International Financial Institutions
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Course Introduction
This course provides an in-depth examination of international financial institutions (IFIs), such as the International Monetary Fund (IMF), World Bank, and regional development banks. It explores their origins, roles, structures, and functions within the global financial system. Topics include the governance and decision-making processes of IFIs, their mechanisms for providing financial assistance and policy advice, and their impact on international economic stability and development. The course also critically analyzes contemporary challenges faced by these institutions, including issues of accountability, effectiveness, and the changing dynamics of global finance. By the end of the course, students will gain a comprehensive understanding of how IFIs influence economic policy, growth, and cooperation worldwide.
Recommended Textbook
International Financial Management 13th Edition by Jeff Madura
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Page 2
Chapter 1: Multinational Financial Management: An Overview
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Q1) Which of the following is not one of the more common methods used by MNCs to improve their internal control process?
A)establishing a centralized database of information
B)ensuring that all data are reported consistently among subsidiaries
C)speeding the process by which all departments and all subsidiaries have access to the data that they need
D)making executives more accountable for financial statements by personally verifying their accuracy
E)All of the above are common methods used by MNCs to improve their internal control process
Answer: A
Q2) The commonly accepted goal of an MNC is to:
A)maximize short-term earnings.
B)maximize shareholder wealth.
C)minimize risk.
D)A and C.
E)maximize international sales.
Answer: B
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Chapter 2: International Flow of Funds
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Q1) The ____, an accord among 117 nations, called for lower tariffs around the world.
A)General Agreement on Tariffs and Trade (GATT)
B)North American Free Trade Agreement (NAFTA)
C)Single European Act of 1987
D)European Union Accord
E)none of the above
Answer: A
Q2) Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.
A)low; small
B)high; small
C)low; large
D)high; large
Answer: C
Q3) A balance-of-trade surplus indicates an excess of imports over exports.
A)True
B)False
Answer: False
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4
Chapter 3: International Financial Markets
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Sample Questions
Q1) When obtaining a loan, the risk premium depends on the:
A)risk-free interest rate of the borrower.
B)credit risk of the borrower.
C)borrower's stock price.
D)lender's stock price.
Answer: B
Q2) In general, common-law countries such as the United States, Canada, and the United Kingdom allow for more legal protection of shareholders than civil-law countries such as France and Italy.
A)True
B)False
Answer: True
Q3) The main participants in the international money market are:
A)consumers.
B)small firms.
C)large corporations.
D)small European firms needing European currencies for international trade.
Answer: C
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Chapter 4: Exchange Rate Determination
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Q1) If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the United States and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.
A)yen; dollars
B)yen; yen
C)dollars; yen
D)dollars; dollars
Q2) A financial institution that expects a particular foreign currency to appreciate may try to benefit from its expectation by borrowing funds in that currency and repaying the loan aFter the exchange rate changes in the expected manner.
A)True
B)False
Q3) Movements of foreign currencies tend to be more volatile for shorter time horizons. A)True
B)False
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6
Chapter 5: Currency Derivatives
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Q1) A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:
A)in the money.
B)out of the money.
C)at the money.
D)at a discount.
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) If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date. A)True
B)False
Q4) The currency futures markets are regulated by the International Monetary Fund. A)True
B)False
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Chapter 6: Government Influence on Exchange Rates
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Q1) A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.
A)True
B)False
Q2) Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.
A)upward; reduce; unchanged
B)upward; increase; higher
C)downward; reduce; unchanged
D)downward; increase; higher
Q3) The European Central Bank is located in:
A)London.
B)Denmark.
C)Luxembourg.
D)Frankfurt.
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8
Chapter 7: International Arbitrage and Interest Rate Parity
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Q1) American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025.
Locational arbitrage would involve:
A)buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.
B)buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.
C)buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.
D)buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.
E)Locational arbitrage is not possible in this case.
Q2) Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent
A)True
B)False
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Page 9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Q1) According to the IFE, if British interest rates exceed U.S. interest rates:
A)the British pound's value will remain constant.
B)the British pound will depreciate against the dollar.
C)the British inflation rate will decrease.
D)the forward rate of the British pound will contain a premium.
E)today's forward rate of the British pound will equal today's spot rate.
Q2) There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect.
A)True
B)False
Q3) Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the franc will ____ by about ____.
A)appreciate; 3 percent
B)appreciate; 1 percent
C)depreciate; 3 percent
D)depreciate; 2 percent
E)appreciate; 2 percent
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Chapter 9: Forecasting Exchange Rates
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Q1) A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.
A)True
B)False
Q2) Which of the following forecasting techniques would be most likely to use today's spot exchange rate of the euro to forecast the euro's future exchange rate?
A)fundamental forecasting
B)market-based forecasting
C)technical forecasting
D)mixed forecasting
Q3) Corporations tend to make only limited use of technical forecasting because it typically focuses on the near future, which is not very helpful for developing corporate policies.
A)True
B)False
Q4) Fundamental models examine moving averages over time and thus allow the development of a forecasting rule.
A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Q1) The maximum one-day loss computed for the value-at-risk (VaR) method does not depend on:
A)the expected percentage change in the currency for the next day.
B)the standard deviation of the daily percentage changes in the currency over a previous period.
C)the current level of interest rates.
D)the confidence level used.
Q2) A set of currency cash inflows is more volatile if the correlations are low.
A)True
B)False
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
Q4) Which of the following is not a form of exposure to exchange rate fluctuations?
A)transaction exposure
B)credit exposure
C)economic exposure
D)translation exposure
12
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Chapter 11: Managing Transaction Exposure
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Q1) The real cost of hedging payables in Japanese yen is especially high when the yen appreciates over time.
A)True
B)False
Q2) Futures, forward, and money market hedges all lock into a certain price to be received from hedging a receivable. For a currency option hedge with a put option, however, the exact amount received is not known until the option is (or is not) exercised.
A)True
B)False
Q3) Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be:
A)positive.
B)negative.
C)positive if the forward rate exhibits a premium, and negative if the forward rate exhibits a discount.
D)zero.
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Q1) Which of the following is an example of economic exposure but not an example of transaction exposure?
A)An increase in the dollar's value hurts a U.S. firm's domestic sales because foreign competitors are able to increase their sales to U.S. customers.
B)An increase in the pound's value increases a U.S. firm's cost of British pound payables.
C)A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.
D)A decrease in the Swiss franc's value decreases the dollar value of interest payments on a Swiss deposit sent to a U.S. firm by a Swiss bank.
Q2) Translation exposure results when an MNC translates each subsidiary's financial data to its home currency for consolidated financial statements.
A)True
B)False
Q3) All MNCs are subject to transaction exposure.
A)True B)False
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Page 14
Chapter 13: Direct Foreign Investment
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Q1) Direct foreign investment is normally completed first, and then capital budgeting can be applied later.
A)True
B)False
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) A country with high unemployment could best increase its employment by:
A)encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
B)encouraging foreign firms to establish licensing arrangements for products local firms produce.
C)encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
D)none of the above would reduce employment.
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Chapter 14: Multinational Capital Budgeting
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Q1) Assume a U.S.-based MNC has a Chilean subsidiary that annually remits 30 million Chilean pesos to the United States. If the peso ____, the dollar amount of remitted funds
A)appreciates; decreases
B)depreciates; is unaffected
C)appreciates; is unaffected
D)depreciates; decreases
E)B and C
Q2) When assessing a German project administered by a German subsidiary of a U.S.-based MNC solely from the German subsidiary's perspective, which variable will most likely influence the capital budgeting analysis?
A)the withholding tax rate
B)the euro's exchange rate
C)the U.S. tax rate on earnings remitted to the United States
D)the German government's tax rate
E)A and C
Q3) In multinational capital budgeting, depreciation is treated as a cash outflow.
A)True
B)False
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Page 16
Chapter 15: International Corporate Governance and Control
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Q1) The stock price of a target may decrease if investors anticipate that the target will be acquired, since they are aware that stock prices of targets fall abruptly aFter a bid by the acquiring firm.
A)True
B)False
Q2) An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.
A)True
B)False
Q3) An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
A)True
B)False
Q4) An MNC may have to pay a higher price to acquire a target in countries that do not strictly enforce laws against insider trading.
A)True
B)False
Page 17
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Chapter 16: Country Risk Analysis
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Q1) A micro-assessment of country risk involves consideration of all variables that affect country risk except for those unique to a particular firm or industry.
A)True
B)False
Q2) Eurenasia is a country that has frequently been assigned low macro-assessment ratings of country risk in the recent past due to its tendency to war with neighboring nations. MNC A is considering the establishment of a subsidiary to manufacture tablet computers in Eurenasia, while MNC B is considering the establishment of a subsidiary to manufacture tanks there. Which of the two MNCs is likely to be less affected by the low macro-assessment?
A)MNC A.
B)MNC B.
C)Both will be equally affected, since the macro-assessment does not vary.
D)none of the above
Q3) A micro-assessment of country risk:
A)is adjusted for the particular business of the firm involved.
B)excludes aspects relevant to a particular firm or project.
C)A and B
D)none of the above
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Page 18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Q1) Capital asset pricing theory suggests that ____ risk of projects can be ignored and that ____ risk is relevant.
A)unsystematic; unsystematic
B)unsystematic; systematic
C)systematic; unsystematic
D)systematic; systematic
Q2) One argument for why subsidiaries should be wholly owned by the MNC parent is that parent ownership avoids a potential conflict of interest between the:
A)parent's managers and board of directors.
B)parent and managers at the subsidiary who are minority shareholders.
C)parent and existing creditors.
D)subsidiary's managers and creditors.
Q3) If the parent ____ the debt of the subsidiary, the subsidiary's borrowing capacity might be ____.
A)does not back; increased B)backs; reduced C)does not back; reduced D)backs; increased
E)C and D
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Chapter 18: Long-Term Debt Financing
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Q1) Since yield curves are identical across countries, MNCs rarely consider them when deciding on the maturity of bonds denominated in a foreign currency.
A)True
B)False
Q2) If an MNC issues bonds denominated in a foreign currency and that currency depreciates against the MNC's home currency, the funds needed to make coupon payments will increase.
A)True
B)False
Q3) A(n) _____ yield curve for a country means that annualized yields there are ____ for short-term debt than for long-term debt.
A)upward-sloping; higher
B)flat; lower
C)downward-sloping; lower
D)upward-sloping; lower
Q4) Floating-rate bonds are oFten issued with a floating coupon rate that is tied to LIBOR.
A)True
B)False
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Chapter 19: Financing International Trade
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Q1) Cross-border factoring involves a network of factors in various countries that assess importers' credit risk.
A)True
B)False
Q2) When products are shipped under a ______, the importer that accepts the draft is promising to pay the exporter at a specified future date.
A)prepayment arrangement
B)time draft
C)counterpurchase arrangement
D)sight draft
Q3) In factoring, a bank provides an exporter with a loan that is secured by the exporter's accounts receivable.
A)True
B)False
Q4) A time draft that is issued by a firm and guaranteed by a bank is called a banker's acceptance.
A)True
B)False
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Chapter 20: Short-Term Financing
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Q1) Which of the following is a scenario under which a U.S.-based MNC probably would not consider short-term foreign financing?
A)Canadian dollars offer a lower interest rate than is available in the United States and are expected to appreciate over the maturity of the loan.
B)Australian dollars offer a lower interest rate than is available in the United States and are expected to depreciate over the maturity of the loan.
C)The MNC has net receivables in British pounds.
D)A and C
E)None of the above
Q2) Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to ____ against the dollar by ____ in order to have the same effective financing rate as borrowing dollars.
A)depreciate; about 3.74 percent
B)appreciate; about 3.74 percent
C)appreciate; about 4.53 percent
D)depreciate; about 4.53 percent
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22
Chapter 21: International Cash Management
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Q1) The Swiss one-year interest rate is 7 percent, while the U.S. one-year interest rate is 2 percent. Assume that interest rate parity exists. If a U.S. firm invests in a Swiss one-year deposit and sells Swiss francs forward with a forward contract to hedge its exchange rate exposure, the effective yield from investing in a one-year deposit in Switzerland will be about:
A)9 percent.
B)7 percent.
C)4 percent.
D)2 percent.
Q2) Generally, if interest rate parity holds and the forward rate is an unbiased predictor of the future spot rate, then the international Fisher effect will also hold.
a.True
b.False
A)True
B)False
Q3) In what is known as dynamic hedging, banks always hedge open positions in any foreign currencies.
A)True
B)False
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Page 23