Mock 1-Questions 1-3

Question 1

In what ways is multinational financial management different from domestic financial management???

Answer 1

Operate in more than one country Deal with different economic systems, cultures, business traditions, law, politics (PESTLE). Different opportunities and risks. Different financial goals and ways of dealing with costs and risk. Different methods of setting up new business

Question 2

​(b)​List the MNC’s key stakeholders. How does each have a stake in the MNC?

Answer 2

Stakeholders narrowly defined include shareholders, debtholders, and management. More broadly defined, stakeholders also would include employees, suppliers, customers, host governments, and residents of host countries. cing taxes through international operation,

Question 3

2.​(a)​Describe five modes of entry into international markets. Which of these modes requires the most resource commitment on the part of the MNC? Which has the greatest risks? Which offers the greatest growth potential?

Answer 3

Entry modes into foreign markets include export-based entry, import-based entry, contract-based entry, investment-based entry, and entry through a strategic alliance. Investment entry requires the most resource commitment and exporting the least. The other side of the coin is that expected returns are often higher with investment-based entry than with exporting (so long as the project is positive-NPV and the MNC can pull it off). The advantages and disadvantages of contract-based entry depend on the particular contract. A strategic alliance refers to any collaborative agreement that is designed to achieve some strategic goal. Strategic alliances often combine elements of other market entry modes.

Question 4

(b)​Define country risk? Define political risk? Define financial risk? Give an example of each different type of country risk.

Answer 4

Country risk refers to the political and financial risks of conducting business in a particular foreign country. Political risk is the risk that a host government will unexpectedly change the rules of the game under which businesses operate, such as through an election outcome. Financial risk refers to unexpected events in a country’s financial, economic, or business life that impact financial prices, such as an oil price shock in an oil-producing country.

Question 5

c)​How can the MNC protect its competitive advantages in the international marketplace?

Answer 5

The text lists several ways to protect competitive advantages such as the firm’s intellectual property rights. The most important of these protections lies in finding the right partner. Other ways that the MNC can protect itself include:
​i)​limit the scope of the technology transfer to include only non-essential parts of the production process,
​ii)​limit the transferability of the technology by contract,
​iii)​limit dependence on any single partner,
​iv)​use only assets near the end of their product life cycle,
​v)​use only assets with limited growth options,
​vi)​trade one technology for another, and
​vii)​remove the threat by acquiring the stock or assets of the foreign partner.

Question 6

3.​(a)​What is operating exposure to currency risk, and why is it important?

Answer 6

A firm has operating exposure to currency risk when the value of its nonmonetary (real) cash flows changes with unexpected changes in currency values.

Question 7

b)​State how each of the following companies are affected by a real depreciation of the domestic currency: i) an importer, ii) an exporter, iii) a diversified multinational corporation competing in globally competitive goods and financial markets.

Answer 7

i) The classic exporter faces costs that are locally determined in segmented markets and revenues that are globally determined in integrated markets, resulting in a positive exposure to the foreign currency.
​ii) The classic importer buys goods in integrated global markets and sell them in segmented local markets, resulting in a negative exposure to foreign currency values. A real depreciation of the foreign currency hurts the exporter and helps the importer.
​iii) Multinational corporations operating in integrated global input and output markets have foreign currency exposures in both revenues and costs. The net exposure of the multinational corporation depends on the balance between its import and export activities.

Question 8

c)​Discuss difficulties in hedging operational exposure.

Answer 8

Operating exposure to currency risk is more difficult to measure than transaction exposure because the values of exposed real assets do not vary one-for-one with exchange rate changes as exposed monetary assets and liabilities do. Weak relations (i.e. low r-squares) between asset and currency values make financial market hedges of operating exposures less than perfect. Operating hedges might be more effective, but they are also more difficult to implement.
Requires a good understanding of macro-economies, domestic and world
Tools involve operational and financial hedges
• Operating hedge: product sourcing , plant location, market selection and promotion
• Financial hedge: foreign borrowing and lending, long-dated forward contracts, currency swaps, roll-over hedge through a series of short-term forward contracts
Why combining:
• Operating hedges are more effective, but costly and difficult to install and to reverse
• Financial hedges are easy to do and to undo, but contractual cash flows less satisfactory
So should be combined to maximize value