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International BusinessChapter 19 The Multinational Finance Function

1) Global Positioning Solutions Inc. is a Utah-based company that ________.A) provides location assistance for global executives who travel frequently B) is a division of a banking syndicate in the Western part of the United StatesC) assists firms that have foreign-exchange needs but that lack in-house foreign-exchange teams D) started out by providing foreign exchange services that were not being offered by commercial banksAnswer: C

2) A major challenge to Global Positioning Systems in providing foreign exchange services to its clients is that ________.A) GPS lacks access to major foreign exchange quoting services B) GPS has to constantly upgrade the quality of the services it offersC) GPS cannot provide individualized attention to its customers, so it has to commoditize its product linesD) new regulations have stopped GPS from selling foreign exchange services that compete with the banksAnswer: B

3) The long-term financing dimension of cash management ________.A) deals with the selection, issuance, and management of long-term debt and equityB) is unaffected by currency changes because everyone borrows in U.S. dollarsC) focuses on the analysis of investment opportunitiesD) is independent of the capital structure of an MNEAnswer: A

4) The financial management activity that determines the proper mix of debt and equity is ________.A) capital structureB) long-term financingC) capital budgetingD) working capital managementAnswer: A

5) The CFO's function in a company focuses on ________.A) improving distributor relationshipsB) acquiring financial resources C) handling accounting issuesD) creating financial statements Answer: B

6) Acquiring and allocating financial resources among the company's activities and projects is the responsibility of the ________.A) accounting function of the firmB) external auditorsC) CFOD) financial marketing managerAnswer: C

7) The degree to which a firm funds the growth of a business by debt is known as ________.A) leveragingB) equity financingC) hedgingD) after-tax cost of debtAnswer: A

8) The concept of leveraging in finance refers to ________.A) the degree to which companies rely on foreign exchange to fund operationsB) how a company hedges its foreign currency obligationsC) the degree to which a firm funds the growth of a business by debtD) how much cash the CFO has in the bankAnswer: C

9) According to 2010 data, which of the following statements about the mix of debt and equity to fund operations is true?A) The debt/asset ratio has risen in Japan since 2007. B) A growing number of Russian firms are relying more on debt.C) The equity/asset ratio fell for firms in France and Germany since 2007. D) In most emerging markets, shares of stock are broadly held like in the U.S. Answer: B

10) MNEs most likely use offshore debt markets ________.A) to hide their cash from tax authoritiesB) to take advantage of their ability to access capital in different countriesC) since debt in foreign countries is always cheaper than in the home country marketD) because investors don't like to invest in companies that only raise capital in their home marketsAnswer: B

Learning Outcome: Discuss the factors influencing financial management decisions in international business

11) Which of the following is NOT an advantage associated with Eurocurrencies?A) more convenience for users B) better yield for lenders C) tighter U.S. regulation D) cheaper lending ratesAnswer: C


12) Which of the following is a characteristic of the Eurocurrency market?A) The Eurocurrency market is both short and medium term.B) Private borrowers are the major players in the Eurocurrency market.C) The Eurocurrency market is a retail, rather than wholesale, market.D) The interest rates in the Eurocurrency market are about the same as in domestic markets.Answer: A


13) LIBOR is best defined as the ________.A) interest rate of the National Bank of LondonB) short-term interest rate for dollars held in the Eurodollar marketC) interest rate of the European UnionD) deposit rate that applies to commercial loans in the European UnionAnswer: B

14) A situation in which several banks pool resources in the Eurocurrency market to extend credit to a borrower and spread the risk is known as ________.A) credit collaborationB) leverage equity financingC) syndicationD) short-term Eurocurrency financingAnswer: C

15) A bond issue floated by a U.S. company in dollars in London, Luxembourg, and Switzerland by a syndication of bonds is an example of a(n) ________.A) global bondB) domestic bondC) EurobondD) foreign bondAnswer: C

16) Which of the following countries has the largest market for domestic bonds?A) the U.K.B) the U.S.C) JapanD) ChinaAnswer: B

17) A bond issued by a Brazilian company in British pounds in London is a(n) ________.A) EurobondB) global bondC) local bondD) foreign bondAnswer: D

18) Firms most likely borrow money in the international bond market to ________.A) guarantee high yields and low ratesB) enable diversification of funding sourcesC) protect against costly government regulationsD) allow emerging markets to invest in foreign exchangeAnswer: B


19) Brooke buys shares of stock in a small bakery in a foreign country in return for an ownership position and promised capital gains. This is an example of ________.A) equity securitiesB) debt financingC) playing the stock marketD) investing in EuroequitiesAnswer: A

20) The market for shares sold outside the boundaries of the issuing company's home country is the ________.A) Eurocurrency marketB) international bond marketC) international equity marketD) Euroequity marketAnswer: D

21) The stock market is also known as the ________.A) capital marketB) foreign exchange marketC) bond marketD) equity-capital marketAnswer: D

22) A negotiable certificate issued by a U.S. bank to represent the underlying shares of a foreign corporation's stock is called a(n) ________.A) EuroequityB) American Depositary ReceiptC) Global Depositary ReceiptD) European Depositary ReceiptAnswer: B

23) The best way for a Euroequity to get a listing in the United States is to issue a(n) ________.A) Global Depositary ReceiptB) European Depositary ReceiptC) American Depositary ReceiptD) Domestic Depositary ReceiptAnswer: C

24) When Sistema, a Russian company, issued a U.S. dollar stock offering in London, its shares were classified as a(n) ________.A) Global Depositary ReceiptB) American Depositary ReceiptC) European Depositary ReceiptD) International Depositary ReceiptAnswer: A

25) What is the main challenge companies face in listing ADRs in the United States?A) paying costly fees and tariffsB) complying with SEC reporting requirementsC) listing shares in U.S. dollars instead of EurodollarsD) conducting time-consuming performance evaluations Answer: B


26) A city or country that provides large amounts of funds in currencies other than its own is a(n) ________.A) offshore financial centerB) ADR facilitatorC) interbank marketD) currency regulatorAnswer: A

27) Which of the following is a characteristic of most offshore financial centers?A) strict domestic regulationB) minimal banking activitiesC) large foreign currency markets D) nominal or non-existent tax ratesAnswer: C


28) Which of the following has extensive banking activities involving short-term financial transactions?A) booking centerB) operational centerC) foreign exchange marketD) international regulatory marketAnswer: B

29) What is the primary concern about offshore financial centers?A) engaging in illegal activities B) enabling firms to avoid taxationC) allowing the transfer of large funds D) existing in politically risky environmentsAnswer: B


AACSB: Ethical understanding and reasoning abilities

30) Capital budgeting is best described as the ________.A) process that determines which countries will receive capital investment fundsB) procedure for determining the proper mix of debt and equity for a countryC) proper management of a country's current assets and liabilitiesD) simplification of corporate tax procedures Answer: A

31) Which of the following is unique to foreign project assessment in the capital budgeting decision?A) Project cash flows must be determined.B) Parent cash flows and project cash flows are the same.C) Local tax issues affect the determination of free cash flows and the remittance of earnings.D) Inflation is not an issue, because companies use the same inflation rate in both the domestic and international setting in order to make the analysis more comparative.Answer: C

32) Vale, the large Brazilian mining company, is trying to decide if it wants to invest in a Canadian nickel mine. Which of the following questions is LEAST relevant to Vale's capital budgeting decision?A) How will differing rates of inflation in Canada and Brazil affect the parent and subsidiary?B) How will dividends be affected by the Canadian and Brazilian tax systems?C) What is the difference in inflation rates between Brazil and Canada?D) Does Brazil or Canada have the absolute advantage in exporting?Answer: D


33) One way to account for the challenge of the variability of future cash flows is to ________.A) adjust the hurdle rate for the projectB) use the most likely cash flow estimateC) ignore different rates of inflation to prevent confusion D) leave out a consideration of the terminal value of an investmentAnswer: A

34) Which of the following is NOT a major internal source of funds available to MNEs?A) intercompany loansB) equity investments by the parent company in its subsidiariesC) equity capital raised within the country where the subsidiary is locatedD) intercompany receivables and payablesAnswer: C

35) The process of coordinating cash inflows and outflows among subsidiaries so that only the balance in cash is transferred is known as ________.A) dividend remissionsB) transfer pricingC) multilateral nettingD) currency hedgingAnswer: C

36) Multilateral netting in global cash management is best described as ________.A) establishing a safety net so companies don't run out of cashB) coordinating cash inflows and outflows among subsidiariesC) transferring currencies among subsidiaries to exhibit transparencyD) transferring funds in the absence of a good cash budget or loan arrangementAnswer: B

37) A foreign exchange exposure that occurs because of a change in the value of exposed assets or liabilities of foreign currency financial statements is a(n) ________.A) translation exposureB) transaction exposureC) economic exposureD) hedge exposureAnswer: A

38) The effect of an exchange-rate change on the financial statements of a foreign subsidiary ________.A) generally results in a foreign exchange gainB) generally results in a foreign exchange lossC) is neither a gain nor a loss because of accounting rulesD) is either a net gain or a net lossAnswer: D

39) FTX, a U.S. electronics firm, has operations in Japan. Currently, the yen is rising against the dollar. Which of the following will most likely occur?A) Translated earnings will be higher than before the strengthening of the exchange rate.B) Translated earnings will be lower than before the strengthening of the exchange rate.C) There will be no gain or loss on translating the financial statements into dollars.D) The gains or losses will not affect earnings per share and stock prices.Answer: A


40) Diego is a Brazilian mining company that has operations in Canada. Currently, the Canadian dollar is falling against the Brazilian real. Which of the following will most likely occur?A) Translated earnings will be lower after the fall in the dollar.B) Translated earnings will be lower than before the strengthening of the dollar.C) Translated earnings will be higher than when the Brazilian real was worth more.D) The gains or losses on translated earnings will not affect earnings per share and stock prices.Answer: A

41) A transaction exposure for a U.S. company ________.A) occurs when the dollar value of a payable from exports changes as the exchange-rate changes B) generally takes place when foreign currencies weaken against the dollarC) occurs when reporting systems are inadequateD) does not result in a gain or loss in cash flowsAnswer: A

42) If a U.S. company exports to Canada and the sale is denominated in Canadian dollars, which of the following is true?A) The U.S. company would report a gain if the U.S. dollar rises against the Canadian dollar.B) The Canadian company would report a gain if the Canadian dollar falls against the U.S. dollar.C) The U.S. company would report a loss if the Canadian dollar falls against the U.S. dollar.D) Exports do not result in a gain or loss.Answer: C

43) If a British company exports to a German company and the export is denominated in euros, which of the following is true?A) The German company would experience a loss if the euro strengthens against the pound.B) The British company would experience a gain if the euro strengthens against the pound.C) The British company would not experience a gain or a loss because the sale is denominated in euros, not pounds.D) Exports result in translation exposures but not transaction exposures.Answer: B

44) A Japanese company exports merchandise to a U.S. importer for ¥1,000,000 when the exchange rate is ¥107 per dollar. Payment is not due until the end of the month. At the end of the month, the exchange rate has moved to ¥105 per dollar, and the U.S. importer pays the Japanese exporter for the merchandise. From the standpoint of the U.S. importer, ________.A) there is no transaction exposure since they will sell the merchandise in the United States for dollarsB) the merchandise will be carried on the books at $93,468 (rounded)C) the Japanese exporter will be paid $9,524D) the exposure is considered to be a translation exposure, not a transaction exposureAnswer: C

45) Which term refers to the potential for change in expected cash flows that arises from the pricing of products and the location of investments?A) translation exposureB) transaction exposureC) economic exposureD) hedge exposureAnswer: C

46) An economic exposure ________.A) occurs when reporting systems are inadequateB) generally takes place when foreign currencies weaken against the dollarC) occurs when the sourcing and costs of components change as exchange rates changeD) is the same as a translation exposureAnswer: C

47) Assume a U.S. exporter sells to a British importer and denominates the sale in dollars. If the dollar rises over time against the British pound, what types of economic exposure and/or possible strategies could the exporter or importer face?A) The U.S. exporter has no economic risk because the sale is denominated in dollars.B) The British importer has only economic risk if the dollar falls against the pound.C) The U.S. exporter could lower prices in order to reduce the cost to the importer and thereby keep up sales volume.D) The U.S. exporter does not face an economic exposure, but the British importer does because it must pay in dollars.Answer: C


AACSB: Reflective thinking skills

48) An example of an operational hedging strategy against foreign exchange risk is ________.A) using a forward contract to establish a fixed exchange rate for future transactionsB) using local debt to balance local assetsC) using a foreign currency option to ensure access to foreign currency at a fixed exchange rate for a specific period of timeD) not using leads and lags for intercompany paymentsAnswer: B

49) A hedging instrument that allows one to establish a fixed exchange rate for future transactions where delivery is required is a(n) ________.A) optionB) investment contractC) future spot contractD) forward contractAnswer: D

50) Assume that a Canadian exporter sells to a French importer and denominates the sale in euros, which opens the exporter up to foreign exchange risk. Also, assume that the exporter goes to its investment bank and enters into a contract with the bank to gain the right but not the obligation to deliver euros for Canadian dollars at an agreed-upon exchange rate. This is an example of a ________.A) lead strategyB) lag strategyC) foreign-currency optionD) forward contractAnswer: C


51) A U.S. importer buys merchandise from a German manufacturer worth €100,000 when the exchange rate is €0.6451 per dollar with payment due in 30 days. The importer decides to enter into a forward contract to deliver dollars for euros for €0.6329. At the time the payment is due, the spot rate is €0.6711. Based on this, which of the following is true?A) The importer would have paid more for the merchandise at the future spot rate than at the forward rate.B) The importer will have to pay $67,110 for the merchandise.C) There is no foreign exchange risk to the importer since the sale is denominated in euros.D) The exporter will receive €100,000 for the sale.Answer: D

52) Foreign branch income is ________.A) deferred from U.S. taxation until a dividend is remitted to the parent companyB) considered passive income and therefore not subject to U.S. taxationC) directly included in the parent's taxable income in the year in which it is earnedD) considered active income and therefore deferred until future yearsAnswer: C


53) Foreign source income that is derived from the active conduct of a trade or business and therefore subject to U.S. taxation is known as ________.A) passive incomeB) active incomeC) uncontrollable foreign corporation incomeD) tax haven incomeAnswer: B

54) Subpart F income is ________.A) usually earned by a branch rather than a corporationB) not taxed to the parent unless a dividend is remittedC) not eligible for the tax creditD) passive and usually derived from operations in a tax-haven countryAnswer: D

55) According to U.S. tax law, if a foreign subsidiary earns income, ________.A) its income is immediately taxable to the parent, irrespective of the type of income earnedB) that income is not taxable to the parent company as long as the subsidiary pays income taxes in the country where it is earnedC) passive income is taxable to the parent unless the parent company is a controlled foreign corporationD) active income is taxable to the parent when it is remitted as a dividendAnswer: D

56) A price on goods and services sold by one member of a corporate family to another is known as a(n) ________.A) transfer priceB) tax credit priceC) passive priceD) active priceAnswer: A

57) If a foreign subsidiary is located in a low tax country, the parent company would probably use a ________.A) high transfer price on inventory shipped from the parent to the subsidiaryB) high transfer price on goods sold by the subsidiary to the parentC) low transfer price on inventory shipped from the subsidiary to the parentD) tax credit price to minimize local tax liabilitiesAnswer: B


58) The OECD is concerned about transfer pricing practices because ________.A) transfer pricing can help maximize a company's worldwide tax liabilityB) transfer prices tend to be higher in industrial than developing countriesC) governments use transfer prices to manipulate companies' investment strategiesD) companies use transfer prices to manipulate prices and therefore taxesAnswer: D



59) The principle by which the tax authorities allow firms to reduce their tax liability by the amount of income taxes paid to foreign governments is known as ________.A) transfer pricingB) a tax creditC) lag strategies in tax planningD) passive income reductionsAnswer: B

60) Assume that U.S. MNE A earns $100,000 of foreign source income, that the tax rate in the foreign country is 40 percent, and that the tax rate in the United States is 35 percent. How much total (both domestic and foreign) tax would the company pay on that foreign source income, assuming that the tax credit principle applies?A) $40,000B) $35,000C) $75,000D) $5,000Answer: A

61) The long-term financing dimension of cash management deals with the selection, issuance, and management of long-term debt and equity.Answer: TRUE

62) Acquiring and allocating financial resources among the company's activities and projects is the responsibility of the financial marketing manager.Answer: FALSE

63) Equity financing is the degree to which a firm funds the growth of a business by debt.Answer: FALSE

64) A Eurocurrency is any currency that is banked outside its country of origin.Answer: TRUE

65) The Eurocurrency market is a retail, rather than wholesale, market.Answer: FALSE

66) A French company floating a bond issued in Swiss francs in Switzerland would be selling a foreign bond.Answer: TRUE


67) The international bond market is much larger and more lucrative than the domestic bond market.Answer: FALSE


68) Another source of financing, in which an investor takes an ownership position in return for shares of stock in the company and the promises of capital gains, is called debt financing.Answer: FALSE


69) Two forms of equity financing are private placement with a venture capital firm and the equity capital market, otherwise known as the stock market.Answer: TRUE


70) An ADR is a negotiable certificate issued by a U.S. bank in the United States to represent the underlying shares of a foreign corporation's stock held at a custodian bank in the foreign country.Answer: TRUE

71) The best way for a Euroequity to get a listing in the United States is to issue a Global Depositary Receipt.Answer: FALSE

72) A major problem with MNEs using offshore financial centers is that they may give unfair tax advantages to companies.Answer: TRUE



73) Capital budgeting requires companies to determine free cash flows, which are affected by factors such as local tax rates.Answer: TRUE


74) The process of coordinating cash inflows and outflows among subsidiaries so that only net cash is transferred is known as multilateral netting.Answer: TRUE

75) A translation exposure arises because the dollar value of the exposed asset changes as the exchange rate changes.Answer: TRUE

76) The combined effect of an exchange-rate change on the financial statements of a foreign subsidiary is neither a gain nor a loss because of accounting rules.Answer: FALSE

77) A transaction exposure results in a foreign exchange gain or loss.Answer: TRUE

78) A translation exposure occurs when the dollar value of a receivable or payable from exports or imports changes as the exchange-rate changes.Answer: FALSE

79) An economic exposure does not result in a change in future cash flows.Answer: FALSE

80) An exposure that arises from effects of exchange rate changes on the competitive position of the company is called an economic exposure.Answer: TRUE

81) Assume that a company has a foreign subsidiary in a country with an exchange rate that is expected to strengthen against the parent company's currency. If the parent is planning the timing for the subsidiary to send a dividend to the parent, it would probably choose a lag strategy.Answer: TRUE


82) An option is a hedging instrument that allows one to establish a fixed exchange rate for future transactions where delivery is required.Answer: FALSE

83) Taxation is an important cash flow issue, but it typically does not have a strong impact on the choice of organizational form (such as branch or subsidiary) or the location of an investment.Answer: FALSE

84) Subpart F income is passive and usually derived from operations in a tax-haven country.Answer: TRUE

85) The OECD has set transfer pricing guidelines to enhance the manipulation of prices and therefore taxes for MNEs and the countries where they operate.Answer: FALSE


86) A transfer price is a price on goods and services sold by one member of a corporate family to another.Answer: TRUE

87) A tax credit is a credit on goods and services paid by one member of a corporate family to another.Answer: FALSE

88) The principle by which the tax authorities allow firms to reduce their tax liability by the amount of income taxes paid to a foreign government is known as a tax credit.Answer: TRUE

89) When using a lag strategy, a company collects foreign-currency receivables before they are due when the foreign currency is expected to weaken. Answer: FALSE

90) Tax law variations around the world affect an MNE's capital budgeting, financing, and method of setting transfer prices. Answer: TRUE


91) You are the chief financial officer at an MNE. What are your main responsibilities in this position? What taxation issues have a significant effect on the decisions you make?Answer: One of the most important people on the management team, crucial to a company's success, is the vice president of finance, also known as the chief financial officer (CFO). The CFO acquires financial resources and allocates them among the company's activities and projects. Acquiring resources means generating funds either internally or from sources external to the company at the lowest possible cost. The CFO's job is more complex in a global environment than in the domestic setting because of forces such as foreign exchange risk, currency flows and restrictions, different tax rates and laws pertaining to the determination of taxable income, and regulations on access to capital in different markets. Tax planning is a crucial responsibility for the CFO, because taxes can profoundly affect profitability and cash flow. Taxation has a strong impact on several choices made by the CFO, such as location of operations; choice of operating form, such as export or import, licensing agreement, or overseas investment; legal form of the new enterprise, such as branch or subsidiary; possible facilities in tax-haven countries to raise capital and manage cash; method of financing, such as internal or external sourcing and debt or equity; capital budgeting decisions; and method of setting transfer prices.

Learning Outcome: Discuss the factors influencing financial management decisions in international businessSkill: Synthesis, 7AACSB: Reflective thinking skills

92) What is an offshore financial center? What are the main characteristics of OFCs?Answer: Offshore financial centers are cities or countries that engage in a variety of financial transactions and that provide significant tax advantages to companies and individuals who do business there. These centers provide an alternative, usually cheaper, source of funding for MNEs so that they don't have to rely strictly on their own national markets. Offshore financial centers have one or more of the following characteristics:a. a large foreign-currency market for deposits and loansb. a market that is a large net supplier of funds to the world financial marketsc. a market that is an intermediary or pass-through for international loan fundsd. economic and political stabilitye. an efficient and experienced financial communityf. good communications and supportive servicesg. an official regulatory climate favorable to the financial industry, in the sense that it protects investors without unduly restricting financial institutions


93) What is multilateral netting? What are the advantages of multilateral netting?Answer: An important cash-management strategy is netting cash flows internationally. Netting means a company establishes one center to handle all internal cash/funds/financial transactions. A big advantage of establishing clearing accounts and mechanisms for transferring funds across national boundaries is minimizing the number of foreign-currency transactions.


94) What is foreign currency translation exposure? How can this type of exposure affect an MNE?Answer: Foreign currency financial statements are translated into the reporting currency of the parent company so that they can be combined with financial statements of other companies in the corporate group to form the consolidated financial statements. Exposed accounts either gain or lose value in dollars when the exchange rate changes. The combined effect of the exchange rate change on all assets and liabilities is either a net gain or loss. However, the gain or loss does not represent an actual cash-flow effect because the cash is only translated into dollars, not converted into dollars. The problem is that reported earnings can either rise or fall against the dollar because of the translation effect, and this can affect earnings per share and stock prices.


95) What is capital budgeting? What types of risks are involved? How can an MNE manage these risks? Answer: When making a capital budgeting decision, the MNE determines which projects and countries will receive its capital investment funds. The parent company must compare the net present value or internal rate of return of a potential foreign project with that of its other projects around the world to determine the best place to invest resources. The technique used to compare different projects is called capital budgeting. If all exchange rates were fixed in relation to one another, there would be no foreign-exchange risk. However, rates are not fixed, and currency values change frequently. Instead of infrequent, one-way changes, currencies fluctuate often and both up and down. A change in the exchange rate can result in three different exposures for a company: translation exposure, transaction exposure, and economic or operational exposure. To protect assets adequately against risks from translation, transaction, and economic exposure of exchange rate fluctuations, management must:a. define and measure exposureb. organize and implement a reporting system that monitors exposure and exchange-rate movementsc. adopt a policy assigning responsibility for minimizing exposured. formulate strategies for hedging exposure

Learning Outcome: Discuss the factors influencing financial management decisions in international businessSkill: Synthesis, 6

96) What is a transfer price? Why are transfer prices used?Answer: A major tax challenge, as well as impediment to performance evaluation, is the extensive use

of transfer pricing in international operations. A transfer price is a price on goods and services sold by one member of a corporate family to another, such as a parent to its subsidiary in a foreign country. Because the price is between related entities, it is not necessarily an arm's-length price, that is, a price between two companies that do not have an ownership interest in each other. Companies establish arbitrary transfer prices primarily due to differences in taxation between countries. Companies also may set arbitrary transfer prices for competitive reasons or because of restrictions on currency flows.


97) What are the major sources of external funds for an MNE's normal operations? Why do MNEs use offshore financial centers to raise funds?Answer: Two major sources of funds external to the MNE's normal operations are debt markets and equity markets. Offshore financial centers such as Bahrain, the Caribbean, Hong Kong, London, New York, Singapore, and Switzerland deal in large amounts of foreign currency and enable companies to take advantage of favorable tax rates. These centers provide an alternative, usually cheaper, source of funding for MNEs so that they don't have to rely strictly on their own national markets.


98) How do countries differ in terms of taxation? In regards to taxation, why do some MNEs turn to offshore financial centers? Why are offshore financial centers a concern to the OECD?Answer: Countries differ in terms of the types of taxes they have (income versus excise), the tax rates applied to income, the determination of taxable income, and the treatment of foreign-source income. Offshore financial centers such as Bahrain, the Caribbean, Hong Kong, London, New York, Singapore, and Switzerland deal in large amounts of foreign currency and enable companies to take advantage of favorable tax rates. A major concern with OFCs is the tax avoidance dimension of their activities. The OECD has been working closely with the major OFCs to ensure that they are engaged in legal activity. It uses the following key factors in identifying tax havens: (1) no or only nominal taxes, (2) lack of effective exchange of information (especially bank secrecy), (3) lack of transparency, and (4) no substantial activities. Although not trying to tell the sovereign countries what their tax rates should be, the OECD is trying to eliminate harmful tax practices.


99) What are the major sources of internal funds for MNEs? Why do many MNEs acquire external funds through the Eurodollar market?Answer: The major sources of internal funds for an MNE are dividends, royalties, management fees, loans from parent to subsidiaries and vice versa, purchases and sales of inventory, and equity flows from parent to subsidiaries. The Eurodollar market is the most significant eurocurrency market. A Eurodollar is a certificate of deposit in dollars in a bank outside of the United States. Most Eurodollar CDs are held in London, but they could be held anywhere outside of the United States, including the Bahamas, the Cayman Islands, Hong Kong, Japan, the Netherlands Antilles, etc. A major advantage of the Eurodollar market is that it is not regulated by the U.S. Federal Reserve Bank.


100) What is the difference between translation exposure, transaction exposure, and economic exposure?Answer: Translation exposure occurs because exposed accounts—those translated at the balance-sheet rate or current exchange rate—either gain or lose value in dollars when the exchange rate changes. Denominating a transaction in a foreign currency gives rise to transaction exposure, because the company has accounts receivable or payable in foreign currency that must be settled eventually. Economic exposure, also known as operating exposure, is the potential for change in expected cash flows that arises from the pricing of products, the sourcing and cost of inputs, and the location of investments.


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sophiasapiens.chez.comsophiasapiens.chez.com/gestion/International-Business... · Web view... What is foreign currency translation exposure? How can this type of exposure affect an