560 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management
Over the past two decades, the global economy has become increasingly integrated
and more companies generate more of their pro" ts from overseas operations. In
many respects, the concepts developed in the " rst 16 chapters still apply to multina-
tional " rms. However, multinational companies have more opportunities but also
face di! erent risks than do companies that operate only in their home market. The
chapter discussed many of the key trends a! ecting the global markets today, and it
described the most important di! erences between multinational and domestic " -
nancial management.T Y I N G I T A L L T O G E T H E R
KEY TERMS Define each of the following terms:
a. Multinational, or global, corporation
b. Vertically integrated investment
c. International monetary system
d. Exchange rate
e. Freely-floating regime; managed-float regime
f. Currency board arrangement
g. Fixed-peg arrangement
h. Cross rate
i. American terms; European terms
j. Direct quotation; indirect quotation
k. Spot rate; forward exchange rate
l. Discount on forward rate; premium on forward rate
m. Interest rate parity; purchasing power parity
n. Eurocredits; Eurodollar
o. Eurobond; foreign bond
p. American Depository Receipts (ADRs); repatriation of earnings
q. Country risk; exchange rate risk; political risk; business climate
CROSS RATES Suppose the exchange rate between the U.S. dollar and the EMU euro is
€0.65" $1.00 and the exchange rate between the U.S. dollar and the Canadian dollar is
$1.00 " C$0.98. What is the cross rate of euros to Canadian dollars?Why do U.S. corporations build manufacturing plants abroad when they can build them
at home?
If the euro depreciates against the U.S. dollar, can a dollar buy more or fewer euros as a result?
If the United States imports more goods from abroad than it exports, foreigners will tend
to have a surplus of U.S. dollars. What will this do to the value of the dollar with respect
to foreign currencies? What is the corresponding effect on foreign investments in the
United States?