International Banking
Exam Answer Key
Course Introduction
International Banking explores the structure, functions, and operations of banks that conduct business across national borders. The course examines the regulatory frameworks, risk management strategies, financial instruments, and market environments in which international banks operate. Topics include foreign exchange markets, international payment and settlement systems, cross-border lending, international banking regulations such as Basel accords, and the impact of globalization on the banking sector. Students will gain an understanding of how financial institutions facilitate international trade and investment, manage economic and political risks, and respond to challenges posed by changing international financial landscapes.
Recommended Textbook
International Financial Management 11th Edition by Jeff Madura
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21 Chapters
1676 Verified Questions
1676 Flashcards
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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79 Verified Questions
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Sample Questions
Q1) If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product.
A)True
B)False
Answer: False
Q2) Due to the risks involved in international business, firms should: A) only consider international business in major countries.
B) maintain international business to no more than 20% of total business. C) maintain international business to no more than 35% of total business.
D) none of the above
Answer: D
Q3) The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors.
A)True
B)False
Answer: True
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Page 3
Chapter 2: International Flow of Funds
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Sample Questions
Q1) Over the last several years, international trade has generally:
A) increased for most major countries.
B) decreased for most major countries.
C) stayed about constant for most major countries.
D) increased for about half the major countries and decreased for the others.
Answer: A
Q2) Intracompany trade makes up approximately ____ percent of all international trade.
A) 50
B) 70
C) 25
D) 13
E) 5
Answer: A
Q3) The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.
A)True
B)False
Answer: False
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Page 4
Chapter 3: International Financial Markets
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102 Verified Questions
102 Flashcards
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Sample Questions
Q1) Which of the following is probably not an example of the use of forward contracts by an MNC?
A) Hedging pound payables by selling pounds forward
B) Hedging peso receivables by selling pesos forward
C) Hedging yen payables by purchasing yen forward
D) Hedging peso payables by purchasing pesos forward
E) All of the above are examples of using forward contracts.
Answer: A
Q2) When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the:
A) closing prices in the U.S. during the previous day.
B) closing prices in Canada during the previous day.
C) prevailing prices in locations where the foreign exchange markets have been open.
D) officially set by central banks before the U.S. market opens.
Answer: C
Q3) The strike price on a currency option is also known as an exercise price.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.
A) increase; U.S. dollar
B) increase; nondollar currencies
C) decrease; nondollar currencies
D) decrease; U.S. dollar
Q2) The phrase "the dollar was mixed in trading" means that:
A) the dollar was strong in some periods and weak in other periods over the last month.
B) the volume of trading was very high in some periods and low in other periods.
C) the dollar was involved in some currency transactions, but not others.
D) the dollar strengthened against some currencies and weakened against others.
Q3) Government controls can only affect the supply of a given currency for sale and not the demand.
A)True
B)False
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Chapter 5: Currency Derivatives
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Sample Questions
Q1) Forward contracts are the best technique for managing exposure arising from project bidding.
A)True
B)False
Q2) The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
A)True
B)False
Q3) Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that exercise price of call and put options are the same. The most appropriate method for speculation is ____and it may be achieved by ____.
A) straddle; purchase put option and purchase call option.
B) strangle; purchase put option and sell call option.
C) strangle; sell put option and sell put option.
D) straddle; sell put option and buy call option.
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Under a pegged exchange rate system, the home currency's value is pegged to a foreign currency.
A)True
B)False
Q2) An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.
A)True
B)False
Q3) Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.
A)True
B)False
Q4) Countries that have adopted the euro must agree on a single ____ policy.
A) monetary
B) fiscal
C) worker compensation
D) foreign relations
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?
A) $2,041,667
B) $9,804
C) $500
D) $1,639
Q2) Which of the following is an example of triangular arbitrage initiation?
A) Buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.
B) Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.
C) Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.
D) Converting funds to a foreign currency and investing the funds overseas.
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Page 9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.
A) lower U.S. inflation; depreciate
B) lower U.S. inflation; appreciate C) higher U.S. inflation; depreciate
D) higher U.S. inflation; appreciate
Q2) Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
A) reduce the probability that PPP shall hold.
B) increase the probability that PPP shall hold.
C) increase the probability the IFE will hold.
D) B and C
Q3) If purchasing power parity holds, then the Fisher effect must also hold.
A)True
B)False
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Page 10
Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:
A) appreciation of yen's value over the next year.
B) depreciation of yen's value over the next year.
C) no change in yen's value over the next year.
D) information about interest rates is needed to answer this question.
Q2) According to the text, research generally supports ____ in foreign exchange markets.
A) weak-form efficiency
B) semistrong-form efficiency
C) strong-form efficiency
D) A and B
E) B and C
Q3) Which of the following is not a forecasting technique mentioned in your text?
A) Accounting-based forecasting
B) Technical forecasting
C) Fundamental forecasting
D) Market-based forecasting
E) Mixed forecasting
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) Economic exposure refers to:
A) the exposure of a firm's international contractual transactions to exchange rate fluctuations.
B) the exposure of a firm's local currency value to transactions between foreign exchange traders.
C) the exposure of a firm's financial statements to exchange rate fluctuations.
D) the exposure of a firm's cash flows to exchange rate fluctuations.
E) the exposure of a country's economy (specifically GNP) to exchange rate fluctuations.
Q2) Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.
A) reduction; reduction
B) increase; increase
C) increase; reduction
D) reduction; increase
Q3) A high correlation between two currencies would be desirable for achieving low exchange rate risk if one is an inflow currency and the other is an outflow currency.
A)True
B)False
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) Lorre Company needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar: \(\begin{array}{cc}
{\text { Possible Value of }} \\
\text { Canadian Dollar in 90 Days } & \text { Probability } \\ \hline \$ 0.54 & 15 \% \\
0.57 & 25 \% \\
0.58 & 35 \% \\ 0.59 & 25 \%
\end{array}\)
The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?
A) 40%.
B) 60%.
C) 15%.
D) 85%.
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will be favorably affected by an appreciation of the foreign currency.
A)True
B)False
Q2) Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchange rate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.
A) decreasing foreign revenues; decreasing foreign expenses
B) decreasing foreign revenues; increasing foreign expenses
C) increasing foreign revenues; decreasing foreign revenues
D) decreasing foreign expenses; increasing foreign revenues
Q3) Hedging translation exposure with forward contracts can backfire if the currency being hedged depreciates.
A)True
B)False
Q4) All MNCs are subject to transaction exposure.
A)True
B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) A firm will likely benefit most from diversifying if:
A) the correlations between country economies are high.
B) the correlations between country economies are low.
C) the variability of all country economy levels is high.
D) B and C
Q2) ____ is not a revenue-related motive for direct foreign investment.
A) Attracting new sources of demand
B) Fully benefiting from economies of scale
C) Exploiting monopolistic advantages
D) Entering profitable markets
Q3) Which of the following is a reason to consider international business?
A) economies of scale.
B) exploit monopolistic advantages.
C) diversification.
D) all of the above
Q4) Direct foreign investment (DFI) represents investment in real assets (such as land, buildings, or even existing plants) in foreign countries.
A)True
B)False
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Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) When conducting a capital budgeting analysis and attempting to account for effects of exchange rate movements for a foreign project, inflation ____ included explicitly in the cash flow analysis, and debt payments by the subsidiary ____ included explicitly in the cash flow analysis.
A) should be; should be
B) should definitely not be; should definitely not be C) should definitely not be; should be D) should be; should definitely not be
Q2) Assume an MNC establishes a subsidiary where it has no other existing business. The present value of parent cash flows from this subsidiary is more sensitive to exchange rate movements when:
A) the subsidiary finances the entire investment by local borrowing.
B) the subsidiary finances most of the investment by local borrowing.
C) the parent finances most of the investment.
D) the parent finances the entire investment.
Q3) Refer to Exhibit 14-1. What is the net present value of the Norwegian project?
A) -$803,848.
B) $5,803,848.
C) $1,048,829.
D) none of the above
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Chapter 15: International Corporate Governance and Control
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Sample Questions
Q1) Which of the following tax-related factors need not be considered in assessing a foreign target?
A) corporate tax rates in the host country.
B) withholding tax rates in the host country.
C) withholding tax rates in the home country.
D) corporate tax rates in the home country.
E) all of the above must be considered in assessing a foreign target.
Q2) Privatization involves the sale of previously government-owned businesses by the government.
A)True
B)False
Q3) If a target is privately held, general stock market conditions will not affect the amount that an acquirer has to pay for a foreign target.
A)True
B)False
Q4) The sale of a subsidiary by an MNC is referred to as a divestiture.
A)True
B)False
Page 17
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) If an MNC diversifies its operations internationally to reduce its exposure to any individual country's problems, country risk analysis becomes irrelevant.
A)True
B)False
Q2) Which of the following is not a technique to assess country risk?
A) Gamma technique.
B) Delphi technique.
C) checklist approach.
D) inspection visits.
Q3) Perhaps the most appropriate method for incorporating forms of country risk in a capital budgeting analysis is to estimate how the ____ would be affected by each form of risk.
A) discount rate
B) cash flows
C) opportunity cost
D) none of the above
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18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) According to the text, there is evidence that the debt ratios (debt/capital) of MNCs based in:
A) the U.S. tend to be generally higher than MNCs headquartered in Japan and Germany.
B) China tend to be generally higher than MNCs headquartered in other non-U.S. countries.
C) the U.S. tend to be generally lower than MNCs headquartered in Japan and Germany.
D) A and B
Q2) According to your text, which of the following is not a factor that increases an MNC's cost of capital?
A) higher exposure to exchange rate risk.
B) higher exposure to country risk.
C) an increase in the risk-free interest rate.
D) an increase in the size of the MNC.
Q3) The cost of capital incurred by U.S.-based MNCs is primarily driven by the global stock market volatility.
A)True
B)False
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Page 19
Chapter 18: Long-Term Debt Financing
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Sample Questions
Q1) An upward-sloping yield curve for a foreign country means that annualized yields there are ____ for short-term debt than for long-term debt. The yield curve in this country reflects ____.
A) higher; several periods
B) lower; several periods
C) higher; a specific point in time
D) lower; a specific point in time
Q2) If the foreign currency that was borrowed appreciates over time, an MNC will need fewer funds to cover the coupon or principal payments. [Assume the MNC has no other cash flows in that currency.]
A)True
B)False
Q3) Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR. A)True B)False
Q4) Many MNCs simultaneously swap interest payments and currencies.
A)True
B)False
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Chapter 19: Financing International Trade
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Sample Questions
Q1) A ____ provides a summary of freight charges and conveys title to the merchandise.
A) letter of credit
B) banker's acceptance
C) bill of lading
D) bill of exchange
Q2) Consider an exporter that is willing to send goods to the importer without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported goods. This reflects:
A) accounts receivable financing.
B) forfaiting.
C) factoring.
D) a letter of credit.
Q3) Consider an exporter that sells its accounts receivables off to another firm that becomes responsible for obtaining cash from the various importers. This reflects:
A) accounts receivable financing.
B) consignment.
C) factoring.
D) a letter of credit.
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Page 21
Chapter 20: Short-Term Financing
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Sample Questions
Q1) An MNC's parent or subsidiary in need for funds commonly determines whether there are any available internal funds before searching for outside funding.
A)True
B)False
Q2) If a firm repeatedly borrows a foreign currency portfolio, the variability of the portfolio's effective financing rate will be highest if the correlations between currencies in the portfolio are ____ and the individual variability of each currency is ____.
A) high; low
B) high; high
C) low; low
D) low; high
Q3) Refer to Exhibit 20-3. What is the expected financing rate of the portfolio contemplated by Cameron Corporation?
A)3.10%.
B)1.90%.
C)17.00%.
D)13.00%.
E)none of the above
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Chapter 21: International Cash Management
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Sample Questions
Q1) MNCs often use ____ to invest excess cash while retaining liquidity.
A) international bond markets
B) international equity markets
C) international money markets
D) the market for acquisitions
Q2) Refer to Exhibit 21-1. What is the probability that the yield of the two-currency portfolio is less than the domestic yield?
A) .1575.
B) .35.
C) .6425.
D) 1.
E) none of the above
Q3) When investing in a portfolio of foreign currencies, the currencies represented within the portfolio are ideally highly positively correlated if the goal is to reduce exchange rate risk.
A)True
B)False
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Page 23