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zInternational Finances > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is Financial Management mainly concerned about?

A

With how to optimally make various corporate financial decisions, such as those pertaining to investment, financing, dividend policy, and working capital management, with a view to achieving a set of given corporate objectives.

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2
Q

Name an example of why we are now living in a highly globalized and integrated world economy.

A

American consumers, for example, routmely purchase oil imported from Saudi Arabia and Nigeria, TV sets from automobiles from Germany and Japan, garments from Chma, shoes from Indonesia, pasta from Italy, and wine from France.

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3
Q

What do integration in financial markets has allowed?

A

ThIs development allows investors to diversify their investment portfolios.

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4
Q

What are the major economic functions?

A

Consumption, production, and investment

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5
Q

What are the three dimensions that set international finance apart from domestic finance?

A
  1. Foreign exchange and political risks.
  2. Market imperfections.
  3. Expanded opportunity set.
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6
Q

What happens when when finns and individuals are engaged in cross-border transactions?

A

They are potentially exposed to foreign exchange risk and political risk.

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7
Q

Name examples of foreign exchange risk.

A
  • Hungarians have borrowed in terms of the euro or Swiss franc to purchase houses. They were initially attracted by the easy availability and low interest rates for foreign currency mortgage loans. However, as the Hungarian currency, forint, was falling against the euro and Swiss franc during the recent global financial crisis, the burden of mortgage payments in terms of forint has increased sharply.
  • Mexico is a major export market for your company and the Mexican peso depre- ciates drastically against the U.S. dollar, this means that your company’s products can be priced out of the Mexican market.
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8
Q

What was the year in which fixed exchange rates were abandoned?

A

1970

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9
Q

What does Political risk mean?

A

Political risk arises from the fact that a sovereign country can change the “rules of the game”. It ranges from unexpected changes in tax rules to outright expropriation of assets held by foreigners.

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10
Q

Name a case of Political Risk.

A

In 1992, for example, the Enron Development Corporation, a subsidiary of a Houston-based energy company, signed a contract to build India’s largest power plant. After Enron had spent nearly $300 million, the project was canceled in 1995 by nationalist politicians in the Maharashtra state who argued India didn’t need the power plant.

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11
Q

What barriers still hamper free movements of people, goods, services, and capital across national boundaries.?

A

These barriers include legal restrictions, excessive transaction and transportation costs, information asymmetry, and discriminatory taxation.

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12
Q

What do we call market imperfections?

A

To the various frictions and impediments preventing markets from functioning perfectly, play an important in motivating MNCs to locate production overseas.

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13
Q

When can firms benefit from an expanded opportunity set?

A

When firms venture into the arena of global markets.

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14
Q

What is a ‘Swap’?

A

A swap is a derivative contract through which two parties exchange financial instruments. These instruments can be almost anything, but most swaps involve cash flows based on a notional principal amount that both parties agree to.

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15
Q

What are benefits from a swap?

A

To mitigate interest rate risk or to speculate.

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16
Q

What is Shareholder wealth maximization?

A

It means that the firm makes all business decisions and investments with an eye toward making the owners of the firm «the shareholders» better off financially, or more wealthy, than they were before.

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17
Q

Where is Shareholder wealth maximization commonly used?

A

In “Anglo-Saxon” countries, such as Australia, Canada, the United Kingdom, and especially the United States.

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18
Q

How is financial management in Europe?

A

In countries like France and Germany, for example, shareholders are generally viewed as one of the “stakeholders” of the firm, others being employees, customers, suppliers, banks, and so forth.

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19
Q

How is financial management in Japan?

A

In Japan many companies form a small number of interlocking business groups called keiretsu, such as Mitsubishi, Mitsui, and Sumitomo, which arose from consolidation of family-owned business empires.

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20
Q

What is corporate governance?

A

The financial and legal framework for regulating the relationship between a company’s management and Its shareholders.

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21
Q

In what type of countries can corporate governance be a great problem and why?

A

It’s a problem especially in emerging and transition economies, such as Indonesia, Korea, China, and Russia, where legal protection of shareholders is weak or virtually nonexistent.

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22
Q

What happens with corporate ownership in countries where shareholders do not have strong legal rights?

A

It tends to be concentrated. The concentrated ownership of the firm, in turn, may give rise to the conflicts of interest between dominant shareholders (often the founding family) and small outside shareholders.

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23
Q

How are stakeholders the owners of the business?

A

As it is their capital that is at risk.

24
Q

In what date did the most celebrated deregulation in London happen? and how is it called?

A

It occurred in London on October 27, 1986, and is known as the “Big Bang.”

25
Q

What innovative instruments were the result of the natural environment for financial innovations?

A

They include currency futures and options, multicurrency bonds, international mutual funds, country funds, exchange traded funds (ETFs), and foreign stock index futures and options.

26
Q

Mention examples of cross-border listings of stocks that allowed investors to buy and sell foreign shares as if they were domestic shares, facilitating international investments.

A

Non-U.S. companies as BHP Billiton, Petro- bras, China Mobile, Nokia, Wipro, Honda Motor, Telmex, lNG, BP, Korea Telecom, and UBS are directly listed and traded on the New York Stock Exchange. At the same time, U.S. firms such as IBM and GE are listed on the Frankfurt, London, and Paris stock exchanges.

27
Q

It represents a momentous event in the history of the world financial system that has profound ramifications for the world economy. It started in the beginning of 1999.

A

The advent of the euro.

28
Q

How many countries and people use the euro nowadays?

A

Currently, more than 300 million Europeans in 17 countries (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal,$lovakia, Slovenia, and Spain)

29
Q

Name new member of the EU that do NOT use the euro.

A

Czech Republic, Hungary, Baltic states, and Poland.

30
Q

By whom is the common monetary policy for the euro zone formulated?

A

By the European Central Bank (ECB).

31
Q

Where is the European Central Bank (ECB) located?

A

In Frankfurt, Germany.

32
Q

It is often referred to as the intellectual father of the euro.

A

Professor Robert Mundell

33
Q

Since when have foreign exchange rates of currencies quoted against the dollar?

A

Since the end of World War I, when the U.S. dollar played the role of the dominant global currency, displacing the British pound.

34
Q

What is “deficits without tears”?

A

The ability to run trade deficits without havIllg to hold much in foreign exchange reserves.

35
Q

Explain the 2009 Europe’s sovereign debt crisis.

A

The crisis started III December 2009 when the new Greek government revealed that its budget deficit for the year would be 12.7 percent of GDP, not the 3.7 percent previously forecast. The previous government had falsified the national account data. The Greek predIcament is attributed to excessive borrowing and spending, with wages and prices rising faster than productivity. With the adoption of the euro, Greece no longer can use the traditional means of restoring competitiveness, i.e., depreciation of the national currency.

36
Q

What weakness did the Europe’s sovereign-debt crisis of 2010 revealed?

A

Euro-zone countries have achieved monetary by adopting the euro, but without fiscal integration. While share common monetary policy, fiscal policies governing taxation, spending, and borrowing firmly remain under the control of national governments. Hence, a lack of discipline in a euro-zone country can always become a Europe-wide crisis.

37
Q

It’s a multilateral agreement among member coun- tries, that has played a key role in dismantling barriers to international trade.

A

General Agreement on Tariffs and Trade (GATT)

38
Q

In what year was the GAAT funded?

A

1947

39
Q

Under the auspices of GATT, the Uruguay Round launched in 1986 aims to…

A

(1) reduce import tariffs worldwide by an average of 38 percent,
(2) increase the proportion of duty-free products from 20 percent to 44 percent for industrialized countries, and
(3) extend the rules of world trade to cover agriculture, services such as banking and insurance, and intellectual property rights.

40
Q

What is the latest round of the WTO?

A

The Doha Round commenced at Doha, Qatar, in 2001, is still continuing.

41
Q

What is the objective of the Doha Round?

A

Its objective is to lower trade barriers around the world, pro- moting free trade between developed and developing countries.

42
Q

What are the two leads of the Doha Round?

A

The developed countries led by the United States, European Union, and Japan, and.
The developing countries led by Brazil, China and India.

43
Q

What are the main disagreements of the Doha Round?

A

The main disagreements are over opening up agricultural and Industrial markets of various countries and how to reduce rich countries’ agricultural subsidies.

44
Q

Country that began to implement market-oriented economic reforms in the late 1970s. Its economy has grown rapidly, often at an astounding rate of 10 percent per annum, and in the process has lifted tens of millions of local citizens from poverty.

A

China

45
Q

Country that has implemented its own market-onented smce the early 1990s, gradually dismantling the “license-raj” or quota system in all economic spheres and encouraging private entrepreneurship. It has emerged as the most important center for outsourcing technology. (IT) services, back-office support, and R&D functions.

A

India

46
Q

Name the four largest economies in the world.

A
  1. US
  2. China
  3. Japan
  4. India
47
Q

Prime example of formal arrangements among countries that been instituted to promote economic integration.

A

The European Union is the direct descendent of the European Community (formerly the European Economic Community).

48
Q

Today, the EU includes ____ member states that have eliminated barriers to the free flow of goods, capital, and people.

A

27 members.

49
Q

Year in which Canada the United States and Mexico entered into the North American Free Trade
(NAFTA).

A

1994

50
Q

Through _______, a country divests itself of the ownership and operation of a business venture by turning over to the free market system. In one sense it is a denationalization process.

A

Privatization

51
Q

What are some benefits of privatization?

A

It’s often seen as a cure for bureaucratic inefficiency and waste; some economists estimate that privatization improves efficiency and reduces operating costs by as much as 20 percent.

52
Q

When was the defining moment of the crisis of 2008-2009?

A

On September 14, 2008, when Lehman Brothers, a major U.S. investment bank with a global presence, went bankrupt.

53
Q

What caused the global financial crisis? Also referred as the “Great Recession”.

A

First, households and financial institutions borrowed too much and took too much risk.
Second, the crisis was amplified manyfold and transmitted globally by securitization.
Third, the “invisible hands” of free markets appar- ently faIled to self-regulate its excesses, contributing to the banking crisis.

54
Q

It allows loan originators to avoid bearing the default risk, which leads to a compromised lending standard and increased moral hazard.

A

Securitization

55
Q

It is a business firm incorporated in one coun-

try that has production and sales operations in several other countries.

A

A multinational corporation (MNC)

56
Q

Name examples of MNCs.

A 
General Electric (GE)
General Motors
British Petroleum (BP)
Toyota
BMW
IBM
Wal-Mart Stores
Procter & Gamble
Nestle
Pfizer 
Siemens
57
Q

How do MNCs use their global presence?

A

By advantage of underpriced labor services available in certain developing countries, and gain access to special R&D capabilities residing in advanced foreign countries.

zInternational Finances (4 decks)

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