Global Firms And Governance, International Monetary Systems, Forex Markets, And Market Parities

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Problem Set 1 (*optional items)

Global firms and governance, international monetary systems, forex markets, and market parities.

Global firms and governance:
1. How would you define and measure multinational corporations?
If the firm is operating facilities in multiple countries or it is controlling real assets in multiple countries then the firm is called MNC. Multinational corporations can be measured by foreign ratios, foreign sales, and foreign employee ratios by how many countries in which the firm has operations.

2. Define Greenfield investment versus foreign direct investment.
Greenfield investment: when a parent company begins a new venture by constructing new facilities in a country outside of where the company is
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Stocks options are used in shareholder wealth maximizing to align the interests of managers with those of shareholders, believing that those managers will make decisions which will enhance the wealth of all stockholders.

5. Discuss the extent to which the stakeholder governance model is applicable for U.S. firms?

6. *Japan has a lower ratio of stock market capitalization relative to GDP than the US. Provide two reasons as to why this may be so. Interest rate and market valuations.
7. *Given the added political and economic risks that appear to exist overseas, are MNCs more or less risky than purely domestic firms in the same industry?
MNCs are likely to be less risky than purely domestic firms because much of the risk faced overseas is diversifiable.

International monetary systems
1. (ESM14, ch2-q1) Under the gold standard all national governments promised to follow the “rules of the game.” This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply?

Money supply was limited to the amount of gold held by a country’s central bank. Any change in its holdings of gold needed to be matched by a change in the number of local currency units outstanding. 2. (ESM14, ch2-q5) What are the advantages and disadvantages of the fixed exchange rate regime?
• It provides stability in international prices for trading which reduces risk.
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