Question

1) Moral hazard may occur in decision making when a firm or individual takes on more risk, when it knows that someone else will "pick up the tab." True           or         False

2) Management must be able to access information that forecast disequilibria (unstable conditions) in international markets to take advantage of diversification strategies.         True           or         False

3) Diversification is possibly the best technique for reducing the problems associated with international transactions.

  True           or         False

4) Currency swaps ARE gaining increasing importance as financial derivative instruments. True           or         False

Answer 1

1.) True

Moral hazard may occur since the management would want to have the first mover advantage and may take more risk than justifiable.

2.) True

By having access to information management can actually decide whether if they are enough diversified or not and take appropriate actions accordingly.

3.) True

Diversification is possibly one of the best strategies to reduce exposure in the international market.

4.) True

There are four types of derivatives, forward, futures, options and swaps and currency swaps have gained prominence because of the multinational company’s operation in more than one country.