FIN 450 Exam 1 Review

1. Multinational corporation (MNC)

2. Theory of Comparative Advantage: A
B
3. Imperfect Markets Theory: factors of production (i.e., capital, labor, resources, and land) are
somewhat immobile.
4. Product Cycle Theory: as a firm matures, it recognizes opportunities outside its domestic
market.
5.
International trade: Importing/exporting
Licensing: technology. Airport Starbucks
Franchising: strategy. McDonalds in France
Joint Ventures: Shanghai GM
Acquisitions of existing operations: full control. Daimler-Chrysler
Establishing new foreign subsidiaries
6. Thus, the value of the MNC now depends on Expected cash flows, which now also depend on
international and country-specific economic and political conditions. Expected exchange
rates.
Any changes in these, as well as changes in k due to how volatile cash flows are, will cause the
MNCs value to rise or fall.
7. The Balance of Payments is a summary of transactions between domestic and foreign
residents for a specific country (e.g., U.S.) over a specified period of time (e.g., a quarter,
year).
- Identity: current account= - capital account
- Current Account: summary of flow of funds due to purchases of goods or services (and
the provision of income on financial assets). balance of trade in goods and
services. current account surplus, current account
deficit.
- Capital Account: summary of flow of funds resulting from the sale of assets between one
specified country and all other countries over a specified period of time.
8. Capital account investment
- Direct foreign investment
- Portfolio investmentcross-border purchase of stocks and bonds.
- U.S. capital account is typically in surplus
- Investment has positive implications for the U.S. in the long-term.
9. Factors affecting international trade flows
- Inflation: import increase, current account decreases.
- National income current account decreases
- Government policy
- Exchange rate USD us IM>EX
CA decreases
10. Factors Affecting International Portfolio Investment
- Tax rates on Interest or Dividends
- Interest rate. Hedge funds and mutual funds are now engaged in global search for high
yields. Heavily engaged in the carry trade. The carry trade: borrow currencies that have
low interest rates (JPY) and buy currencies with high interest rates (AUD).
- Exchange rate. If Sony stock increases by 10 percent, but yen weakens by 15, then US
dollar return is (1+0.10)(1-0.15) 1 = -0.065, or -6.5%.
11. Impact of International Flows on U.S. Interest Rates
-
- interest relatively high, high returns, and safer.
- supply of funds increases, interest rate decrease
12. The over the counter Market(OTC) foreign exchange dealer
13. The spot market: largest & most liquid. Immediate delivery.
14. The forward market: major portion of FX market. Forward rate
rate
15. MNCs currency forward hedge against currency risk
16. eurodollar depositany US dollar deposit made anywhere in the world besides the US. It is also
possible to borrow in the eurodollar market (i.e., borrowing in dollars from a bank outside the
US).
17. A eurocurrency deposit is a deposit in any currency made in a bank located outside of the
home country of that currency. For example, depositing Swiss francs in a Singaporean bank.
18. International bonds
- Foreign bonds: issued by borrower that is foreign to the country where the bond is placed.
For example:
- Eurobonds: bonds sold in countries other than the country of the currency denominating
the bond