Inter Business Finance

Since the end of World War I, the dominant global currency has been the British pound. Japanese yen. Euro. U.S. dollar.

U.S. dollar.

A corporation that can source its products in one country, sell them in another country, and raise the funds in a third country is a multinational corporation. is a domestic firm if all of the shareholders are from the same country. enjoys a built-in hedge against exchange rate risk. enjoys a built-in hedge against political risk.

is a multinational corporation.

Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billion Balance on the capital account = BKA = −$86 billion Balance on the reserves account = BRA =? The balance on the reserves account (BRA), under the fixed exchange regime is −$44 billion $44 billion $216 billion none of the options

−$44 billion

A country that gives foreign aid to another country can be viewed as importing goodwill from the latter. exporting goodwill to the latter.

importing goodwill from the latter.

The choice between the alternative exchange rate regimes (fixed or floating) is likely to involve a trade-off between national monetary policy autonomy and international economic integration. exchange rate uncertainty and national policy autonomy. balance of payments autonomy and inflation. unemployment and inflation.

national monetary policy autonomy and international economic integration.

Today for an MNC to produce merchandise in one country on capital equipment financed by funds raised in a number of different currencies through issuing securities to investors in many countries, and then selling the finished product to customers in yet other countries is not uncommon. extremely common. Uncommon. the norm.

not uncommon.

When money can move freely across borders, policy makers must choose between exchange-rate stability and economic growth. exchange-rate stability and inflation. exchange-rate stability and an independent monetary policy exchange-rate stability and capital controls.

exchange-rate stability and an independent monetary policy

A currency board arrangement is when the currency of another country circulates as the sole legal tender. when the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent.

where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent.

Prior to the Argentine Peso Crisis Argentina had a "dirty float" where the government allowed the exchange rate to float within wide bands. Argentina had a currency board arrangement with the peso pegged to the U.S. dollar at parity the Argentine government defaulted on its international debts. weakening of the U.S. dollar led the Argentine government to abandon dollarization.

Argentina had a currency board arrangement with the peso pegged to the U.S. dollar at parity

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime. BCA + BKA + BRA = 0 BCA = −BKA BCA + BKA = −BRA BRA = −BCA

BCA = −BKA

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for the statistical discrepancy. The statistical discrepancy = (BCA + BKA) − BRA The statistical discrepancy = BCA − BKA + BRA The statistical discrepancy = BCA − BKA − BRA The statistical discrepancy = BCA + BKA + BRA

The statistical discrepancy = BCA + BKA + BRA

Privatization refers to the process of having government operate businesses for the betterment of the public sector. government allowing the operation of privately owned business. prohibiting government operated enterprises. a country divesting itself of the ownership and operation of a business venture by turning it over to the free market system.

a country divesting itself of the ownership and operation of a business venture by turning it over to the free market system.

The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involve acquisitions of controlling interests in foreign businesses. investments in foreign stocks and bonds that do not involve acquisitions of control. bank deposits, currency investment, trade credit, and the like. all of the options

acquisitions of controlling interests in foreign businesses.

A purely domestic firm that sources its products, sells its products, and raises its funds domestically can face stiff competition from a multinational corporation that can source its products in one country, sell them in several countries, and raise its funds in a third country. can be more competitive than an MNC on its home turf due to superior knowledge of the local market. can still face exchange rate risk, just like an MNC. all of the options

all of the options

Advantages of a fixed exchange rate include reduction in exchange rate risk for businesses. reduction in transactions costs. reduction in trading frictions. all of the options

all of the options

Advantages of a flexible exchange rate include which of the following? National policy autonomy. Easier external adjustments. The government can use monetary and fiscal policies to pursue whatever economic goals it chooses. all of the options

all of the options

An MNC may gain from its global presence by spreading R&D expenditures and advertising costs over their global sales. pooling global purchasing power over suppliers. utilizing their technological and managerial know-how globally with minimum additional costs. all of the options

all of the options

Financial managers of MNCs should learn how to manage foreign exchange and political risks using proper tools and instruments. deal with (and take advantage of) market imperfections. benefit from expanded investment and financing opportunities. all of the options

all of the options

The Mexican peso crisis is significant in that it is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital. selling by international portfolio managers had a highly destabilizing, contagious effect on the world financial system. it provides a cautionary tale that as the world's financial markets are becoming more integrated, this type of contagious financial crisis is likely to occur more often. all of the options

all of the options

The statistical discrepancy in the balance-of-payments accounts arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods. arise because some transactions (illegal transactions) occur "off the books." represents omitted and misreported transactions. all of the options

all of the options

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

all of the options

The official reserve account includes the export and import of goods and services. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). none of the options

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

International trade is a "zero-sum" game in which one country benefits at the expense of another country. an "increasing-sum" game at which all players become winners. prone to both countries being worse off than had they not participated in international trade.

an "increasing-sum" game at which all players become winners.

Nestlé, a well-known Swiss corporation has been a paragon of virtue in its opposition to all forms of political risk. at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, the total market value of the firm fell. 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. none of the options

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.

If the interest rate rises in the U.S. while other variables remain constant capital inflows into the U.S. will increase. capital inflows into the U.S. may not materialize. capital will flow out of the U.S. none of the options

capital inflows into the U.S. will increase.

In 2012, the United States had a current account deficit. The current account deficit implies that the United States had a surplus on legal consulting and engineering services. produced more output than it consumed. consumed more output than it produced. none of the options

consumed more output than it produced.

Generally speaking, liberalization of financial markets when combined with a weak, underdeveloped domestic financial system tends to strengthen the domestic financial system in the short run. create an environment susceptible to currency and financial crises. raise interest rates and lead to domestic recession. none of the options

create an environment susceptible to currency and financial crises.

The capital account measures the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets. the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products. none of the options

the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

Under a flexible exchange rate regime, governments can retain monetary policy independence because the external balance will be achieved by the exchange rate adjustments. the price-specie flow mechanism. the Triffin paradox. none of the options

the exchange rate adjustments.

The "J-curve effect" shows the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation. the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation. the trade balance's lack of responsiveness to the exchanges rate changes. none of the options

the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.

The main cost of European monetary union is the loss of national monetary and exchange rate policy independence. increased exchange rate uncertainty. lessened political integration. none of the options

the loss of national monetary and exchange rate policy independence.