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International Finance
Examination 1

These questions are from the test bank. Some questions have multiple parts.

Short Answer Essay

1. What are two problems that corporations have over proprietorship and partnership?

(a) Which business organization dominates international trade?

(b) Why do they dominate international trade?

2. Identify four reasons why an enterprise expands into a foreign country?

3. Please distinguish between a mature economy and emerging-market economy.

(a) Give examples of both economies.

(b) Please explain the profitability, competitiveness, and risk associated with both types of economies.

4. What are three requirements for a multinational enterprise to enter a foreign country?

5. What is the Principal-Agency Problem?

(a) When investment banks were converted to corporations during the 1990s, how did the Principal-Agent Problem play a role?

(b) Could a family-owned corporation reduce the problem with the Agency Problem? Please explain.

6. What is a Keiretsu? Why were the Keiretsus important for the rapid growth of the Japanese economy?

(a) What kind of planning horizons do U.S. corporations tend to use?

(b) Which countries do the governments tend to be shareholders in a corporation? What are characteristics of these corporations?

7. What are Special Purpose Entities (SPEs)?

(a) How did Enron use SPEs?

(b) Although the U.S. government passed the Sarbanes-Oxley Act, did this law prevent future corporate fraud problems?

(c) What is transparency?

8. You have two countries: Bosnia and Herzegovina and Colombia. Both countries grow tobacco and coffee. The two countries can produce a maximum that is recorded in the table, given their resources.

Production Tobacco Coffee
Bosnia and Herzegovina 1,000 500
Colombia 500 1,000

(a) Please draw the straight line Production Possibilities Curve (PPCs) for both countries.

(b) What is the production level under autarky, if each country sets its production level at the halfway point?

(c) After both countries engage in world trade, which products do both countries specialize in?

(d) What is the gain in production after these countries engage in free trade?

9. What are three additional functions that international banks have over the standard one-country bank?

10. What are offshore accounts?

(a) Where are the offshore markets located?

(b) What are three characteristics of offshore accounts?

11. What are the three methods for a bank to enter a foreign market? Which method is preferable?

12. What is exchange rate risk?

(a) What are two methods a bank can protect itself from this risk?

13. What is the spot market?

(a) What is the derivatives market?

(b) What are Forward transactions?

(c) Distinguish between a spot against a forward and a forward-forward currency swap?

14. What is a Banker's Acceptance? Explain how an importer would use one.

(a) Distinguish between a primary and secondary market?

(b) Must exporters hold onto these Banker's Acceptance?

15. What are Eurodollars?

(a) How could a bank circumvent regulations using Eurodollars?

(b) Which country created Eurodollars, and why?

16. Please define the following terms.

(a) What is the current account?

(b) What is the financial account?

(c) What is the official settlements balance?

(d) What is the statistical discrepancy?

17. What is a balance-of-payments deficit?

(a) How can a central bank finance these deficits?

(b) Why does the United States have such a large current account deficit?

(c) What is the equation that relates the current account and financial account?

(d) Explain how the large U.S. trade deficit and U.S. government debt are related?

18. What is the Official Settlements account?

(a) If a country has a balance-of-payments deficit, what are five methods a government (or central bank) uses to finance this deficit?

(b) If a country has a balance-of-payments deficit and the government has no reserves, what can the government do?

(c) If a country has a balance-of-payments surplus, what happens to that country’s reserves?

19. What is the Statistical Discrepancy account?

(a) What are three reasons why this statistical discrepancy occurs?

20. What does China and the Asian tigers to the exchange rate of their currency to the U.S. dollar?

(a) What happens to their current account (and possibly their Balance of Payments)?

(b) What are three strategies an Asian Tiger or China can do when they accumulate official reserves?

21. What is the European Union (EU)? Explain in terms of currency and flow of goods, resources, and labor.

(a) What is the European Central Bank?

(b) What is a benefit of the European Union?

(c) What is a problem of the European Union?


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