Global Banking and Financial Institutions
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Course Introduction
This course offers a comprehensive exploration of global banking and financial institutions, focusing on their structure, function, and evolving role in the world economy. Students will examine the regulatory frameworks, risk management practices, and technological advancements shaping international banking operations. Topics include commercial and investment banking, central banking, the shadow banking system, and the impact of globalization on financial markets. Through case studies and current events, students will gain insight into the challenges and innovations faced by financial institutions in a dynamic global landscape.
Recommended Textbook
International Financial Management 2nd Edition by Geert J Bekaert
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Page 2
Chapter 1: Globalization and the Multinational Corporation
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Q1) Which one of the following has a single currency managed by a common central bank?
A) ASEAN
B) European Union
C) World Trade Organization
D) The Organization for Economic Cooperation and Development
Answer: B
Q2) Why might setting up production facilities abroad lead to expanded sales in local markets?
Answer: When a firm such as a multinational produces abroad,it can more easily monitor market developments,adapt its products and production schedules,and provide more comprehensive after-sales services.Establishing local production facilities also demonstrates a greater commitment to the local citizens and the markets.It can also assure a stable supply of resources.This is particularly important for firms who produce intermediate goods for sale to other countries.
Q3) Institutional investors play important roles in financial markets.Explain.
Answer: Institutional investors such as insurance companies,retirement funds,and mutual funds have the ability to help determine security prices,the cost of equity and debt.
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Page 3
Chapter 2: The Foreign Exchange Market
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Q1) Eastern Copper Mines of New Zealand has called a broker at Deutsche Bank to ask her opinion about the Japanese yen to New Zealand dollar exchange rate.What would the broker's answer be?
A) ¥104.30/NZ$
B) ¥80.60/NZ$
C) ¥75.44/NZ$
D) ¥65.57/NZ$
Answer: D
Q2) What is the largest financial market in the world measured in dollar-volume trade?
A) the U.S. stock markets
B) the currency markets
C) the forward and swap currency markets
D) the global market for loanable funds
Answer: B
Q3) Describe how an exchange rate is like a market price?
Answer: The direct quote for a currency is the local currency price (numerator)of one unit of foreign currency (denominator).
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4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) What is a spot-forward swap?
A) the purchase of foreign currency spot against the sale of the same amount of foreign currency forward
B) the sale of foreign currency spot against the purchase of the same amount of the foreign currency forward
C) both the purchase or sale of a foreign currency spot against the sale or purchase of the foreign currency forward
D) the purchase of a foreign currency forward contract at the outright rate
Answer: C
Q2) If the USD is selling at a discount relative to the yen in the forward market,is the forward price of JPY/USD larger or smaller that the spot price of the JPY/USD?
A) larger
B) smaller
C) indeterminate
D) the same
Answer: B
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Chapter 4: The Balance of Payments
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Q1) The sale of American computers to the Spanish government shows up as
A) a debit on the official reserves account.
B) a credit on the official reserves account.
C) a credit on the trade account.
D) a debit on the current account.
Q2) As the real value of the dollar rises,the balance on the current account is likely to ________.
A) increase
B) decrease
C) stay the same
D) move with the capital account adjustments factor
Q3) The Japanese current account surplus can best be attributed to
A) the high rate of Japanese domestic investment.
B) Japanese protectionism.
C) the high rate of Japanese savings.
D) government budget deficits.
Q4) Give an example of how the balance of payments provides information concerning exchange rate determination?
Q5) If a U.S.non-profit makes a large gift to an Israeli agency,how is it handled in the balance of payments?
6
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Chapter 5: Exchange Rate Systems
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Q1) What is the negative side effect on the money supply of a non-sterilized foreign exchange intervention?
A) A higher money supply eventually leads to lower inflation, and the foreign exchange objective of the central bank's policy may conflict with its abroad goal of price stability.
B) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the IMF's policy may conflict with its domestic goal of price stability.
C) A higher money supply eventually leads to lower inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.
D) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.
Q2) What are the three major components of the official reserves account?
A) foreign exchange reserves, gold, and IMF-related reserve assets
B) foreign exchange reserves, foreign government bonds, gold
C) IMF-related reserve assets, gold, and U.S. Dollars
D) gold, IMF-related reserves assets, and government-owned land
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Chapter 6: Interest Rate Parity
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Sample Questions
Q1) Identify an external currency market and how it operates?
Q2) Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S.dollars.
Q3) If the underlying transaction gives you a liability,denominated in foreign currency,the general principal behind a money market hedge states you need an equivalent ________ in the money market to provide a hedge.
A) liability
B) asset
C) forward contract
D) foreign bank account
Q4) The empirical evidence indicates that interest rate parity is the norm,especially during periods of financial market ________.
A) arbitrage
B) turbulence
C) profit-taking
D) tranquility
Q5) Explain the bid-ask spread in the external currency market?
Q6) If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?
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Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Questions
Q1) Describe how you construct the uncertain \(£\)-denominated return from investing 1 \(£\) in the Swiss franc money market.
Q2) The ________ holds that it is the covariance of an asset's return with that of the market portfolio that determines the asset's risk premium.
A) Law of One Price
B) Law of Iterated Expectations
C) Capital Asset Pricing Model
D) Interest Rate Parity Model
Q3) Which one of the following is the only determinant of volatility in the forward currency markets?
A) interest rate parity
B) economic recovery
C) political turmoil
D) variance of the future exchange rates
Q4) If interest rate parity prevails,what is the return from a hedged foreign currency investment?
Q5) What is the prediction of the CAPM for the relationship between the forward exchange rate and the expected future spot exchange rate?
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) Because the real exchange is composed of three variables that can all move simultaneously,many combinations of changes lead to a real appreciation of the pound (in this case).Which one of the following options is NOT a basic movement?
A) a decrease in the pound prices of U.S. goods, not holding the dollar prices constant
B) a decrease in the dollar prices of U.S. goods, holding the exchange rate and the pound prices of goods constant
C) an increase in the pound prices of goods, holding the exchange rate and the dollar prices of goods constant
D) an increase in the nominal exchange rate ($/?), holding the dollar prices and pound prices of goods constant
Q2) Which one of the following reasons for violations of the Law of One Price is the most obvious?
A) tariffs on imports
B) banking rules
C) industrial policies
D) exchange rate controls
Q3) Under what conditions could the law of one price be violated?
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Page 10
Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) When a producer charges different prices for the same good in different markets,the practice is known as ________.
A) pricing-to-market
B) exchange rate pass-through
C) marking-to-market
D) market integration
Q2) Another name for operating exposure is ________ exposure.
A) translation
B) sovereign risk
C) accounting
D) economic
Q3) Which one of the following is NOT a type of subsidiary?
A) The Net Importer
B) The Net Exporter
C) The Neutral Firm
D) The Monopolist
Q4) What determines how much a foreign producer allows the dollar price of a product sold in the United States to be affected by a change in the real exchange rate?
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Chapter 10: Exchange Rate Determination and Forecasting
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Q1) To make predictions regarding fixed exchange rate systems and devaluations,forecasters may employ
A) macroeconomic information.
B) financial information.
C) interest rate differentials.
D) macroeconomic, financial and even interest rate differentials.
Q2) Construct a list of a country's economic statistics you would assemble to help determine the probability of a devaluation of its currency within the coming year.
Q3) All things considered,it is unlikely that equality of real interest rates across countries is a good description of reality,especially in the short run.The following options explain the reasons for this EXCEPT:
A) identical nominal returns imply very different real returns for investors in different countries.
B) returns in different currencies can have different currency risk premiums.
C) political risks or the threat of capital controls prevent investors from taking advantage of higher returns in other countries.
D) PPP deviations are not sizable and prolonged.
Q4) Describe how the macroeconomic fundamental,money supply,affects exchange rates.
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Chapter 11: International Debt Financing
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Q1) The long-term debts of eurobanks are known as ________.
A) LIBOR loans
B) syndicates
C) eurocredits
D) euronotes
Q2) International banks created facilities for sales of short-term,negotiable promissory notes,called ________.
A) eurocredits
B) euro commercial paper
C) euro-MTNs
D) euronotes
Q3) Which type of bond is issued and traded within the internal market of a single country and denominated in the currency of that country?
A) dragon bond
B) domestic bond
C) Eurobond
D) foreign bond
Q4) How are the transactions in the global bond market in reality a simultaneous transaction in two separate markets?
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Chapter 12: International Equity Financing
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Q1) What is the name of the effect related to market liquidity that occurs when a market lacks liquidity and an investor's trade is relatively large and results in an adverse effect on the price the investor gets?
A) turnover
B) blocked funds
C) demutualization
D) market impact
Q2) A private bourse is owned and operated by a ________ founded for the purpose of trading securities.
A) corporation
B) non-profit corporation
C) syndicate of traders
D) commercial bank
Q3) How have global stock markets adjusted to competitive pressure from global investors?
Q4) When one corporation owns shares in another,the practice is known as ________.
A) cross-listing
B) cross-market
C) cross-holding
D) diversification
Page 14
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Chapter 13: International Capital Market Equilibrium
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Q1) Which one of the following causes the regression computation of a stock's beta to be imprecise?
A) total risk
B) systematic risk
C) idiosyncratic risk
D) home country bias
Q2) The capital asset pricing model was derived with simplified assumptions building on the original mean-variance optimizations analytics developed by ________.
A) Mossin
B) Sharpe
C) Lintner
D) Markowitz
Q3) The APT postulates that other economy-wide factors can systematically affect the returns on a large number of securities.These factors might include all of the following EXCEPT:
A) news about inflation.
B) interest rates.
C) gross national product.
D) unemployment rate.
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Page 15
Chapter 14: Country and Political Risk
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Q1) ________ are the name of treaties that have helped investors avoid legal problems associated with sovereign debt.
A) Bilateral trade treaties
B) Bilateral investment treaties
C) Free trade zone treaties
D) Currency union treaties
Q2) ________ are assessments of political and economic events produced by specialized organizations that that could aversely affect companies operating in a country.
A) Country risk premiums
B) Commercial risk ratings
C) Country risk ratings
D) Sovereign risk ratings
Q3) Which one of the following is the name for the action of a country takes when it repays a loan at a discount?
A) debt buyback
B) discount bond exchange
C) par bond exchange
D) conversion bonds
Q4) What is the difference between political risk and sovereign risk?
Page 16
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Chapter 15: International Capital Budgeting
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Q1) With respect to currency measurement,what is the rule when discounting cash flows?
A) The revenues and expenses must be measured as they occur rather than on an incremental basis.
B) There is no need to incorporate the risk premium of that the firm's stockholders would demand in the discount rate.
C) Revenues and expenses should be measured on a pre-tax cash flow basis.
D) All cash flows should be measured in the same currency.
Q2) If projects are mutually exclusive,the project with the ________ should be accepted by the firm.
A) lowest ANPV
B) highest ANPV
C) highest return
D) lowest tax burden
Q3) Which of the following does NOT add cash flows to the parent's free cash flows?
A) royalties
B) cannibalization of exports
C) overhead management fees
D) licensing agreements
Q4) What is meant by the cannibalization of an export market?
Page 17
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) What is the name given to the ratio of investment to gross cash flows?
A) payout ratio
B) retention ratio
C) plowback ratio
D) debt to equity ratio
Q2) Assuming an upward-sloping term structure of spot interest rates,if the expected profits from a foreign project are discounted by a higher discount rate found in later years,the ________ of the project is penalized needlessly.
A) future value
B) future market value
C) total risk
D) present value
Q3) The Capital Asset Company has accepted a project for investment.It can be assumed that the firm is earning its WACC and the rate of return on the project
A) should equal the plowback ratio
B) would be irrelevant
C) is the same or greater
D) is the same or less
Q4) Explain how to calculate the rate of return on invested capital?
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) According to the Wharton/CIBC Survey of 1998 on hedging,only when a firm is sufficiently large to overcome the fixed costs of hedging does the firm
A) create an international division responsible for hedging.
B) institute tax shelters using hedging devices.
C) institute a hedging policy.
D) hold only the cash manager responsible for hedging.
Q2) How can hedging increase the value of a firm?
A) by reducing its liabilities
B) by reducing its future income taxes
C) by increasing its interest expense
D) by increasing its headquarter expense
Q3) If Alpha International Inc.has debt in its capital structure,it may forego a ________ project because too much of the increase in the firm's value may accrue to the creditors rather than the stockholders.
A) negative NPV
B) zero NPV
C) positive NPV
D) negative rate of return
Q4) Why is hedging considered a cost center and not a profit center?
Page 19
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Chapter 18: Financing International Trade
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Q1) When a bank accepts a time draft for payment and sells it in the money markets,it is known as a
A) time draft.
B) trade acceptance.
C) forfait transaction.
D) banker's acceptance.
Q2) The Financial Credit Insurance Association offers two basic types of insurance polities to protect exporters against ________ and ________ risks.
A) exchange rate, political
B) commercial, political
C) exchange rate, economic
D) commercial, logistics
Q3) A(n)________ is a document required by certain countries which forces the exporter to provide information to customs officials in the importing country with the goal of preventing false declarations of the value of the merchandise.
A) consular invoice
B) order bill of lading
C) commercial invoice
D) clean bill of lading
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Page 20
Chapter 19: Managing Net Working Capital
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Q1) One technique a multinational may use to avoid the blocked fund strategy of a foreign nation is for the parent to lend funds to the affiliate.The loan is known as a ________ loan.
A) parallel
B) back-to-back
C) fronting
D) transfer pricing
Q2) Using a centralized cash management system results in a decreased ________ cash demand.
A) transactions
B) long-term
C) precautionary
D) short-term
Q3) When using the cash management methods of lagging or leading payments,the basic idea is to move funds from
A) a high tax jurisdiction to a lower one.
B) a low tax jurisdiction to a higher one.
C) a high tax jurisdiction to a tax neutral one.
D) the affiliate to the parent headquarters.
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Page 21
Chapter 20: Foreign Currency Futures and Options
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Q1) Unlike forward contracts,the maturity dates in the futures market are ________.
A) limited to four dates during the year
B) based on the first business day of each month
C) unlimited since futures contracts may be terminated anytime
D) limited to only regular business days rather than calendar days
Q2) Which one of the following practices in the futures markets adds greater stability to the market?
A) credit checks
B) the initial margin
C) marking to market
D) the right but not the requirement to perform the contract
Q3) Due to arbitrage,the futures price at maturity ________.
A) is driven to equality with the spot rate on that date
B) remains the same as the price of the opening trade for the date
C) represents the last trading price
D) represents the average price of the open interest outstanding
Q4) What does it mean for an American option to be "in the money"?
Q5) What are the differences between foreign currency option contracts and forward contracts for foreign currency?
Page 22
Q6) What effects does "marking to market" have on futures contracts?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) Between 2001 and 2004 the phenomenal growth in the use of swap markets has been a rate of over ________ per year.
A) 100%
B) 80%
C) 50%
D) 33%
Q2) The theoretical principal underlying the swap is termed the A) basis amount.
B) swap differential.
C) notional principal.
D) arbitrage principal.
Q3) The ________ is a trade organization that offers controls on the legal aspects of swaps.
A) Options Clearing Corporation
B) Chicago Board Options Exchange
C) Securities Exchange Commission
D) International Swap and Derivatives Association
Q4) Why are swap market transactions costs lower than transaction costs in the long term forward market?
Q5) Describe how a back-to-back loan is used.
Page 23
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