CHAPTER 1
Introduction
EASY (factual)
1.1 Historically, the primary motive for U.S. multinationals to produce abroad has been to
a. lower costs
b. respond more quickly to the marketplace
c. avoid trade barriers
d. gain tax benefits
ANSWER: b: p.8, evolution of multinational
1.2 The primary objective of the multinational corporation is to a. maximize shareholder wealth b. maximize world production c. minimize debt d. minimize the cost of doing business globally
ANSWER: a: p.21, Multinational Financial Management: Theory and Practice
1.3 ____________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit form a price discrepancy.
a.
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shift production from one location to another in search of lower costs b. avoid taxes c. cause balance of payments difficulties d. engage in environmental protection measures ANSWER: d: p.22, criticisms of the MNC
1.21 Multinational firms
a. are riskier than purely domestic firms because of the exposures of operating abroad
b. are less risky than purely domestic firms because of international diversification
c. may be less risky than domestic firms if the added risks of operating overseas are more than offset by the ability to operate in nations whose economic cycles are not perfectly in phase
d. invest in developed countries only and avoid developing economies
ANSWER: c: p.25, the importance of total risk
1.22 According to the capital asset pricing model a. only the systematic component of risk affects the required return b. foreign investments whose returns are uncorrelated with the market's return should have a higher required return than comparable domestic investments c. total risk of the investment is most relevant for small to medium-sized firms d. diversification is secondary to risk levels of the investment
ANSWER: a: p.25, capital asset pricing
1.23 The internationalization process tends to a. proceed in a preprogrammed series of steps b. begin by licensing foreign producers c. inevitably involve foreign production d. none of the above
ANSWER: d: p.25, capital asset pricing
1.24 According to the
In today’s global marketplace, doing business abroad has become as common as getting dressed each day. Technology has bridged the gap for entrepreneurs and corporate visionaries to expand into global markets with ease. Extensive risk analysis and market research must be communicated effectively to enable strategic financial steps that maximize shareholder equity and minimize company risk and exposure to be exercised. This paper will identify and discuss various factors that will impact global finance over the next 10 years
It also requires more of an investment and commitment by the international company which creates a higher risk. There is also the down side of having difficulty managing local resources.
The goal of this case is to help Sandra Meyer develop a presentation to address Henry Bosse’s concerns about international investments. The general idea is to demonstrate to Henry the benefits of international diversification, if any. To achieve this goal, you need to have a view on 1) the impact of foreign exchange (FX) rates on the return and risk of international investments, and 2) the impact of having more assets on the return and risk of the investment portfolio To form views on these two points, answer the following questions: I. The impact of FX rates on the risk and return of foreign investments 1a) Using data in Appendix A, calculate the
3. Geoff has a written agreement with Huck. To accomplish the objectives of this relationship, Geoff's authority can
As previously identified, there are also “non-legal/extra-governmental” political risks which could bring unexpected upheaval to foreign firms. Macro political risks such as the threat of violence, corruption, war or military coup, political instability and terrorism are all direct threats to foreign investors.
A1. Global risks are usually predictable and have a high probability of occurrence but are often referred to as uncontrollable risks (Merna, 2008). Of the risks listed above, one that has more of a global aspect on marketplace activities is the political and regulatory risks. This would include potential losses from expropriation, nationalization, civil unrest, terrorism and significant changes to trade policy. Specifically,
(1) to defraud any person in connection with any commodity for future delivery, or any option on a commodity for future delivery, or any security of an issuer with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d)); or
10. Buying and selling in more than one market to make a riskless profit is called
However, the investment was not without risks. There are four types of risks in international business called cross-culture risk, country risk, currency risk and commercial risk. Cross-cultural risk refers to a situation or event where a cultural miscommunication puts some human value at stake. Country risk describes the potentially adverse effects on company operations and profitability holes by developments in the political, legal, and economic environment in a foreign country. Currency risk is the risk of adverse unexpected fluctuations in exchange rates. Commercial risk refers to potential loss or failure from poorly developed or executed business strategies, tactics, or procedures (Boter & Wincent, 2010). Investment in Rulmenti Grei, Timken might face the salient risks of political and economic instability. Romania’s economic growth was slower, inflation was higher, and the labor force was more volatile. Furthermore, there might be a risk of re-nationalization. It is said that economic risk analysis tells corporate leaders the ability of a particular country to pay its debt while political risk analysis tells them whether that country will pay its debt. Political risk measures the stability of individual countries through the
2. Some risks that are common between domestic and international funds are: losing money and management risk. Any investment has some type of risk. Losing money is the first risk that every investment has whether it is domestic or international. Management risk is the bad management decisions that a company makes. Some unique risks that only international funding has are: economic risk, country/regional risk, and currency risk. Currency risk is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in the currency exchange rates. Economic risk is the stability of a country’s economic. Country/regional risk is political, financial troubles, and natural disasters that will affect the value of securities issued by companies in foreign countries or regions.
This future look into PNC’s operations gives current and future customers a message of PNC’s self control and conservative approach to growth. As the result of the recent crisis, many banks engaged in risky investments jeopardizing the stability of the organization and creating a systemic risk. It seems from PNC’s future direction, they have learned the lesson.
There are always business risk when it comes to expanding a company, especially from an international standpoint. There are many strategic risk that needs to be evaluated in order to expand the company successfully. Examining the possible risk of foreign currency exposure, basic functions of international banking/financial market, support of long term financing of operations, and assessment of opportunities that can be implemented within the company. There are risk on three dimensions of international finance, economic trends of the country, impact of globalization and monetary system. All of these situations will be discussed in this paper.
INTRODUCTION As companies and governments look to projections of the future, they would do well to realise that acting on their existing strategies may no longer be an effective plan in order for them to grow. Because of financial, technological, and labor developments overseas with other companies, it is expected that domestic businesses would excel financially if they outsourced jobs or partnered with companies abroad. While some Americans prefer to keep business ventures in the states for domestic employment level reasons, companies should look to international enterprises to remain profitable. Domestic economic growth is slowing, Western companies are beginning to see competition, and rapid communications are allowing customers
For firms seeking to engage in international business, government intervention may increase both the risks and costs they undergo. With liberalised trade, firms
To maintain a business, a firm needs to bear uncertain risks. The risks can come from economy, policies or demand fluctuation, etc. Those risks can decline the profits of a firm. However, the risks can be diversified by global marketing since the loss in a market can be covered from other profitable markets compared with only relying on a single market. Besides, there are certain country markets where a global firm wants to be present though competition is fierce and profitability is uncertain. These are called lead markets. The market situations of these markets are as similar as local market or other targeted markets but there are countries location-specific advantage, such as free from government regulation and technological know-how and labor skills (Mühlbacher, Leihs and Dahringer, 2006). The firm can explore the markets’ practices, learn from other competitors and customers and accumulate experience to improve other existing markets’ practices and to design marketing strategies elsewhere, which can help to reduce the market risks in existing and new markets.