Question

QUESTION 14 The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers. True False QUESTION 15 A firm considers which strategy is optimal for its globalization initiatives. It considers: 1) a Foreign Direct Investment (FDI), which has a present value of $6,000,000 and an initial cost of $4,000,000; 2) an exporting strategy, which has a present value of $3,500,000 and an initial cost of $500,000; and finally, 3) a Licensing strategy, which has a present value wf $2,000,000 and no initial costs If the firm uses the Net Present Value (NPV) decision rule, which option should it choose? None of the three options Licensing FDI The firm should be indifferent between the three options, because they all have positive NPVs

Answer 1

Question 14.

Solution: The given statement is True. Because high-speed computer linkages between the different trading centers around the globe, resulted in creating a single integrated market.

Ex. If pound to dollar exchange rate quoted in UK. at 2:00 p.m. is 1pound = $1.28, the pound/dollar exchange rate quoted in the New York exchange will be identical at the same time (9:00 a.m.)

Question 15.

Solution: We can identify the best option by comparing the NPV.

NPV of FDI = Present value - Initial cost

   = $6,000,000 - 4,000,000

= $2,000,000

NPV of exporting strategy = $3,500,000 - 500,000 = $3,000,000

NPV of Licensing strategy = $2,000,000 - 0 = $2,000,000

Thus, on comparing NPV, exporting strategy is the best option.