International Economics
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Course Introduction
International Economics explores the principles and dynamics governing economic relations between countries. This course examines the theories and models of international trade, the effects of trade policies, and the role of international organizations such as the World Trade Organization. Students analyze the impact of tariffs, quotas, and exchange rates on global markets, and study the determinants of international capital flows and foreign investment. The course also addresses current issues such as globalization, regional economic integration, and balance of payments, providing students with analytical tools to understand and evaluate economic policies in an increasingly interconnected world.
Recommended Textbook
Multinational Business Finance 14th Edition by
David K. Eiteman
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Page 2
Chapter 1: Multinational Financial Management: Opportunities and Challenges
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Q1) 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 than only indirectly through traded goods and services.
A)True
B)False
Answer: True
Q2) 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.
Answer: C
Q3) 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
Answer: A
Page 3
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Chapter 2: The International Monetary System
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Q1) If exchange rates were fixed,investors and traders would be relatively certain about the current and near future exchange value of each currency.
A)True
B)False
Answer: True
Q2) Most Western nations were on the gold standard for currency exchange rates from 1876 until 1914.Today we have several different exchange rate regimes in use,but most larger economy nations have freely floating exchange rates today and are not obligated to convert their currency into a predetermined amount of gold on demand.Currently several parties still call for the "good old days" and a return to the gold standard.Develop an argument as to why this is a good idea.
Answer: The gold standard forces a nation to maintain sufficient reserves of gold to back its currency's value.This helps control inflation,as a country cannot print additional money without sufficient gold to back it up.The gold standard eases international transactions as there is little uncertainly about exchange rates for trade with foreign countries.
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Chapter 3: The Balance of Payments
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Sample Questions
Q1) China is currently experiencing a surplus in its current account and its capital/financial accounts.Which of the following is NOT a contributing factor for this unusual situation?
A) The exceptional growth in the Chinese economy contributes to the current account surplus.
B) The positive prospects for China's continued growth contribute to the capital/financial account surplus.
C) China's inevitable acquisition of Taiwan is driving the market for Chinese investment.
D) All of the above are contributing factors for China's twins surpluses.
Answer: C
Q2) Portfolio investment is capital invested in activities that are ________ rather than made for ________.
A) short term; the long term
B) long term; profit
C) profit motivated; control
D) control motivated; profit
Answer: C
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Chapter 4: Financial Goals and Corporate Governance
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Q1) Describe the management objectives of a firm governed by the shareholder wealth maximization model and one governed by the stakeholder wealth maximization model.Give an example of how these two models may lead to different decision-making by executive management.
Q2) Which of the following is NOT typically associated with the private ownership of business organizations?
A) the government
B) families
C) individuals
D) publicly traded, widely-held organizations
Q3) The study of how shareholders can motivate management to accept the prescriptions of the shareholder wealth maximization model is called:
A) market efficiency.
B) the SWM model.
C) agency theory.
D) the SCM model.
Q4) Define patient and impatient capitalism and discuss how each may lead to different decision-making in the shareholder wealth maximization model.
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) For individuals and firms involved in the import and export of goods and services ,using the foreign exchange market is necessary,but incidental,to their underlying commercial or investment purpose.
A)True
B)False
Q2) The most commonly quoted currency exchange is that between the U.S.dollar and the European euro.For example,a quotation of EUR/USD 1.2174.The euro is the base currency and the dollar the price currency.
A)True
B)False
Q3) The greatest amount of foreign exchange trading takes place in the following three cities:
A) New York, London, and Tokyo.
B) New York, Singapore, and Zurich.
C) London, Frankfurt, and Paris.
D) London, Tokyo, and Zurich.
Q4) The foreign exchange market provides the physical and institutional structure through which three typical functions are accomplish.List and explain three functions of the foreign exchange market.
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) Phillips NV produces DVD players and exports them to the United States.Last year the exchange rate was $1.25/euro and Plillips charged 120 euro per player in Euroland and $150 per DVD player in the United States.Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player.What is the degree of pass through by Phillips NV on their DVD players?
A) 92%
B) 33.3%
C) 41.7%
D) 4.1%
Q2) According to the international Fisher Effect,if an investor purchases a five-year U.S.bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%,then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years.
A) British pound; appreciate B) British pound; revalue C) U.S. dollar; appreciate D) U.S. dollar; depreciate
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Chapter 7: Foreign Currency Derivatives: Futures and Options
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Sample Questions
Q1) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market.Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$.Jasper thinks the yen will move to ¥128.00/$ in the next six months.If Jasper buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$,he will earn a profit of:
A) $146.09.
B) $101,460.94.
C) $1460.94.
D) nothing; he will lose money
Q2) Historical volatility is the correct method for the calculation of the option volatility.
A)True
B)False
Q3) Option values increase with the length of time to maturity.The expected change in the option premium from a small change in the time to expiration is termed delta.
A)True
B)False
Q4) List and explain three "Greek" elements and impacts on a call option premium.
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Chapter 8: Interest Risk and Swaps
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Sample Questions
Q1) A/an ________ is a contract to lock in today interest rates over a given period of time.
A) forward rate agreement
B) interest rate future
C) interest rate swap
D) none of the above
Q2) Refer to Instruction 8.1.Which strategy (strategies)will eliminate credit risk?
A) Strategy #1
B) Strategy #2
C) Strategy #3
D) Strategies #1 and #2
Q3) If a financial manager earning interest on a future date were to buy Futures and interest rates end up going up,the position outcome would be:
A) Futures price falls; short earns a profit.
B) Futures price rises; short earns a loss.
C) Future price falls; long earns a loss.
D) Futures price rises; long earns a profit.
Q4) Swap rates are derived from the yield curves in each major currency.
A)True
B)False
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Chapter 9: Foreign Exchange Rate Determination
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Q1) Explain how a central bank would engage in direct intervention to decrease the value of its domestic currency.Since the 1970s it has been difficult for central banks alone to engage in direct intervention to alter the value of their domestic currency.Identify and explain at least two other activities in which a central bank could engage to alter the value of their domestic currency.
Q2) In 1991,Argentina adopted a currency board (the Argentine peso had been pegged to the U.S.dollar at a one-to-one rate of exchange)to fight hyperinflation.This currency board lasted for a decade until the economic crisis of 2001.Discuss : 1)the pros and cons of a currency board policy,2)the crisis condition of the Argentina's economy by 2001,and 3)the lessons to be drawn from the the Argentina story.
Q3) An important thing to remember about foreign exchange rate determination is that parity conditions,asset approach,and balance of payments approaches are ________ theories rather than ________ theories.
A) competing; complementary B) competing; contemporary C) complementary; contiguous D) complementary; competing
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Chapter 10: Transaction Exposure
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Q1) There is considerable question among investors and managers about whether hedging is a good and necessary tool.
A)True
B)False
Q2) Like a forward market hedge,a money market hedge also involves a contract and a source of funds to fulfill that contract.In this instance,the contract is a loan agreement.
A)True
B)False
Q3) The various hedging alternatives explored (the forward,money market,and purchase option hedges)only work to protect the value of the exposed asset at the time of maturity.
A)True
B)False
Q4) A hedge constructed using puts foreign currency options would be symmetric. A)True B)False
Q5) The commonly used 100% forward contract cover is a symmetric hedge. A)True B)False
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Chapter 11: Translation Exposure
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Q1) The two methods for the translation of foreign subsidiary financial statements are the current rate and temporal methods.Briefly,describe how each of these methods translates the foreign subsidiary financial statements into the parent company's consolidated statements.Identify when each technique should be used and the major advantage(s)of each.
Q2) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
Q3) If the British subsidiary of a European firm has net exposed assets of £125,000,and the pound increases in value from 1.40/£ to 1.44/£,the European firm has a translation:
A) gain of 5,000.
B) loss of 5,000.
C) gain of £5,000.
D) loss of £5,000.
Q4) The biggest advantage of the current rate method of reporting translation adjustments is the fact that the gain or loss goes directly to the reserve account on the consolidated balance sheet and does not pass through the consolidated income statement.
A)True
B)False
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Chapter 12: Operating Exposure
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Q1) Recently the Canadian dollar realized an unexpected appreciation in value.Which of the following actions being considered by Tall Timber Exports,a Canadian logging firm specializing in exporting raw forest products,would be considered a highly unlikely response to the appreciation of the Canadian dollar?
A) Tall Timber Exports might lower export prices in an effort to maintain market share.
B) Tall Timber Exports might raise export prices only slightly in an effort to increase market share.
C) Tall Timber Exports might leave export prices as they are and wait to determine what actions to take if any in the future.
D) all of the above
Q2) Costs associated with the purchase of sizeable put options positions include each of the following EXCEPT:
A) the purchase price of the options.
B) the opportunity cost of buying the options rather than diversifying operations to reduce risk.
C) executive salaries of having corporate offices in more than one country.
D) none of the above
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Chapter 13: The Global Cost and Availability of Capital
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Q1) The MNE can ________ its ________ by gaining access to markets that are more liquid and/or less segmented than its own.
A) increase; MCC.
B) decrease; MCC.
C) maintain; MRR.
D) none of the above
Q2) A fully diversified domestic portfolio has a beta of:
A) 0.0.
B) 1.0.
C) -1.0.
D) There is not enough information to answer this question.
Q3) Which of the following is NOT a portfolio diversification technique used by portfolio managers?
A) diversify by type of security
B) diversify by the size of capitalization of the securities held
C) diversify by country
D) All of the above are diversification techniques.
Q4) What are the components of the weighted average cost of capital (WACC)and how do they differ for an MNE compared to a purely domestic firm?
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Chapter 14: Raising Equity and Debt Globally
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Q1) What are the two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms.Explain which school of thought you hold to and why.
Q2) Most financial theorists believe that the optimal capital structure is a ________ with a debt to total value ratio somewhere around ________.
A) point; 50%
B) point; 25%
C) range; 30%-60%
D) range; 10%-40%
Q3) Eurobonds offer tax anonymity.
A)True
B)False
Q4) ADRs that are created at the request of a foreign firm wanting its shares traded in the United States are:
A) facilitated.
B) unfacilitated.
C) sponsored.
D) unsponsored.
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Chapter 15: Multinational Tax Management
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Q1) Refer to Table 15.1.What is the minimum effective tax rate that BayArea can achieve on its foreign-sourced income?
A) 26%
B) 35%
C) 40%
D) 0%
Q2) Refer to Instruction 15.1.If the U.S.has no bilateral trade agreement with the host country,what is the total amount of income taxes Green Valley Exporters will pay?
A) $25,000
B) $35,000
C) $51,250
D) $60,000
Q3) The worldwide approach,also referred to as the residential or national approach to tax policy,levies taxes on the income earned by firms that are incorporated in the host country,regardless of where the income was earned (domestically or abroad).
A)True
B)False
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Chapter 16: International Trade Finance
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Q1) Export receivables are normally sold at a discount.The size of the discount depends on the following factors EXCEPT:
A) overdraft fees
B) collection risk
C) cost of credit insurance
D) size of financing and services fees
Q2) The primary advantage of a letter of credit is that it reduces risk.
A)True
B)False
Q3) The Export-Import Bank (also called Eximbank)is an independent agency of the U.S.government,established in 1934 to stimulate and facilitate the foreign trade of the United States.
A)True
B)False
Q4) To constitute a true letter of credit transaction,the issuing bank must receive a fee or other valid business consideration for issuing the L/C.
A)True
B)False
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Chapter 17: Foreign Direct Investment and Political Risk
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Q1) According to the Boston Consulting Group gloabl challengers are companies based in rapidly developing economies that are "shaking up" the established economic order.
A)True
B)False
Q2) ________ is NOT one of the three main country-specific risks as outlined by your authors.
A) Transfer risk
B) Cultural differences
C) Thin equity base
D) Protectionism
Q3) A country can react to the potential for blocked funds prior to making an investment,during operations,or by investing in the local country in assets than maintain their value.
A)True
B)False
Q4) What is meant by the term "governance risk"? What is the most important type of governance risk?
Q5) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Currency risk is a concern for any international merger and acquisition activity.For instance,once the bidder has successfully won the acquisition,the exposure evolves from a transaction exposure to a contingent exposure.
A)True
B)False
Q2) Real option analysis treats cash flows in terms of future value in a positive sense,whereas DCF treats future cash flows negatively.
A)True
B)False
Q3) Which of the following is NOT an advantage of cross-border acquisitions over greenfield investments?
A) quicker
B) cost-effective
C) target firms to be undervalued
D) melding corporate cultures
Q4) What is real option analysis? How is it a better method of making investment decisions than using traditional capital budgeting analysis?
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