Course Introduction
International Banking Practice Questions
International Banking explores the operations, functions, and regulatory environment of banks operating across national borders. The course examines the structure of the international banking system, including the roles of multinational banks, offshore banking centers, and the Eurocurrency markets. Topics include foreign exchange risk management, international lending, global payment and settlement systems, regulatory challenges, and the implications of international financial crises. Students gain an understanding of the strategies banks use to compete in global markets and the impact of international banking on global financial stability.
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Fundamentals of Multinational Finance 3rd Edition by Michael
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Page 2
H. Moffett
Chapter 1: Globalization and the Multinational Enterprise
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Sample Questions
Q1) Refer to Table 1.1. Austria has a larger relative advantage over Russia in the production of ________ at a ratio of ________.
A) snowboards; 5 to 4
B) cameras; 8 to 3
C) snowboards; 8 to 3
D) cameras; 3 to 8
Answer: B
Q2) A well-established, large firm U.S.-based MNE will probably not be able to overcome which of the following obstacles to maximizing firm value?
A) an open market place
B) high quality strategic management
C) access to capital
D) none of the above
Answer: D
Q3) Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Goals and Corporate Governance
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Sample Questions
Q1) According to the authors, dual classes of voting stock are the norm in non-Anglo-American markets.
A)True
B)False
Answer: True
Q2) The primary operational goal for the firm is to
A) maximize after-tax profits in each country where the firm is operating.
B) minimize the total financial risk to the firm.
C) maximize the consolidated after-tax profits of the firm.
D) maximize the total risk to the firm.
Answer: C
Q3) According to a recent Forrester survey, which of the following categories is the single most important cause of losses of stock value?
A) operational mistakes
B) business hazard
C) strategic mistakes
D) financial mistakes
Answer: C
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4
Chapter 3: The International Monetary System
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Sample Questions
Q1) The IMFs exchange rate regime classification identifies ________ as the most rigidly fixed, and ________ as the least fixed.
A) exchange arrangements with no separate legal tender; independent floating
B) crawling pegs; managed float
C) currency board arrangements; independent floating
D) pegged exchange rates within horizontal bands; exchange rates within crawling pegs
Answer: A
Q2) 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
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Chapter 4: The Balance of Payments
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Sample Questions
Q1) According to the authors, the following types of transactions dominate the balance of payments:
A) the exchange of guns for butter.
B) the exchange of stocks and bonds.
C) the exchange of goods and services.
D) the exchange of real and financial assets.
Q2) The BOP must be in balance but the current account need not be.
A)True
B)False
Q3) Which of the following is NOT part of the balance of payments account?
A) the current account
B) the financial/capital account
C) the official reserves account
D) All of the above are BOP accounts.
Q4) Which of the following would NOT be considered a direct investment either into or from the United States?
A) the purchase of U.S. Treasury (debt) securities
B) Ford Motor Company building an assembly plant in Mexico
C) Honda of Japan building a manufacturing plant in Alabama
D) intel purchasing a chip manufacturing plant in Thailand
Page 6
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) ________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.
A) Speculators and arbitragers
B) Foreign exchange brokers
C) Central banks
D) Treasuries
Q2) The European and American terms for foreign currency exchange are square roots of one another.
A)True
B)False
Q3) While trading in foreign exchange takes place worldwide, the major currency trading centers are located in
A) London, New York, and Tokyo.
B) New York, Zurich, and Bahrain.
C) Paris, Frankfurt, and London.
D) Los Angeles, New York, and London.
Q4) New York City has the greatest volume of foreign exchange activity in the world. A)True
B)False
Page 7
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates.
A)True
B)False
Q2) One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland." The current spot rate between the euro and dollar is $1.3225/euro. What is the expected spot rate in one year if the international Fisher effect holds?
A) $1.3315/euro
B) $1.3135/euro
C) $1.3225/euro
D) None of the above
Q3) ________ states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.
A) Fisher-open
B) Fisher-closed
C) The Fisher Effect
D) None of the above
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8
Chapter 7: Foreign Exchange Rate Determination and Forecasting
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Q1) The ________ 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
Q2) The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.
A)True
B)False
Q3) Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.
A) high; high
B) low; low
C) low; high
D) high; low
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Chapter 8: Foreign Currency Derivatives
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Sample Questions
Q1) A speculator that has ________ a futures contract has taken a ________ position.
A) sold; long
B) purchased; short
C) sold; short
D) purchased; sold
Q2) Assume that a call option has an exercise price of $1.50/³. At a spot price of $1.45/³, the call option has ________.
A) a time value of $0.04
B) a time value of $0.00
C) an intrinsic value of $0.00
D) an intrinsic value of -$0.04
Q3) Volatilities are the only judgmental aspect of currency option pricing and are therefore, the least important component therein.
A)True
B)False
Q4) Foreign currency options are available both over-the-counter and on organized exchanges.
A)True
B)False
Page 10
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Chapter 9: Transaction Exposure
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Sample Questions
Q1) Which of the following is NOT cited as a good reason for hedging currency exposures?
A) Reduced risk of future cash flows is a good planning tool.
B) Reduced risk of future cash flows reduces the probability that the firm may not meet required cash flows.
C) Currency risk management increases the expected cash flows to the firm.
D) Management is in a better position to assess firm currency risk than individual investors.
Q2) Which of the following is cited as a good reason for NOT hedging currency exposures?
A) Shareholders are more capable of diversifying risk than management.
B) Currency risk management through hedging does not increase expected cash flows.
C) Hedging activities are often of greater benefit to management than to shareholders.
D) All of the above are cited as reasons NOT to hedge.
Q3) Hedging, or reducing risk, is the same as adding value or return to the firm.
A)True
B)False
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11
Chapter 10: Operating Exposure
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Sample Questions
Q1) Which of the following is NOT an example of diversifying operations?
A) diversifying sales
B) diversifying location of operations
C) raising funds in more than one country
D) sourcing raw materials in more than one country
Q2) A U.S. timber products firm has a long-term contract to import unprocessed logs from Canada. To avoid occasional and unpredictable changes in the exchange rate between the U.S. dollar and the Canadian dollar, the firms agree to split between the two firms the impact of any exchange rate movement. This type of agreement is referred to as ________.
A) risk-sharing
B) currency-switching
C) matching
D) a natural hedge
Q3) Reinvoicing centers provide the following benefits:
A) Aid in the management of foreign exchange exposure.
B) Effectively guarantee the exchange rate for future orders.
C) Help manage intra-subsidiary cash flows.
D) All of the above.
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Page 12
Chapter 11: Translation Exposure
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Sample Questions
Q1) Historical exchange rates may be used for ________, while current exchange rates may be used for ________.
A) fixed asses and current assets; income and expense items
B) equity accounts and fixed assets; current assets and liabilities
C) current assets and liabilities; equity accounts and fixed assets
D) equity accounts and current liabilities; current assets and fixed assets
Q2) Multinational enterprises always completely hedge translation exposure.
A)True
B)False
Q3) It is possible to use different exchange rates for different line items on a financial statement.
A)True
B)False
Q4) A balance sheet hedge is the main technique for managing ________.
A) transaction
B) operating
C) translation
D) money market
Q5) Describe a balance sheet hedge and give at least two examples of when such a hedge could be justified.
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Chapter 12: Global Cost and Availability of Capital
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Sample Questions
Q1) The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as ________.
A) beta
B) the geometric mean
C) the market risk premium
D) the arithmetic mean
Q2) LipTea Incorporated purchases raw materials and has processing plants around the world.
The firm finances 30% of its assets with debt and 70% with equity, has a 30% average tax rate, and can issue bonds at a pre-tax rate of 7%. Their standard deviation of returns is roughly 1.50 times as great as the market's returns, and has a correlation with the market of 0.45. If the risk-free rate of return is 5% and the expected return on the international market portfolio is 14%, what is the firm's WACC?
A) 7.75%
B) 8.38%
C) 12.24%
D) There is not enough information to answer this question.
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Page 14
Chapter 13: Sourcing Equity Capital Globally
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Sample Questions
Q1) Transaction costs for trading equity securities as measured by the bid-ask spreads are lowest on which exchange?
A) NYSE
B) Nasdaq
C) London
D) Tokyo
Q2) An MNE may cross list its shares on a foreign stock exchange so that it can
A) create a secondary market so that shares may be used to compensate top local managers.
B) create a secondary market so that shares can be used to acquire local firms.
C) increase the firm's visibility to its customers and employees.
D) accomplish all of the above.
Q3) Private equity funds (PEF) differ from traditional venture capital (VC) funds in that A) VC operate mainly in lesser-developed countries while PEF do not.
B) VC typically invest in family business whereas PEF do not.
C) VC is almost unavailable to emerging markets while PEF capital is available.
D) all of the above are true.
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Chapter 14: Financial Structure and International Debt
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Sample Questions
Q1) The domestic theory of optimal capital structure does not need to be modified for MNEs.
A)True
B)False
Q2) If we accept the MNE objective of minimizing the consolidated cost of capital then
A) the subsidiary's cost of capital is relevant only to the extent that it affects this overall goal.
B) the objective of minimizing the cost of capital for each individual subsidiary may not be appropriate.
C) the value of the MNE as a whole should be maximized.
D) all of the above.
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 15: Interest Rate and Currency Swaps
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Sample Questions
Q1) The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could
A) sell an interest rate futures contract of a similar maturity to the loan.
B) buy an interest rate futures contract of a similar maturity to the loan.
C) swap the adjustable rate loan for another of a different maturity.
D) none of the above.
Q2) Corporate treasury departments have traditionally been A) profit centers.
B) centers of aggressive profit taking.
C) service or cost centers.
D) none of the above.
Q3) Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.
A)True
B)False
Q4) Over the last decade floating-rate notes have decreased in both total volume and percentage of total dollar-denominated bond issuances.
A)True
B)False
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Chapter 16: International Portfolio Theory and Diversification
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Sample Questions
Q1) Which of the following is NOT an important question regarding the validity of a global version of the capital asset pricing model (CAPM)?
A) barriers to the free and open movement of capital across boundaries
B) difficulties in estimating a global portfolio, i.e., trading limitations, illiquid markets, and incomplete information
C) the lack of a single true worldwide risk-free security
D) all of the above
Q2) Which of the following statements is NOT true?
A) International diversification benefits induce investors to demand foreign securities.
B) An international security adds value to a portfolio if it reduces risk without reducing return.
C) Investors will demand a security that adds value.
D) All of the above are true.
Q3) The construction of an internationally diversified portfolio combines
A) currency and asset risk and return.
B) country risk with currency return.
C) credit risk with inflation risk.
D) asset risk with sovereign risk.
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Chapter 17: Foreign Direct Investment Theory and Strategy
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Sample Questions
Q1) Which of the following is NOT a potential advantage to a cross-border acquisition compared to a Greenfield investment?
A) Market imperfections may under-price local assets and allow the purchase of assets at significant discount.
B) Cross-border acquisitions take longer, thus allowing the firm a better understanding of the local market before attempting sales.
C) Acquisitions may be a cost-effective way of gaining competitive advantages such as technology or brand names.
D) All of the above are advantages of acquisition over green field investment.
Q2) A ________ is a shared ownership in a foreign business.
A) licensing agreement
B) greenfield investment
C) joint venture
D) wholly-owned affiliate
Q3) Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.
A)True
B)False
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19
Chapter 18: Political Risk Assessment and Management
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Q1) FDI may require firms to be flexible in how they do business. Which of the following is NOT a potential problem associated with a firm adapting to a government requirement of local sourcing?
A) a lack of local economies of scale to produce needed raw materials
B) unreliable delivery schedules on the part of local firms
C) uncertain quality control
D) All of the above are potential forced local sourcing problems.
Q2) A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank.
A) fronting; link financing
B) parallel; a back-to-back loan
C) fronting; a back-to-back loan
D) link financing; parallel loan
Q3) Governance risk due to goal conflict between an MNE and its host government is the main political ________ risk.
A) firm-specific
B) country-specific
C) global-specific
D) cultural-specific
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Page 20
Chapter 19: Multinational Capital Budgeting
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Sample Questions
Q1) Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency.
A) appreciating; depreciating B) depreciating; depreciating C) appreciating; appreciating D) depreciating; appreciating
Q2) Refer to Instruction 19.1. What is the IRR of the Wheel Deal expansion?
A) 14.4%
B) 10.3%
C) 12.0%
D) 8.6%
Q3) 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.
Q4) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
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Page 21
Chapter 20: International Trade Finance
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Sample Questions
Q1) The ________ is the instrument normally used to actually effect payment in international commerce.
A) banker's acceptance
B) bill of exchange
C) bill of lading
D) letter of credit
Q2) Refer to Instruction 20.1. What is the total Jackson Automotive can expect to receive if the firm takes payment today?
A) $993,000
B) $995,000
C) $988,000
D) $996,000
Q3) A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.
A) exporter's; portfolio risk
B) importer's; blocked foreign exchange
C) exporter's; blocked foreign exchange
D) none of the above
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22
Chapter 21: Multinational Tax Management
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Sample Questions
Q1) The basic idea behind withholding taxes for foreign investors is
A) to receive taxes on passively earned income.
B) a recognition that most foreign investors are unlikely to file taxes in the host country.
C) to ensure that income earned is taxed by the host country.
D) all of the above.
Q2) ________ is NOT an "arm's length price" method of determining transfer prices among parent and affiliated firms.
A) Comparable uncontrolled price method
B) Resale price method
C) Cost-plus method
D) All of the above are acceptable methods.
Q3) The U.S. Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income. In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making, thus establishing a "guilty until proved innocent" tax approach.
A)True
B)False
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Chapter 22: Working Capital Management
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Sample Questions
Q1) Refer to Instruction 22.1. What is the amount of money SureDrip will save on accounts payable if they accept the discount?
A) $400,000
B) $8,000
C) $33,333
D) $20,000
Q2) Japanese markets are noted for their short maturity payment terms (less than 20 days), and the general reluctance of the manufacturer to supply any type of credit to customers.
A)True
B)False
Q3) Other things equal, managers prefer a lower "days working capital" to a higher one.
A)True
B)False
Q4) Even though dividends are cash payments, firms typically must consider both cash flow and net income when making dividend distribution decisions.
A)True
B)False
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