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Exam. Finance Essay

Finance 415
Exam I
Review Questions
1) Read chapters 1 – 5 and review the PPTs we covered in class. 2) Expect 5 or 7 short-answer questions
General Questions –
1. In class we reviewed three firms in three different countries. The M/S Milad Nor Company in Afghanistan, Caritex in Bulgaria, and Obod in Montenegro. Each company was faced with different problems and issues. Please briefly summarize the similarities between the firms and their individual issues. How do the problems faced by these firms compare to problems faced by similar firms in more developed countries? 2. Your stock market simulation calls for you to invest in securities with a significant presence outside the US – debt, equity, commodities, currencies, derivatives… In researching equities trading on exchanges outside of the US what similarities/differences have you found compared to firms trading on exchanges in the US? Chapter 1

1.The term globalization has become very widely used in recent years. How would you define it? 2.What does an MNE need in order for it to create value through the globalization process? 3.How does the concept of capitalism actually apply to the globalization process of a business, as it moves from elemental to multinational stages of development? 4. Define and explain the theory of comparative advantage

5. Key to understanding most theories is what they say and they don’t. Name four or five key limitations to theory of comparative advantage. 6.Why have Eurocurrencies and LIBOR remained the centerpiece of the global financial marketplace for so long? * These are domestic currencies of one country on deposit in a second country * The Eurocurrency markets serve two valuable purposes: * Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity * The Eurocurrency market is a major source of short-term

bank loans to finance corporate working capital needs (including export and import financing) * LIBOR is the most widely accepted rate of interest used in standardized quotations, loan agreements, and financial derivatives transactions *

7. Which assets play the most critical role in linking the major institutions that make up the global financial marketplace? * The linkages are the interbank networks using currency. Without ready exchange of currencies the market is hard-pressed to operate efficiently.

Chapter 2

1. How does ownership alter the goals and governance of a business? Public ownership may be wholly state-owned or partially publicly traded. State Owned Enterprises (SOEs) are created for business purposes rather than for regulation or civil activities. Private firms may be publicly traded (stock) or privately owned by partners or family. 2.Why is this separation so critical to the understanding of how businesses are structured and led? 3.Explain the assumptions and objectives of the shareholder wealth maximization model. 4.Explain the assumptions and objectives of the stakeholder wealth maximization model. 5.Define the following terms:

a.Corporate governance
b.Agency theory
c.Stakeholder capitalism

6.In Germany and Scandinavia, among other countries, labor unions have representation on boards of directors or supervisory boards. How might such union representation be viewed under the shareholder wealth maximization model compared to the corporate wealth maximization model? 7.In many countries it is common for a firm to have two or more classes of common stock with differential voting rights. In the United States the norm is for a firm to have one class of common stock with one-share-one-vote. What are the advantages and disadvantages of each system? 8.What are the key differences in the goals and motivations of family ownership of the business

as opposed to the widely held publicly traded business? 9.It has been claimed that failures in corporate governance have hampered the growth and profitability of some prominent firms located in emerging markets. What are some of the typical causes of these failures in corporate governance?p34 10. Do markets appear to be willing to pay for good governance?p36 Chapter 3

1.Under the gold standard all national governments promised to follow the “rules of the game.” This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply? 2.If a country follows a fixed exchange rate regime, what macroeconomic variables could cause the fixed exchange rate to be devalued? 3.What are the advantages and disadvantages of fixed exchange rates? 4.Explain what is meant by the term impossible trinity and why it is true. 5.Fixed exchange rate regimes are sometimes implemented through a currency board (Hong Kong) or dollarization (Ecuador). What is the difference between the two approaches? 6.High capital mobility is forcing emerging market nations to choose between free-floating regimes and currency board or dollarization regimes. What are the main outcomes of each of these regimes from the perspective of emerging market nations? 7.On January 4, 1999, eleven member states of the European Union initiated the European Monetary Union (EMU) and established a single currency, the euro, which replaced the individual currencies of participating member states. Describe three of the main ways that the euro affects the members of the EMU. 8.Why did the fixed exchange rate regime of 1945–1973 eventually fail? 9.How did the Argentine currency board function from 1991 to January 2002 and why did it collapse? DEAD

Chapter 4

1. Business managers and investors need BOP data to anticipate changes in host country economic policies that might be driven by BOP events.

2. From the perspective of business managers and investors list three specific signals that a country’s BOP data can provide.

3. What are the two main types of economic activity measured by a

country’s BOP?

4. Why does the BOP always “balance”?

5. If the BOP were viewed as an accounting statement, would it be a balance sheet of the country’s wealth, an income statement of the country’s earnings, or a funds flow statement of money into and out of the country?

6. What are the main component accounts of the current account? Give one debit and one credit example for each component account for the United States. adjust

7. The US dollar has maintained or increased its value over the past 20 years despite running a gradually increasing current account deficit. Why has this phenomenon occurred?

Chapter 5

1. What were the three major forces behind the credit crisis of 2007 and 2008?

2. Why were LIBOR rates so much higher than Treasure yields in 2007 and 2008? What is needed to return LIBOR rates to the lower, more stable rates of the past?

3. What were the three key elements of the package used by the U.S. government to resolve the 2008-9 credit crisis?

4. Why are the sovereign debtors of the Eurozone considered to have a problem that is different from any other heavily indebted country, like the United States?

5. Why has the case of Portugal been termed a “case of contagion” rather than a sovereign debt crisis?

6. What are the three primary methods which might be used individually or in combination to resolve the European debt crisis?

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