International Banking
Mock Exam
Course Introduction
International Banking explores the structure, functions, and regulatory aspects of banking institutions operating across national boundaries. The course examines topics such as the international payment system, foreign exchange markets, offshore banking, and the management of international banking risks. Students will analyze the impact of globalization on banking practices, understand the role of multinational banks in facilitating trade and investment, and discuss the regulatory frameworks governing international banking activities, including Basel Accords and anti-money laundering standards. Through real-world case studies, the course provides insights into current issues, challenges, and innovations in the international banking sector.
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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Sample Questions
Q1) Between 2007 and 2010 the world witnessed a full-blown financial crisis that was attributed to
A) subprime mortgage repricing.
B) quantitative easing by the Fed.
C) foreign exchange imbalances.
D) banking failures.
Answer: A
Q2) According to the United Nations Conference on Trade and Development,what percentage of China's GDP in 2009 was attributed to the trade sector?
A) 70%
B) 60%
C) 65%
D) 50%
Answer: D
Q3) Which of the following was created in an effort to promote free trade?
A) World Trade Organization
B) the Sarbanes-Oxley Act
C) multilateral development banks
D) the Organization for Economic Cooperation and Development
Answer: A
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Chapter 2: The Foreign Exchange Market
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Q1) What currency currently serves as the world's primary vehicle currency?
A) Japanese yen
B) British pound
C) U.S. Dollar
D) European euro
Answer: C
Q2) 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).
Q3) What do the market makers in the currency markets provide?
A) insurance against default by the buyers
B) solvency
C) stability
D) liquidity
Answer: D
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4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) If the euro is selling at a premium relative to the USD in the forward market,is the forward price of USD /EUR larger or smaller than the spot price of the USD /EUR?
A) larger
B) smaller
C) indeterminate
D) the same
Answer: A
Q2) 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
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5
Chapter 4: The Balance of Payments
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Q1) Into what subcategory in the current account do you find the export and import of education,insurance,consulting,telecommunications,royalties on films,etc?
A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services
Q2) In a freely floating exchange rate system,if the capital account surplus for the U.S.rises,what will most likely happen to the real value of the dollar?
A) It will decline.
B) It will rise.
C) There is no impact on the dollar.
D) The IMF will step in to adjust rising exchange rates.
Q3) In a freely floating exchange rate system,if the capital account is running a deficit
A) the balance of payments must run a deficit.
B) the balance of payments must be zero.
C) the current account must run a surplus.
D) both B and C.
Q4) Explain the double-entry system of the balance of payments.
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Page 6
Chapter 5: Exchange Rate Systems
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Q1) When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds,the practice is known as ________.
A) open market operations
B) a sterilized float
C) a dirty float
D) changing the required reserves
Q2) What is the name for the set of regulations pertaining to flows of capital into and out of a country?
A) capital controls
B) target zone system
C) crawling peg
D) lead-lag operations
Q3) What is the name of the exchange rate system in which countries allow the value of their currency to be determined freely in the foreign exchange markets around the world without any government restrictions?
A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency
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Page 7
Chapter 6: Interest Rate Parity
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Q1) Explain the bid-ask spread in the external currency market?
Q2) What is the name for the bank market for deposits and loans that is denominated in a currency different to the currency of the country in which a bank is operating?
A) internal currency market
B) foreign exchange market
C) external currency market
D) interbank market
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) It is often said that interest rate parity is satisfied when the differential between the interest rates denominated in two currencies equals the forward premium or discount between the two currencies.Explain why this is an imprecise statement when the interest rates are not continuously compounded.
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8
Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) If there is no systematic difference between the forward rate and the expected future spot rate,then the expected forward market return should be ________.
A) zero
B) greater than one
C) equal to the stockholders' required rate of return
D) less than one but greater than zero
Q2) If you were attempting to forecast the forward exchange rate for a particular horizon such as 90 days,how would the forward exchange rate be an unbiased predictor of the future spot exchange rate?
Q3) If interest rate parity prevails,what is the return from a hedged foreign currency investment?
Q4) The risk that is associated with an asset's return arising from the covariance of the return with the return on a large,well-diversified portfolio is known as ________ risk.
A) business
B) exchange rate
C) market
D) systematic
Q5) What is the main determinant of the volatility of forward market returns?
Page 9
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) What is likely to happen to the balance of trade when inflation is great in Mexico than in the U.S.but the peso is pegged to the dollar?
Q2) When the price of one commodity is the same wherever in the world the good is being sold when denominated in a particular currency,it is said the Law of ________ prevails.
A) currency supply
B) currency demand
C) purchasing power parity
D) one price
Q3) When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.
A) purchasing power parity
B) interest rate parity
C) the Fisher effect
D) the International Fisher effect
Q4) What is the distinction between relative purchasing power parity and absolute purchasing power parity?
Q5) What effects do deviations from the law of one price have on absolute purchasing power parity?
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) When managers respond to changes in the real exchange rate with their relative price,it is known as ________.
A) real exchange risk
B) economic exposure
C) exchange rate pass-through
D) a real depreciation
Q2) When a real appreciation occurs in the domestic currency,who tends to be more profitable?
A) government subsidized companies
B) exporters
C) export competitors
D) import competitors
Q3) You have been asked to evaluate possible sites for an South American production facility that will manufacture your firm's products and sell them to the South American market.What real exchange rate considerations should you entertain in your evaluation?
Q4) Why does the strategy of pricing-to-market depend on the assumption of market segmentation?
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11
Chapter 10: Exchange Rate Determination and Forecasting
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Q1) If expected real interest rates are similar across countries,countries with ________ expected inflation rates will have ________ nominal interest rates,and countries with ________ expected inflation rates will have ________ nominal interest rates.
A) high, high, high, low
B) high, low, high, low
C) low, high, low, high
D) high, high, low, low
Q2) In the short run,equality of interest rates across country boundaries is ________.
A) unlikely
B) a good description of reality
C) a good description of purchasing power parity
D) a result of stable foreign currency markets
Q3) Which of the following statistics would NOT be useful to forecast currency exchange rates?
A) the root mean square error
B) mean absolute deviation
C) the Sharpe ratio
D) the covariance with the benchmark currency changes
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12
Chapter 11: International Debt Financing
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Q1) Which one of the following would NOT contribute to the positive creditworthiness of the firm?
A) the firm's financial structure
B) its profitability
C) the number of bank accounts it holds
D) the stability of its cash flows
Q2) 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
Q3) The ________ is the discount rate or internal rate of return that equates the present value of all the future interest rate and principal payments to the net proceeds received by the issuer.
A) all-in-cost
B) internal rate of return
C) LIBOR rate
D) floating-rate note
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Page 13
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) GDRs are like ADRs,but they can trade across many markets and A) they are always associated with existing companies seeking to increase their shareholder base.
B) they are not associated with companies wanting to tap the equity market for the first time.
C) are primarily interested on raising additional capital.
D) settle in the currency of each market.
Q3) What is a price-driven trading system?
Q4) What are the most import characteristics of foreign securities that leads to diversification benefits?
Q5) How have global stock markets adjusted to competitive pressure from global investors?
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Chapter 13: International Capital Market Equilibrium
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Q1) In a ________,the market portfolio is defined as the aggregate asset holdings of all investors in a particular country.
A) international CAPM
B) domestic CAPM
C) country CAPM
D) world CAPM
Q2) The evidence of the phenomenon of home bias seems to be ________.
A) true for most developing countries
B) true for most developed countries
C) true for most countries in the world
D) untrue for the developed countries
Q3) Why is the computation of cost of capital likely to be higher under the Fama-French model than the CAPM?
A) The Fama-French model does not use the difference in the return on a portfolio of small.
B) The Fama-French model does not use return on the value-weighted market portfolio.
C) The CAPM does not measure the market correlation.
D) Fama-French has two additional factors.
Q4) What is the trend for the home bias phenomenon.
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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) MNCs can purchase political risk insurance from
A) both public and private sector insurers.
B) public sector insurers only.
C) private sector insurers only.
D) central banks in the country where they are headquartered.
Q4) What is the difference between political risk and sovereign risk?
Q5) What are some indicators of country health?
Page 16
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Chapter 15: International Capital Budgeting
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Q1) Can an investment project of a foreign subsidiary that has a positive net present value when evaluated as a stand-alone firm ever be rejected by the parent corporation?
Assume that the parent accepts all projects with positive adjusted net present values.
Q2) When discounting cash flows,it is important that only the ________,after-tax cash flows be used.
A) monthly
B) annual
C) incremental
D) total
Q3) A firm is in ________ if it is having difficulty meeting its commitments to its creditors such as the bondholders.
A) bankruptcy
B) default
C) financial distress
D) receivership
Q4) Based on their computation what is the difference between EBIT and NOPLAT?
Q5) What is meant by the cannibalization of an export market?
Q6) How does the role of underwriting affect the issuing of securities?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) What is the name of the approach that discounts the after-tax free cash flows to stockholders at the required rate of return on the equity to derive the value of a project?
A) weighted average cost of capital
B) flow-to-equity
C) adjusted net present value
D) unlevered cash flow
Q2) Another name for the reinvestment ratio is the ________ ratio.
A) acid test
B) retention
C) payout
D) plowback
Q3) With respect to project value,what is meant by the underinvestment problem?
Q4) The change in a firm's future operating profit is another way to state its increase in ________.
A) terminal value
B) gross cash flow
C) net working capital
D) WACC
Q5) What is the U.S.tax treatment of interest paid on a foreign currency loan?
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) When a firm is unprofitable it generates a ________ that allows it to offset the losses that were incurred against future income.
A) tax credit
B) itemized deductions
C) tax-loss carry-forward
D) a write-down
Q2) Regarding the true hedging cost,if the bid-ask spread widens for more distant future contracts,the cost of forward hedging
A) decreases with the maturity of the contract.
B) remains constant with the maturity of the contract.
C) increases with the maturity of the contract.
D) has no direct relationship to the longer term.
Q3) If a country's corporate tax rate is flat,when does it not make sense for a firm to hedge?
Q4) What does it mean when a tax code is convex?
A) It is a flat tax and does not vary as taxable income varies.
B) It is regressive and taxes lower incomes more.
C) Is proportional and the rate always taxes at proportional income equivalents.
D) It imposes a higher rate on higher incomes and a lower rate on lower incomes.
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Chapter 18: Financing International Trade
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Q1) What is the most popular way for an exporter to finance its accounts receivable?
Q2) A documentary credit reduces the uncertainty of a transaction by
A) creating guarantees of payment by the importer.
B) providing insurance in case of loss or damage to the merchandise.
C) allowing extended repayment terms for the importer.
D) clearly establishing the acts that the exporter must carry out in order to receive payment.
Q3) Which one of the following methods of payments is most straightforward and one that is the least risky for the exporter?
A) documents against payment
B) time draft
C) documentary collection
D) cash in advance
Q4) In which of the two forms of payment does the exporter not give up control of the merchandise until paid: a documents against payment collection or a documents against acceptance collection?
Q5) What are four different methods by which an exporter can accept payment from an importer? List them in increasing order of risk to the importer.
Q6) What is the purpose of marine insurance?
Page 20
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Chapter 19: Managing Net Working Capital
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Q1) When the IRS determines an appropriate transfer price that a multinational's affiliate may use,the guideline is known as ________.
A) reasonable man principle
B) the book value
C) arm's length price
D) resale price
Q2) When an affiliate is located in a high tax jurisdiction,the general rule is to set the transfer price that another affiliate would charge as ________ as possible.
A) high
B) low
C) neutral
D) proportional
Q3) Which one of the following represents the most serious risk that arises when the government of a foreign country makes the nation's currency inconvertible?
A) controlled exchange rates
B) managed currency
C) blocked funds
D) expropriation
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21
Chapter 20: Foreign Currency Futures and Options
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Q1) The ________ is the primary location in the United States to trade currency options.
A) Philadelphia Stock Exchange
B) Chicago Board of Trade
C) Chicago Mercantile Exchange
D) New York Stock Exchange
Q2) What is the name of the total number of contracts outstanding for a particular derivative contract?
A) a long position
B) open interest
C) settle amount
D) open settlement
Q3) An option that can be exercised only at maturity is known as a(n)________.
A) American option
B) European option
C) currency warrant
D) call option
Q4) What are the differences between foreign currency option contracts and forward contracts for foreign currency?
Q5) What does it mean for an American option to be "in the money"?
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) The principal amount of the currencies in a currency swap is determined by ________ between the two parties to the swap.
A) the notional principal
B) negotiation
C) the right of offset
D) the yield to call
Q2) Suppose Ace International Company decides at t+18 to use a six-month contract to hedge the t + 24 receipt of yen from Kensui Incorporated.Six-month interest rates (annualized)at t + 18 are 5.9% in dollars and 2.1% in yen.The 6 month forward rate at time t + 18 is ¥128.58.With this hedge in place,what fixed dollar amount would Ace have paid and received at time t + 24?
Q3) A currency swaps allows a multinational corporation to change the ________.
A) currency of denomination of its debts
B) forward rate on contracts it secures to hedge exchange rate risk
C) principal and interest rate on its debt
D) nature of its debt from a fixed interest rate to a floating interest rate
Q4) What are some factors that underlie the economic benefits of swaps?
Q5) Describe how the cash flows of swaps are similar in structure to the cash flow of bonds.
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