Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Kenneth R. Szulczyk

6. The Forex Beta measures the economic exposure and is a parameter estimate of a linear
   regression equation. It has two sources of variation: Fluctuations in the exchange rate and
   the sensitivity of the asset’s price to changes in the exchange rate.


7. First, company could locate its production in countries where it sells it backpacks, trying to
   equal accounts payable and accounts receivable. Then it uses accounts receivables to offset
   its accounts payable. Second, company can shift its production to low-cost countries,
   especially in countries that weaken its currency.

Answers to Chapter 20 Questions.........................................................

1. A firm only invests and operates a small portion of its production in a foreign country. If a
   firm has a conflict with the government, then only that portion of the production facility is in
   jeopardy. Furthermore, if a company continually updates its technology, subsequently, it
   could use intellectual property rights to protect its technology. In theory, the firm could deny
   the government to use its technology. Finally, a firm could use leverage, where it heavily
   borrows from banks within the foreign country. If the firm has a conflict with the
   government, it can exit the country and default on its bank loans.


2. A government protects its agricultural, defense/military, energy, and communication
   industries. These industries are critical for a modern, functioning society, and a supply
   disruption could cause a severe crisis within the country.


3. A firm cannot transfer its profits outside a country because the country imposed capital
   controls. Thus, a firm could buy a local product and export the product to recoup its profits
   abroad.


4. Special dispensation is government grants exceptions and favors to industries it wants, such
   as pharmaceutical, high-tech, electronics, and computers. These industries are prestigious
   and lead to a rise of skilled and educated labor force.


5. Average basis points for the CCC grade are 450. Thus, you add 4.5% to the 5%, yielding
   9.5%.


6. The Risk Rating System is a method to measure a country risk. The Rating System uses four
   measures: Economic Indicators, Debt Management, Political Factors, and Structural Factors.
   We measure each factor on a scale from zero to 100. A country's score is a weighted average
   of the four factors. Although this method appears to be objective, the weights and measures
   of some factors are subjective.