Global Banking and Finance Test Preparation
Course Introduction
Global Banking and Finance explores the structure, operations, and regulations of international financial systems in a globalized economy. The course examines the roles of multinational banks, central banking, international financial markets, and the impact of globalization on financial institutions. Students learn about topics such as cross-border capital flows, foreign exchange markets, international lending, financial crises, and risk management. Through case studies and real-world examples, the course develops an understanding of global financial instruments, regulatory frameworks, and the challenges faced by banks and other financial intermediaries operating on an international scale.
Recommended Textbook
International Financial Management 6th Edition by Cheol
S. Eun Bruce G. Resnick
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Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) An example of a political risk is
A)expropriation of assets.
B)adverse change in tax rules.
C)the opposition party being elected.
D)both answers a) and b) are correct.
Answer: D
Q2) Privatization
A)has spurred a tremendous increase in cross-border investment.
B)has allowed many governments to have the funds to nationalize important industries.
C)has guaranteed that new ownership will be limited to the local citizens.
D)has generally decreased the efficiency of the enterprise.
Answer: A
Q3) A true MNC,with operations in dozens of different countries
A)must effectively manage foreign exchange risk.
B)can ignore foreign exchange risk since it is diversified.
C)will pay taxes in only its home county.
D)none of the above
Answer: A
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Chapter 2: International Monetary System
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Q1) Since the SDR is a "portfolio" of currencies
A)its value tends to be more stable than the value of any of the individual currencies included in the SDR.
B)its value tends to be less stable than the value of any of the individual currencies included in the SDR.
C)its value tends to be as stable as the average of the individual currencies included in the SDR.
D)none of the above
Answer: A
Q2) An "international" gold standard can be said to exist when
A)gold alone is assured of unrestricted coinage.
B)there is two-way convertibility between gold and national currencies at stable ratios.
C)gold may be freely exported or imported.
D)all of the above
Answer: D
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Chapter 3: Balance of Payments
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Questions
Q1) Government controlled investment funds,known as sovereign wealth funds,
A)are playing a less-important role in international finance following the end of the fixed exchange rate era.
B)are mostly domiciled in Asian and Middle Eastern countries.
C)are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves.
D)none of the above
Answer: B
Q2) The capital account is divided into three subcategories: direct investment,portfolio investment,and other investment.Portfolio investment involves
A)acquisitions of controlling interests in foreign businesses.
B)investments in foreign stocks and bonds that do not involve acquisitions of control.
C)bank deposits, currency investment, trade credit, and the like.
D)all of the above
Answer: B
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Chapter 4: Corporate Governance Around the World
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Q1) Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management
A)by moving to a better county.
B)by listing their stocks in countries with strong investor protection.
C)by voluntarily complying with the provisions of the U.S.Sarbanes-Oxley Act.
D)having a press conference and promising to be nice to their investors.
Q2) The genius of public corporations stems from their capacity to allow efficient sharing or spreading of risk among many investors,who can buy and sell their ownership shares on liquid stock exchanges and let professional managers run the company on behalf of shareholders.This risk sharing stems from
A)the liquidity of the shares.
B)the limited liability of shareholders.
C)the limited liability of bondholders.
D)the limited ability of shareholders.
Q3) In countries with concentrated ownership
A)hostile takeovers are quite rare.
B)hostile takeovers are quite common.
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Chapter 5: The Market for Foreign Exchange
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Q1) If the $/ bid and ask prices are $1.50/ and $1.51/ ,respectively,the corresponding /$ bid and ask prices are
A) 0.6667 and 0.6623.
B)$1.51 and $1.50.
C) 0.6623 and 0.6667.
D)cannot be determined with the information given.
Q2) Using the table above,what is the bid price of euro in terms of pounds?
A) 1.3371/£
B) 1.3378/£
C)£0.7475/
D)£0.7479/
Q3) Using the table above,what is the bid price of pounds in terms of euro?
A) 1.3371/£
B) 1.3378/£
C)£0.7475/
D)£0.7479/
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) If you borrowed $1,000,000 for one year,how much money would you owe at maturity?
Q2) The International Fisher Effect suggests that
A)any forward premium or discount is equal to the expected change in the exchange rate.
B)any forward premium or discount is equal to the actual change in the exchange rate
C)the nominal interest rate differential reflects the expected change in the exchange rate.
D)an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.
Q3) Generally unfavorable evidence on PPP suggests that
A)substantial barriers to international commodity arbitrage exist.
B)tariffs and quotas imposed on international trade can explain at least some of the evidence.
C)shipping costs can make it difficult to directly compare commodity prices.
D)all of the above
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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Sample Questions
Q1) With currency futures options the underlying asset is A)foreign currency.
B)a call or put option written on foreign currency.
C)a futures contract on the foreign currency.
D)none of the above
Q2) A European option is different from an American option in that A)one is traded in Europe and one in traded in the United States.
B)European options can only be exercised at maturity; American options can be exercised prior to maturity.
C)European options tend to be worth more than American options, ceteris paribus.
D)American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option.
Q3) A CME contract on 125,000 with September delivery
A)is an example of a forward contract.
B)is an example of a futures contract.
C)is an example of a put option.
D)is an example of a call option.
Q4) Find the risk neutral probability of an "up" move.
Q5) If the call finishes out-of-the-money what is your portfolio cash flow?
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Chapter 8: Management of Transaction Exposure
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Q1) Transaction exposure is defined as
A)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
B)the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
C)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.
D)ex post and ex ante currency exposures.
Q2) Since a corporation can hedge exchange rate exposure at low cost
A)there is no benefit to the shareholders in an efficient market.
B)shareholders would benefit from the risk reduction that hedging offers.
C)the corporation's banker would benefit from the risk reduction that hedging offers.
D)none of the above
Q3) 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)
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Chapter 9: Management of Economic Exposure
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Q1) It is conventional to classify foreign currency exposures into the following types:
A)economic exposure, transaction exposure, and translation exposure.
B)economic exposure, noneconomic exposure, and political exposure.
C)national exposure, international exposure, and trade exposure.
D)conversion exposure, and exchange exposure.
Q2) The variance of the exchange rate is:
A)0.0200
B)0.101875
C)0.002
D)none of the above
Q3) The variance of the exchange rate is:
A)0.0200
B)0.10
C)0.002
D)none of the above
Q4) Discuss how you can hedge your exchange risk exposure and also examine the consequences of hedging.
Q5) Estimate your exposure (b)to the exchange risk.
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Chapter 10: Management of Translation Exposure
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Q1) When determining the functional currency,
A)if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency.
B)if there is an active local market for the foreign entity's products the local currency should be the functional currency.
C)if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the functional currency should be the home currency.
D)all of the above
Q2) Translation exposure,
A)is not entity specific, rather it is currency specific.
B)is not currency specific, rather it is entity specific.
C)involves restatement from Italian to French.
D)none of the above
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Chapter 11: International Banking and Money Market
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Q1) Offshore banks
A)are frequently located on old oil drilling platforms located in international waters.
B)are often located in "pariah" countries like North Korea and Iran.
C)operate as branches or subsidiaries of the parent bank.
D)none of the above
Q2) Edge Act banks are so-called because
A)they are Federally chartered subsidiaries of U.S.banks that are physically located in the United States and are allowed to engage in a full range of international banking activities.
B)Senator Walter
C)they can only be chartered in states that are on the borders of the United States-on the "edge" of the map.
D)none of the above
E)Edge of New Jersey sponsored the 1919 amendment to Section 25 of the Federal Reserve Act to allow U.S.banks to be competitive with the services foreign banks could supply their customers.
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Chapter 12: International Bond Market
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Q1) A "bearer bond" is one that
A)shows the owner's name on the bond.
B)the owner's name is recorded by the issuer.
C)possession is evidence of ownership.
D)both a) and b)
Q2) In contrast to many domestic bonds,which make _________ coupon payments,coupon interest on Eurobonds is typically paid _________
A)semiannual, annually.
B)annual, semiannually.
C)quarterly, semiannually.
D)quarterly, annually.
Q3) Suppose your firm needs to raise 100,000,000 with a one-year bond with a coupon rate of 8 percent per annum.The underwriting spread is 2 percent.What should the amount of the bond offering be?
A) 102,000,000
B) 102,040,816.30
C) 94,482,237
D) 110,204,081.60
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Chapter 13: International Equity Markets
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Q1) The sale of previously issued common stock traded between investors occurs in
A)the primary market.
B)the secondary market.
C)the on-the-run market.
D)the dealer market.
Q2) A market-value index
A)is calculated such that the proportion of the index a stock represents is determined by its proportion of the total market capitalization of all stocks in the index.
B)is calculated as the average price of all the stocks in the index that trade that day, one example is the NASDAQ.
C)is calculated like the DJIA.
D)none of the above
Q3) Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management
A)by moving to a better county.
B)by listing their stocks in countries with strong investor protection.
C)by voluntarily complying with the provisions of the U.S.Sarbanes-Oxley Act.
D)having a press conference and promising to be nice to their investors.
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Page 15
Chapter 14: Interest Rate and Currency Swaps
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Q1) A major risk faced by a swap dealer is credit risk.This is
A)the probability that a counterparty will default.
B)the probability that both counterparties default.
C)the probability floating rates will move against the dealer.
D)none of the above
Q2) In the problem just previous,company X
A)is probably British.
B)is probably American.
C)has a comparative advantage in borrowing pounds.
D)both a) and c)
Q3) A major risk faced by a swap dealer is exchange rate risk.This is
A)the probability that a foreign counterparty will default in a currency swap.
B)the probability that either counterparty defaults in a currency swap.
C)the probability exchange rates will move against the dealer.
D)none of the above
Q4) Explain how this opportunity affects which swap firm A will be willing to participate in.
Q5) Explain how this opportunity affects which swap firm B will be willing to participate in.
Q6) What would be the interest rate?
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Chapter 15: International Portfolio Investment
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Q1) With regard to the past price performance of closed end mutual funds
A)most funds have traded at both a premium and a discount to NAV.
B)most funds trade on a stock exchange just like a publicly traded corporation.
C)suggests the risk-return characteristics can be quite different from those of the securities underlying the fund.
D)all of the above
Q2) The "world beta" measures the
A)unsystematic risk.
B)sensitivity of returns on a security to world market movements.
C)risk-adjusted performance.
D)risk of default and bankruptcy.
Q3) 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.
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) More than fifty percent of FDI in dollar terms
A)takes the form of cross-border mergers and acquisitions.
B)takes the form of Greenfield investment.
C)is initiated by governments.
D)none of the above
Q2) The product life-cycle theory predicts that
A)over time the United States switches from an exporting country of new products to an importing country.
B)over time the United States switches from a comparative advantage in R&D to a service economy.
C)over time the United States education system maintains the country's dominant position in the world economy.
D)none of the above
Q3) International markets for goods and services are often imperfect.Which is the MOST common and MOST important?
A)Acts of governments
B)Natural barriers like distance
C)Cultural barriers
D)Lack of knowledge
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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-equity ratio for a firm with a debt-to-total-value ratio of ½. A)1 B)2 C)3 D)4 E)5
Q3) Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3½.
A)3/4
B)7/9
C)4/5
D)9/11
E)5/6
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Chapter 18: International Capital Budgeting
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Q1) The financial manager's responsibility involves
A)increasing the per share price of the company's stock at any cost and by any means, ways and fashion that is possible.
B)the shareholder wealth maximization.
C)which capital projects to select.
D)both b) and c)
Q2) What is the euro-denominated IRR of this project?
Q3) What is the euro-denominated IRR of this project?
Q4) What is the dollar-denominated IRR of this project?
Q5) What is the levered after-tax incremental cash flow for year 4?
A)$281,704,000
B)$465,152,000
C)-$194,848,000
D)$460,796,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.
Q6) The hedge fund manager notices the optionality in starting this project today.He asks you to comment and outline your valuation strategy.
Q7) What is CF1 in dollars?
Page 20
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Chapter 19: Multinational Cash Management
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Q1) Calculate the increase in annual after-tax profits if the higher transfer price of $1,250 per unit is used.
A)$250,000
B)$500,000
C)$1,000,000
D)$1,250,000
Q2) The U.S.IRS allows transfer prices to be set using the resale price method.This method requires
A)finding the price that an unrelated willing seller would accept from an unrelated willing buyer.
B)the price at which the good is resold by the distribution affiliate is reduced by an amount sufficient to cover overhead costs and a reasonable profit.
C)an appropriate profit is added to the cost of the manufacturing affiliate.
D)financial models and econometric techniques.
Q3) Using your results to the last question,use bilateral netting to simplify.
Q4) Using your results to the last question,use bilateral netting to simplify.
Q5) Using your results to the last question,use multilateral netting to simplify.
Q6) Fill out the following figure with the initial situation shown in the table.
Q7) Using your results to the last question,use bilateral netting to simplify.
Page 21
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Chapter 20: International Trade Finance
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Q1) The term "forfaiting"
A)means relinquishing, waiving, yielding, and penalty.
B)is a type of medium-term trade financing used to finance the sale of capital goods.
C)involves the sale of promissory notes signed by the importer in favor of the exporter, who might sell the notes at a discount from face value.
D)both b) and c)
Q2) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q3) A switch trade
A)is the purchase by a third party of one country's a clearing agreement balance for hard currency.
B)is a form of barter.
C)involves two parties agreeing to buy a specified amount of goods or services from one another.
D)all of the above
Q4) Determine the amount the exporter will receive if he holds the B/A until maturity.
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) The lower the transfer price
A)the higher the net profit reported by the MNC.
B)the lower the gross profit of the transferring division relative to the receiving division.
C)the higher the gross profit of the receiving division relative to the transferring division.
D)none of the above
Q2) The organizational form of a MNC can affect the timing of a tax liability.This means
A)the principle of tax equity might be violated.
B)as long as regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rates apply, then the tax due date doesn't matter.
C)tax timing will even out over a reporting cycle, so there is no big deal here.
D)none of the above
Q3) Capital export neutrality
A)is a goal based on worldwide economic efficiency.
B)is an example of Mercantilism.
C)is based on host country economic efficiency.
D)is based on MNC home country economic efficiency.
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