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Oxford University Press | Online Resource Centre | Chapter 10

Hamilton & Webster: The International Business Environment 2e

Chapter 10

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Question 1
The existence of money is a beneficial to international business because:
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Correct answer:
d) Money avoids costly cross-border bartering of goods and services.
Feedback:
In the absence of money firms would be reduced to bartering which would slow down trade and increase costs of exchanging goods and
services. Countries having their own currencies and exchange rates can increase the costs of cross-border trade and investment. Not all
currencies are accepted as a means of payment in international business. In addition, some currencies such as the N. Korean won and the
Cuban peso are not officially convertible into other currencies.
Page reference: 282,283

Question 2
The International Monetary Fund is important because:
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Correct answer:
b) It has sufficient financial resources to help individual countries facing balance of payments problems.
Feedback:
The IMF has the resources to make a significant financial contribution to countries experiencing balance of payments problems. Its resources
are insufficient to make a significant contribution to the resolution of a global financial crisis. Emerging economies have little influence on the
IMF. The IMF does not have the power to fix exchange rates.
Page reference: 285-287

Question 3
Between 2009 and mid 2011 inflation globally was on the rise. By June 2011 it was at an annual rate of 6.4% in China and 3.6% in the US. Given
China's desire to maintain a stable exchange rate against the US dollar, this means that:
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c) US exporters to China will find it easier to sell there.
Feedback:
The Chinese authorities wish to keep their currency stable against the US dollar. This means that the higher rate of inflation in China will not lead
to a depreciation in its value - a depreciation would increase the competitiveness of Chinese against their US rivals. Thus, the lower rate of
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Oxford University Press | Online Resource Centre | Chapter 10

inflation in the US will make it easier for its exporters to sell in China. Conversely, Chinese firms will find it more difficult to compete with US
rivals on world markets. US importers of Chinese goods will find the costs of their imports rising making them less competitive. US firms
producing in China will find their operating costs rising compared with US rivals who service the Chinese market through exports.
Page reference: 283,284

Question 4
Which of the following characterize the early stages of a financial crisis?
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Correct answer:
a) Excessive euphoria about the future price of certain assets.
Feedback:
In the early stages of a financial crisis prices of assets such as shares or houses or commodities start to rise. An expectation takes root that
prices will continue to rise and buyers rush into the market. An excessive euphoria develops based on the assumption that asset prices will
continue to increase.
Page reference: 297, 298

Question 5
Which of the following are characteristic of the period when financial bubbles burst?
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Correct answer:
b) Excessive pessimism about future asset prices.
Feedback:
When a financial bubble bursts there is excessive pessimism about future asset prices. Asset prices fall and an expectation builds up that they
will continue to fall.
Page reference: 297, 298

Question 6
The financial crisis of 2007/08 started in the USA. It spread to other countries because:
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Correct answer:
a) Foreign banks had bought securities based on US sub-prime mortgages.
Feedback:
Financial institutions in the US repackaged sub-prime mortgages with other less risky financial products and sold these securities on to other
banks. Banks in the UK, the Netherlands, Germany and Japan were the biggest purchasers. Banks in developing economies, including China,
had not purchased many of these securities and emerged relatively unscathed. A number of European banks were taken into public ownership
as a consequence of the crisis.
Page reference: 298, 299

Question 7
How do financial institutions facilitate international trade and investment?
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Oxford University Press | Online Resource Centre | Chapter 10

c) They offer payment systems making it easier to export and import goods and services.
Feedback:
Banks run systems such as SWIFT and LS which enable firms to make cross-border payments. Without such systems international trade and
investment would become more difficult and costly. Any reluctance on the part of financial institutions to lend for trade and investment would
hamper those activities. The bundling and selling on of assets with varying degrees of risk was a contributory factor to the credit crunch which
started in 2007 and which made it more difficult for business to borrow. The interest rates charged fluctuate so sometimes they are high and
sometimes low.
Page reference: 288-290

Question 8
What functions do financial institutions traditionally perform?
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Correct answer:
c) They spread risk.
Feedback:
Financial institutions have traditionally spread risk by mobilising savings and using them to finance a whole range of projects with varying
degrees of risk. The financial system provides short, medium and long-term finance. Some commentators argue that the global financial crisis
of 2007-09 was caused by financial institutions spreading the high risks associated with excessive lending on US sub-prime mortgages around
the world.
Page reference: 288-290

Question 9
Why has there been much cross-border restructuring in the financial sector?
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Correct answer:
c) Financial institutions wanted to take advantage of expanding markets in S. E. Asia.
Feedback:
Some cross-border restructuring occurred because financial institutions were attracted by market opportunities in the fast growing economies
of S.E. Asia in general and China in particular. Banks also pursued strategies of product diversification. There is also some evidence that
financial institutions were attracted to countries where regulation was loose. There is no evidence of the restructuring coming about because of
a major competitive threat from Japanese banks.
Page reference: 291-295

Question 10
It is claimed that the global financial crisis starting in 2007 was partially caused by poor regulation of the world financial system. A major problem with
regulation of financial institutions is:
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Correct answer:
a) The variety of different national regulatory systems.
Feedback:
There is no single system of regulation for the international financial system. Different countries have their own regulatory frameworks which
make effective of the global financial system more difficult. Basel II has been criticized for allowing banks to assess their own risk levels and is
weakened by the failure of a large number of countries to sign up to it. Banks have been criticised for not being more open about their activities.
Some of the new financial products, for example, were kept off their balance sheets. As a result, regulatory agencies were kept in the dark.
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Regulators were also criticised for not probing the activities of financial institutions more deeply.
Page reference: 302-305

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