Multinational Business Finance 15th Global Edition by David K. Eiteman solution manual
Chapter 1
Multinational Financial Management:
Opportunities and Challenges
1. Globalization Risks for MNEs. Was globalization responsible for the slowdown of MNE business during the financial crisis of 2008?
In today’s global economy, the process that integrates world trade, links financial markets, and propels cross-border capital flows is called financial globalization. In our globalized world, €4–5 trillion in foreign exchange transactions are made daily, and around €20 trillion of goods and services are traded globally. As much as financial globalization has produced many opportunities for MNEs, it has also introduced new threats. Irresponsible bank lending and credit excesses led to failures of highly leveraged banks and large businesses. The bust credit and sharp economic downturn rapidly spread from the United States and Europe to the rest of the world. Consequently, global purchasing power and consumer confidence dropped round the world, severely impacting sales revenues. MNEs were especially hit, not only because their global sales dropped, but also because much of their excess funds were invested in risky assets.
2. MNEs and Operation in Global Markets. What are the factors that affect the decisions of multinational enterprises to operate in global markets?
The main determining factor for operating in a new market is the comparative advantage in terms of cost and rate of productivity of factors of production, better regulations, lower taxation, protectionist trade barriers, stable foreign exchange, and larger markets. Other factors that incentivize foreign investors are savings on transportation costs and the need to regularly adapt to changing local demand.
3. Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies? What is meant by a Eurocurrency market?
A eurocurrency is a freely tradable foreign currency deposited in a domestic bank of a nation that is not the native country issuing this currency. The main eurocurrencies are the US dollar, the euro, the British pound, and the Japanese yen. A eurocurrency market is a money market where financial institutions provide banking services to a variety of individual, corporate, and sovereign customers in eurocurrencies.
4. Fragility of the Global Financial Marketplace. How has the global financial crisis exposed the fragility of assets and institutions of the global system?
In the interlocked financial global system, the fragility of assets and institutions led to the eruption of the global financial sector. High risk assets such as derivatives were traded. While initially generated to hedge against risks and create liquidity, many of these derivatives were multi-tiered and highly opaque, making it difficult to assess the inherent risks associated with them. The institutional framework for deregulation and lapse supervision left many financial institutions and instruments unregulated. Moreover, the lack of a global regulatory framework left interbank transactions highly unsupervised. All of these factors—ranging from irresponsible issuance and trading in high risk assets, poor domestic supervision, and the lack of global regulation of interbank transactions—exposed the fragility of the global financial framework when the global financial crisis erupted.
5. MNEs and LIBOR. Most MNEs either take loans in eurocurrencies or issue eurobonds with a floating coupon rate tied to the LIBOR. Explain how MNEs were affected by the LIBOR scandal.
A few large banks were fined and penalized for rigging the benchmark LIBOR rate. While large banks borrowed funds (as was the case during the global financial crisis), they made their quotes below the fair market rate. Regulators often assumed that banks were also trying to benefit their corporate customers, allowing MNEs to issue new eurobonds at lower rates, hence substantially reducing the purchasing power of those holding their bonds.
6. Post-LIBOR Scandal. Why do you think the UK government has resolved against the total elimination of LIBOR benchmarks after the scandal?
The London Interbank Offered Rate (LIBOR) is widely used as a benchmark interest rate for hundreds of billions of dollars in financial contracts, corporate loans, and adjustable rate home mortgages and consumer loans. In 2012, the LIBOR scandal was exposed, revealing collusion between and inaccurate interest rate quotes by a dozen large British banks, some of which fraudulently reported their short-term borrowing costs so as to profit from deals. Following the LIBOR scandal, many have called for the total elimination of LIBOR. However, as it remains the one and only pervasive interest rate benchmark, the British government decided against abandoning it and resolved to take measures to save and reform it. The number of LIBOR quotes would drop from 150 to the 20 most important ones. Among the currencies to be phased out are the Australian dollar, Canadian dollar, New Zealand dollar, Danish kroner, and Swedish kroner. Moreover, four of the longer-term maturities would be eliminated. Additionally, all reporting banks are required to submit documentation proving the sources of the rates they are quoting. However, the caveat is that many of the rates would remain unsupported by actual interbank transactions, raising doubts about the accuracy of longer-term LIBOR quotes.
Multinational Financial Management:
Opportunities and Challenges
1. Globalization Risks for MNEs. Was globalization responsible for the slowdown of MNE business during the financial crisis of 2008?
In today’s global economy, the process that integrates world trade, links financial markets, and propels cross-border capital flows is called financial globalization. In our globalized world, €4–5 trillion in foreign exchange transactions are made daily, and around €20 trillion of goods and services are traded globally. As much as financial globalization has produced many opportunities for MNEs, it has also introduced new threats. Irresponsible bank lending and credit excesses led to failures of highly leveraged banks and large businesses. The bust credit and sharp economic downturn rapidly spread from the United States and Europe to the rest of the world. Consequently, global purchasing power and consumer confidence dropped round the world, severely impacting sales revenues. MNEs were especially hit, not only because their global sales dropped, but also because much of their excess funds were invested in risky assets.
2. MNEs and Operation in Global Markets. What are the factors that affect the decisions of multinational enterprises to operate in global markets?
The main determining factor for operating in a new market is the comparative advantage in terms of cost and rate of productivity of factors of production, better regulations, lower taxation, protectionist trade barriers, stable foreign exchange, and larger markets. Other factors that incentivize foreign investors are savings on transportation costs and the need to regularly adapt to changing local demand.
3. Eurocurrencies and Eurocurrency Markets. What are the major eurocurrencies? What is meant by a Eurocurrency market?
A eurocurrency is a freely tradable foreign currency deposited in a domestic bank of a nation that is not the native country issuing this currency. The main eurocurrencies are the US dollar, the euro, the British pound, and the Japanese yen. A eurocurrency market is a money market where financial institutions provide banking services to a variety of individual, corporate, and sovereign customers in eurocurrencies.
4. Fragility of the Global Financial Marketplace. How has the global financial crisis exposed the fragility of assets and institutions of the global system?
In the interlocked financial global system, the fragility of assets and institutions led to the eruption of the global financial sector. High risk assets such as derivatives were traded. While initially generated to hedge against risks and create liquidity, many of these derivatives were multi-tiered and highly opaque, making it difficult to assess the inherent risks associated with them. The institutional framework for deregulation and lapse supervision left many financial institutions and instruments unregulated. Moreover, the lack of a global regulatory framework left interbank transactions highly unsupervised. All of these factors—ranging from irresponsible issuance and trading in high risk assets, poor domestic supervision, and the lack of global regulation of interbank transactions—exposed the fragility of the global financial framework when the global financial crisis erupted.
5. MNEs and LIBOR. Most MNEs either take loans in eurocurrencies or issue eurobonds with a floating coupon rate tied to the LIBOR. Explain how MNEs were affected by the LIBOR scandal.
A few large banks were fined and penalized for rigging the benchmark LIBOR rate. While large banks borrowed funds (as was the case during the global financial crisis), they made their quotes below the fair market rate. Regulators often assumed that banks were also trying to benefit their corporate customers, allowing MNEs to issue new eurobonds at lower rates, hence substantially reducing the purchasing power of those holding their bonds.
6. Post-LIBOR Scandal. Why do you think the UK government has resolved against the total elimination of LIBOR benchmarks after the scandal?
The London Interbank Offered Rate (LIBOR) is widely used as a benchmark interest rate for hundreds of billions of dollars in financial contracts, corporate loans, and adjustable rate home mortgages and consumer loans. In 2012, the LIBOR scandal was exposed, revealing collusion between and inaccurate interest rate quotes by a dozen large British banks, some of which fraudulently reported their short-term borrowing costs so as to profit from deals. Following the LIBOR scandal, many have called for the total elimination of LIBOR. However, as it remains the one and only pervasive interest rate benchmark, the British government decided against abandoning it and resolved to take measures to save and reform it. The number of LIBOR quotes would drop from 150 to the 20 most important ones. Among the currencies to be phased out are the Australian dollar, Canadian dollar, New Zealand dollar, Danish kroner, and Swedish kroner. Moreover, four of the longer-term maturities would be eliminated. Additionally, all reporting banks are required to submit documentation proving the sources of the rates they are quoting. However, the caveat is that many of the rates would remain unsupported by actual interbank transactions, raising doubts about the accuracy of longer-term LIBOR quotes.