B6-3 Flashcards
A U.S. parent company is reviewing the cash flows from its international subsidiaries. In addition to exchange rate risk, which of the following items would be a primary consideration in the company’s cash flow analysis?
a.
Foreign trade deficit.
b.
Default risk premium.
c.
Repatriation restrictions.
d.
American depository receipts.
Choice “c” is correct. Repatriation restrictions exist when a company invests money in a foreign company but is restricted from bringing that money back to its home country. These restrictions would affect the cash inflows expected from the investment.
Choice “d” is incorrect. American depository receipts (ADRs) are securities of non-U.S. companies that trade in U.S. financial markets. Because they trade like regular shares of stock on U.S. exchanges and are denominated in U.S. dollars, they carry lower levels of risk than direct investments in foreign entities.
Choice “b” is incorrect. The default risk premium is the additional return that a lender requires from a borrower to compensate for the risk that the borrower may not be able to make interest or principal payments. This exists in most lending arrangements and is not specific to international transactions.
Choice “a” is incorrect. A foreign trade deficit is relevant at a macro level and occurs when imports exceed exports.
Each of the following is an effect from opening markets to foreign investment, except:
a.
A change in the volatility of emerging stock market returns.
b.
A decrease in local firms’ cost of capital.
c.
An increase in the correlation of emerging stock markets with world markets.
d.
A decrease in investment growth rates.
Choice “d” is correct. Opening markets to foreign investment is encompassed within globalization, which is the distribution of industrial and service activities across many nations. Investment growth rates will likely increase (rather than decrease) through globalization, as there are more opportunities for investment and growth.
Choice “c” is incorrect. Emerging markets will become more correlated (integrated) with world markets as globalization increases.
Choice “a” is incorrect. Emerging markets on their own tend to be highly volatile, but integration with world markets will help to reduce that volatility.
Choice “b” is incorrect. Local firms will likely see a decrease in their cost of capital because of an increase in growth and demand.
A massive earthquake and tsunami seriously damaged the productive capabilities of auto manufacturers in Japan. As a result, workers at U.S. parts manufacturing firms dedicated to supplying the Japanese manufacturers are furloughed because the parts produced in the U.S. plants are temporarily unneeded. The negative impact of the Japanese earthquake and tsunami on these U.S. parts manufacturers is best described as:
a.
Global sourcing complications.
b.
Transaction risk.
c.
Economic risk.
d.
A shift in the economic balance of power.
Choice “a” is correct. Global sourcing is the use of a worldwide supply chain. The reduced production in U.S. factories, as a result of a natural disaster in Japan, is an example of the complications that come from global sourcing.
Choice “b” is incorrect. Transaction risk is the risk that the settlement of a specific transaction in a foreign currency will result in a translation loss.
Choice “c” is incorrect. Economic risk is the general risk that fluctuations in exchange rates could have a negative impact on a company that either consistently sells to foreign customers or consistently buys from foreign vendors.
Choice “d” is incorrect. Shifts in the economic balance of power relate to the shared and changing ability of countries to impact the worldwide economy.
The world’s emerging nations are frequently associated with the leadership of four economies whose overall economic activity represents an increasing component of the world’s GDP and a gradual shift in the economic balance of power. These nations are generally comprised of all but the following:
a.
Indonesia.
b.
Russia.
c.
China.
d.
Brazil.
Choice “a” is correct. The emerging nations most frequently associated with the shift in the economic balance of power are the BRIC nations which include Brazil, Russia, India and China, not Indonesia.
Choice “d” is incorrect. The shift in the economic balance of power is normally associated with the BRIC nations which include Brazil.
Choice “b” is incorrect. The shift in the economic balance of power is normally associated with the BRIC nations which include Russia.
Choice “c” is incorrect. The shift in the economic balance of power is normally associated with the BRIC nations which include China.
The United States has been the world’s sole economic and military superpower. The concentration of power in one country is referred to as:
a.
Unilateral.
b.
Unipolar.
c.
Multipolar.
d.
Multilateral.
Choice “b” is correct. Power concentrated in a single nation is referred to as a unipolar distribution of power.
Choice “a” is incorrect. Action taken by a single nation acting on its own is referred to as unilateral. The distribution of power is a separate issue.
Choice “c” is incorrect. Power distributed amongst multiple nations refers to a multipolar distribution of power.
Choice “d” is incorrect. Multilateral refers to power that is not only distributed but shared cooperatively among nations.
Securing cooperation amongst emerging nations to limit the emissions of greenhouse gasses can be made more difficult because of:
a.
Trade deficits.
b.
Lack of genuine functional interdependence.
c.
Shifts in the economic balance of power.
d.
Lack of genuine systemic interdependence.
Choice “b” is correct. The failure of developed nations to fully engage emerging nations within worldwide institutions represents a lack of functional interdependence. Compliance with the requirements of worldwide rule-making bodies is largely dependent upon broad participation among all nations in those institutions. Without genuine participation, emerging nations may feel the pressure to circumvent pollution rules to catch up with the industrialized nations. While the impact of greenhouse emissions is an example of systemic interdependence, cooperation amongst nations to control those emissions is a demonstration of effective functional interdependence.
Choice “d” is incorrect. Systemic interdependence refers to the global warming and nuclear proliferation issues that face all nations.
Choice “a” is incorrect. Trade deficits may undermine the credibility of the world’s developed nations but they are not as directly related to international cooperation as genuine functional interdependence.
Choice “c” is incorrect. The shift in economic balance of power creates the demand for greater genuine functional interdependence but does not inhibit international cooperation.
Global companies that deal with the political and financial risks of conducting business in a particular foreign location face which of the following types of risk?
a.
Principal risk.
b.
Commodity price risk.
c.
Interest rate risk.
d.
Country risk.
Choice “d” is correct. Country risk encompasses the political risk, economic risk, transfer risk, sovereign risk, and exchange rate risk associated with engaging in business with foreign countries.
Choice “a” is incorrect. Principal risk relates to the risk of losing an investment (money).
Choice “c” is incorrect. Interest rate risk relates to the fluctuation in value of an investment as a result of changes in interest rates.
Choice “b” is incorrect. Commodity price risk relates to market values and future cash inflows that are affected by fluctuations in commodity prices.
Globalization is frequently associated with comparative advantage and:
a.
Elimination of tariffs.
b.
Maintenance of global economic balance of power.
c.
Increased specialization.
d.
Decreased specialization.
Choice “c” is correct. A global economy with increased economies of scale will likely result in increased specialization in individual economies.
Choice “d” is incorrect. A global economy will likely promote increased economies of scale and increased, not decreased, specialization.
Choice “b” is incorrect. Globalization put economic activity between nations in play and will likely result in shifts rather than maintenance of the economic balance of power.
Choice “a” is incorrect. Globalization does not result in elimination of tariffs. Globalization and competition may even motivate governments to adopt protective barriers such as tariffs to protect local economies.
The concept of a global economic balance of power anticipates:
a.
Exchange rates are self-regulating.
b.
Trade balances are self-regulating.
c.
A distribution of power and influence that ensures that no one nation or group of nations will dominate or interfere with the activities of others.
d.
The industrialized nations of the G6 will always lead the globe.
Choice “c” is correct. The concept of balance of power anticipates that no one nation will dominate or interfere with the activities of others.
Choice “a” is incorrect. Self regulation of exchange rates through supply and demand for currency contributes to maintaining economic balance of power, however means of exchange do not require floating exchange rates.
Choice “d” is incorrect. The concept of a global balance of power does not anticipate consistent dominance by any one nation or group of nations.
Choice “b” is incorrect. Self regulation of trade balances (net imports and net exports) contributes to a global economic balance of power, however trade balances need not entirely self regulate to ensure the balance of power.
Increased globalization is made possible by each of the listed factors, except:
a.
Technological advancements including improved communications.
b.
Regulation of currency values through the International Monetary Fund.
c.
Reduced transportation costs.
d.
Deregulation of international financial markets.
Choice “b” is correct. The IMF does not regulate currency values. IMF activities are designed to stabilize exchange rates but it is not empowered to regulate currency values.
Choice “c” is incorrect. Reduced transportation costs facilitate exports and increase globalization.
Choice “a” is incorrect. Technological advancements and improved communications facilitate worldwide trade and promote globalization.
Choice “d” is incorrect. Deregulation of international financial markets is widely regarded as contributing to increased globalization.
Globalization is often measured using the following statistic:
a.
World trade growth as a percentage of GDP.
b.
Shifts in global supply and demand curves.
c.
Exports as a percentage of imports.
d.
Exchange rate velocity.
Choice “a” is correct. Globalization represents the increased dispersion and integration of the world’s economies. Globalization is often objectively measured as the growth in world trade as a percentage of GDP.
Choice “d” is incorrect. Exchange rate velocity is not used to measure globalization.
Choice “c” is incorrect. Exports as a percentage of imports for a particular country will not provide a measure of globalization.
Choice “b” is incorrect. Shifts in global supply or demand could come as a result of domestic or international activity and are not used to measure globalization.
NAFTA offers trading partners operating within its boundaries reductions in tariffs on products in exchange for compliance with limits on imported labor and materials used in the manufacture of those products. This practice is also known as a:
a.
International rebate.
b.
Sourcing requirement.
c.
Foreign trade zone.
d.
Value added tax.
Choice “b” is correct. Sourcing requirements generally refer to content or value added limits on the percentage of labor or materials used in imported products. Compliance with limits may result in tariff reductions.
Choice “c” is incorrect. A foreign trade zone contemplates a physical location in which tariffs are waived on imported products until they leave the zone. Foreign trade zones anticipate delay rather than reductions in tariffs.
Choice “d” is incorrect. A value added tax is an incremental tax, not a reduction in tariffs.
Choice “a” is incorrect. An international rebate is not a tariff reduction practice.
