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Ch 18 Learning Goals

Ch 18 Learning Goals. Understand the major factors that influence the financial operations of multinational companies (MNCs). Discuss exchange rate risk and political risk, and explain how MNCs manage them. The MNC and its Environment.

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Ch 18 Learning Goals

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  1. Ch 18 Learning Goals • Understand the major factors that influence the financial operations of multinational companies (MNCs). • Discuss exchange rate risk and political risk, and explain how MNCs manage them.

  2. The MNC and its Environment • In recent years, international finance has become an increasingly important • ______________: multinational corporation • Certain factors unique to the international setting tend to complicate the financial management of MNCs.

  3. The MNC and its Environment • During the 1990s, three important trading blocks emerged. • In 1992, the United States, Mexico and Canada signed the North American Free Trade Agreement (_____________________). • In 1992, Western Europe also strengthened previously existing European Union by forming the European Open Market which included the adoption of a common currency called the _________ in January.

  4. The MNC and its Environment • In 1991, the Mercosur Group of South America, including the countries of Brazil, Argentina, Paraguay and Uruguay formed a trading block.

  5. The MNC and its Environment • The General Agreement on Tariffs and Trade (GATT) is currently the most important international treaty governing trade. • It extends free trading rules to broad areas of economic activity and is policed by the World Trade Organization (WTO).

  6. Issues Facing MNCs • ________________ considerations • Economic instability: many countries have less stable economies than the US • ____________________________ risk • ____________________________ risk

  7. The MNC and its Environment Taxes Rules • Tax issues facing MNCs include: • The ____________________ of foreign taxes. • The definition of ___________ income must be ascertained. • U.S. – based MNCs may often take foreign taxes as a direct credit against U.S. tax liabilities.

  8. Financial Statements Exchange Rate Risk • Exchange rate risk is the risk caused by varying exchange rates between two currencies. • The foreign exchange rate between the U.S. dollar ($US) and Canadian dollar ($C) is expressed as follows: $US1.00 = SF1.25 $C1.00 = $US0.80 • The usual exchange rate quotation in international markets is given as $C1.25/$US.

  9. Financial Statements Exchange Rate Risk • Under the current system of floating exchange rates, the value of any two major currencies with respect to one another is allowed to fluctuate on a daily basis. • For many smaller country currencies, however, exchange rates are __________________________ with respect to one of the major currencies.

  10. Financial Statements Exchange Rate Risk • In general, it is possible for management to insure against the risk of fluctuating exchange rates through ___________________.

  11. Financial Statements Political Risks • Political risk results from the discontinuity or seizure of an MNCs operations in a host country due to the host’s implementation of specific rules and regulations.

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