International Finance

  1. How is international financial management different from domestic financial management?
    • 1) Foreign Exchange Risk & Political Risk
    • 2) Market Imperfections
    • 3) Expanded Opportunity Set
  2. What were the three major trends that have prevailed in international business during the last two decades?
    • 1980s: brought a rapid integration of international capital and financial markets (initially came from the governments of major countries that had begunn to deregulate foreign exchange and capital markets)
    • 1990s: Privatization; the process by which a country divests itself of the ownership 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 regional and global levels
  3. How is a country's economic well-being enhanced through free international trade?
    David Ricardo states that with free international trade, it is mutually beneficial for two countries to each specialize in the production of the goods that it can produce relatively most efficiently and then trade those goods. Allows both countries to consumer more of both goods. It is not a zero-sum game, rather an increasing-sum game.
  4. What considerations might limit the extent to which the theory of comparative advantage is realistic?
    Theory claims that economic well-being is enhanced if each country's citizens produce what they have a comparative advantage in producing relative to the citizens of other countries, and then trade products. Underlying the theory are assumptions of free trade between nations and that the factors of production (land, buildings, labor, technology, and capital) are relatively immobile. **Comparative Advantage will not realistically describe international trade**
  5. What are MNCs?
    A multinational corporation can be defined as a business firm incorporated in one country that has production and sales operations in several other countries (would want to establish international banking relationships, place short-term funds in several currency denominations, and to manage foreign exchange risk)
  6. How would you assess Mr. Perot's position on NAFTA?
    Many companies have invested heavily in Mexico, temporarily causing unemployment in the United States, though were generally hired by other industries and offered higher wages. If the unemployment rate is quite low in the U.S., then Mexico would be experiencing an economic boom.
  7. Is shareholder wealth a universally accepted goal of corporate management?
    No, especially outside the United States and possibly a few other Anglo-Saxon countries including the United Kingdom and Canada.
  8. What is Foreign Exchange Risk?
    Foreign exchange risk is the risk of exchanging money between countries; whichever country has the largest interest rate means that funds are flowing into that country meaning they are experiencing a depreciating currency.
  9. What is Political Risk?
    Political Risk is the risk of the government doing something (possibly through policy) that affects money exchange
  10. What is Comparative Advantage?
    It exists when one party can produce a good/service at a lower opportunity cost than another. The absolute cost of production does not matter, the OPPORTUNITY COST is what does.
  11. What is corporate governance?
    A financial and legal framework for regulating the relationship between a company's management and its shareholders
  12. What is GATT?
    Plays a key role in dismantling barriers to international trade, reduces import tariffs worldwide by an average of 38%, increases the proportion of duty-free products from 20% to 44%, and extends the rules of world trade.
  13. What is WTO?
    WTO was created by GATT, and has more power than GATT. It lowers trade barriers world-wide.
  14. What is privatization?
    It is when a country divests itself of the ownership and operation of a business venture by turning it over to the free market system (essentially a denationalization process)
  15. Where is Corporate Governance more of an issue?
    In countries with emerging and transitional economies such as Korea and Russia, and where legal protection of shareholders is weak or non-existent.
  16. What is denationalization?
    The selling off of state-run enterprises to investors; seen in socialist economies in transition to market economies. It increases the efficiency of enterprise and spurs an increase in cross-border investments.
  17. Approximately how many MNCs are there currently?
    60,000 in the world
  18. Which four companies in the U.S. are part of the top 10 MNCs?
    GE (1), Ford (3), GM (5), and Exxon (10)
  19. What is absolute advantage?
    When one country can produce more output per unit of productive input than another
  20. What are the three parts to the General Theory?
    • 1) Wages are determined in a national labor market
    • 2) Constant Employment is a reasonable approximation
    • 3) The balance of payments is not a problem
  21. How are wages determined in a national labor market?
    Most people do not see a national labor market; wages earned in one industry are largely determined by wages earned in another, and workers earn more by moving to the industry in which they have a comparative advantage
  22. How is constant employment a reasonable approximation?
    Unemployment is constantly a concern of economic policy; non-economists think policies will create jobs, reality is that the Central Banks and Federal Reserve try to stabalize employment around a minimal average.
  23. Why is the balance of payments not a problem?
    Trade imbalances are self correcting; a surplus country will acquire money, leading to rising prices that price its goods out of world markets, while a deficit country will correspondinly find its goods increasingly competitively priced

    **The trade balance is equal to the difference between savings and investments**
  24. What are examples of market imperfections?
    Legal restrictions, excessive transaction and transportation costs, information asymmetry, and discriminatory taxation
  25. What are some effects of Market Imperfections?
    They can play a role in MNC's locating overseas production and restrict the extent to which investors diversify their portfolios.
Card Set
International Finance
Exam One