Exam 1 Conceptual Review 31 questions total 1 point each one extra credit question 5 pts Multiple choice True False Short response for math problems Chapters 1 4 CHAPTER 1 What is the primary goal of MNCs o To maximize shareholders wealth stock price What is an agency cost o Conflict between managers and shareholders How can MNCs reduce agency costs o Use a centralized system parent company controls all subsidiaries Types of International Business in order of least risk least capital required to most International Trade o Pure import and export of goods between countries Licensing Franchising o Allows a foreign firm to use your copyrights patents trademarks etc for fees ex Allowing a Chinese company to manufacture Spongebob toys o Providing your firm s business model and service strategy to be used foreign markets in exchange for fees ex Opening a McDonald s restaurant in India Joint Ventures considered a direct foreign investment DFI o When two firms apply their cooperative advantages to a new project for operation in two or more markets ex Sony Ericsson electronics Establishing new foreign subsidiary DFI o Starting new operations in foreign countries Acquisitions of Existing Operations DFI o Acquiring full control of an already established foreign business ex Belgian Brazilian owned InBev purchasing American owned Anheuser Busch Factors that go into the valuation of MNC cash flows CFE t CFE tj SE tj m j 1 V CFE t t 1 k n t 1 CF cash flows T time period S spot rate spot price exchange rate to be converted K discount rate required rate CHAPTER 2 How factors impact the current account Balance of Trade Ex If a country s government imposes a tariff on imported goods that county s current account balance will likely INCREASE assume no retaliation from other governments o A tariff would make it more difficult to import thus creating higher exports o Current account balance export imports so if imports decrease the total value will increase If currency appreciates current account decreases If national income increases current account decreases If inflation increases imports increase goods are cheaper overseas and exports decrease thus current account decreases International Financial Institutions International Financial Corporation IFC o Promotes private enterprise within countries o Promotes economic development through the private sector World Bank WB o Makes loans to enhance economic development o Profit oriented o Funds come from the sale of debt instruments to private sector o AAA credit rating International Monetary Fund IMF o Government run public o Regulates exchange rates o Promotes cooperation among countries on international monetary issues o Promotes free trade and mobility of funds across countries Bank for International Settlements BIS o Nicknamed the Central Bank s central bank o Largely provides financing for Latin American and Eastern European countries World Trade Organization WTO o Referred to as the International Court o Settles trade disputes across countries International Development Association IDA o Similar to the World Bank in function o Major difference provides loans at a lower interest rate to poorest nations that cannot qualify for WB loans J curve the short run tendency for a country s balance of trade to deteriorate even while its currency is depreciating Historical Growth in International Trade Factors Events North American Free Trade Agreement NAFTA o Created uniform regulations between U S Mexico and Canada Removal of Berlin Wall Single European Act o Increased trade between Eastern and Western Europe o Prior to the Euro standardized business regulations across Europe o Allowed capital to flow freely throughout Europe General Agreement on Tariffs and Trade GATT o Created global basic guidelines lead to the WTO Inception of the Euro o Several countries adopted the Euro o Eliminated exchange rate risk o Ex Countries that have adopted the euro must agree on a single monetary policy Components of the Current Account Merchandise and Services o Balance of Trade Exports imports o Export selling goods to another country cash in credit o Import buying goods from another country cash out debit o A deficit is when BOT is negative Imports exports o Ex Dell buys parts for its computers from a firm in China represents an import cash out debit Factor Income Payments o Interest coupons dividends on stock o Ex A U S investor receives a dividend payment from a British company cash in credit Transfer Payments o Aid grants gifts between countries o Ex U S sends aid to Haiti post earthquake cash out debit CHAPTER 3 History of Foreign Exchange Gold Standard o Exchange of currency was tied to their relative convertibility rates per ounce of gold o Path to convert USD Gold Mexican peso Bretton Woods Agreement of 1944 o Allowed the fixed rate tied to gold to move by 1 o Ex A primary result of the Bretton Woods Agreement was establishing that exchange rates of most major currencies were to be allowed to fluctuate 1 above or below their initially set values Smithsonian Agreement of 1971 o Changes allowed movement to 2 25 o Directly tied currencies USD Mexican peso Floating Exchange Rates o In 1973 all official boundaries were eliminated o Currency tied to the market International Markets International Money Market o Low risk o Used for short term less than 1 yr financial instruments o Used when corporations or governments need short term funds denominated in a currency different from their home country could have lower interest rates or is depreciating International Credit Market o Medium term funds 1 10 yrs o Usually in the form of notes International Bond Market o MNCs issue bonds in international bond market to attract demand or finance a foreign project in a particular currency with a lower interest rate to reduce costs o Foreign bonds company headquarters are different then where you are loaning ex U S corporation issues a bond denominated in Mexican pesos in Mexico o Euro bonds country issued in and currency are different NOT euro specific ex U S company issues a bond denominated in Euros in Mexico o High credit risk in bonds due to longer terms of maturity International Stock Market o Issuance of stock in foreign markets ex Japanese owned Honda is traded on American stock exchange o What Investors look for in foreign stocks Developing and emerging markets Country expected to perform well Legal protection of shareholders Government enforcement of securities laws Voting