Mock 2-Questions 1-3 Flashcards

1
Q

1.​(a)​In what ways is multinational financial management different from domestic financial management? Explain.

A
  • Operate in more than one country
  • Deal with different economic systems, cultures, business traditions law systems, politics, etc.
  • Different opportunities and risks
  • Different financial goals and ways of dealing with costs and risks
  • Different modes of setting up new business
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2
Q

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

A

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.

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3
Q

​(c)​Critically assess the main methods that may be used to forecast exchange rates

A

Market-based forecast:
​Using forward exchange rate
​Using interest rate parity (if no forward market)
Model-based forecast:
​Technical analysis
​Fundamental analysis (econometrics modelling)

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4
Q

2.​(a)​Is international diversification effective in reducing portfolio risk? Why?

A

​International portfolio diversification can reduce portfolio risk in two ways: 1) national stock markets are only loosely linked, and 2) the correlation between exchange rates and national market returns is very low, so domestic-currency returns on foreign investments are further isolated from returns elsewhere in the domestic market.

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5
Q

b)​Are individual stocks exposed to currency risk? Does currency risk affect required returns?

A

Individual stocks (especially firms with international operations) are often exposed to currency risk. Jorion’s and De Santis and Gérard’s studies (presented in the text) suggest that currency risk is not priced in the U.S. stock market, but does appear to be priced in non-U.S. stock markets. In any case, managers will continue to care about currency risk because —as employees of the firm—they cannot diversify their wealth in the same way that outside shareholders can.

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6
Q

c)​What is the value premium? What is the size effect? Do international stocks exhibit these characteristics? Are these factors evidence of market inefficiency?

A

The value premium refers to the tendency of value (high equity book-to-market) stocks to outperform growth (low equity book-to-market) stocks. The size effect refers to the tendency of small stocks to outperform large stocks. Fama and French [1998] found that these factors are present in a study of 13 national stock markets. Size and value premiums are not necessarily evidence of informational inefficiency, as they could reflect systematic (nondiversifiable) risks such as relative financial distress.

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7
Q

3.​(a)​Describe five modes of entry into international markets. Which of these modes requires the most resource commitment on the part of the MNC, and which least? Which offers the greatest growth potential?
(

A

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.

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8
Q

​(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.

A

​a) 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.
​b) 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.
​c) 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.

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9
Q

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

A

​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:
​a)​limit the scope of the technology transfer to include only non-essential parts of the production process,
​b)​limit the transferability of the technology by contract,
​c)​limit dependence on any single partner,
​d)​use only assets near the end of their product life cycle,
​e)​use only assets with limited growth options,
​f)​trade one technology for another, and
​g)​remove the threat by acquiring the stock or assets of the foreign partner.

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