SOLUTION MANUAL
International Financial Management,
9th Edition By Cheol Eun, Bruce G. Resnick,
All Chapter 1 - 21
,TABLE OF CONTENTS
PART ONE: Foundations of International Financial Management
Chapter 1: Globalization and the Multinational Firm
Chapter 2: International Monetary System
Chapter 3: Balance of Payments
Chapter 4: Corporate Governance Around the World
PART TWO: The Foreign Exchange Market, Exchange Rate Determination, and
Currency Derivatives
Chapter 5: The Market for Foreign Exchange
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange
Rates
Chapter 7: Futures and Options on Foreign Exchange
PART THREE: Foreign Exchange Exposure and Management
Chapter 8: Management of Transaction Exposure
Chapter 9: Management of Economic Exposure
Chapter 10: Management of Translation Exposure
PART FOUR: World Financial Markets and Institutions
,Chapter 11: International Banking and Money Market
Chapter 12: International Bond Market
Chapter 13: International Equity Markets
Chapter 14: Interest Rate and Currency Swaps
Chapter 15: International Portfolio Investment
PART FIVE: Financial Management of the Multinational Firm
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
Chapter 17: International Capital Structure and the Cost of Capital
Chapter 18: International Capital Budgeting
Chapter 19: Multinational Cash Management
Chapter 20: International Trade Finance
Chapter 21: International Tax Environment and Transfer Pricing
,CHAPTER 1
GLOBALIZATION AND THE MULTINATIONAL FIRM
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
QUESTIONS
1. Why is it important to study international financial management?
Answer: We are now living in a world where all the major economic functions, such as
consumption, production, investment, and financing, are highly globalized. It is thus essential for
financial managers to fully understand vital international dimensions of financial management. This
global shift is in marked contrast to a situation that existed when the authors of this book were learning
finance a few decades ago. At that time, most professors customarily (and safely, to some extent)
ignored international aspects of finance. This mode of operation has become untenable since then.
2. How is international financial management different from domestic financial management?
Answer: There are three major dimensions that set apart international finance from domestic
finance. They are:
1. foreign exchange and political risks,
2. market imperfections, and
3. expanded opportunity set.
3. Discuss the major trends that have prevailed in international business during the last two
decades.
Answer: The 2000s brought a rapid integration of international capital and financial markets. Impetus
for globalized financial markets initially came from the governments of major countries that had begun
to deregulate their foreign exchange and capital markets. The economic
,integration and globalization that began in the eighties and nineties are picking up speed in the 2000s.
Trade liberalization and economic integration continued to proceed at both the regional and global
levels. Despite sovereign debt crisis in Europe, more EU member countries have adopted the common
currency, the euro, that effectively became the second global currency after the U.S. dollar. In the last
few years, however, economic nationalism has been gaining some popularity, as exemplified by the
Brexit decision of the United Kingdom and the so-called
―America First‖ policies of the Trump Administration. To the extent that economic nationalism is a
populist response to the global financial crisis and Great Recession, it may subside as the world
economy continues to recover.
4. How is a country‘s economic well-being enhanced through free international trade in goods and
services?
Answer: According to David Ricardo, 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. By doing so, the two countries can increase their combined
production, which allows both countries to consume more of both goods. This argument remains valid
even if a country can produce both goods more efficiently in absolute terms than the other country.
International trade is not a ‗zero-sum‘ game in which one country benefits at the expense of another
country. Rather, international trade could be an ‗increasing- sum‘ game from which all players become
winners.
5. What considerations might limit the extent to which the theory of comparative advantage is
realistic?
Answer: The theory of comparative advantage was originally advanced by the nineteenth century
economist David Ricardo as an explanation for why nations trade with one another. The theory claims
that economic well-being is enhanced if each country produces what it has a comparative advantage
in producing relative to other countries, and then trade products.
Underlying the theory are the assumptions of free trade between nations and that the factors of
production (labor, technological know-how, and capital) are relatively immobile. To the extent that
these assumptions do not hold, the theory of comparative advantage may not realistically describe
international trade. In addition, free trade produces winners and losers and if the losers are not
compensated, free trade may faces political opposition from them.
6. What are multinational corporations (MNCs) and what economic roles do they play?
,Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one
country that has production and sales operations in many other countries. Indeed, some MNCs have
operations in a few dozens of different countries. MNCs obtain financing from major money centers
around the world in many different currencies to finance their operations. Global operations force the
treasurer‘s office to establish international banking relationships, to place short-term funds in several
currency denominations, and to effectively manage foreign exchange risk. By circumventing and also
taking advantage of various market imperfections, such as barriers to trade and barriers to flow of
people and capital across countries, MNCs contribute to greater integration of the world economy and
ing more perfect functioning of global markets.
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political party in
the United States, had strongly objected to the creation of the North American Trade Agreement
(NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of American jobs to Mexico
where it is much cheaper to hire workers. What are the merits and demerits of Perot‘s position on
NAFTA? Considering the recent economic developments in North America, how would you assess
Perot‘s position on NAFTA?
Answer: Since the inception of NAFTA, many American companies indeed have invested heavily in
Mexico, sometimes relocating production from the United States to Mexico. Although this might have
temporarily caused unemployment of some American workers, they were eventually rehired by other
industries often for higher wages. At the same time, Mexico has been experiencing a major economic
boom. It seems clear that both Mexico and the U.S. have benefited from NAFTA. Perot‘s concern
appears to have been ill founded.
8. In 1995, a working group of French chief executive officers was set up by the Confederation of
French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the French
corporate governance structure. The group reported the following, among other things: ―The board of
directors should not simply aim at maximizing share values as in the U.K. and the U.S. Rather, its goal
should be to serve the company, whose interests should be clearly distinguished from those of its
shareholders, employees, creditors, suppliers and clients but still equated with their general common
interest, which is to safeguard the prosperity and continuity of the company‖. Evaluate the above
recommendation of the working group.
Answer: The recommendations of the French working group clearly show that shareholder wealth
maximization is not a universally accepted goal of corporate management, especially
,outside the United States and possibly a few other Anglo-Saxon countries including the United Kingdom
and Canada. To some extent, this may reflect the fact that share ownership is not wide spread in most
other countries.
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the
aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President George
W. Bush stated that while tougher laws might help, ―ultimately, the ethics of American business
depends on the conscience of America‘s business leaders.‖ Describe your view on this statement.
Answer: There can be different answers to this question. If business leaders always behave with a
high ethical standard, many of the corporate scandals we have seen lately might not have happened.
Since we cannot fully depend on the ethical behavior on the part of individual business leaders,
the society should protect itself by adopting the rules/regulations and governance structure that would
induce business leaders to behave in the interest of the society at large. But at the same time, we need
to make sure that excessive regulations do not stymy free enterprises, an important engine of
economic growth. It is important to strike the right balance.
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a world
leader in mobile phones, TVs, and home appliances. But before you make investment decision, you
would like to learn about the company. Visit the website of Yahoo (http://finance.yahoo.com) and
collect information about Samsung Electronics, including the recent stock price history and analysts‘
views of the company. Discuss what you learn about the company. Also discuss how the instantaneous
access to information via internet would affect the nature and workings of financial markets.
Answer: As students might have learned from visiting the website, information is readily available even
for foreign companies like Samsung Electronics. Ready access to international information helps
integrate financial markets, dismantling barriers to international investment and financing. Integration,
however, may help a financial shock in one market to be quickly transmitted to other markets.
11. Most companies make corporate decisions to maximize their profits, without taking
into consideration the possibly negative effects of corporate activities on the environments,
thereby
,contributing to climate change. How would you “incentivize” companies to change their behavior in such
a way that they would protect the environments?
Answer: Any measures that can induce self-interested companies to voluntarily take actions that will
help preserve the environments would qualify as answers for this question. Such incentivizing measures
may include government subsidies for production and purchase of electric vehicles, instead of those
using internal combustion engines, supply more “green” energies at lower prices so that companies can
switch from using “brown” energies generated by coals and oil to green energies for their own
interests, promote the presence of green activist investors in the board of directors, etc.
12. One of the major economic consequences of the covid-19 pandemic that started in early 2020 is
the unusually high inflation rates in most countries. In March, 2022, for instance, the annual inflation
rate hits 8.5% in the U.S., the highest level since 1981, and 5.9% in EU, the highest level since the
introduction of the euro in 1999. In your opinion, how did inflation become so high during the covid era
and what can be done to reduce it?
Answer: Inflation became unusually high since early 2020 for the two reasons: global supply chain
disruptions, e.g., factory lockdowns in China, and expansionary monetary and fiscal policies in many
major countries, both related to the covid pandemic, with the Russian invasion of Ukraine in early 2022
exasperating the supply chain disruption, especially in energy and food markets. Inflation can be
brought under control by (i) reducing the aggregate demands that were boosted by near-zero interest
rates and massive fiscal stimulus in many major countries to deal with the negative economic impact of
the pandemic, and (ii) mitigating the supply chain disruptions by onshoring (domestic production), for
example, and also mitigating geopolitical risk around the world by diplomatic negotiations, to the extent
possible.
MINI CASE: NIKE AND SWEATSHOP LABOR
Nike, a company headquartered in Beaverton, Oregon, is a major force in the sports footwear and
fashion industry, with annual sales exceeding $ 30 billions, more than half of which now come from
outside the United States. The company was co-founded in 1964 by Phil Knight, a CPA at Price
Waterhouse, and Bill Bowerman, college track coach, each investing $ 500 to start. The company,
initially called Blue Ribbon Sports, changed its name to Nike in 1971 and adopted the ―Swoosh‖ logo—
recognizable around the world—originally designed by a college student for $35. Nike became highly
successful in designing and marketing mass- appealing products such as the Air Jordan, the best selling
athletic shoe of all time.
, Nike has no production facilities in the United States. Rather, the company manufactures athletic
shoes and garments in such Asian countries as India, Indonesia, and Vietnam using subcontractors, and
sells the products in the U.S. and international markets. In each of those Asian countries where Nike has
production facilities, the rates of unemployment and under- employment are relatively high. The wage
rate is very low in those countries by U.S. standards—the hourly wage rate in the manufacturing sector
is less than $ 2 in each of those countries, compared with about $ 38 in the United States. In addition,
workers in those countries often operate in poor and unhealthy environments and their rights are not
particularly well protected. Understandably, host countries are eager to attract foreign investments like
Nike‘s to develop their economies and raise the living standards of their citizens. Recently, however,
Nike came under worldwide criticism for its practice of hiring workers for such a low rate of pay—
―next to nothing‖ in the words of critics—and overlooking poor working conditions in host countries.
Initially, Nike denied the sweatshop charges and lashed out at critics. But later, the company
began monitoring the labor practice at its overseas factories and grading the factories in order to
improve labor standards. Nike also agreed to random factory inspections by disinterested parties.
Discussion points
1. Do you think the criticism of Nike is fair, considering that the host countries are in dire needs
of creating jobs?
2. What do you think Nike‘s executives might have done differently to prevent the
sensitive charges of sweatshop labor in overseas factories?
3. Do firms need to consider the so-called corporate social responsibilities in making
investment decisions?
Suggested Solution to Nike and Sweatshop Labor
Obviously, Nike‘s investments in such Asian countries as China, Indonesia, and Vietnam were
motivated to take advantage of low labor costs in those countries. While Nike was criticized for the
poor working conditions for its workers, the company has recognized the problem and has
substantially improved the working environments recently. Although Nike‘s workers get paid very low
wages by the Western standard, they probably are making substantially more than their local
compatriots who are either under- or unemployed. While Nike‘s detractors may have valid points, one
should not downplay the fact that the company is making contributions to the economic welfare of
those Asian countries by creating job
, opportunities and also helping earn hard currencies that can be used to fund economic growth of
those countries.
APPENDIX 1A. GAIN FROM TRADE: THE THEORY OF COMPARATIVE ADVANTAGE
PROBLEMS
1. Country C can produce seven pounds of food or four yards of textiles per unit of input.
Compute the opportunity cost of producing food instead of textiles. Similarly, compute the
opportunity cost of producing textiles instead of food.
Solution: The opportunity cost of producing food instead of textiles is one yard of textiles per 7/4 =
1.75 pounds of food. A pound of food has an opportunity cost of 4/7 = .57 yards of textiles.
2. Consider the no-trade input/output situation presented in the following table for Countries X and
Y. Assuming that free trade is allowed, develop a scenario that will benefit the citizens of both
countries.
INPUT/OUTPUT WITHOUT TRADE
Country
X Y Total
I. Units of Input (000,000)
Food 70 60
Textiles 40 30
II. Output per Unit of Input (lbs or yards)
Food 17 5
Textiles 5 2
III. Total Output (lbs or yards) (000,000)
