IF midterm q & a

• Which domestic financial instruments have NOT been modified for use in international financial management?

  ALL
• What cultural aspects are not always understood by MNE management?

  Culture, history, and institutions
• Why must MNEs modify finance theories like cost of capital and capital budgeting?

  Due to foreign complexities
• Relative to MNEs, what is the political risk level of purely domestic firms?

  They tend to have GREATER political risk
• Why do domestic firms tend to use financial derivatives more than MNEs?

  Because they can bear the greater risk
• What is common for MNEs regarding the application of domestic rules in foreign countries?


  It is FALSE that they apply domestic rules
• What are examples of financial instruments modified for international financial management?

  Foreign currency options and futures, interest rate and currency swaps, letters of credit
• Do domestic firms have foreign exchange risk?

  FALSE
• What is one reason a firm becomes multinational?

  To seek markets
• What is NOT a reason why market-seeking firms produce in foreign countries?

  Political safety and small likelihood of government expropriation of assets
• What are proactive investments designed to do?

  Promote and enhance growth and profitability
• What are defensive investments designed to do?

  Deny opportunities to competitors
• What is NOT a reason why raw material seekers extract raw materials in foreign countries?

  ALL
• How can strategic motives for firms in oligopolistic competition be categorized?

  Into proactive and defensive investments
• What is FALSE about defensive measures for firms?

  They are designed to enhance growth and profitability of the firm itself
• What is FALSE about knowledge seekers operating in foreign countries?

  They exploit existing technological expertise
• Are the five strategic motives for becoming an MNE mutually exclusive?

  FALSE
• What is the phase of globalization characterized by imports and exports called?

  INTERNATIONAL TRADE PHASE
• How is the multinational phase of globalization characterized?

  By ownership of assets and enterprises in foreign countries
• What risk does a firm in the International Trade Phase of Globalization bear?

  Direct foreign exchange risk
• What was NOT mentioned as an increase in demands for financial management services due to globalization?

  Foreign consumer method of payment preferences
• What are the twin agency problems limiting financial globalization caused by?

  Corporate insiders and rulers of sovereign states
• What is typically true for a firm in its domestic stage of globalization?

  All financial transactions are in its domestic currency
• What is typically true about a "greenfield" investment abroad?

  It is considered to have a greater foreign presence than a joint venture
• What may prove to be a troublesome barrier to international finance?

  Financial inefficiency caused by influential insiders
• What is FALSE about the process for the development of a MNE?

  It begins with a purely domestic phase, followed by the multinational phase, and topping out with the international trade phase
• What is widely assumed about financial globalization today?

  There are NO LIMITS
• What is seen as an impediment to the growth of financial globalization?

  The growth in the influence and self-enrichment of organizational insiders
• What are the agency costs that act as an impediment to globalization?

  The actions of corporate insiders and rulers of sovereign states
• What is NOT true about fixed exchange rates?

  They are inherently inflationary
• What is NOT an attribute of the "ideal" currency?

  ALL
• What does the "Impossible Trinity" refer to?

  The inability to achieve exchange rate stability, full financial integration, and monetary independence simultaneously
• If a country chooses a pure float exchange rate regime, which two goals can it achieve?

  Full financial integration and monetary independence
• What policies has China chosen that is NOT aimed at stimulating its domestic economy?

  Full financial integration
• What is the case when a currency's value is changed by a government?

  Devaluation and revaluation
• What is FALSE about variable exchange rates?

  They provide stability in international prices for trade
• What happens if exchange rates are fixed?

  Investors and traders would be relatively certain about currency values
• What is FALSE about depreciation in currency values?

  It is when a currency's value is changed by a government
• What is TRUE about high capital mobility in emerging market nations?

  They must choose between a free-floating exchange rate or a hard peg regime
• Why did Argentina abandon its currency board in 2002?

  Due to perceived lack of equality between the Argentine Peso and the U.S. dollar