Global Banking and Finance
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Course Introduction
Global Banking and Finance explores the international dimensions of financial institutions, markets, and systems, examining their roles in facilitating global economic activity. The course covers topics such as the structure and function of global banks, international financial regulations, cross-border capital flows, risk management, foreign exchange markets, and the impact of global financial crises. Students will analyze case studies highlighting the influence of globalization on banking practices and the interconnectedness between financial institutions worldwide, equipping them with analytical tools to assess contemporary issues and trends in global finance.
Recommended Textbook
International Financial Management 6th Edition by Cheol S. Eun Bruce G. Resnick
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) The massive privatization that is currently taking place in formerly socialist countries,will likely
A)eventually enhance the standard of living to these countries' citizens.
B)depend on private investment.
C)increase the opportunity set facing these countries' citizens.
D)all of the above
Answer: D
Q2) Which state has a comparative advantage in wheat production in Case I?
A)South Dakota
B)North Dakota
C)Neither state
Answer: A
Q3) If the international price of beer is one keg of beer = 1 bottle of whiskey,how much whiskey will Northern Ireland consume? Each country completely specializes and 500 kegs of beer are traded for 500 bottles of whiskey.
A)1,000 bottles
B)1,200 bottles
C)500 bottles
D)600 bottles
Answer: A
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Chapter 2: International Monetary System
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Q1) Following the demise of the Bretton Woods system,the IMF
A)created a new role for itself, providing loans to countries facing balance-of-payments and exchange rate difficulties.
B)ceased to exist, since the era of fixed exchange rates had ended.
C)became the sole agent responsible for maintaining fixed exchange rates.
D)became the central bank of the United Nations.
Answer: A
Q2) Once the changeover to the euro was completed by July 1,2002,the legal-tender status of national currencies in the euro zone
A)was canceled, leaving the euro as the sole legal tender in the euro zone countries. B)was affirmed at the fixed exchange rate.
C)was tied to gold.
D)none of the above
Answer: A
Q3) In the years leading to the collapse of the Bretton Woods system
A)it became clear that the dollar was undervalued.
B)it became clear that the dollar was overvalued.
Answer: B
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4
Chapter 3: Balance of Payments
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Q1) When a country's currency depreciates against the currencies of major trading partners,
A)the country's exports tend to rise and imports fall.
B)the country's exports tend to fall and imports rise.
C)the country's exports tend to rise and imports rise.
D)the country's exports tend to fall and imports fall.
Answer: A
Q2) Foreign direct investment (FDI)occurs
A)when an investor acquires a measure of control of a foreign business.
B)when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.
C)with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.
D)both a) and b)
Answer: D
Q3) In the short run a currency depreciation can make a trade balance worse if
A)there is no domestic producer of an import.
B)there is no domestic buyer for an import.
C)there is no export market for a country's output.
Answer: A
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Chapter 4: Corporate Governance Around the World
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Q1) In the U.S.,the chief role of the board of directors is
A)to hire the management team.
B)to decide on the annual capital budget.
C)to design an effective incentive compatible compensation scheme for themselves.
D)none of the above
Q2) Debt can reduce agency costs between shareholders and management,but
A)only if the firm is totally up to its eyeballs in debt.
B)only to the extent that the firm can commit all of its free cash flow.
C)excessive debt can create its own agency conflicts.
D)debt is best used as a corporate governance mechanism by young companies with limited cash reserves.
Q3) The Sarbanes-Oxley Act of 2002
A)has had the consequence that many foreign firms have de-listed in the U.S.exchanges and listed their shares on the London Stock Exchange and other European exchanges.
B)has increased the pace of foreign firms listing their shares in the U.S.
C)a) and b) are both true
D)all of the above
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Page 6
Chapter 5: The Market for Foreign Exchange
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Q1) The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 forward premium is 8 percent.What is the outright spot exchange rate?
A)SF1.30/$
B)SF1.35/$
C)SF1.25/$
D)None of the above
Q2) The standard size foreign exchange transactions are for
A)$10 million U.S.
B)$1 million U.S.
C) 1 million.
Q3) Using the table shown,what is the spot cross-exchange rate between pounds and euro?
A) 1.00 = £0.75
B)£1.33 = 1.00
C)£1.00 = 0.75
D)none of the above
Q4) Using the table,what is 3-month forward premium or discount (expressed as an annual percentage rate)for the British pound in terms of U.S.dollars?
Q5) Using the table,what is the Canadian dollar-euro spot cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) The price of a McDonald's Big Mac sandwich
A)is about the same in the 120 countries that McDonalds does business in.
B)varies considerably across the world in dollar terms.
C)supports PPP.
D)none of the above.
Q2) Academic studies tend to discredit the validity of technical analysis.Which of the following is true?
A)This can be viewed as support technical analysis.
B)It can be rational for individual traders to use technical analysis-if enough traders use technical analysis the predictions based on it can become self-fulfilling to some extent, at least in the short-run.
C)That can be explained by the difficulty professors may have in differentiating between technical analysis and fundamental analysis.
D)None of the above
Q3) USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward BID exchange rate in $ per that that satisfies IRP from the perspective of a customer.
Q4) If you borrowed 1,000,000 for one year,how much money would you owe at maturity?
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Which of the following is correct?
A)The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000 only when the spot exchange rate is $2 = £1.
B)The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000.
Q2) A put option on $15,000 with a strike price of 10,000 is the same thing as a call option on 10,000 with a strike price of $15,000.
A)True
B)False
Q3) The current spot exchange rate is $1.55 = 1.00 and the three-month forward rate is $1.60 = 1.00.Consider a three-month American call option on 62,500 with a strike price of $1.50 = 1.00.Immediate exercise of this option will generate a profit of
A)$6,125
B)$6,125/(1+i<sub>$</sub>)<sup>3/12</sup>
C)negative profit, so exercise would not occur
D)$3,125
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Chapter 8: Management of Transaction Exposure
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Q1) If you owe a foreign currency denominated debt,you can hedge with
A)a long position in a currency forward contract.
B)a long position in an exchange-traded futures option.
C)buying the foreign currency today and investing it in the foreign county.
D)both a) and c)
Q2) The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is
A)transaction exposure.
B)translation exposure.
C)economic exposure.
D)none of the above
Q3) If you have a long position in a foreign currency,you can hedge with:
A)A short position in an exchange-traded futures option
B)A short position in a currency forward contract
C)A short position in foreign currency warrants
D)Borrowing (not lending) in the domestic and foreign money markets
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Chapter 9: Management of Economic Exposure
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Q1) In recent years,the U.S.dollar has depreciated substantially against most major currencies of the world,especially against the euro.
A)The stronger euro has made many European products more expensive in dollar terms, hurting sales of these products in the United States.
B)The stronger euro has made many American products less expensive in euro terms, boosting sales of U.S.products in Europe.
C)Both a) and b)
D)None of the above
Q2) Suppose the U.S.dollar substantially depreciates against the Japanese yen.The change in exchange rate
A)can have significant economic consequences for U.S.firms.
B)can have significant economic consequences for Japanese firms.
C)can have significant economic consequences for both U.S.and Japanese firms.
D)none of the above
Q3) Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Q4) Estimate your exposure (b)to the exchange risk.
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11
Chapter 10: Management of Translation Exposure
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Q1) Which of the following is a translation method where a "plug" equity account called cumulative translation adjustment is used?
A)Current/noncurrent method
B)Current rate method
C)Current/future method
D)Short/long term method
Q2) Which of the following statements is false?
A)Most income statement items under the current/noncurrent method are translated at the average exchange rate for the accounting period.
B)Under the current/noncurrent method, revenue and expense items that are associated with current assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item.
C)Under the current/noncurrent method, revenue and expense items that are associated with noncurrent assets or liabilities, such as depreciation expense, are translated at the historical rate that applies to the applicable balance sheet item.
D)Depreciation expense is translated at the historical rate that applies to the applicable depreciable asset items.
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Page 12
Chapter 11: International Banking and Money Market
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Sample Questions
Q1) Banks that both perform traditional commercial banking functions and engage in investment banking activities are often called
A)international service banks.
B)investment banks.
C)commercial banks.
D)merchant banks.
Q2) Forward rate agreements can be used for speculative purposes.If one believes rates will be less than the agreement rate,
A)take a short position in a forward rate agreement.
B)the purchase of a FRA is the suitable position.
C)the sale of a FRA is the suitable position.
D)take a long position in the spot market.
Q3) Banking tends to be
A)a low marginal cost industry.
B)a high marginal cost industry.
C)a constant average cost industry.
D)none of the above
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Chapter 12: International Bond Market
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Sample Questions
Q1) Zero-coupon bonds issued in 2006 are due in 2016.If they were originally sold at 55 percent of face value,the implied yield to maturity at issuance is
A)1.062%.
B)6.16%.
C)8.31%.
D)cannot be determined, need more information.
Q2) A five-year,4 percent euro denominated bond sells at par.A comparable risk five-year,5.5 percent euro/dollar dual-currency bond pays $1,500 at maturity per 1,000 of face value.It sells for 1,250.What is the implied $/ exchange rate at maturity?
A)$1.2266/ 1.00
B) 0.8153/$1.00
C)$1.25/ 1.00
D)$1.50/ 1.00
Q3) Eurobonds sold in the United States may not be sold to U.S.citizens.
A)True
B)False
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Page 14
Chapter 13: International Equity Markets
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Sample Questions
Q1) The advantages of a market order include the fact that
A)you are pretty much guaranteed that your order will be executed (assuming that there are willing buyers and sellers).
B)a market order typically has lower commissions than a limit order.
C)market orders increase your liquidity.
D)both a) and b)
Q2) In mutual funds,investment in emerging foreign equity markets
A)represents less than one percent of investments in U.S.-based mutual funds.
B)represents about five percent of investments in U.S.-based mutual funds.
C)represents more than twenty percent of investments in U.S.-based mutual funds.
D)declined during the 1990s.
Q3) American Depository Receipt (ADRs)represent foreign stocks
A)denominated in U.S.dollars that trade on European stock exchanges.
B)denominated in U.S.dollars that trade on a U.S.stock exchange.
C)denominated in a foreign currency that trade on a U.S.stock exchange.
D)non-registered (bearer) securities.
Q4) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Amortizing currency swaps
A)the debt service exchanges decrease periodically through time as the hypothetical notational principal is amortized.
B)incorporate an amortization feature in which periodically the amortized portions of the notational principals are re-exchanged.
C)both a) and b)
D)none of the above
Q2) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q3) A swap bank
A)can act as a broker, bringing together counterparties to a swap.
B)can act as a dealer, standing ready to buy and sell swaps.
C)both a) and b)
D)only sometimes a) but never ever b)
Q4) An interest-only single currency interest rate swap
A)is also known as a plain vanilla swap.
B)is also known as an interest rate swap.
C)is about as simple as swaps can get.
D)all of the above
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Page 16
Chapter 15: International Portfolio Investment
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Q1) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a £50 British stock.One year after investment,the stock pays a £1 dividend,and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound,although he sold £8,800 forward at the forward rate of 1.28 per pound.
Q2) Current research suggests that A)investors can get more diversification with shares of domestic, large-cap stocks. B)investors can get more diversification with shares of domestic, small-cap stocks. C)investors can get more diversification with shares of foreign, large-cap stocks. D)investors can get more diversification with shares of foreign, small-cap stocks.
Q3) Assume that the correlation of expected return between A and B is negative 1.Calculate the standard deviation of expected return of the portfolio in the last question.
Q4) Calculate the expected return of a portfolio that is half invested in A and half in B.
Q5) Find the Global Minimum Variance Portfolio.
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Coca-Cola has invested in bottling plants all over the world rather than licensing local firms
A)because the foreigners can't be trusted to follow the secret recipe.
B)because Coca-Cola wanted to protect the formula for its famous soft drink.
C)because of the internalization theory of FDI.
D)both b) and c)
Q2) Country risk
A)is a broader measure of risk than political risk.
B)encompasses political risk, credit risk, and other economic performances.
C)all of the above
D)none of the above
Q3) Firms become multinational
A)when they undertake foreign direct investments (FDI).
B)with the establishment of new production facilities in foreign countries such as Honda's Ohio plant.
C)when they become involved in mergers with and acquisitions of existing foreign businesses.
D)all of the above
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of . A)1
B)2
C)3
D)4
E)5
Q2) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.
A)3/4
B)7/9
C)4/5
D)9/11
E)5/6
Q3) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1½.
A)
B)½
C)3/5
D)
E)5/7
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Chapter 18: International Capital Budgeting
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Q1) Find the euro-zone cost of capital to compute the dollar-denominated NPV of this project.
Q2) The required return on equity for an all-equity firm is 10.0%.They currently have a beta of one and the risk-free rate is 5% and the market risk premium is 5%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the beta if this firm changes capital structure.
A)1.12
B)1
C)7.4%
D)None of the above
Q3) What is CF5 in dollars?
Q4) What is the euro-denominated IRR?
Q5) What is the unlevered after-tax incremental cash flow for year 2?
A)-$4,610
B)$102,300
C) $202,300
D)$255,000
E)None of the above
Q6) Compute the NPV at the two possible prices of gold.
Page 20
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Chapter 19: Multinational Cash Management
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Q1) Find the net cash flow in (out of)the German affiliate.
A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above
Q2) The U.S.IRS allows transfer prices to be set using comparable uncontrolled price method.This method is difficult to apply in practice because many factors enter into the pricing of goods and services.Examples include
A)differences in the terms of sale.
B)differences in quantity and or quality sold.
C)differences in location or date of sale.
D)all of the above
Q3) Find the net cash flow in (out of)the U.S.affiliate.
A)$0 in or out
B)$5,000 out
C)$10,000 in
D)$15,000 out
E)None of the above
Q4) Using your results to the last question,use multilateral netting to simplify.
Page 21
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Chapter 20: International Trade Finance
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Q1) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q2) Assume the time from acceptance to maturity on a $1,000,000 banker's acceptance is 180 days.Further assume that the importing bank's acceptance commission is 1.25 percent and that the market rate for 180-day B/As is 5.0 percent.Calculate the amount the exporter will receive if he holds it to maturity.
A)$906,250
B)$909,375
C)$968,750
D)$993,750
Q3) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q4) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q5) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q6) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) The United States withholds ___________ percent of passive income from taxpayers that reside in countries with which it does not have withholding tax treaties.
A)10
B)20
C)30
D)40
E)50
Q2) Suppose a U.S.-based MNC makes bicycles with parts from its subsidiary in a low-tax East Asian country.The bicycle frames are made here,the component parts (cranksets,wheels,and so on)are made abroad,the bicycles are assembled in Japan and reimported to the U.S.It can reduce its reported U.S.income-and increase its subsidiary's profits-by
A)overcharging its subsidiaries for the U.S.-made frames.
B)undercharging its subsidiaries for the U.S.-made frames.
C)assembling the bicycles in the U.S.
D)none of the above
Q3) An income tax is a direct tax
A)True
B)False
Page 23
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