurchasingVpowerVofVthoseVholdingVtheirVbonds.



6. Post-
LIBORVScandal.VWhyVdoVyouVthinkVtheVUKVgovernmentVhasVresolvedVagainstVtheVtotalVeliminatio
nVofVLIBORVbenchmarksVafterVtheVscandal?



TheVLondonVInterbankVOfferedVRateV(LIBOR)VisVwidelyVusedVasVaVbenchmarkVinterestVrateVforVhu
ndredsVofVbillionsVofVdollarsVinVfinancialVcontracts,VcorporateVloans,VandVadjustableVrateVhomeV

, ChapterV1VMultinationalVFinancialVManagement:VOpportunitiesVandVChallengesV▪V
mortgagesVandV3consumerVloans.VInV2012,VtheVLIBORVscandalVwasVexposed,VrevealingVcollusionVb
etweenVand
inaccurateVinterestVrateVquotesVbyVaVdozenVlargeVBritishVbanks,VsomeVofVwhichVfraudulentlyVreported

, ChapterV1VMultinationalVFinancialVManagement:VOpportunitiesVandVChallengesV▪V
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theirVshort-
termVborrowingVcostsVsoVasVtoVprofitVfromVdeals.VFollowingVtheVLIBORVscandal,VmanyVhaveVcall
edVforVtheVtotalVeliminationVofVLIBOR.VHowever,VasVitVremainsVtheVoneVandVonlyVpervasiveVinte
restVrateVbenchmark,VtheVBritishVgovernmentVdecidedVagainstVabandoningVitVandVresolvedVtoVt
ake
measuresVtoVsaveVandVreformVit.VTheVnumberVofVLIBORVquotesVwouldVdropVfromV150VtoVtheV
20VmostVimportantVones.VAmongVtheVcurrenciesVtoVbeVphasedVoutVareVtheVAustralianVdollar,V
CanadianVdollar,
NewVZealandVdollar,VDanishVkroner,VandVSwedishVkroner.VMoreover,VfourVofVtheVlonger-
termVmaturitiesVwouldVbeVeliminated.VAdditionally,VallVreportingVbanksVareVrequiredVtoVsubmitVd
ocumentationVprovingVtheVsourcesVofVtheVratesVtheyVareVquoting.VHowever,VtheVcaveatVisVthatV
manyVofVtheVratesVwould
remainVunsupportedVbyVactualVinterbankVtransactions,VraisingVdoubtsVaboutVtheVaccuracyVofVlo
nger-VtermVLIBORVquotes.



7. LimitationsVofVComparativeVAdvantage.VKeyVtoVunderstandingVmostVtheoriesVisVwhatVtheyVsa
yVandVwhatVtheyVdon’t.VNameVfourVorVfiveVkeyVlimitationsVtoVtheVtheoryVofVcomparativeVad
vantage.



AlthoughVinternationalVtradeVmightVhaveVapproachedVtheVcomparativeVadvantageVmodelVdurin
gVtheVnineteenthVcentury,VitVcertainlyVdoesVnotVtoday,VforVtheVfollowingVreasons:



▪ CountriesVdoVnotVappearVtoVspecializeVonlyVinVthoseVproductsVthatVcouldVbeVmostVefficie
ntlyVproducedVbyVthatVcountry’sVparticularVfactorsVofVproduction.VInstead,VgovernmentsVin
terfereVwithVcomparativeVadvantageVforVaVvarietyVofVeconomicVandVpoliticalVreasons,Vsuc
hVasVtoVachieveVfullVemployment,VeconomicVdevelopment,VnationalVself-
sufficiencyVinVdefense-
relatedVindustries,VandVprotectionVofVanVagriculturalVsector’sVwayVofVlife.VGovernmentVint
erferenceVtakesVtheVformVofVtariffs,Vquotas,VandVotherVnon-tariffVrestrictions.


▪ AtVleastVtwoVofVtheVfactorsVofVproduction,VcapitalVandVtechnology,VnowVflowVdirectlyVand
VeasilyVbetweenVcountries,VratherVthanVonlyVindirectlyVthroughVtradedVgoodsVandVservices.V
ThisVdirectVflowVoccursVbetweenVrelatedVsubsidiariesVandVaffiliatesVofVmultinationalVfirms,
VasVwellVasVbetweenVunrelatedVfirmsVviaVloansVandVlicenseVandVmanagementVcontracts.VE
venVlaborVflowsVbetweenVcountries,VsuchVasVimmigrantsVintoVtheVUnitedVStatesV(legalVand
Villegal),VimmigrantsVwithinVtheVEuropeanVUnionVandVotherVunions.



▪ ModernVfactorsVofVproductionVareVmoreVnumerousVthanVinVthisVsimpleVmodel.VFactorsVcons
ideredVinVtheVlocationVofVproductionVfacilitiesVworldwideVincludeVlocalVandVmanagerialVskil
ls,VaVdependableVlegalVstructureVforVsettlingVcontractVdisputes,VresearchVandVdevelopmentVc
ompetence,VeducationalVlevelsVofVavailableVworkers,VenergyVresources,VconsumerVdemandVf
orVbrandVnameVgoods,VmineralVandVrawVmaterialVavailability,VaccessVtoVcapital,VtaxVdiffere
ntials,VsupportingVinfrastructureV(roads,Vports,VcommunicationVfacilities),VandVpossiblyVother
s.