International Banking and Finance
Textbook Exam Questions
Course Introduction
This course provides an in-depth exploration of the structure and functioning of international banking and the global financial system. Students will examine the roles of international banks and financial institutions, the complexities of cross-border financial transactions, and the regulatory frameworks governing global finance. Key topics include foreign exchange markets, international lending, risk management, offshore banking, and the impact of economic policies and international events on banking operations. The course also addresses contemporary challenges such as financial crises, regulatory compliance, and the influence of technological innovations on international banking practices.
Recommended Textbook
Multinational Business Finance 12th Edition by
Arthur I. Stonehill
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Page 2
Chapter 1: Globalization and the Multinational Enterprise
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Q1) In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market seeking firms produce in foreign countries?
A)Satisfaction of local demand in the foreign country.
B)Satisfaction of local demand in the domestic markets.
C)Political safely and small likelihood of government expropriation of assets.
D)All of the above are market-seeking activities.
Answer: C
Q2) ________ investments are designed to promote and enhance the growth and profitability of the firm. ________ investments are designed to deny those same opportunities to the firm's competitors.
A)Conservative; Aggressive
B)Defensive; Proactive
C)Proactive; Defensive
D)Aggressive; Proactive
Answer: C
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3
Chapter 2: Financial Goals and Corporate Governance
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Q1) The Stakeholder Capitalism Model
A)clearly places shareholders as the primary stakeholder.
B)combines the interests and inputs of shareholders, creditors, management, employees, and society.
C)has financial profit as its goal and is often termed impatient capital.
D)is the Anglo-American model of corporate governance.
Answer: B
Q2) The relatively low cost of compliance with the Sarbanes-Oxley Act (SOX)has been a surprising benefit of the act.
A)True
B)False
Answer: False
Q3) Under the Shareholder Wealth Maximization Model of corporate governance, poor firm performance is likely to be faced with all but which of the following?
A)Sale of shares by disgruntled current shareholders.
B)Shareholder activism to attempt a change in current management.
C)As a maximum threat, initiation of a corporate takeover.
D)Prison time for executive management.
Answer: D
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Page 4
Chapter 3: The International Monetary System
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Q1) Which of the following correctly identifies exchange rate regimes from less fixed to more fixed?
A)Independent floating, currency board arrangement, crawling pegs.
B)Independent floating, currency board arrangement, managed float.
C)Independent floating, crawling pegs, exchange arrangements with no separate legal tender.
D)Exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs.
Answer: C
Q2) In January 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with the U.S. dollar. This practice is known as ________.
A)bi-currencyism.
B)sucrerization.
C)a Yankee bailout.
D)dollarization.
Answer: D
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Chapter 4: The Balance of Payments
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Q1) The effect of an imbalance in the BOP is the same for countries on a fixed exchange rate regime as for those on a floating exchange rate regime.
A)True
B)False
Q2) ________ is the cross-border purchase of assets that are then managed in a way that hides the movement of money and its ownership.
A)Capital flight
B)Capital mobility
C)Irrational exuberance
D)Money laundering
Q3) The authors identify a tip for understanding BOP accounting. They recommend that you "follow the cash flow."
A)True
B)False
Q4) Significant amounts of United States Treasury issues are purchased by foreign investors, therefore the U.S. must earn foreign currency to repay this debt.
A)True
B)False
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Chapter 5: Current Multinational Financial Challenges: the Credit Crisis
of 2007-2009
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Q1) Near the end of the U.S. housing boom many of the mortgages classified as Alt-A were in fact sub-prime.
A)True
B)False
Q2) It is pretty clear after reading this chapter that securitization in and of itself is a poor financial idea.
A)True
B)False
Q3) The authors make it clear that the main source of market failure with collateralized debt obligations lay almost exclusively with the rating agencies.
A)True
B)False
Q4) Securitization is likely to be declared illegal in the U.S. though it may still exist elsewhere in the world.
A)True
B)False
Q5) The international credit crisis began in full force in September 2008.
A)True
B)False
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Chapter 6: The Foreign Exchange Market
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Q1) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?
A)The transfer of purchasing power between countries.
B)Obtaining or providing credit for international trade transactions.
C)Minimizing the risks of exchange rate changes.
D)All of the above were identified as functions of the foreign exchange market.
Q2) In general, NDF markets normally develop for country currencies having large cross-border capital movements, but still subject to convertibility restrictions.
A)True
B)False
Q3) A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.
A)Eurodollar transaction
B)import/export exchange
C)foreign exchange transaction
D)interbank market transaction
Q4) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.
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Chapter 7: International Parity Conditions
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Q1) With covered interest arbitrage,
A)the market must be out of equilibrium.
B)a "riskless" arbitrage opportunity exists.
C)the arbitrageur trades in both the spot and future currency exchange markets.
D)all of the above
Q2) Use interest rate parity to answer this question. A U.S. investor has a choice between a risk-free one-year U.S. security with an annual return of 4%, and a comparable British security with a return of 5%. If the spot rate is $1.43/£, the forward rate is $1.44/£, and there are no transaction costs, the investor should invest in the U.S. security.
A)True
B)False
Q3) If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is ________.
A)correctly priced
B)under priced
C)over priced
D)not enough information to determine if the price is appropriate or not
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9
Chapter 8: Foreign Currency Derivatives
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Q1) The value of a European style call option is the sum of two components, the
A)present value plus the intrinsic value.
B)time value plus the present value.
C)intrinsic value plus the time value.
D)the intrinsic value plus the standard deviation.
Q2) Foreign currency options are available both over-the-counter and on organized exchanges.
A)True
B)False
Q3) Which of the following statements regarding currency futures contracts and forward contracts is NOT true?
A)A futures contract is a standardized amount per currency whereas the forward contact is for any size desired.
B)A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.
C)Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.
D)All of the above are true.
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Chapter 9: Interest Rate and Currency Swaps
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Q1) Swap agreements replace existing loan agreements.
A)True
B)False
Q2) An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an ________.
A)forward rate agreement
B)interest rate future
C)interest rate swap
D)none of the above
Q3) An agreement to swap a fixed interest payment for a floating interest payment would be considered a/an ________.
A)currency swap
B)forward swap
C)interest rate swap
D)none of the above
Q4) The Federal Funds rate is the most common reference rate for international interest rate calculations.
A)True
B)False
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Chapter 10: Foreign Exchange Rate Determination and Forecasting
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Q1) The Asian Currency crisis appeared to begin in ________.
A)South Korea.
B)Taiwan.
C)Thailand.
D)Japan.
Q2) The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets
A)balance of payments
B)monetary
C)asset market
D)law of one price
Q3) The authors did NOT identify which of the following as a root of the Asian currency crisis?
A)The collapse of some Asian currencies.
B)The rate of inflation in the United States.
C)Corporate socialism.
D)Banking stability and management.
Q4) Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security)prices in general?
and
12
Chapter 11: Transaction Exposure
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Q1) A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. The U.S. firm is at risk today of a loss if
A)the exchange rate changes to $2.00/£.
B)the exchange rate changes to $2.05/£.
C)the exchange rate doesn't change.
D)all of the above
Q2) The key arguments in opposition to currency hedging such as market efficiency, agency theory, and diversification do not have financial theory at their core.
A)True
B)False
Q3) As a generalized rule, only realized foreign exchange losses are deductible for tax purposes.
A)True
B)False
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13
Chapter 12: Operating Exposure
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Q1) The goal of operating exposure analysis is to identify strategic operating techniques the firm might adopt to enhance value in the face of unanticipated exchange rate changes.
A)True
B)False
Q2) A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British firm, has a subsidiary in Britain. Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows. The following are techniques to consider:
(a)matching currency cash flows
(b)risk-sharing agreements
(c)back-to-back or parallel loans
Q3) The particular strategy of trying to offset stable inflows of cash from one country with outflows of cash in the same currency is known as ________.
A)hedging
B)diversification
C)matching
D)balancing
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14
Chapter 13: Translation Exposure
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Q1) If the same exchange rate were used to remeasure every line on a financial statement, then there would be no imbalances from remeasuring.
A)True
B)False
Q2) If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure.
A)maximize translation; no transaction
B)eliminate translation; transaction
C)maximize transaction; no translation
D)eliminate transaction; translation
Q3) A/an ________ subsidiary is one in which the firm operates as an extension of the parent company with cash flows highly interrelated with the parent.
A)self-sustaining foreign
B)integrated foreign entity
C)foreign
D)none of the above
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Chapter 14: The Global Cost and Availability of Capital
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Q1) Systematic risk
A)is the standard deviation of a security's return.
B)is measured with beta.
C)is measured with standard deviation.
D)none of the above
Q2) Relatively high costs of capital are more likely to occur in ________.
A)highly illiquid domestic securities markets
B)highly liquid domestic securities markets
C)unsegmented domestic securities markets
D)none of the above
Q3) Theoretically, most MNEs should be in a position to support higher ________ than their domestic counterparts because their cash flows are diversified internationally.
A)equity ratios
B)debt ratios
C)temperatures
D)none of the above
Q4) What are the components of the weighted average cost of capital (WACC)and how do they differ for an MNE compared to a purely domestic firm?
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Chapter 15: Sourcing Equity Globally
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Q1) According to the U.S. school of thought, the worldwide trend toward fuller and more standardized disclosure rules should ________ the cost of equity capital.
A)increase
B)decrease
C)have no impact on
D)none of the above
Q2) ADRs cannot be exchanged for the underlying shares of the foreign stock, therefore, arbitrage cannot keep the prices in line with the foreign price of the stock.
A)True
B)False
Q3) Depositary receipts traded outside the United States are called ________ depositary receipts.
A)Euro
B)Global
C)American
D)none of the above
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Page 17
Chapter 16: Sourcing Debt Globally
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Q1) MNEs situated in countries with small illiquid and segmented markets are most like
A)small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing.
B)large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of financing.
C)small domestic U.S. firms in that they have a strong niche market in the U.S.
D)None of the above is true.
Q2) ________ are domestic currencies of one country on deposit in a second country.
A)LIBORs
B)Eurocurrencies
C)Federal funds
D)Discount window deposits
Q3) Eurocredits are
A)bank loans to MNEs and others denominated in a currency other than that of the country where the bank is located.
B)typically variable rate and tied to the LIBOR.
C)usually for maturities of six months or less.
D)All of the above are true.
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Chapter 17: International Portfolio Theory and Diversification
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Q1) The optimal domestic portfolio of risky securities is the portfolio of minimum risk.
A)True
B)False
Q2) The efficient frontier of the domestic portfolio opportunity set
A)runs along the extreme left edge of the opportunity set.
B)represents optimal portfolios of securities that represent minimum risk for a given level of expected portfolio return.
C)contains the portfolio of risky securities that the logical investor would choose to hold.
D)all of the above
Q3) An internationally diversified portfolio
A)should result in a portfolio with a lower beta than a purely domestic portfolio.
B)has the same overall risk shape as a purely domestic portfolio.
C)is only about 12% as risky as the typical individual stock.
D)all of the above
Q4) The Sharpe and Treynor measures are each measures of return per unit of risk.
A)True B)False
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Chapter 18: Foreign Direct Investment Theory and Political Risk
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Q1) Local partners in a foreign country and in a joint venture with an MNE are likely to make decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm.
A)True
B)False
Q2) Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary?
A)The parent makes a deposit equal to the size of the desired loan into a large commercial bank.
B)The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate.
C)The lending bank is located in the subsidiary's country.
D)All of the above are typical characteristics of a fronting loan.
Q3) A number of institutional services provide updated country risk ratings on a regular basis. This is an example of micro-risk information for MNEs using this data.
A)True
B)False
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Page 20
Chapter 19: Multinational Capital Budgeting
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Q1) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.
Q2) When estimating a firm's cost of equity capital using the CAPM, you need to estimate A)the risk-free rate of return.
B)the expected return on the market portfolio.
C)the firm's beta.
D)all of the above
Q3) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.
A)7.87 krone per dollar
B)8.10 krone per dollar
C)8.34 krone per dollar
D)There is not enough information to answer this question.
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21
Chapter 20: Multinational Tax Management
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Q1) A country CANNOT have both a territorial and a worldwide approach as a national tax policy.
A)True
B)False
Q2) Tax treaties generally have the effect of increasing the withholding taxes between the countries that are negotiating the treaties.
A)True
B)False
Q3) In the mid 1980s the U.S. led the way to higher corporate income tax rates worldwide. Today, most of the G7 nations have surpassed the U.S. and have higher corporate income tax rates than the U.S.
A)True
B)False
Q4) Tax haven subsidiaries of MNEs are categorically referred to as international offshore financial centers.
A)True
B)False
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Chapter 21: Working Capital Management
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Q1) Polaris Corporation (US)has bid a price on a project for a Korean firm, but the Korean firm has not yet placed an order. This portion of the operating cycle is best described as the
A)quotation period.
B)input sourcing period.
C)cash conversion cycle.
D)accounts payable cycle.
Q2) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity.
A)Syndicated banking
B)Centralized depositing
C)Multilateral netting
D)Debt cancellation
Q3) Refer to Instruction 21.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?
A)7.3%
B)9.5%
C)10.4%
D)22.9%
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Page 23
Chapter 22: International Trade Finance
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Q1) In a typical international trade transaction, the order of activity would be which of the following?
A)The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The buyer's bank submits payment to the manufacturer's bank.
B)The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank; The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance.
C)The foreign buyer places an order; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank.
D)The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The foreign buyer places an order; The buyer's bank submits payment to the manufacturer's bank.
Q2) What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter?
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Page 24