Multinational Finance

INTERNATIONAL FINANCIAL MANAGEMENT

FALL 2015

Homework #7

Chapter 14 - Conceptual Questions:

o 14.2: International capital markets are integrated when real required returns on assets of equivalent risk are the same everywhere. Because the law of one price holds, in an integrated market the MNC cannot raise funds more cheaply in one location or currency than in another. A market is segmented from other markets if the required rate of return in that market is independent of the required return of assets of equivalent risk in other markets. Like complete market integration, complete segmentation is not found in practice. Regardless of ruthlessness in which governments attempt to segment national financial markets, there are invariably some cross-border price leakages.

o 14.3: Factors contributing to capital market segmentation include informational barriers, transaction costs, differing legal and polticial systems, regulatory interference, differential taxes, and home asset bias (investors’ tendency to favor local assets).

o 14.8: The usual consequence of an increase in country risk on a national stock market means that the country’s stock market will be lower and sometimes could potentially cause a crash in the market. High-risk countries have higher volatility than in other markets. Additionally, high-risk countries have higher betas relative to the world stock market index.

o 14.11: Project finance allows a project sponsor to raise external funds for a specific project. Three characteristics distinguish project finance from other forms of financing:

o The project is a separate legal entity and relies heavily on debt financing.

o The debt is contractually linked to the cash flow generated by the project.

o Governments participate through infrastructure support, operating or financial guarantees, rights-of-way, or assurances against political risk.

o Problems: 14.1, 14.3, 14.8...