International Banking and Finance Practice Exam
Course Introduction
International Banking and Finance explores the structure, functions, and operations of the international financial system, focusing on the role of banks and financial institutions in the global economy. The course covers topics such as foreign exchange markets, international financial instruments, risk management, regulatory frameworks, and cross-border lending. Students will examine the impact of globalization on banking practices, the challenges of managing financial risk in a multinational context, and the implications of recent crises and reforms. Emphasis is placed on understanding the interconnectedness of financial markets, the management of international portfolios, and current issues shaping international banking and finance policies.
Recommended Textbook
International Corporate Finance 1st Edition by J. Ashok Robin
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Page 2
Chapter 1: Introduction
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Q1) The Imperfect Markets Theory is a relatively new theory to explain international trade.What does the Imperfect Markets Theory say about why international trade happens?
Answer: The Imperfect Markets Theory recognizes that the cross-border movement of factors needed from production is not perfect,that there are impediments that exist to those flows of factors.If countries were not open to the cross-border movement of these factors of production (labor,capital,raw materials),then there would be no trade between countries;each country would have to produce the things that it needed.If countries were totally open to the cross-border movement of these factors of production,then the price and availability of all factors of production would eventually equalize and the basis for comparative advantage would be removed,and,since comparative advantage is seen as the basis for trade,the need for trade,at least in final goods,would be lost.The Imperfect Markets Theory says,however,that this potential loss of comparative advantage has not and will not happen because,while most countries are open to cross-border movement of factors of production,there are a number of impediments to that free movement of factors of production - such as taxes,transportation costs,and government imposed restrictions - that ensure that the equilibrium that completely free movement of factors would achieve will not be accomplished.
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Chapter 2: International Financial Markets: Structure and Innovation
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Q1) In foreign exchange markets,________________ is the price that market makers are willing to buy and ____________________ is the price at which market makers are willing to sell a foreign currency.
A)ask;bid
B)bid;ask
C)offer;acceptance
D)acceptance;offer
Answer: B
Q2) Foreign exchange transactions can be classified into three categories:
A)spot transactions,forward transactions,and forward exchange swap agreements.
B)foreign currency transactions,domestic currency transactions,and regional currency transactions.
C)hedge transactions,exchange transactions and investment transactions.
D)Interbank transactions,MNC transactions,and miscellaneous transactions. Answer: A
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Chapter 3: Currency and Eurocurrency Derivatives
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Q1) The exchange rate that is specified in a currency forward contract is called the: A)strike price.
B)contract exchange rate.
C)prevailing exchange rate.
D)forward price.
Answer: D
Q2) If the forward price in a currency forward is lower than the spot price of the base currency,the currency forward is said to contain a(n): A)error.
B)bonus.
C)forward premium.
D)forward discount.
Answer: C
Q3) A request to deposit additional funds in a margin account is a: A)margin call.
B)deposit advice.
C)required deposit.
D)margin hold.
Answer: A
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Chapter 4: Currency Systems and Valuation
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Q1) A currency system where small adjustments to value of the currency are made at preset points or in response to specific macroeconomic indicators is a:
A)currency board system.
B)crawling peg system.
C)managed float system.
D)independent float system.
Q2) We now understand that _____________________ is (are)the most important factor in global economic growth.
A)free trade agreements
B)the work of the IMF
C)free movement of capital
D)minimal restrictions on immigration
Q3) The equilibrium value of a currency is the value:
A)at which the amount of the currency that is demanded will equal the amount of the currency that is supplied.
B)at which the currency is most often found.
C)of the currency that has been maintained for at least 30 days.
D)at which the country issuing the currency will issue additional currency.
Q4) What was the classical gold standard and why is it not observed today?
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Chapter 5: Currency Parity Conditions
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Q1) The profit in a currency arbitrage transaction is the price differential in buying and selling the currency.What can cause the reduction or loss of that profit?
Q2) "Grossing-up" nominal interest rates means:
A)adding up all of the interest rates at major institutions in a country and dividing by the number of institutions considered to determine an average interest rate.
B)determining the differential in interest rates in one country compared to interest rates in another country.
C)reducing nominal rates by the inflation rate to compensate for the loss of purchasing power attributed to inflation.
D)increasing nominal rates by the inflation percentage to determine the real purchasing power of consumers.
Q3) What is the law of one price?
Q4) Currency-related parity conditions arise from:
A)international currency markets.
B)cross-border financial transactions.
C)relationships between currency exchange rates and certain economic variables.
D)the interaction of spot and forward currency exchange rates.
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Chapter 6: Currency Risk Exposure Measurement
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Q1) In the Markowitz Portfolio Approach,risk is reduced by:
A)the diversification of assets.
B)the correlation between assets.
C)investing in arrangements that return cash to the firm at different times.
D)investing in real assets rather than derivatives.
Q2) ___________________ is the component of operating exposure that involves the conversion of a firm's foreign cash flow into the home country currency of the firm.
A)Operating impact
B)Transaction exposure
C)Conversion impact
D)Currency impact
Q3) In netting cash flow across time,the scenario that assumes that the interest rate is zero:
A)is not a valid scenario for estimating currency risk.
B)is valid because interest rates generally do not affect cash flow.
C)underestimates the currency risk involved in the situation being analyzed.
D)is easy to use,but only makes sense where the interest rate does not affect the estimation of the currency risk.
Q4) What is the difference between operating exposure and transaction exposure?
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Chapter 7: Currency Exposure Management
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Q1) Firms typically buy put options to hedge against:
A)payables.
B)inventory.
C)recessions.
D)receivables.
Q2) "On Balance Sheet Commitments" are:
A)items such as receivables that constitute a significant part of a firm's transaction exposure.
B)items such as inventory that is not involved in a firm's transaction exposure.
C)items in connection with which the firm has some liability.
D)obligations owed by a firm to another firm that depends on currency values at a particular time.
Q3) Unlike the forward hedge,there are upfront cash flows related to the option premium,which means that:
A)the buyer or seller must pay a fee to buy or sell an option.
B)dealing with options always results in some loss of money.
C)money must be spent to buy the option or money is received on the sale of an option.
D)option results in the elimination of cash flow variables.
Q4) How significant is currency risk compared to other risks that an MNC might face?
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Chapter 8: Capital Budgeting
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Q1) ____________________________ is a figure that represents a firm's overall cost of financing or its opportunity cost of capital.
A)Discounted cash flow
B)Net present value
C)Wealth effect
D)Weighted average cost of capital
Q2) What is the difference between "off shoring" and "outsourcing"?
A)Off shoring refers to manufacturing in others countries,while outsourcing refers to buying raw materials in other countries.
B)Off shoring is an activity of MNCs,while outsourcing is an activity of purely domestic firms.
C)Off shoring refers to obtaining foreign labor to work on domestic projects,while outsourcing refers to using contract domestic labor for domestic projects.
D)There is no difference,they are interchangeable terms.
Q3) What three taxes might be incurred when an MNC conducts a project through a foreign subsidiary?
Q4) What is decentralization and what does it mean for MNCs?
Q5) What are the components of country risk?
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Chapter 9: Advanced Capital Budgeting
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Q1) In some situations,the profits earned by a subsidiary cannot be immediately paid to the parent because of:
A)restrictions on how much of the profit of a foreign subsidiary can be remitted to the parent imposed by the country where the parent is located.
B)international trade restrictions that limit the amount of capital flow from country to country.
C)restrictions on remittances from the subsidiary to the parent imposed by the country where the subsidiary is located.
D)the lack of liquidity in the assets of the subsidiary that would allow the subsidiary to send cash to the parent.
Q2) Differences in NPV of a proposed project between parent and subsidiary can arise from:
A)political risk or currency risk.
B)cash flow or currency asymmetries.
C)cash flow or cost-of-capital asymmetries.
D)political risk or economic risk.
Q3) How do remittance restrictions impact the cash flow to the parent from a project?
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Chapter 10: Long-Term Financing
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Q1) One characteristic that distinguishes MNCs from domestic organizations and that makes MNCs better risks than domestic organizations is that:
A)MNCs are better organized than domestic organizations.
B)domestic organizations are not as high-profile as MNCs.
C)MNCs are more in touch with markets than domestic organizations.
D)MNCs have diversified portfolios of cash flow.
Q2) One of the first decisions that an MNC has to make when considering financing is whether to pursue:
A)internal financing or external financing.
B)debt financing or internal financing.
C)public financing or private financing.
D)equity financing or internal financing.
Q3) An attraction of internal equity is that _____________________ but a disadvantage is that _____________________________.
A)earnings are increased;dividends to stockholders are reduced
B)the cost of internal equity is very low;earnings are reduced
C)the cost of internal equity is very low;regulatory approval is necessary for the use of internal equity
D)the cost of internal equity is very low;dividends to stockholders are reduced
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Page 12
Chapter 11: Optimizing and Financing Working Capital
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Q1) In the context of cash management,what are opportunity costs?
Q2) Firms need financing for the following reasons:
A)refinancing of existing debt,operations,and long-term asset acquisition.
B)long-term asset acquisition,operations,and cash reserves.
C)cash reserves for emergencies,operations,and investments.
D)investments,long-term asset acquisition,and cash reserves.
Q3) If an MNC borrows in a foreign currency and the value of that currency appreciates during the term of the loan:
A)the MNC will not be affected because its obligations are established when the loan is made.
B)the MNC can cancel the loan and refund the proceeds of the loan.
C)the MNC will have to repay the principle and interest of the loan in a more valuable currency.
D)the lender will have the option of canceling the loan.
Q4) Higher currency risk calls for:
A)avoiding countries with volatile currencies.
B)higher implicit cash balance costs.
C)higher cash balances.
D)lower cash balances.
Q5) How does a firm monetize receivables?
Page 13
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Chapter 12: International Alliances and Acquisitions
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Q1) How can firms constructively react to overcapacity?
A)Firms can invest to modernize facilities and production facilities.
B)Firms can merge with firms that need addition capacity so that the capacity of the two firms balances out.
C)Firms can identify unproductive or underproductive assets and obtain the salvage value of those assets.
D)Firms can offshore or outsource to rid themselves of overcapacity.
Q2) What is the difference between private equity funds and hedge funds?
Q3) What category of merger costs are typically incurred post-merger?
A)Transaction costs
B)Merger costs
C)Transition costs
D)Explicit costs
Q4) The more visible costs of a merger,such as professional fees,are classified as:
A)sunk costs.
B)merger transaction costs.
C)conversion costs.
D)merger direct costs.
Q5) What is the difference between a vertical merger and a horizontal merger?
Q6) How is outsourcing related to a firm's core competencies?
Page 14
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Chapter 13: International Trade
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Q1) If there is informational asymmetry in a transaction,who bears the primary risk of default?
A)The exporter
B)The importer
C)Both the exporter and importer have the same risk of default
D)The financial institution financing the transaction
Q2) A government-sponsored institution that is intended to assist the import and export activities with the country by providing information,financing,and insurance is called a(n):
A)trade improvement council.
B)foreign trade organization.
C)export-import bank.
D)foreign exchange market.
Q3) What kind of products usually face higher import/export regulation than most other products?
A)Industrial products
B)Consumer products
C)Products used to product other products
D)Agricultural products
Q4) Describe the process by which a letter of credit is paid.
Page 15
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Chapter 14: International Taxation and Accounting
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Q1) What is the primary purpose of tax treaties?
A)To ensure that the maximum allowable corporate income tax is collected
B)To prohibit more than one country taxing the same income
C)To allow countries to change income tax rates without prior notice
D)To reduce the incidents of double taxation
Q2) If the income tax rate in a foreign country where an MNC has a subsidiary is lower than the tax rate in the MNC's home-country:
A)the MNC might sell goods or services to that foreign subsidiary at higher prices to increase the income in the low-tax-rate country.
B)the MNC might sell goods or services to that foreign subsidiary at low prices to increase the income in the low-tax-rate country.
C)the MNC might sell goods or services to that foreign subsidiary at higher prices to decrease the income in the higher-tax-rate country.
D)the MNC might sell goods and services to that foreign subsidiary at prices that would allow the MNC and its subsidiary to have balanced income.
Q3) How does the separate entity approach to taxation differ from the integrated system approach?
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Chapter 15: International Portfolio Investments
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Q1) Ultimately,what is the net effect of government control of foreign investors?
A)Increased foreign investment in the country because of reduced risk.
B)Increased transaction costs for investors and a desire for higher returns to offset the increased transaction costs.
C)Decreased foreign investment by investors who seek less regulation of their investments.
D)Decreased returns for investors because regulation reduces cost of capital.
Q2) Compare open-end and closed-end mutual funds.
Q3) Internal arrangements related to corporate governance include:
A)employment procedures that thoroughly review the backgrounds of executives before they are hired.
B)incentive contracts for managers and executives.
C)policies that prohibit unethical conduct in corporate matters.
D)programs designed to give stockholders a better understanding of corporate actions.
Q4) In inefficient markets,asset prices tend to be:
A)lower than normal,so investment opportunities are available.
B)higher than normal,so investment opportunities are limited.
C)abnormally high or low,thereby creating opportunities for profit.
D)subject to the forces of supply and demand.
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