Principles of International Finance

Midterm Chapters (1,2,3,4,5,7)

What is the main goal of a multinational corporation (MNC)?

Creation of value for shareholders.

What is meant by shareholder alignment in the context of MNCs?

Aligning the interests of the company with the interests of its shareholders.

What theory suggests a country should specialize in a specific production process and import the rest?

Comparative advantage theory (Ricardo's theory).

What is an example of a company that shifted its structure to increase shareholder value?

Fiat, under CEO Mr. Marchionne's leadership, shifted its operations to become a multinational corporation.

Which type of market theory highlights the inability to easily transfer products between countries?

Imperfect market theory.

What is one agent problem related to multinational corporations?

Lack of alignment between managers and shareholders.

What is the impact of agency problems on large multinational corporations?

It becomes more difficult to align interests of management with those of shareholders as the size increases.

What does a joint venture entail?

A new company formed between an MNC and a local business, sharing ownership, profits, and risks.

What are the risks associated with international business operations?

Exchange rate risk, economic conditions, and political and regulatory risk.

What is one method MNCs use to reduce exposure to exchange rate fluctuations?

Forward contracts to lock in exchange rates for future transactions.

What is the significance of regulatory compliance for MNCs?

MNCs must follow local laws and regulations to operate effectively in different countries.

What are Dim-sum bonds?

Foreign bonds issued and sold in Hong Kong, denominated in local currency.

How do multinational corporations utilize international money markets?

For short-term financing and managing liquidity.

What role do commercial banks play in the forex market?

They serve as financial intermediaries for currency exchanges and market transactions.

What is the objective of the Product Life Cycle Theory?

To explain how products evolve and expand across international markets over time.

What does the term 'Liquidity management' refer to in the context of MNCs?

Management of short-term assets to meet immediate operational needs.

What does FDI stand for and its implication for MNCs?

Foreign Direct Investment, indicating an active investment in establishing subsidiaries abroad.

What is the primary concern of ethical constraints for MNCs?

Addressing issues such as bribery and corruption across different cultural practices.

Why might a company’s perception differ from its actual structure in the market, as seen in the FIAT case?

Market perception can lag behind strategic changes in operations, impacting valuation.

What is meant by decentralized control in multinational corporations?

Decisions are made by local managers, allowing more flexibility but potentially less oversight.

What does 'stock compensation' refer to in the context of agency problems?

Giving stock options to managers to align their interests with those of shareholders.

What is the purpose of shareholder activists in the context of corporate governance?

To acquire minority shares in listed companies to influence management and increase company value.

What are the impacts of exchange rate on an MNC's operations?

Currency fluctuations can affect revenues, costs, and overall profitability.

What are some common forms of international business operations?

Licensing, franchising, joint ventures, and foreign direct investment.

What are the implications of political and regulatory risks for MNCs?

Government policies and regulations may hinder operational ability, impacting performance.

What key factors drive the growth of international capital markets?

Technology advancements, deregulation, and increased competition in financial trading.