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Fundamentals of Multinational Finance, 6e (Moffett et al.)
Chapter 1 Multinational Financial Management: Opportunities and Challenges
1.1 Financial Globalization and Risk
1) Financial globalization has not resulted in:
A) continuing imbalances of balance of payments.
B) an increase in quantity and speed in the flow of capital across the world.
C) capital markets less open and a decrease in the availability of capital for many organizations.
D) uniform ways of ownership, control, and governance across the world.
2) BRICs is a term used in international finance to represent assets that are considered to be
inexpensive and sturdy, but fundamentally unsound and and incapable of coping with the
upheavals now apparent in international financial markets.
3) Multinational enterprises (MNEs) are firms, both for profit companies and not-for-profit
organizations, that have operations in more than one country, and conduct their business through
foreign subsidiaries, branches, or joint ventures with host country firms.
4) Ownership, control, and governance changes radically across the world. The publicly traded
company is not the dominant global business organization—the privately held or family-owned
business is the prevalent structure—and their goals and measures of performance differ
dramatically.
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5) The theme dominating global financial markets today is the complexity of risks associated
with financial globalization. List and explain examples of the complexity of risks affecting the
leading and managing of multinational firms in the rapidly moving marketplace.
1.2 The Global Financial Marketplace
1) A well-established, large U.S.-based MNE will probably NOT be able to overcome which of
the following obstacles to maximizing firm value?
A) an open market place
B) high quality strategic management
C) access to capital
D) none of the above
2) A well-established, large China-based MNE will probably be most adversely affected by
which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
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3) A well-established, large, Brazil-based MNE will probably be most adversely affected by
which of the following elements of firm value?
A) an open marketplace
B) high-quality strategic management
C) access to capital
D) access to qualified labor pool
4) A major cost avoided in the eurocurrency markets is the payment of deposit insurance fees,
such as:
A) Federal Deposit Insurance Corporation – FDIC.
B) Office of the Comptroller of the Currency – OCC.
C) International Monetary Fund – IMF.
D) World Bank – WB.
5) The modern eurocurrency market was born shortly after:
A) World War II.
B) World War I.
C) Korean War.
D) Bosnian War.
6) The reference rate of interest in the eurocurrency market is the:
A) London Interbank Offered Rate.
B) Prima rate.
C) Federal funds rate.
D) Treasury rate.
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7) Interest spreads in the eurocurrency market are small for many reasons EXCEPT:
A) Eurocurrency loans are secured loans.
B) Eurocurrency deposits and loans are made in amounts of $500,000 or more on an unsecured
basis.
C) The eurocurrency is a wholesale market.
D) Borrowers are usually large corporations or government entities.
8) Your authors suggest that one way to characterize the global financial marketplace is through
its assets, institutions, and linkages.
9) Eurocurrencies are domestic currencies of one country on deposit in a second country.
10) A eurodollar deposit is a demand deposit.
11) Eurocurrency markets serve two valuable purposes: 1) Eurocurrency deposits are an efficient
and convenient money market device for holding excess corporate liquidity; and 2) the
Eurocurrency market is a major source of short-term bank loans to finance corporate working
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12) The key factor attracting both depositors and borrowers to the Eurocurrency loan market is
the narrow interest rate spread within that market.
13) The Eurocurrency market continues to thrive because it is a large international money market
relatively free from governmental regulation and interference. Recent events may lead to greater
regulation.
14) Business involves the interaction of individuals and individual organizations for the
exchange of products, services, and capital through markets. The global capital markets are
critical for the conduct of this exchange. The authors suggest that one way to characterize the
global financial marketplace is through its assets, institutions, and linkages. Explain how each of
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1.3 The Theory of Comparative Advantage
1) The theory that suggests specialization by country can increase worldwide production is:
A) the theory of comparative advantage.
B) the theory of foreign direct investment.
C) the international Fisher effect.
D) the theory of working capital management.
2) Which of the following is NOT a reason governments interfere with comparative advantage?
A) Governments attempt to achieve full employment.
B) Governments promote economic development.
C) national self-sufficiency in defense-related industries
D) All are reasons governments interfere with comparative advantage.
3) Which of the following factors of production DO NOT flow freely between countries?
A) raw materials
B) financial capital
C) (non-military) technology
D) All of the above factors of production flow freely among countries.
4) Which of the following would NOT be a way to implement comparative advantage?
A) IBM exports computers to Egypt.
B) Computer hardware is designed in the United States but manufactured and assembled in
Korea.
C) Water of the greatest purity is obtained from wells in Oregon, bottled, and exported
worldwide.
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5) Of the following, which would NOT be considered a way that government interferes with
comparative advantage?
A) tariffs
B) managerial skills
C) quotas
D) other non-tariff restrictions
6) The concept of absolute comparative advantage’s origins lie in:
A) Adam Smith’s work of 1776.
B) David Ricardo’s work of 1776.
C) The Wealth of Nations book, published in 1887.
D) On the Principles of Political Economy and Taxation book, published in 1817.
7) The concept of relative comparative advantage’s origins lie in:
A) Adam Smith’s work of 1776.
B) David Ricardo’s work of 1776.
C) The Wealth of Nations book, published in 1887.
8) Comparative advantage is one of the underlying principles driving the growth of global
business.
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9) The theory of comparative advantage owes it origins to Ben Bernanke as described in his book
The Wealth of Bankers.
10) International trade might have approached the comparative advantage model in the 19th
century, and it does so even more today.
11) Comparative advantage shifts over time as less developed countries become more developed
and realize their latent opportunities.
12) Comparative advantage in the 21st century is based more on services and their cross border
facilitation by telecommunications and the Internet.
13) Comparative advantage was once the cornerstone of international trade theory, but today it is
archaic, simplistic, and irrelevant for explaining investment choices made by MNEs.
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14) When discussing comparative advantage, it is apparent that today at least two of the factors
of production, capital and technology, now flow directly and easily between countries, rather
15) It would be safe to make the statement that modern telecommunications now take business
activities to labor rather than moving labor to the places of business.
16) As the general principle of comparative advantage is still valid, complete specializatoin
remains a realistic case.
17) Although international trade might have approached the comparative advantage model
during the nineteenth century, it certainly does not today, for a variety of reasons. Develop an
argument as to why this is not happening today.
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1.4 What Is Different About International Financial Management?
1) Which of the following domestic financial instruments have NOT been modified for use in
international financial management?
A) currency options and futures
B) interest rate and currency swaps
C) letters of credit
D) All of the above are domestic financial instruments that have also been modified for use in
2) Which of the following is not always understood by MNE management?
A) Culture, history, and institutions
B) Political risk
C) Foreign exchange risk
D) Financial instruments
3) In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms
produce in foreign countries?
A) satisfaction of local demand in the foreign country
B) satisfaction of local demand in the domestic markets
C) political safety and small likelihood of government expropriation of assets
D) All of the above are market-seeking activities.
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4) ________ investments are designed to promote and enhance the growth and profitability of
the firm. ________ investments are designed to deny those same opportunities to the firm’s
competitors.
A) Conservative; Aggressive
B) Defensive; Proactive
C) Proactive; Defensive
D) Aggressive; Proactive
5) In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a raw material seeker. Which of the following is NOT a reason why raw material
seeker extract raw materials in foreign countries?
A) They extract raw materials wherever they can be found to export from the host country.
B) They extract raw materials wherever they can be found for sale in the host country.
C) They extract raw materials wherever they can be found for further processing in the host
country.
D) All of the above.
6) MNEs must modify finance theories like cost of capital and capital budgeting because of
foreign complexities.
7) Relative to MNEs, purely domestic firms tend to have GREATER political risk.
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8) Domestic firms tend to make GREATER use of financial derivatives than MNEs because they
can bear the greater risk presented by these financial instruments.
9) Because countries have different financial regulations and customs, it is common for MNEs to
apply their domestic rules and regulations when doing financial business in a foreign country.
10) A number of financial instruments that are used in domestic financial management have been
modified for use in international financial management. Examples are foreign currency options
and futures, interest rate and currency swaps, and letters of credit.
11) Domestic firms do not have foreign exchange risk.
12) For firms competing in a world characterized by oligopolistic competition, strategic motives
can be subdivided into proactive and defensive investments.
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13) Defensive measures are designed to enhance growth and profitability of the firm itself.
14) In determining why a firm becomes multinational there are many reasons. One reason is that
the firm is a knowledge seeker. They operate in foreign countries to exploit existing
technological expertise.
15) The five strategic motives driving the decision to invest abroad and become an MNE (market
seekers, raw material seekers, production efficiency seekers, knowledge seekers, and political
16) List and explain three strategic motives why firms become multinationals and give an
example of each.
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17) The objectives and responsibilities of the modern multinational have grown significantly
more complex in the twenty-first century. Develop and argument as to why this is the case.
1.5 The Globalization Process
1) The phase of the globalization process characterized by imports from foreign suppliers and
exports to foreign buyers is called the:
A) domestic phase.
B) multinational phase.
C) international trade phase.
2) The authors describe the multinational phase of globalization for a firm as one characterized
by the:
A) ownership of assets and enterprises in foreign countries.
B) potential for international competitors or suppliers even though all accounts are with domestic
firms and are denominated in dollars.
C) imports from foreign suppliers and exports to foreign buyers.
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3) A firm in the International Trade Phase of Globalization:
A) makes all foreign payments in foreign currency units and all foreign receipts in domestic
currency units.
B) receives all foreign receipts in foreign currency units and makes all foreign payments in
domestic currency units.
C) bears direct foreign exchange risk.
D) none of the above
4) Of the following, which was NOT mentioned by the authors as an increase in the demands of
financial management services due to increased globalization by the firm?
A) evaluation of the credit quality of foreign buyers and sellers
B) foreign consumer method of payment preferences
C) credit risk management
D) evaluation of foreign exchange risk
5) The twin agency problems limiting financial globalization are caused by these two groups
acting in their own self-interests rather than the interests of the firm.
A) rulers of sovereign states and unsavory customs officials
B) corporate insiders and attorneys
C) corporate insiders and rulers of sovereign states
D) attorneys and unsavory customs officials
6) Typically, a firm in its domestic stage of globalization has all financial transactions in its
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7) Typically, a “greenfield” investment abroad is considered an investment having a greater
foreign presence than a joint venture with a foreign firm.
8) The authors argue that financial inefficiency caused by influential insiders may prove to be an
increasingly troublesome barrier to international finance.
9) The authors describe a process for development of a MNE that begins with a purely domestic
phase, followed by the multinational phase, and topping out with the international trade phase.
11) The growth in the influence and self-enrichment of organizational insiders is seen as an
12) The actions of corporate insiders and the actions of rulers of sovereign states are both agency
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13) Describe the structural and managerial changes and challenges experienced by a firm as it
moves its operations from domestic to global (globalization process).