Chapter 1-Multinational Financial Management: Opportunities & Challenges

Question 1

Examples of Globalization Risks

Answer 1

1. Uncertainty about the IMF
2. Large Fiscal Debts held by some of the key trading countries. This leads to problems such as negative interest rates.
3. Ownership & governance vary dramatically worldwide.

Question 2

3 Elements of Value

Answer 2

1. . High-Value Strategic Management
2. Open Marketplace
3. Access to Capital

Question 3

Comparative Advantage

Answer 3

A theory that everyone gains if each nation specializes in the production of those goods that it produces relatively most efficiently and imports those goods that other countries produce relatively most efficiently. The theory supports free trade arguments.

Question 4

Absolute Advantage

Answer 4

The ability of an individual party or country to produce more of a product or service with the same inputs as another party. It is therefore possible for a country to have no absolute advantage in any international trade activity.

Question 5

Tariff

Answer 5

A duty or tax on imports that can be levied as a percentage of cost or as a specific amount per unit of import.

Question 6

Quota

Answer 6

A limit, mandatory or voluntary, set on the import of a product.

Question 7

Terms of Trade

Answer 7

The weighted average exchange ratio between a nation’s export prices and its import prices, used to measure gains from trade. Gains from trade refers to increases in total consumption resulting from production specialization and international trade.

Question 8

Capital Markets

Answer 8

The financial markets of various countries in which various types of long-term debt and/or ownership securities, or claims on those securities, are purchased and sold.

(See Securities, Institutions, and Linkages)

Question 9

Foreign (Currency) Exchange Rate

Answer 9

The price of one country’s currency in terms of another currency, or in terms of a commodity such as gold or silver

Question 10

Bid Rate

Answer 10

The price that a dealer is willing to pay to purchase foreign exchange or a security.

Question 11

Offer Rate

Answer 11

The price of sale or ask as in bid-ask and bid-offer.

Question 12

Quotation

Answer 12

In foreign exchange trading, the pair of prices (bid and ask) at which a dealer is willing to buy or sell foreign exchange

Question 13

Eurocurrency

Answer 13

A currency deposited in a bank located in a country other than the country issuing the currency

Question 14

Convertible Currency

Answer 14

A currency that can be exchanged freely for any other currency without government restrictions.

Question 15

London Interbank Offered Rate (LIBOR)

Answer 15

The deposit rate applicable to interbank loans in London. LIBOR is used as the reference rate for many international interest rate transactions.

Question 16

Working Capital Management

Answer 16

The management of the net working capital requirements (A/R plus inventories less A/P) of the firm.

Question 17

Reasons firms become MNEs

Answer 17

Market seekers produce in foreign markets either to satisfy local demand or to export to markets other than their home market. U.S. automobile firms manufacturing in Europe for local consumption are an example of market-seeking motivation.

Raw material seekers extract raw materials wherever they can be found, either for export or for further processing and sale in the country in which they are found—the host country. Firms in the oil, mining, plantation, and forest industries fall into this category.

Production efficiency seekers produce in countries where one or more of the factors of production are underpriced relative to their productivity. Labor-intensive production of electronic components in Taiwan, Malaysia, and Mexico is an example of this motivation.

Knowledge seekers operate in foreign countries to gain access to technology or managerial expertise. For example, German, Dutch, and Japanese firms have purchased U.S. electronics firms for their technology.

Political safety seekers acquire or establish new operations in countries that are considered unlikely to expropriate or interfere with private enterprise. For example, Hong Kong firms invested heavily in the United States, United Kingdom, Canada, and Australia in anticipation of the consequences of China’s 1997 takeover of the British colony.

Question 18

Corporate Social Responsibility

Answer 18

A form of corporate self-regulation to pursue business in a legal, ethical manner, and consistent with a series of social norms such as environmental and social sustainability.

Question 19

Limitations of Comparative Advantage

Answer 19

1. Government Interference
2. Free flow of Labor between countries
3. Free flow of technology between countries
4. Free flow of capital between countries
5. Economies of scale
6. Differentiated products in an imperfect market