Question 1

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)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,and 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.

Accepted Answer

When the British pound depreciates against the U.S. dollar, it means that it takes more pounds to buy the same amount of goods priced in dollars. If a U.S.-based firm wants to maintain its market share in the UK, it may need to reduce its prices in dollar terms to keep the price the same in pounds, otherwise, its products could become too expensive for British consumers, potentially pricing the firm out of the market. This scenario combines the effects described in options B and C.

Question 2

Although the world economy is much more integrated today than was the case 10 or 20 years ago,a variety of barriers still hamper free movements of people,goods,services,and capital across national boundaries.These barriers include
A)legal restrictions.
B)excessive transportation costs.
C)information asymmetry.
D)all of the options

Accepted Answer

All of the options listed contribute to barriers that hinder free movements of people, goods, services, and capital across national boundaries. Legal restrictions can include quotas, tariffs, and protectionist policies that limit trade and investment. Excessive transportation costs can make it difficult to transport goods and services across borders, while information asymmetry can create uncertainties that discourage investment and trade. Therefore, all of these factors must be addressed to achieve greater economic integration and reduce barriers to global trade and investment.

Question 3

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 options,since $100,000 = €80,000 × $1.25/€1.00.

Accepted Answer

This is an example of political risk because the expropriation by the Italian government resulted in a loss for the firm. Even though the exchange rate did not change, the firm still suffered a financial loss due to government action.

Question 4

Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2.One year later,the stock rises to £60.You are happy with your 20 percent return on the stock,but when you sell the stock and exchange your £60 for dollars,you only get $45 since the pound has fallen to £1 = $0.75.This loss of value is an example of
A)exchange rate risk.
B)political risk.
C)market imperfections.
D)weakness in the dollar.

Accepted Answer

This loss of value is due to the fluctuations in the exchange rate between pounds and dollars, which is commonly known as exchange rate risk.

Question 5

Production of goods and services has become globalized to a large extent as a result of
A)natural resources being depleted in one country after another.
B)skilled labor being highly mobile.
C)multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher.
D)common tastes worldwide for the same goods and services.

Accepted Answer

Multinational corporations have been the main drivers of globalization of production, seeking out lower costs and higher profits by sourcing inputs and locating production in different countries. This has resulted in a worldwide system of production where goods and services are produced and traded internationally. Natural resources being depleted or common tastes for goods and services are not the main reasons for globalization of production, although they may have played a role in some cases. Skilled labor being highly mobile is also a factor, but it is not sufficient to explain the extent of globalization of production.

Question 6

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 it's probably written in a foreign language.
D)they should invest only in dollars or euros.

Accepted Answer

Investing internationally can provide investors with a larger pool of investment opportunities, which can help to diversify their portfolio and potentially increase returns. While there is exchange rate risk, this can be managed through strategies such as hedging or investing in mutual funds or exchange-traded funds that track international markets. It is important for investors to carefully research and understand the prospectus, even if it is written in a foreign language, in order to make informed investment decisions. It is also not necessary to invest only in dollars or euros, as there are many other currencies and investment options available globally.

Question 7

The goal of shareholder wealth maximization
A)is not appropriate for non-U.S.business firms.
B)means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially.
C)is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.
D)is in conflict with the privatization process taking place in third-world countries.

Accepted Answer

Shareholder wealth maximization means that the primary objective of a firm is to increase the financial well-being of its shareholders. This objective is applicable to business firms worldwide and is considered the ultimate objective of a firm's decision-making process. Other objectives, such as customer satisfaction and social responsibility, are considered secondary to the goal of shareholder wealth maximization.

Question 8

Suppose that you are a U.S.producer of a commodity good competing with foreign producers.Your inputs of production are priced in dollars and you sell your output in dollars.If the U.S.currency depreciates against the currencies of our trading partners,
A)your competitive position is likely improved.
B)your competitive position is likely worsened.
C)your competitive position is unchanged.
D)none of the options

Accepted Answer

If the U.S. currency depreciates, it means that it takes more dollars to purchase goods in other currencies. This makes domestically produced goods relatively cheaper compared to foreign goods, which enhances the competitiveness of domestic producers. Therefore, A is the correct answer.

Question 9

What major dimension sets apart international finance from domestic finance?
A)Foreign exchange and political risks
B)Market imperfections
C)Expanded opportunity set
D)all of the options

Accepted Answer

International finance involves various complexities due to the involvement of foreign exchange rates and political risks. The market imperfections and the expanded opportunity set further add to the challenges of international finance. Thus, all the options mentioned in the question set apart international finance from domestic finance.

Question 10

An example of a political risk is
A)expropriation of assets.
B)adverse change in tax rules.
C)the opposition party being elected.
D)both the expropriation of assets and adverse changes in tax rules are correct.

Accepted Answer

Expropriation of assets and adverse changes in tax rules are both examples of political risk. Expropriation of assets occurs when a government seizes or nationalizes property or assets belonging to foreign investors. Adverse changes in tax rules can result in increased tax liabilities, which can significantly impact a company's financial performance. The opposition party being elected is not necessarily a political risk but rather a normal part of democratic processes.

Question 11

Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso appreciates drastically against the U.S.dollar.This means
A)your company's products can be priced out of the Mexican market,as the peso price of American imports will rise following the peso's fall.
B)your firm will be able to charge more in dollar terms while keeping peso prices stable.
C)your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports.
D)your firm will be able to charge more in dollar terms while keeping peso prices stable and your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports.

Accepted Answer

The appreciation of the Mexican peso against the U.S. dollar means that the peso price of American imports will fall, making them cheaper for Mexican consumers. This will allow your firm to charge more in dollar terms while keeping peso prices stable, and your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports.

Question 12

Recently,financial markets have become highly integrated.This development
A)allows investors to diversify their portfolios internationally.
B)allows minority investors to buy and sell stocks.
C)has increased the cost of capital for firms.
D)none of the options

Accepted Answer

Financial market integration allows investors to diversify their portfolios internationally by providing access to a broader range of investment options. This has led to greater investment efficiency, as investors can now allocate their investment funds to a wider range of assets that offer higher returns and lower risks.

Question 13

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 domestic shareholders.
D)none of the options

Accepted Answer

Nestlé relaxed restrictions on foreign ownership of its stock, which led to a transfer of wealth from foreign shareholders to domestic shareholders.

Question 14

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.

Accepted Answer

The barrier to the free movement of labor due to government restrictions on crossing borders illegally is an example of a market imperfection. Market imperfections are factors that hinder the efficient functioning of the market, and in this case, the restriction affects the labor market by limiting the ability of workers to freely move and work where they might be most needed or where they could achieve higher productivity.

Question 15

Undoubtedly,we are now living in a world where all the major economic functions-consumption,production,and investment-
A)are still inherently local.
B)are still regional in nature.
C)are slowly becoming globalized.
D)are highly globalized.

Accepted Answer

The statement suggests that the economic functions of consumption, production, and investment are now highly globalized. This means that businesses and individuals operate in a global economy where goods and services are produced and consumed globally, and investments are made across borders. The interconnectedness of markets, technological advances, and increased competition have all contributed to the globalization of economic functions.

Question 16

The Japanese automobile company Honda decided to establish production facilities in Ohio,mainly to
A)circumvent trade barriers.
B)reduce transportation costs.
C)reduce transactions costs.
D)all of the options

Accepted Answer

The answer of The Japanese automobile company Honda decided to...

Question 17

Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments.Examples of these innovative instruments include
A)currency futures and options,foreign stock index futures and options.
B)multicurrency bonds.
C)international mutual funds,country funds,exchange traded funds.
D)all of the options

Accepted Answer

All of the options are correct as they all represent innovative financial instruments that were introduced as a result of deregulation and increased competition in financial markets. Currency futures and options, foreign stock index futures and options, multicurrency bonds, international mutual funds, country funds, and exchange-traded funds are all examples of innovations that have emerged in this environment.

Question 18

Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S.dollar,as it did in December 1994.This means that
A)your company's products can be priced out of the Mexican market,as the peso price of American imports will rise following the peso's fall.
B)your firm will be able to charge more in dollar terms while keeping peso prices stable.
C)your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
D)none of the options

Accepted Answer

If the Mexican peso depreciates drastically against the U.S. dollar, it means that American imports will become more expensive in peso terms. This will lead to pricing your company's products out of the Mexican market as the peso price of American imports will rise following the peso's fall. Therefore, choice A is the correct answer. B is incorrect because the firm cannot keep peso prices stable. C is also incorrect because Mexican imports will become cheaper, and domestic competitors will face increased price competition from Mexican imports.

Question 19

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.

Accepted Answer

Japanese investors have invested heavily in U.S. and other foreign financial markets as a response to large trade surpluses. This investment helps to diversify their portfolios, mitigate risk, and seek higher returns in foreign markets.

Question 20

The Nestlé Corporation,a well-known Swiss MNC,used to issue two different classes of common stock,bearer shares and registered shares,and foreigners were allowed to hold only
A)registered shares.
B)bearer shares.
C)voting shares.
D)convertible shares.

Accepted Answer

Foreigners were allowed to hold bearer shares, which are typically easier to transfer and do not require registration of ownership.

Quiz 2: Globalization and the Multinational Firm

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,

Although the world economy is much more integrated today than was the case 10 or 20 years ago,a variety of barriers still hamper free movements of people,goods,services,and capital across national boundaries.These barriers include

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

Production of goods and services has become globalized to a large extent as a result of

When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,

The goal of shareholder wealth maximization

Suppose that you are a U.S.producer of a commodity good competing with foreign producers.Your inputs of production are priced in dollars and you sell your output in dollars.If the U.S.currency depreciates against the currencies of our trading partners,

What major dimension sets apart international finance from domestic finance?

An example of a political risk is

Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso appreciates drastically against the U.S.dollar.This means

Recently,financial markets have become highly integrated.This development

Nestlé,a well-known Swiss corporation,

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

Undoubtedly,we are now living in a world where all the major economic functions-consumption,production,and investment-

The Japanese automobile company Honda decided to establish production facilities in Ohio,mainly to

Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments.Examples of these innovative instruments include

Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S.dollar,as it did in December 1994.This means that

Japan has experienced large trade surpluses.Japanese investors have responded to this by

The Nestlé Corporation,a well-known Swiss MNC,used to issue two different classes of common stock,bearer shares and registered shares,and foreigners were allowed to hold only