Module-1: Introduction to International Environment Additional Review Q&A by kirankvknet@gmail.

com

1. Why is it important to study international financial management? Answer: We are now living in a world where all the major economic functions, i.e., consumption, production, and investment, are highly globalized. It is thus essential for financial managers to fully understand vital international dimensions of financial management. 2. How is international financial management different from domestic financial management? Answer: There are three major dimensions that set apart international finance from domestic finance. They are: 1. Foreign exchange and political risks, 2. Market imperfections, and 3. Expanded opportunity set. 3. What are multinational corporations (MNCs) and what economic roles do they play? Answer: A multinational corporation (MNC) can be defined as a business firm incorporated in one country that has production and sales operations in several other countries. Indeed, some MNCs have operations in dozens of different countries. MNCs obtain financing from major money centers around the world in many different currencies to finance their operations. Global operations force the treasurers office to establish international banking relationships, to place short-term funds in several currency denominations, and to effectively manage foreign exchange risk. 4. Explain Greshams Law. Answer: Greshams law refers to the phenomenon that bad (abundant) money drives good (scarce) money out of circulation. This kind of phenomenon was often observed under the bimetallic standard under which both gold and silver were used as means of payments, with the exchange rate between the two metals fixed. 5. Discuss the advantages and disadvantages of the gold standard. Answer: The advantages of the gold standard include: (1) Since the supply of gold is restricted, countries cannot have high inflation; (2) Any BOP disequilibrium can be corrected automatically through cross-border flows of gold. On the other hand, the main disadvantages of the gold standard are: (1) The world economy can be subject to deflationary pressure due to restricted supply of gold; (2) The gold standard itself has no mechanism to enforce the rules of the game, and, as a result, countries may pursue economic policies (like de-monetization of gold) that are incompatible with the gold standard. 6. What were the main objectives of the Bretton Woods system? Answer: The main objectives of the Bretton Woods system are to achieve exchange rate stability and promote international trade and development. 7. Discuss the criteria for a good international monetary system. Answer: A good international monetary system should provide (i) Sufficient liquidity to the world economy (ii) Smooth adjustments to BOP disequilibrium as it arises, and (iii) Safeguard against the crisis of confidence in the system.