I. Answer all of the Conceptual Questions in Chapter 1 on p.17. Do NOT use more than THREE sentences.

1.1. The stakeholders of an MNC include anyone with interest in company, such as the firms customers, suppliers, employees, host
government(s), and anyone else with an actual or potential claim on the firm. The firms customers help determine the value of revenues
and its s suppliers and employees determine the value of operating expenses. Governmental claims represent the claims of society at large
and include taxes, tariffs, and the costs of compliance with local laws and regulations.

1.2. Cultural differences that can affect the conduct of international business include language, body language, new business systems, social
behaviors and functional business practices. Language and body language are some of the more obvious differences as literal translations of
common words or phrases, along with something as simple as eye contact, can create some difficult and even amusing situations.
Functional business practices, new business systems and social behaviors can cause all sorts of challenges as MNCs must learn new
business models/systems, along with determining which types of behaviors are punished, tolerated and which types can lead to fruitful
partner ships with foreign residents and their governments.

1.3. Country risk is the risk that the business environment in a host country or the host countrys relationship with another country will
unexpectedly change. Country risk can come in the form of political risk, which is the risk that the business environment could change
unexpectedly due to political events. Financial risk is another form of country risk of an unexpected change in a countrys financial or
economic environment.

1.4. Political risk is the risk that the business environment in a host country will unexpectedly change due to political events. Political risk is
usually determined within a country as local political forces influence the business environment. Sources of political risk include
unexpected changes in the business environment arising from repatriation restrictions, taxes, local content and employment regulations,
restrictions on foreign ownership, business and bankruptcy laws, foreign exchange controls, and expropriation.

1.5. Foreign exchange risk, also known as currency risk, is the risk of unexpected changes in currency values that affect the value of the
firm. Volatility in the worlds currency markets can cause the value of the MNC to fluctuate in unexpected ways. Profits can be wiped out
quickly by changes in currency values.

1.6. Multinational corporations have many opportunities that are not available to local firms. Some of those include: global branding
which can provide an advantage over local competitors, marketing flexibility MNCs can more easily shift sales efforts towards higher
paying markets, and MNCs also have advantages of scale and scope which means they can exploit their competitive advantages on a
larger scale and across a broader range of markets and products.

1.7. MNCs can reduce operating expenses in a number of ways that are not available to domestic firms, these include: low-cost raw
materials that can reduce COGS and ensure continuity of supply, low-cost labor which can also reduce COGS, flexibility in global site
selection which allows an MNC to shop around for the most attractive location, flexibility in sourcing and production, economies of scale
and scope, and lastly, economies of vertical integration which allows an MNC to enjoy lower costs through their control of the supply chain.

1.8. The perfect financial market assumptions include: a frictionless market which has no transaction costs, taxes, government
intervention, agency costs or costs of financial distress, market participants have equal access to market prices, that rational investors price
assets with a dispassionate eye toward expected returns and risks, market participants have equal access to costless information. The perfect
market assumptions force an MNC to assume that their financial policy is irrelevant because with equal access to market prices and
information in frictionless market, individual investors can replicate or reverse any action that the firm can take. Thus, the converse of this
irrelevant proposition must also be true: if financial policy is to increase firm value, then it must increase the firms expected cash flows or
decrease the discount rate in a way that cannot be replicated by individual investors.

1.9. Local culture influences the conduct of business in profound and subtle ways, creating important cross-border differences in financial,
economic, political, regulatory, accounting and tax environments. The multinational financial manager must be sensitive to these
differences in the conduct of both professional and personal life. Failing to accommodate cultural patterns and expectations can obstruct
negotiations and result in hostility and mistrust even if both counterparties have the best of intention.

II. Answer the following Conceptual Questions in Chapter 2 on p.43. Do NOT use more than THREE sentences.

2.2. Because trade barriers today are lower than ever, the worlds businesses are turning to foreign sales, foreign sourcing, foreign direct
investment and cross-border partnerships as paths toward business consolidation and expansion. Some countries such as the United States
and the United Kingdom are net importers, while others, including Germany, China, Russia, Saudi Arabia and Japan are net exporters.

2.5. The IMF compiles and publishes a monthly summary of BoP statistics that track each countrys cross-border flow of goods, services
and capital. The statistics show a countrys inflows and outflows of goods, services and capital. The BoP is a double-entry system that is
intended to record both sides of every cross-border transaction.

2.7. The Bretton Woods agreement, created in 1944 by the representatives of the allied nations, in the hopes to create a postwar financial
system that would promote world trade and avoid a repetition of the worldwide depression of the 1930s by establishing a fixed or pegged
exchange rate system, based on a set U.S. price of gold. During the 1960s, a High U.S. inflation caused the market price of gold to rise
well above the $35 per ounce and the market value of the U.S. dollar to fall well below the official rate relative to foreign currencies. A run
on the U.S. dollar ensued as speculators rushed to buy gold and thus the U.S. was forced to remove itself from the gold standard in 1971.

2.10. The global financial crisis of 2008 was brought on by the U.S.s issuance of subrime loans and poor credit screening which increased
the default risk of CDOs. Illiquidity in the subprime CDO market was the first and most visible symptom of the crisis, which eventually
spilled over to other markets, including real estate, stocks, bonds, commercial paper, and bank lending. Industrial output and employment
fell in most major countries and many experienced large budget deficits caused by the drop in tax revenues and the increase in expenses
from fiscal stimulus programs.

III. Answer the following Conceptual Questions in Chapter 3 on 69. Do NOT use more than THREE sentences.

3.3 Financial contracts in an internal market are issued in the currency of a host country, placed within that country, and regulated by
authorities in that country. Financial contracts in an external market are placed outside the borders of any single country and can be
regulated by more than one country or by none at all. This is an important distinction because it determines regulatory jurisdiction.

3.5. Eurocurrency is external credit markets trade deposits and loans that are denominated in a single currency but are traded outside the
boarders of the country issuing that currency rather than inside that country like internal credit markets.

3.6 LIBOR stands for the London Interbank Offer rate that London banks quote for large transactions with other Euromarket banks. The
rate is quoted for all major currencies, including U.S. dollars, yen, euros, and pounds sterling.

3.7 The Basel Accords, developed in 1988, are a single set of regulation governing the capital adequacy of financial institutions such as
commercial banks. It requires that banks set aside equity capital as a protection against unforeseen losses according to the credit risk of the
borrower.

3.8 In the spot markets, trades are made for immediate delivery whereas in the forward market, trades are made for future delivery
according to an agreed upon delivery date, exchange rate, and amount.

3.9 Because two currencies are involved in every currency transaction it is essential that you follow Rule #1 which is keep track of your
currency units. This is important because if you do not keep track, you could end up multiplying when you should be dividing in your
equation. The more complex the equations, the more imperative it is to follow Rule #1.

3.10 Buying or selling currency is like buying or selling any other asset. It is easier to think of buying or selling the currency in the
denominator of an exchange rate, which is Rule #2. Currency values are then just like the price of any other asset.

3.13 Forward premiums and discounts reflect a currencys forward price relative to its spot price. A forward premium is when a forward
price is higher than the spot price and conversely, a forward discount is when a forward price is lower than the spot price.

IV. The following questions are from Chapter 3 on p.69 and 70. You must show how you derive the answers (e.g., equations and numerical
values). Refer to the answers of even number questions on p.607. It will take time to answer all of the questions. But remember if you were
taking this course as a regular course, you would have to answer them with a closed book with only one hour!


V. Answer the following essay questions:
a. Take a look at Figure 2.2 on p.21. Do you see any problems with these graphs? Explain.
The graph on p. 21 indicates that the United States has had a trade deficit since 1978. A trade deficit means that the residents are importing
more goods than they are exporting. This trade balance is important to fiscal and monetary authorities because higher exports mean higher
employment in the domestic economy. As indicated by the graph, the continued deficit indicates that our economy will continue to suffer
until we can reverse the numbers. Unemployment rates are going to be negatively correlated with the deficit. As the deficit declines, the
unemployment rates will continue to increase.

b. According to Figure 2.3 on p.23, the current account of the US has been negative (deficit) over the last decade, but the financial account
has been positive (surplus). Explain the reason why.
The U.S. has been at a negative deficit over the last decade because its residents are importing more goods than they are exporting. At the
same time, the U.S.s financial account has been at a positive or surplus. The financial account covers cross-border transactions associated
with changes in ownership of financial assets and liabilities. Within these accounts, the direct investment accounts include inflows and
outflows of direct investment capital such as equity capital, reinvested earnings, and intercompany transactions between affiliated parties.
Portfolio investment includes cross-border transactions associated with long-term debt and equity securities, money market instruments
and derivative instruments. Other investment reflects other financial transactions including foreign currency deposits, loans and trade
credits. The financial account is the sum of these transactions. The U.S. has run a financial account surplus for many years, with more
money being attracted to the United States than being invested abroad.