Eun & Resnick 4e
CHAPTER 1 Globalization and the Multinational Firm
Questions in the test bank follow the order of the chapter outline:
What’s Special about International Finance?
Foreign Exchange and Political Risks
Expanded Opportunity Set
Goals for International Financial
Globalization of the World Economy:
Emergence of Globalized Financial Markets
Emergence of the Euro as a Global Currency
Trade Liberalization and Economic Integration
MINI CASE: Nike and Sweatshop Labor
APPENDIX 1A: Gains from Trade: The Theory of
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Answer: a. see page 4
5) Japan has experienced large trade surpluses. Japanese investors have responded to this by
a) Liquidating their positions in stocks to buy dollar denominated bonds
b) Investing heavily in U.S. and other foreign financial markets
c) Lobbying the U.S. government to depreciate its currency
d) Lobbying the Japanese government to allow the yen to appreciate
Answer: b - p. 4
6) Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm’s assets paying only €80,000 in compensation. This is an example of
a) Exchange rate risk
b) Political risk
c) Market imperfections
d) None of the above, since $100,000 = €80,000×$1.25/€1.00
Answer: b) political risk—the government is only giving you back your initial investment, if this was a good investment it should have been worth more than $100,000 a year later. For example if your cost of capital was 8% it should have been worth $108,000.
7) Suppose that Great Britain is a major export market for your firm, a U.S. based MNC. If the British pound depreciates against the U.S. dollar,
a) Your firm will be able to charge more in dollar terms while keeping pound prices stable.
b) Your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise.
c) To protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.
d) b) and c) are both correct.
Answer: b) and c) are both correct. See page 5.
8) Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example of
a) Information asymmetry
b) Excessive transactions costs
c) Racial discrimination
d) A market imperfection
Answer: d) see page 6.
9) When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,
a) they trade one market imperfection, information asymmetry, for another, exchange rate risk.
b) they benefit from an expanded opportunity set.
c) They should not bother to read or to understand the prospectus, since its probably written in a foreign language
d) They should invest only in dollars or euros.
Answer: b see page 8.
10) Nestlé, a well-known Swiss corporation,
a) Has been a paragon of virtue in its opposition to all forms of political risk.
b) At one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, the total market value of the firm fell.
c) At one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to Swiss shareholders.
d) None of...