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Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 1 Multinational Financial Management: Opportunities and Challenges
Multiple Choice and True/ False Questions
1.1 Financial Globalization and Risk
1) Which of the following firms are NOT considered to be multinational enterprises (MNEs)
even if they have operations in more than one country?
A) for-profit companies
B) non-for-profit organizations
C) non-government organizations (NGOs)
D) all of the above may be considered MNEs
2) "BRIC" is a term coined in 2001 to refer to a group of countries at about the same stage of
advanced economic development. The BRIC countries are
A) Belgium, Romania, Italy, and Canada.
B) Brazil, Russia, India, and China.
C) Britain, Romania, Israel, and Colombia.
D) Brazil, Russia, Italy, and Chile.
1.2 The Global Financial Marketplace
1) Eurobank is
A) bank incorporated in the European Union.
B) financial intermediary that simultaneously bids for time deposits and makes loans in a
currency other than that of its home currency.
C) a department of a large commercial European bank making loans in Euros.
D) All of the above are true.
2) LIBOR is
A) insignificant interest rate for global financial markets' operation.
B) Madrid and Paris Interbank Offered Rate.
C) published by British Bankers Association (BBA) once per year.
D) adjusted average of estimated borrowing rates in the unsecured interbank market.
3) According to the authors, which of the following groups or securities are at the "heart" to the
global capital markets?
A) debt securities issued by governments
B) bank loans and corporate bons
C) equity securities
D) derivative securities
4) ________ are the largest markets in the world.
A) United States equity markets
B) European debt markets
C) Global currency markets
D) Chinese export markets
5) Domestic currencies of one country on deposit in a second country are called
A) export deposits.
B) eurocurrencies.
C) import deposits.
D) forocurrencies.
6) Eurocurrency deposits are an efficient and convenient money market device for holding
excess corporate liquidity.
7) The Eurocurrency loan market is characterized by narrow interest rate spreads between
deposit and loan rates. This is due in part to which of the following factors?
A) The Eurocurrency market is a "wholesale" market.
B) Loan amounts are very large, often in excess of $500,000.
C) Eurocurrency borrowers are typically large, low-risk corporations or government entities.
D) All of the above are legitimate reasons for the narrow spread in the Eurocurrency market.
4
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) The source of a nation's comparative advantage
A) is created from the mixture of its own labor skills, access to capital, and technology.
B) is determined by its military capability.
C) remains constant over time.
D) is an outdated concept for the 21st century because of the process of globalization.
3) 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
4) Comparative advantage shifts over time as less developed countries become more developed
and realize their latent opportunities.
5) Although the world is a long way from the classical trade model, the general principle of
comparative advantage is still valid.
6) Some of the factors contributing to the emergence of India's low-cost and highly efficient
software industry are
A) combination of Indian Government agricultural subsidies and the overcapacity and the low
cost of the international telecommunication networks.
B) large number of well-educated, English-speaking technical experts willing to work for MNEs
in USA and Western Europe.
C) low-cost, educated and trained labor; solid infrastructure and liberalized foreign direct
investments regime in the service sector.
D) None of the above
TABLE 1.1
Use the information in the table to answer the following question(s).
7) Refer to Table 1.1. A production unit in Austria has a/an ________ over a production unit in
Russia in ________.
A) absolute disadvantage; digital cameras
B) absolute disadvantage; snowboards
C) absolute advantage; both cameras and snowboards
D) none of the above
8) Refer to Table 1.1. Austria has a larger relative advantage over Russia in the production of
________ at a ratio of ________.
A) snowboards; 5 to 4
B) cameras; 8 to 3
C) snowboards; 8 to 3
D) cameras; 3 to 8
9) Refer to Table 1.1. Assume no trade between Russia and Austria. If each country put 25% of
their production units into each product, the total number of snowboards and digital cameras
produced by the two countries combined are ________ and ________.
A) 15,000 snowboards; 3,000 digital cameras
B) 6,000 snowboards; 4,000 digital cameras
C) 2,750 digital cameras; 6,750 snowboards
D) 15,000 digital cameras; 1,000 snowboards
10) Refer to Table 1.1. If trade takes place at Russia's domestic price, ________ snowboards will
be required to obtain 1 digital camera.
A) 4
B) 2 and 2/3
C) 1.25
D) 0.25
11) Refer to Table 1.1. If each country specializes in their production with Austria producing
only digital cameras and Russia producing only snowboards, at a trading rate of three
snowboards per digital camera, how many cameras and snowboards will be available to be
consumed in Austria if they trade 3,000 cameras to Russia?
A) 9,000 snowboards and 5,000 digital cameras
B) 3,000 snowboards and 3,000 digital cameras
C) 3,000 snowboards and 9,000 digital cameras
D) There is not enough information to answer this question.
12) Refer to Table 1.1. If each country specializes in their production with Austria producing
only digital cameras and Russia producing only snowboards, at a trading rate of three
snowboards per digital camera, how many cameras and snowboards will be available to be
consumed in Russia if they trade 9,000 snowboards to Austria?
A) 9,000 snowboards and 5,000 digital cameras
B) 3,000 snowboards and 9,000 digital cameras
C) 3,000 snowboards and 3,000 digital cameras
D) There is not enough information to answer this question.
1.4 What is Different about Global Financial Management?
1) Which of these factors may differ for management of a domestic firm vs an international firm?
A) culture
B) corporate governance
C) political risk
D) All of the above may differ.
2) Which of these issues must be addressed by domestic financial managers but may be ignored
by international financial managers?
A) capital budgeting decisions
B) capital structure decisions
C) working capital management decisions
D) All of the above must also be addressed by international financial managers.
3) US automotive firm manufacturing in Eastern Europe is an example of ________ strategic
motive to become a MNE.
A) market and production efficiency seekers
B) large domestic corporation trying to gain access to overseas cutting edge technology and
managerial expertise
C) political safety and raw material seekers
D) US automotive firms do not invest outside of US
1.5 Market Imperfections: A Rationale for the Existence of the Multinational Firm
1) MNEs look to exploit ________ in national markets for products, factors of production, and/or
financial assets.
A) imperfections
B) perfect capital markets
C) corrupt governments
D) none of the above
2) Large international firms may be better able to exploit such competitive factors as ________
than are their domestic competitors.
A) economies of scale
B) technological expertise
C) product differentiation
D) all of the above
3) Once established abroad, large MNEs internal information networks typically fail to help
implement market opportunities compared to their purely domestic counterparts.
1.6 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.
D) import-export banking 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.
D) requirement that all employees be multilingual.
3) 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
4) Typically, a firm in its domestic stage of globalization has all financial transactions in its
domestic currency.
5) 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.
6) The exposure to foreign exchange risk known as Translation Exposure may be defined as
A) changes in reported owners' equity in consolidated financial statements caused by a change in
exchange rates.
B) the impact of settling outstanding obligations entered into before change in exchange rates but
to be settled after change in exchange rates.
C) the change in expected future cash flows arising from an unexpected change in exchange
rates.
D) all of the above.
7) 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
Essay Questions
1.1 Financial Globalization and Risk
1) There are no questions in this section.
1.2 The Global Financial Marketplace
1) The global financial marketplace consists of assets, institutions, and linkages. Explain how
these factors come together to form the marketplace we know today.
1.3 The Theory of Comparative Advantage
1) Despite the underlying advantages of the Theory of Comparative Advantage, countries do not
appear to specialize in producing only those goods and services that could most efficiently be
produced domestically. Provide at least three reasons why governments interfere with
comparative advantage and the techniques they may use to enforce their objectives.
1.4 What is Different about Global Financial Management?
1) List and explain three concepts differentiating International from Domestic Financial
Management.
1.5 Market Imperfections: A Rationale for the Existence of the Multinational Firm
1) List and explain three strategic motives why firms become multinationals and give an example
of each.
1.6 The Globalization Process
1) Explain the foreign direct investment sequence or the variety of strategic alternatives available
to growing domestic firm.
