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1、CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRMSUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONSQUESTIONS1.Why is it important to study international financial management?Answer:We are now living in a world where all the major economic functions,i.e.,consumption,production,and investment,are highly g
2、lobalized.It is thus essential forfinancial 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 bookwere learning finance some twenty years ago.At that time,most professors cu
3、stomarily(and safely,to some extent)ignored international aspects of finance.This mode of operationhas become untenable since then.2.How is international financial management different from domestic financialmanagement?Answer:There are three major dimensions that set apart international finance from
4、 domesticfinance.They are:1.foreign exchange and political risks,2.market imperfections,and3.expanded opportunity set.3.Discuss the three major trends that have prevailed in international business during the lasttwo decades.Answer:The 1980s brought a rapid integration of international capital and fi
5、nancial markets.Impetus for globalized financial markets initially came from the governments of majorcountries that had begun to deregulate their foreign exchange and capital markets.Theeconomic integration and globalization that began in the eighties is picking up speed in the1990s via privatizatio
6、n.Privatization is the process by which a country divests itself of theownership and operation of a business venture by turning it over to the free market system.Lastly,trade liberalization and economic integration continued to proceed at both the regionaland global levels.4.How is a countrys econom
7、ic well-being enhanced through free international trade ingoods and services?Answer:According to David Ricardo,with free international trade,it is mutually beneficialfor two countries to each specialize in the production of the goods that it can producerelatively most efficiently and then trade thos
8、e goods.By doing so,the two countries canincrease their combined production,which allows both countries to consume more of bothgoods.This argument remains valid even if a country can produce both goods moreefficiently than the other country.International trade is not a zero-sum game in which onecoun
9、try benefits at the expense of another country.Rather,international trade could be anincreasing-sum game at which all players become winners.5.What considerations might limit the extent to which the theory of comparative advantage isrealistic?Answer:The theory of comparative advantage was originally
10、 advanced by the nineteenthcentury economist David Ricardo as an explanation for why nations trade with one another.The theory claims that economic well-being is enhanced if each countrys citizens producewhat they have a comparative advantage in producing relative to the citizens of othercountries,a
11、nd then trade products.Underlying the theory are the assumptions of free tradebetween nations and that the factors of production(land,buildings,labor,technology,andcapital)are relatively immobile.To the extent that these assumptions do not hold,the theoryof comparative advantage will not realistical
12、ly describe international trade.6.What are multinational corporations(MNCs)and what economic roles do they play?Answer:A multinational corporation(MNC)can be defined as a business firm incorporatedin one country that has production and sales operations in several other countries.Indeed,some MNCs hav
13、e operations in dozens of different countries.MNCs obtain financing frommajor money centers around the world in many different currencies to finance their operations.Global operations force the treasurers office to establish international banking relationships,to place short-term funds in several cu
14、rrency denominations,and to effectively manageforeign exchange risk.7.Mr.Ross Perot,a former Presidential candidate of the Reform Party,which is a thirdpolitical party in the United States,had strongly objected to the creation of the NorthAmerican Trade Agreement(NAFTA),which nonetheless was inaugur
15、ated in 1994,for thefear of losing American jobs to Mexico where it is much cheaper to hire workers.What arethe merits and demerits of Mr.Perots position on NAFTA?Considering the recent economicdevelopments in North America,how would you assess Mr.Perots position on NAFTA?Answer:Since the inception
16、of NAFTA,many American companies indeed have investedheavily in Mexico,sometimes relocating production from the United States to Mexico.Although this might have temporarily caused unemployment of some American workers,theywere eventually rehired by other industries often for higher wages.Currently,t
17、heunemployment rate in the U.S.is quite low by historical standard.At the same time,Mexicohas been experiencing a major economic boom.It seems clear that both Mexico and the U.S.have benefited from NAFTA.Mr.Perots concern appears to have been ill founded.8.In 1995,a working group of French chief exe
18、cutive officers was set up by theConfederation of French Industry(CNPF)and the French Association of Private Companies(AFEP)to study the French corporate governance structure.The group reported the following,among other things“The board of directors should not simply aim at maximizing share valuesas
19、 in the U.K.and the U.S.Rather,its goal should be to serve the company,whose interestsshould be clearly distinguished from those of its shareholders,employees,creditors,suppliersand clients but still equated with their general common interest,which is to safeguard theprosperity and continuity of the
20、 company”.Evaluate the above recommendation of theworking group.Answer:The recommendations of the French working group clearly show that shareholderwealth maximization is not a universally accepted goal of corporate management,especiallyoutside the United States and possibly a few other Anglo-Saxon
21、countries including theUnited Kingdom and Canada.To some extent,this may reflect the fact that share ownership isnot wide spread in most other countries.In France,about 15%of households own shares.9.Emphasizing the importance of voluntary compliance,as opposed to enforcement,in theaftermath of corpo
22、rate scandals,e.g.,Enron and WorldCom,U.S.President George W.Bushstated that while tougher laws might help,ultimately,the ethics of American businessdepends on the conscience of Americas business leaders.Describe your view on thisstatement.Answer:There can be different answers to this question.If bu
23、siness leaders always behavewith a high ethical standard,many of the corporate scandals we have seen lately might nothave happened.Since we cannot fully depend on the ethical behavior on the part of businessleaders,the society should protect itself by adopting the rules/regulations and governancestr
24、ucture that would induce business leaders to behave in the interest of the society at large.10.Suppose you are interested in investing in shares of Nokia Corporation of Finland,whichis a world leader in wireless communication.But before you make investment decision,youwould like to learn about the c
25、ompany.Visit the website of CNN Financial network()and collect information about Nokia,including the recent stock pricehistory and analysts,views of the company.Discuss what you learn about the company.Alsodiscuss how the instantaneous access to information via internet would affect the nature andwo
26、rkings of financial Answer:As students might have learned from visiting the website,information is readilyavailable even for foreign companies like Nokia.Ready access to international informationhelps integrate financial markets,dismantling barriers to international investment andfinancing.Integrati
27、on,however,may help a financial shock in one market to be transmitted toother markets.MINI CASE:NIKES DECISIONNike,a U.S.-based company with a globally recognized brand name,manufacturesathletic shoes in such Asian developing countries as China,Indonesia,and Vietnam usingsubcontractors,and sells the
28、 products in the U.S.and foreign markets.The company has noproduction facilities in the United States.In each of those Asian countries where Nike hasproduction facilities,the rates of unemployment and underemployment are quite high.Thewage rate is very low in those countries by the U.S.standard;hour
29、ly wage rate in themanufacturing sector is less than one dollar in each of those countries,which is comparedwith about$18 in the U.S.In addition,workers in those countries often are operating in poorand unhealthy environments and their rights are not well protected.Understandably,Asianhost countries
30、 are eager to attract foreign investments like Nikes to develop their economiesand raise the living standards of their citizens.Recently,however,Nike came under aworld-wide criticism for its practice of hiring workers for such a low pay,“next to nothing inthe words of critics,and condoning poor work
31、ing conditions in host countries.Evaluate and discuss various ethical as well as economic ramifications of Nikesdecision to invest in those Asian countries.Suggested Solution to Nikes DecisionObviously,Nikes investments in such Asian countries as China,Indonesia,andVietnam were motivated to take adv
32、antage of low labor costs in those countries.While Nikewas criticized for the poor working conditions for its workers,the company has recognizedthe problem and has substantially improved the working environments recently.AlthoughNikes workers get paid very low wages by the Western standard,they prob
33、ably are makingsubstantially more than their local compatriots who are either under-or unemployed.WhileNikes detractors may have valid points,one should not ignore the fact that the company ismaking contributions to the economic welfare of those Asian countries by creating jobopportunities.CHAPTER 1
34、A THEORY OF COMPARATIVE ADVANTAGESUGGESTED SOLUTIONS TO APPENDIX PROBLEMSPROBLEMS1.Country C can produce seven pounds of food or four yards of textiles per unit of input.Compute the opportunity cost of producing food instead of textiles.Similarly,compute theopportunity cost of producing textiles ins
35、tead of food.Solution:The opportunity cost of producing food instead of textiles is one yard of textilesper 7/4=1.75 pounds of food.A pound of food has an opportunity cost of 4/7=.57 yardsof textiles.2.Consider the no-trade input/output situation presented in the following table for CountriesX and Y
36、.Assuming that free trade is allowed,develop a scenario that will benefit thecitizens of both countries.INPUT/OUTPUT WITHOUT TRADECountryX YTotalI.Units of Input(000,000)Food7060Textiles4030IL Output per Unit of Input(lbs or yards)FoodTextiles17552III.Total Output(lbs or yards)(000,000)FoodTextiles2
37、001,190603002601,490IV.Consumption(lbs or yards)(000,000)Food1,1903001,490Textiles200 60 260Solution:Examination of the no-trade input/output table indicates that Country X has anabsolute advantage in the production of food and textiles.Country X can trade off,oneunit of production needed to produce
38、 17 pounds of food for five yards of textiles.Thus,ayard of textiles has an opportunity cost of 17/5=3.40 pounds of food,or a pound of food hasan opportunity cost of 5/17=.29 yards of textiles.Analogously,Country Y has anopportunity cost of 5/2=2.50 pounds of food per yard of textiles,or 2/5=.40 yar
39、ds oftextiles per pound of food.In terms of opportunity cost,it is clear that Country X isrelatively more efficient in producing food and Country Y is relatively more efficient inproducing textiles.Thus,Country X(Y)has a comparative advantage in producing food(textile)is comparison to Country Y(X).W
40、hen there are no restrictions or impediments to free trade the economic-well being ofthe citizens of both countries is enhanced through trade.Suppose that Country X shifts20,000,000 units from the production of textiles to the production of food where it has acomparative advantage and that Country Y
41、 shifts 60,000,000 units from the production offood to the production of textiles where it has a comparative advantage.Total output willnow be(90,000,000 x 17=)1,530,000,000 pounds of food and(20,000,000 x 5=100,000,000)+(90,000,000 x 2=180,000,000)=280,000,000 yards of textiles.Furthersuppose that
42、Country X and Country Y agree on a price of 3.00 pounds of food for one yardof textiles,and that Country X sells Country Y 330,000,000 pounds of food for 110,000,000yards of textiles.Under free trade,the following table shows that the citizens of Country X(Y)have increased their consumption of food
43、by 10,000,000(30,000,000)pounds and textilesby 10,000,000(10,000,000)yards.INPUT/OUTPUT WITH FREE TRADEXCountryYTotalI.Units of Input(000,000)Food 900Textiles 2090IL Output per Unit of Input(lbs or yards)FoodTextiles17552III.Total Output(lbs or yards)(000,000)FoodTextiles1001,53018002801,530IV.Consu
44、mption(lbs or yards)(000,000)Food1,2003301,530Textiles21070280CHAPTER 2 INTERNATIONAL MONETARY SYSTEMSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1.Explain Greshams Law.Answer:Greshams law refers to the phenomenon that bad(abundant)money drives good(scarce)money ou
45、t of circulation.This kind of phenomenon was often observed under thebimetallic standard under which both gold and silver were used as means of payments,withthe exchange rate between the two metals fixed.2.Explain the mechanism which restores the balance of payments equilibrium when it isdisturbed u
46、nder the gold standard.Answer:The adjustment mechanism under the gold standard is referred to as theprice-specie-flow mechanism expounded by David Hume.Under the gold standard,a balanceof payment disequilibrium will be corrected by a counter-flow of gold.Suppose that the U.S.imports more from the U.
47、K.than it exports to the latter.Under the classical gold standard,gold,which is the only means of international payments,will flow from the U.S.to the U.K.As a result,the U.S.(U.K.)will experience a decrease(increase)in money supply.Thismeans that the price level will tend to fall in the U.S.and ris
48、e in the U.K.Consequently,theU.S.products become more competitive in the export market,while U.K.products becomeless competitive.This change will improve U.S.balance of payments and at the same timehurt the U.K.balance of payments,eventually eliminating the initial BOP disequilibrium.3.Suppose that
49、the pound is pegged to gold at 6 pounds per ounce,whereas the franc ispegged to gold at 12 francs per ounce.This,of course,implies that the equilibrium exchangerate should be two francs per pound.If the current market exchange rate is 2.2 francs perpound,how would you take advantage of this situatio
50、n?What would be the effect of shippingcosts?Answer:Suppose that you need to buy 6 pounds using French francs.If you buy 6 poundsdirectly in the foreign exchange market,it will cost you 13.2 francs.Alternatively,you canfirst buy an ounce of gold for 12 francs in France and then ship it to England and