Question

Which of the following statements is FALSE?

a. The existence of internationally segmented capital markets makes many decisions in international corporate finance more complicated but potentially more lucrative for a firm that is well positioned to exploit the market segmentation.
b. Many countries regulate or limit capital inflows or outflows, and many do not allow their currencies to be freely converted into dollars, thereby creating capital market segmentation.
c. Swaps, while allowing firms to mitigate their exchange rate risk exposure between assets and liabilities, prevent firms from making investments and raising funds in the most attractive locales.
d. Political, legal, social, and cultural characteristics that differ across countries may require compensation in the form of a country risk premium.

Answer 1

The FALSE statement among the given options is option c, which incorrectly suggests that swaps prevent firms from investing or raising funds in attractive locales. Contrarily, swaps are a tool used to manage financial risks and facilitate investments in various markets.

Step-by-step explanation:

The student asked which statement is FALSE among the provided options. The correct answer is option c: Swaps, while allowing firms to mitigate their exchange rate risk exposure between assets and liabilities, prevent firms from making investments and raising funds in the most attractive locales. This statement is incorrect because swaps are actually financial instruments used precisely to navigate through different financial markets and invest or raise funds in more favorable conditions, despite the existence of market segmentation. They do not prevent firms from making such investments; rather, they facilitate risk management across different currencies and interest rates.

Countries often regulate capital flows and exchange rates, leading to capital market segmentation as mentioned in options a and b. Political, legal, social, and cultural differences do require compensation in the form of country risk premiums, as stated in option d. Overall, these factors contribute to the complexity of decisions in international corporate finance and the potential for lucrative opportunities for well-positioned firms.