11.pdf

11 Student: ___________________________________________________________________________

1.

Edge Act banks are not prohibited from owning equity in business corporations, unlike domestic commercial banks. True False

2.

An Edge Act bank is typically located in a state different from that of its parent in order to get around the prohibition on interstate branch banking. True False

3.

International banks are different from domestic banks in what way(s)? A. International banks can arrange trade financing. B. International banks can arrange for foreign exchange transactions. C. International banks can assist their clients in hedging exchange rate risk. D. All of the above

4.

Major distinguishing features between domestic banks and international banks are A. the types of deposits they accept. B. the types of loans and investments they make. C. membership in loan syndicates. D. all of the above

5.

Since international banks have the facilities to trade foreign exchange, A. they generally also make a market as a dealer in foreign exchange. B. they generally also make a market as a dealer in foreign exchange derivatives. C. they generally also trade foreign exchange products for their own account. D. none of the above

6.

Banks that both perform traditional commercial banking functions and engage in investment banking activities are often called A. international service banks. B. investment banks. C. commercial banks. D. merchant banks.

7.

Merchant banks are different from traditional commercial banks in what way(s)? A. Merchant banks can engage in investment banking activities. B. Merchant banks can arrange for foreign exchange transactions. C. Merchant banks can assist their clients in hedging exchange rate risk. D. All of the above

8.

By far the most important international finance centers are A. New York and London. B. New York, London, and Tokyo. C. New York, London, Tokyo, Paris, and Zurich. D. New York, London, Tokyo, Paris, Zurich, and Frankfurt.

9.

Multinational banks are often not subject to the same regulations as domestic banks. A. There may be increased need to publish adequate financial information. B. There may be reduced need to publish adequate financial information. C. There requirements to publish adequate financial information are the same. D. None of the above

10. A domestic bank that follows a multinational client abroad to preserve that banking relationship A. is playing the role of the desperate housewife in this relationship. B. is pursuing a wholesale defensive strategy. C. is pursuing a retail defensive strategy. D. none of the above 11. A domestic bank that becomes a multinational bank to prevent erosion by foreign banks of the traveler's checks, touring, and foreign business market A. is playing the role of the desperate housewife in this relationship. B. is pursuing a wholesale defensive strategy. C. is pursuing a retail defensive strategy. D. none of the above 12. Banking tends to be A. a low marginal cost industry. B. a high marginal cost industry. C. a constant average cost industry. D. none of the above 13. A U.S.-based multinational bank A. would not have to provide deposit insurance and meet reserve requirements on foreign currency deposits. B. would have to provide deposit insurance and meet reserve requirements on foreign currency deposits. C. would not have to provide deposit insurance but would have to meet reserve requirements on foreign currency deposits. D. would have to provide deposit insurance but not meet reserve requirements on foreign currency deposits. 14. A bank may establish a multinational operation for the reason of low marginal costs. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. C. managerial and marketing knowledge developed at home can be used abroad with low marginal costs. D the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. 15. A bank may establish a multinational operation for the reason of knowledge advantage. The underlying rationale being that Alocal firms may be able to obtain from a foreign subsidiary bank operating in their country more . complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks. Bby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Cgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. D the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market.

16. A bank may establish a multinational operation for the reason of prestige. The underlying rationale being that Alocal firms may be able to obtain from a foreign subsidiary bank operating in their country more . complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks. B the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. C.very large multinational banks have high perceived prestige, liquidity, and deposit safety that can be used to attract clients abroad. Dmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. 17. A bank may establish a multinational operation for the reason of risk reduction. The underlying rationale being that Aby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Bgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. Cmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. D multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. 18. A bank may establish a multinational operation for the reason of regulatory advantage. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. 19. Currently, the biggest bank in the world is A. Citigroup. B. Bank of America. C. UBS. D. The World Bank. 20. A bank may establish a multinational operation for the reason of retail defensive strategy. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions.

21. A bank may establish a multinational operation for the reason of wholesale defensive strategy. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. 22. Which of the following are reasons why a bank may establish a multinational operation? A. Low marginal and transaction costs B. Home nation information services, and prestige C. Growth and risk reduction D. All of the above 23. A bank may establish a multinational operation for the reason of transaction costs. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. 24. A bank may establish a multinational operation for the reason of growth. The rationale being that A. growth prospects in a home nation may be limited by a market largely saturated with the services offered by domestic banks. Bmultinational banks are often not subject to the same regulations as domestic banks. There may be . reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Cgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. Dby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. 25. A bank may establish a multinational operation for the reason of home country information services. The underlying rationale being that Aby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and . foreign exchange risk on currency conversion if government controls can be circumvented. Blocal firms may be able to obtain from a foreign subsidiary bank operating in their country more . complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks. C the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. Dgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. 26. A correspondent bank relationship is established when A. two banks maintain deposits with one another. B. two banks write to each other about the credit conditions of their countries. C. a group of banks form a syndicate to spread out the risk and cost of a large bond offering. D. all of the above

27. Correspondent bank relationships can be beneficial A. because a bank can service its MNC clients at a very low cost. B. because a bank can service its MNC clients without the need to have personnel in many different countries. C. because a bank can service its MNC clients without developing its own foreign facilities to service its clients. D. all of the above 28. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €160,000. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €0.6250/ $1.00. The importer accepts this price, so his bank will proceed to ____________ the importer's account in the amount of ____________. A. Debit; $256,000 B. Credit; €512,100 C. Credit; $500,000 D. Debit; €100,000 29. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will rise by $90,000. B. Bank B's dollar-denominated account at A will fall by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will rise by £45,000. 30. Correspondent bank services include A. prepaid postage and packing materials. B. letters of introduction. C. foreign exchange conversions. D. both b and c 31. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $90,000. B. Bank B's dollar-denominated account at A will rise by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will fall by £45,000. E. All of the above are correct 32. The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $150,000. B. Bank B's dollar-denominated account at A will fall by $150,000. C. Bank A's pound-denominated account at B will fall by €100,000. D. Bank B's pound-denominated account at A will rise by €100,000.

33. A representative office A. is what lawyers' offices are called in Mexico. B is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the . parent bank in dealings with the bank's correspondents. C is a small service facility staffed by correspondent bank personnel that is designed to assist MNC clients . of the parent bank in dealings with the bank's correspondents. D. none of the above 34. A representative office A is a way for the parent bank to provide its MNC clients with a level of service greater than that . provided through merely a correspondent relationship. B is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the . parent bank in dealings with the bank's correspondents. C. is a step up from a correspondent relationship, but below a foreign branch. D. all of the above 35. A foreign branch bank A is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the . parent bank in dealings with the bank's correspondents. B. operates like a local bank, but legally is a part of the parent bank. C. is subject to domestic regulation only. D. all of the above 36. A foreign branch bank A is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the . parent bank in dealings with the bank's correspondents. B. operates like a local bank, but legally is a part of the parent bank. C. is subject to domestic regulation only. D. all of the above 37. Why would a U.S. bank open a foreign branch bank? A Because this form of bank organization can allow a U.S. bank to provide a fuller range of services for . its MNC customers than it can through a representative office. B. To avoid U.S. banking regulation on transactions routed through that foreign country. C Because this form of organization allows the bank to service MNC clients at low cost and without the . need of having bank personnel located in the country. D. both a and b 38. Why would a U.S. bank open a foreign branch bank instead of a foreign chartered subsidiary? A This form of bank organization allows the bank to be able to extend a larger loan to a customer than a . locally chartered subsidiary bank of the parent. B. To slow down check clearing and maximize the bank's float. C. To avoid U.S. banking regulation. D. Both a and c 39. The most popular way for a U.S. bank to expand overseas is A. branch banks. B. representative offices. C. subsidiary banks. D. affiliate banks. 40. A foreign branch bank operates like a local bank, but legally A. it is a part of the parent bank. B. a branch bank is subject to both the banking regulations of its home country and the country in which it operates. C. a branch bank is subject to only the banking regulations of its home country and not the country in which it operates. D. both a and b

41. The major legislation controlling the operation of foreign banks in the U.S. A. specifies that foreign branch banks operating in the U.S. must comply with U.S. banking regulations just like U.S. banks. B specifies that foreign branch banks operating in the U.S. must comply with their country-of-origin . banking regulations just like U.S. banks operating abroad. C. specifies that the "shell" branches are illegal for U.S. and foreign banks. D. both a and c 42. A subsidiary bank is A. a locally incorporated bank that is wholly owned by a foreign parent. B. a locally incorporated bank that is majority owned by a foreign parent. C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent. D. both a and b 43. An affiliate bank is A. a locally incorporated bank that is wholly owned by a foreign parent. B. a locally incorporated bank that is majority owned by a foreign parent. C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent. D. both a and b 44. Both subsidiary and affiliate banks A. operate under the banking laws of the country in which they are incorporated. B. operate under the banking laws of the U.S. C. can underwrite securities, but not accept dollar-denominated deposits. D. both a and b 45. U.S. banks that establish subsidiary and affiliate banks A. are allowed to underwrite securities. B. must provide FDIC insurance on their foreign-currency denominated demand deposits. C. can underwrite securities, but not accept dollar-denominated deposits. D. both a and b 46. Foreign banks that establish subsidiary and affiliate banks in the U.S. A. tend to locate in states that are major centers of financial activity. B. tend to locate in the highly populous states of New York, California, Illinois, Florida, Georgia, and Texas. C. can underwrite securities, but not accept dollar-denominated deposits. D. both a and b 47. Edge Act banks are so-called because Athe are Federally chartered subsidiaries of U.S. banks that are physically located in the United States . and are allowed to engage in a full range of international banking activities. BSenator Walter E. Edge of New Jersey sponsored the 1919 amendment to Section 25 of the Federal . Reserve Act to allow U.S. banks to be competitive with the services foreign banks could supply their customers. C. they can only be chartered in states that are on the borders of the United States—on the "edge" of the map. D. none of the above 48. Edge Act banks Acan accept foreign deposits, extend trade credit, finance foreign projects abroad, trade foreign . currencies, and engage in investment banking activities with U.S. citizens involving foreign securities. B are federally chartered subsidiaries of U.S. banks that are physically located in the United States and are . allowed to engage in a full range of international banking activities. C. can underwrite securities, but can only be located in states on the edge of the U.S. D. both a and b

49. Edge Act banks A. are not prohibited from owning equity in business corporations. B. are prohibited from owning equity in business corporations. C. both a and b D. None of the above 50. An Offshore banking center is A. a country whose banking system is organized to permit external accounts beyond the normal economic activity of the county. B. is external to any government, frequently located on old oil drilling platforms located in international waters. C. a country like North Korea. D. none of the above 51. Offshore banks A. are frequently located on old oil drilling platforms located in international waters. B. are often located in "pariah" countries like North Korea and Iran. C. operate as branches or subsidiaries of the parent bank. D. none of the above 52. The primary activities of offshore banks A. include money laundering where banking secrecy laws are strict. B. is to seek deposits and grant loans in currencies other than the currency of the host government. C. involve check clearing of large bags of checks. D. none of the above 53. Which banks cannot accept foreign deposits? A. Domestic banks located in the U.S. B. Edge Act banks located in the U.S. C. Subsidiary banks located overseas D. Foreign branches located overseas 54. In reference to capital requirements, A. bank capital adequacy refers to the amount of equity capital a bank holds as reserves against impaired loans. B bank capital adequacy refers to the amount of debt capital a bank holds as reserves against risky assets . to reduce the probability of bank failure. C. most bank regulators agree with the doctrine of "less is more". D. none of the above 55. In reference to capital requirements, value-at-risk analysis A. refers to traditional bank loans and deposits. B. refers to a "risk-focused" approach to determining adequate bank capital. C. provides a level of confidence measure of the probability of the maximum loss that can occur during a period of time. D. both b and c 56. The core of the international money market is A. the Eurocurrency market. B. the market for foreign exchange. C. the futures forwards and options markets on foreign exchange. D. none of the above

57. Eurocurrency A. is the euro, the common currency of Europe. B. is a time deposit of money in an international bank located in a county different from the country that issued the currency. C. is a demand deposit of money in an international bank located in a county different from the country that issued the currency. D. either b or c 58. The Eurocurrency market A. is only in Europe. B. is an external banking system that runs parallel to the domestic banking system of the country that issued the currency. C. has languished following monetary union in Europe. D. none of the above 59. LIBOR A. is a market rate, analogous to the U.S. Federal Funds rate. B. is a government set rate, like the discount rate. C. is the rate at which banks in London will accept interbank deposits. D. none of the above 60. LIBOR A. is the London Interbank Offered Rate. B. is the reference rate in London for Eurodollar deposits. C. one of several reference rates in London: there is a LIBOR for Eurodollars, Euroyen, Euro—Canadian dollars, and even euro. D. all of the above 61. The rate charged by banks with excess funds is referred to as the interbank offered rate; they will accept interbank deposits at the interbank bid rate. A. The spread is generally 1/8 of 1 percent for most major Eurocurrencies. B. The spread is generally referred to as "the TED spread". C. The spread is generally referred to as the bid-ask commission. D. None of the above 62. The LIBOR rate for euro A. is EURIBOR. B. is a government set rate. C. is the rate at which Interbank deposits of euro are offered by one prime bank to another in the euro zone. D. both a and c 63. In the wholesale money market, denominations A. are at least $10,000, but sizes of $100,000 or larger are more typical. B. are at least $100,000, but sizes of $500,000 or larger are more typical. C. are at least $500,000, but sizes of $1,000,000 or larger are more typical. D. none of the above 64. Approximately ___ of wholesale Eurobank external liabilities come from fixed time deposits, the remainder from Negotiable Certificates of Deposit. A. 50% B. 75% C. 90% D. None of the above

65. Eurodollars refers to dollar deposits when the depository bank is located in A. Europe. B. Europe, and the Caribbean. C. Outside the United States. D. United States. 66. Eurocredits A. are credit cards that work in the euro zone. B short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign . governments, nonprime banks, or international organizations. C short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign . governments, nonprime banks, or international organizations. D. none of the above 67. Eurocredits A. are often so large that individual banks cannot handle them. B short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign . governments, nonprime banks, or international organizations. C. frequently require the use of a banking syndicate. D. all of the above 68. Eurocredits feature rollover pricing. A Rollover pricing was created on Eurocredits so that Eurobanks do not end up paying more on . Eurocurrency time deposits than they earn from the loans. BBecause of the rollover pricing feature, a Eurocredit may be viewed as a series of shorter-term loans, . where at the end of each time period (generally three or six months), the loan is rolled over and the base lending rate is repriced to current LIBOR over the next time interval of the loan. CThe lending rate on these Eurocredits is stated as LIBOR + X percent, where X is the lending margin . charged depending upon the creditworthiness of the borrower. LIBOR is reset according to a set schedule. D. All of the above are true 69. Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of .75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17 32 percent. Further suppose that over the second three-month interval LIBOR falls to 5 1 8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan? A. $79,921.875 B. $91,171.88 C. $96,174.39 D. $364,687.52 70. A bank agrees to buy from a customer a "three against six" FRA at the market rate for such instruments. How can the bank hedge this obligation? AGo long a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate financed by . going short a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate. BGo short a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate; go long a . 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate. C. Borrow a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate. D. None of the above 71. A forward rate agreement (FRA) is a contract between two banks A. that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits. Bin which the buyer agrees to pay the seller the increased interest cost on a notional amount if interest . rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate. C. that is structured to capture the maturity mismatch in standard-length Eurodeposits and credits. D. all of the above

72. A bank bought a "three against six" FRA. Payment is made when? A. At the end of 3 months B. At the end of 6 months C. At the end of 9 months D. None of the above 73. You are a bank and your customer asks you to quote an agreed-upon rate for a 3 × 9 FRA. You observe the following rates.

What rate should you quote? A. 5.96% B. 4.96% C. 1.94% D. None of the above 74. You are a bank and your customer asks you to quote an agreed-upon rate for a 3 × 6 FRA. You observe the following rates:

What rate should you quote? A. 5.96% B. 4.96% C. 2.48% D. None of the above 75. ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent, but ABC is worried about an increase in three-month LIBOR 3 months from now. What could they do to hedge? A. Buy a 3 × 6 FRA in the amount of $4 million. B. Sell a 3 × 6 FRA in the amount of $4 million. C. Buy a 3 × 3 FRA in the amount of $4 million. D. Buy a 3 × 9 FRA in the amount of $4 million. 76. ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan? A. $50,000 B. $100,000 C. $118,000 D. $120,000

77. You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3%. Suppose at the maturity of the FRA, the correct interest rate is 3½%. Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3% instead of 3½%. What is the payoff at the maturity of the FRA? A. Net payment of $12,391.57 to you B. Net payment of $12,500 to you C. Net payment of $50,000 to you D. Net payment of $48,309.18 to you 78. A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90. A. The bank pays $3,0084.52 at the end of 3 months B. The bank pays $3,0084.52 at the end of 6 months C. The counterparty pays $3,0084.52 at the end of 3 months D. The counterparty pays $3,0084.52 at the end of 6 months 79. A bank sold a 3 × 9 FRA. Payment is made when? A. At the end of 3 months B. At the end of 6 months C. At the end of 9 months D. None of the above ABC Bank (seller) has made a "three against six" Forward Rate Agreement (FRA), with XYZ Bank (buyer).

80. Since SR < AR, then A. ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 91-day FRA period. B. XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 91-day FRA period. C. ABC Bank will pay XYZ Bank a cash settlement at the end of the 91-day FRA period. D. XYZ Bank will pay ABC Bank a cash settlement at the end of the 91-day FRA period. 81. The payment amount under this FRA is A. $9,985. B. $10,111. C. $60,667. D. $120,000. 82. A "three against nine" forward rate agreement A. could call for a buyer to sell a six-month Eurobond in three months at prices agreed upon today. Bcould call for a buyer to pay the seller the increased interest cost on a notational amount if six-month . interest rates fall below an agreed rate beginning three months from now and ending nine months from now. C. is a forward contract on a three-month Eurobond with a nine-month maturity. D. is a forward contract on a nine-month Eurobond with a three-month maturity.

83. Forward rate agreements can be used for speculative purposes. If one believes rates will be less than the agreement rate, A. take a short position in a forward rate agreement. B. the purchase of a FRA is the suitable position. C. the sale of a FRA is the suitable position. D. take a long position in the spot market. 84. The most widely used futures contract for hedging short-term U.S. dollar interest rate risk is A. the Eurodollar contract. B. the Euroyen contract. C. the EURIBOR contract. D. none of the above 85. Consider the position of a treasurer of a MNC, who has $20,000,000 that his firm will not need for the next 90 days. A. He could borrow the $20,000,000 in the money market. B. He could take a long position in the Eurodollar futures contract. C. He could take a short position in the Eurodollar futures contract. D. None of the above 86. A DECREASE in the implied three-month LIBOR yield causes Eurodollar futures price A. to increase. B. to decrease. C. there is no direct or indirect relationship. D. none of the above 87. Which of the following are principles of sound banking behavior? A. Avoid an undue concentration of loans to single activities B. Control mismatches between assets and liabilities C. Expand cautiously into unfamiliar activities D. All of the above 88. Who benefits from debt-for-equity swaps? A. The creditor bank B. The LDC C. The market maker D. All of the above 89. On September 10, 1990 the published prices (cents on the dollar) on Latin American bank debt was quoted as follows:

Assume that the central banks of Mexico, Venezuela, and Chile redeemed their debts at 50 percent, 85 percent, and 76 percent, respectively, of face value in a debt-for-equity swap. If the three countries had equal political risk, based purely on financial considerations, the cost of a $40,000,000 assembly plant investment in local currency would be ranked (lowest to highest) in dollar cost as follows: A. Venezuela first, Mexico second, Chile third B. Venezuela first, Chile second, Mexico third C. Chile first, Venezuela second, Mexico third D. Mexico first, Chile second, Venezuela third 90. The Asian crisis A. followed a period of economic recession in the region coupled with record private capital outflows. B. followed a period of economic expansion in the region financed by record private capital inflows. C. began in the fall of 2001 when Japan devalued the yen. D. none of the above

91. Proceeding the Asian crisis, A. bankers from industrialized countries actively sought to finance the growth opportunities in the region. B the risk exposure of the lending banks in East Asia was primarily to local banks and commercial firms, . and not to sovereignties, as in the LDC debt crisis. C. bankers failed to correctly assess the political and economic risks. D. bankers were willing to lend huge amounts to borrowers with a limited potential to repay. E. all of the above 92. Proceeding the Asian crisis, A domestic price bubbles in East Asia, particularly in real estate, were fostered by capital inflows from . bankers from the G-10 countries. B the liberalization of financial markets coupled with capital inflows from bankers from the G-10 . countries contributed to bubbles in financial asset prices. C the close interrelationships common among commercial firms and financial institutions in Asia resulted . in poor investment decision making. D. all of the above 93. Proceeding the Asian crisis A it may have been implicitly assumed that the governments would come to the rescue of their private . banks should financial problems develop. Bthe history of managed growth in the East Asian region at least suggested that the economic and . financial system, as an integral unit, could be managed in an economic downturn. C. both a and b D. none of the above 94. So-called subprime mortgages were typically A. mortgages granted to borrowers with less-than-perfect credit. B. backed by the full faith and credit of the U.S. government. C. held to maturity by the originating lender, thereby assuring that default risk was priced into the rate of return. D. none of the above 95. One lesson from the credit crunch is that Ain the aggregate, credit scores tend to understate the probability of default—thereby a pool of subprime . mortgages is actually quite a safe investment since not every borrower defaults. B moral hazard, while an issue in the market for used cars, does not seem to affect the U.S. financial . system due to the effective regulatory environment. C bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and . then pass it on to MBS investors rather than hold the paper themselves. D. none of the above 96. The models that the credit rating firms (e.g. Moody's, S&P, and Fitch) used to evaluate the risk of the various tranches of MBS debt and thereby assign a credit rating (e.g. AAA, AA-BB, or unrated) were A. right on target, but only in the aggregate. B. poorly specified. C. superfluous, since the CDOs turned out to be backed by the full faith and credit of the U.S. Treasury. D supermodels, and while as a group they were not so good at evaluating credit risk, they made up for it . with their good looks and impeccable fashion sense. 97. Many lessons should be learned from the credit crunch. A.One lesson is that credit rating agencies need to refine their models for evaluating esoteric credit risk created in MBS and CDOs. B. One lesson is that borrowers must be more wary of putting complete faith in credit ratings. COne lesson is that bankers seem not to scrutinize credit risk as closely when they serve only as mortgage . originators and then pass it on to MBS investors rather than hold the paper themselves. D. All of the above

98. So-called subprime mortgages were typically A. not held by the originating bank, but instead were resold for packaging into mortgage-backed securities. B. aggregated and then sliced into tranches each representing a different risk class: AAA, AA-BB, or unrated. C. both a and b D. None of the above 99. One enduring truth of banking is that A. for some reason, bankers always seem willing to lend huge amounts to borrowers with a limited potential to repay. B. credit ratings work, but only in the aggregate. Cwhen liquidity dries up, bankers are typically able to ride out the storm by buying up other investors . debt at pennies on the dollar, holding it until the crisis is over, and then selling at a huge profit. D. none of the above 100.With regard to creating money, A. only central banks such as the Federal Reserve can create money. B. money is created when a bank customer invests in a time deposit. C.commercial banks can create money when a bank lends out funds borrowed from another customer who invested in a time deposit. D. none of the above 101.Consider the balance sheets of Bank A and Bank B. Bank A is in Milan, Bank B is in New York. The current exchange rate is €1.00 = $1.25. Show the correct balances in each account if a currency trader employed at Bank A buys €100,000 from a currency trader at bank B for $125,000 using its correspondent relationship with Bank B.

102.Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New York. The current exchange rate is £1.00 = $2.00. Show the correct balances in each account if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B.

103.Consider the balance sheets of Bank A and Bank B. Bank A is in London, Bank B is in New York. The current exchange rate is £1.00 = $2.00. Show the correct balances in each account if a currency trader employed at Bank A buys £50,000 from a currency trader at bank B for $100,000 using its correspondent relationship with Bank B.

11 Key 1.

Edge Act banks are not prohibited from owning equity in business corporations, unlike domestic commercial banks. TRUE Eun - Chapter 11 #1 Topic: Edge Act Banks

2.

An Edge Act bank is typically located in a state different from that of its parent in order to get around the prohibition on interstate branch banking. TRUE Eun - Chapter 11 #2 Topic: Edge Act Banks

3.

International banks are different from domestic banks in what way(s)? A. International banks can arrange trade financing. B. International banks can arrange for foreign exchange transactions. C. International banks can assist their clients in hedging exchange rate risk. D. All of the above Eun - Chapter 11 #3 Topic: International Banking Services

4.

Major distinguishing features between domestic banks and international banks are A. the types of deposits they accept. B. the types of loans and investments they make. C. membership in loan syndicates. D. all of the above Eun - Chapter 11 #4 Topic: International Banking Services

5.

Since international banks have the facilities to trade foreign exchange, A. they generally also make a market as a dealer in foreign exchange. B. they generally also make a market as a dealer in foreign exchange derivatives. C. they generally also trade foreign exchange products for their own account. D. none of the above Eun - Chapter 11 #5 Topic: International Banking Services

6.

Banks that both perform traditional commercial banking functions and engage in investment banking activities are often called A. international service banks. B. investment banks. C. commercial banks. D. merchant banks. Eun - Chapter 11 #6 Topic: International Banking Services

7.

Merchant banks are different from traditional commercial banks in what way(s)? A. Merchant banks can engage in investment banking activities. B. Merchant banks can arrange for foreign exchange transactions. C. Merchant banks can assist their clients in hedging exchange rate risk. D. All of the above Eun - Chapter 11 #7 Topic: International Banking Services

8.

By far the most important international finance centers are A. New York and London. B. New York, London, and Tokyo. C. New York, London, Tokyo, Paris, and Zurich. D. New York, London, Tokyo, Paris, Zurich, and Frankfurt. Eun - Chapter 11 #8 Topic: The Worlds Largest Banks

9.

Multinational banks are often not subject to the same regulations as domestic banks. A. There may be increased need to publish adequate financial information. B. There may be reduced need to publish adequate financial information. C. There requirements to publish adequate financial information are the same. D. None of the above Eun - Chapter 11 #9 Topic: Reasons for International Banking

10.

A domestic bank that follows a multinational client abroad to preserve that banking relationship A. is playing the role of the desperate housewife in this relationship. B. is pursuing a wholesale defensive strategy. C. is pursuing a retail defensive strategy. D. none of the above Eun - Chapter 11 #10 Topic: Reasons for International Banking

11.

A domestic bank that becomes a multinational bank to prevent erosion by foreign banks of the traveler's checks, touring, and foreign business market A. is playing the role of the desperate housewife in this relationship. B. is pursuing a wholesale defensive strategy. C. is pursuing a retail defensive strategy. D. none of the above Eun - Chapter 11 #11 Topic: Reasons for International Banking

12.

Banking tends to be A. a low marginal cost industry. B. a high marginal cost industry. C. a constant average cost industry. D. none of the above Eun - Chapter 11 #12 Topic: Reasons for International Banking

13.

A U.S.-based multinational bank A. would not have to provide deposit insurance and meet reserve requirements on foreign currency deposits. B. would have to provide deposit insurance and meet reserve requirements on foreign currency deposits. C. would not have to provide deposit insurance but would have to meet reserve requirements on foreign currency deposits. D. would have to provide deposit insurance but not meet reserve requirements on foreign currency deposits. Eun - Chapter 11 #13 Topic: Reasons for International Banking

14.

A bank may establish a multinational operation for the reason of low marginal costs. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. C. managerial and marketing knowledge developed at home can be used abroad with low marginal costs. D the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. Eun - Chapter 11 #14 Topic: Reasons for International Banking

15.

A bank may establish a multinational operation for the reason of knowledge advantage. The underlying rationale being that Alocal firms may be able to obtain from a foreign subsidiary bank operating in their country more . complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks. Bby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Cgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. D the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. Eun - Chapter 11 #15 Topic: Reasons for International Banking

16.

A bank may establish a multinational operation for the reason of prestige. The underlying rationale being that Alocal firms may be able to obtain from a foreign subsidiary bank operating in their country more . complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks. B the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. C.very large multinational banks have high perceived prestige, liquidity, and deposit safety that can be used to attract clients abroad. Dmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Eun - Chapter 11 #16 Topic: Reasons for International Banking

17.

A bank may establish a multinational operation for the reason of risk reduction. The underlying rationale being that Aby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Bgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. Cmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. D multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Eun - Chapter 11 #17 Topic: Reasons for International Banking

18.

A bank may establish a multinational operation for the reason of regulatory advantage. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Eun - Chapter 11 #18 Topic: Reasons for International Banking

19.

Currently, the biggest bank in the world is A. Citigroup. B. Bank of America. C. UBS. D. The World Bank. Eun - Chapter 11 #19 Topic: Reasons for International Banking

20.

A bank may establish a multinational operation for the reason of retail defensive strategy. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Eun - Chapter 11 #20 Topic: Reasons for International Banking

21.

A bank may establish a multinational operation for the reason of wholesale defensive strategy. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Eun - Chapter 11 #21 Topic: Reasons for International Banking

22.

Which of the following are reasons why a bank may establish a multinational operation? A. Low marginal and transaction costs B. Home nation information services, and prestige C. Growth and risk reduction D. All of the above Eun - Chapter 11 #22 Topic: Reasons for International Banking

23.

A bank may establish a multinational operation for the reason of transaction costs. The underlying rationale being that A banks follow their multinational customers abroad to prevent the erosion of their clientele to foreign . banks seeking to service the multinational's foreign subsidiaries. B multinational banking operations help a bank prevent the erosion of its traveler's check, tourist, and . foreign business markets from foreign bank competition. Cby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Dmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Eun - Chapter 11 #23 Topic: Reasons for International Banking

24.

A bank may establish a multinational operation for the reason of growth. The rationale being that A. growth prospects in a home nation may be limited by a market largely saturated with the services offered by domestic banks. Bmultinational banks are often not subject to the same regulations as domestic banks. There may . be reduced need to publish adequate financial information, lack of required deposit insurance and reserve requirements on foreign currency deposits, and the absence of territorial restrictions. Cgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. Dby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Eun - Chapter 11 #24 Topic: Reasons for International Banking

25.

A bank may establish a multinational operation for the reason of home country information services. The underlying rationale being that Aby maintaining foreign branches and foreign currency balances, banks may reduce transaction costs . and foreign exchange risk on currency conversion if government controls can be circumvented. Blocal firms may be able to obtain from a foreign subsidiary bank operating in their country more . complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks. C the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit . investigations for use in that foreign market. Dgreater stability of earnings is possible with international diversification. Offsetting business and . monetary policy cycles across nations reduces the country-specific risk of any one nation. Eun - Chapter 11 #25 Topic: Reasons for International Banking

26.

A correspondent bank relationship is established when A. two banks maintain deposits with one another. B. two banks write to each other about the credit conditions of their countries. C. a group of banks form a syndicate to spread out the risk and cost of a large bond offering. D. all of the above Eun - Chapter 11 #26 Topic: Correspondent Bank Topic: Types of International Banking Offices

27.

Correspondent bank relationships can be beneficial A. because a bank can service its MNC clients at a very low cost. B. because a bank can service its MNC clients without the need to have personnel in many different countries. C. because a bank can service its MNC clients without developing its own foreign facilities to service its clients. D. all of the above Eun - Chapter 11 #27 Topic: Correspondent Bank Topic: Types of International Banking Offices

28.

Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €160,000. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €0.6250/ $1.00. The importer accepts this price, so his bank will proceed to ____________ the importer's account in the amount of ____________. A. Debit; $256,000 B. Credit; €512,100 C. Credit; $500,000 D. Debit; €100,000 Eun - Chapter 11 #28 Topic: Correspondent Bank Topic: Types of International Banking Offices

29.

The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will rise by $90,000. B. Bank B's dollar-denominated account at A will fall by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will rise by £45,000. Eun - Chapter 11 #29 Topic: Correspondent Bank Topic: Types of International Banking Offices

30.

Correspondent bank services include A. prepaid postage and packing materials. B. letters of introduction. C. foreign exchange conversions. D. both b and c Eun - Chapter 11 #30 Topic: Correspondent Bank Topic: Types of International Banking Offices

31.

The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $90,000. B. Bank B's dollar-denominated account at A will rise by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will fall by £45,000. E. All of the above are correct Eun - Chapter 11 #31 Topic: Correspondent Bank Topic: Types of International Banking Offices

32.

The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $150,000. B. Bank B's dollar-denominated account at A will fall by $150,000. C. Bank A's pound-denominated account at B will fall by €100,000. D. Bank B's pound-denominated account at A will rise by €100,000. Eun - Chapter 11 #32 Topic: Correspondent Bank Topic: Types of International Banking Offices

33.

A representative office A. is what lawyers' offices are called in Mexico. B is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of . the parent bank in dealings with the bank's correspondents. C is a small service facility staffed by correspondent bank personnel that is designed to assist MNC . clients of the parent bank in dealings with the bank's correspondents. D. none of the above Eun - Chapter 11 #33 Topic: Representative Offices

34.

A representative office A is a way for the parent bank to provide its MNC clients with a level of service greater than that . provided through merely a correspondent relationship. B is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of . the parent bank in dealings with the bank's correspondents. C. is a step up from a correspondent relationship, but below a foreign branch. D. all of the above Eun - Chapter 11 #34 Topic: Representative Offices

35.

A foreign branch bank A is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of . the parent bank in dealings with the bank's correspondents. B. operates like a local bank, but legally is a part of the parent bank. C. is subject to domestic regulation only. D. all of the above Eun - Chapter 11 #35 Topic: Foreign Branches

36.

A foreign branch bank A is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of . the parent bank in dealings with the bank's correspondents. B. operates like a local bank, but legally is a part of the parent bank. C. is subject to domestic regulation only. D. all of the above Eun - Chapter 11 #36 Topic: Foreign Branches

37.

Why would a U.S. bank open a foreign branch bank? A Because this form of bank organization can allow a U.S. bank to provide a fuller range of services . for its MNC customers than it can through a representative office. B. To avoid U.S. banking regulation on transactions routed through that foreign country. C Because this form of organization allows the bank to service MNC clients at low cost and without . the need of having bank personnel located in the country. D. both a and b Eun - Chapter 11 #37 Topic: Foreign Branches

38.

Why would a U.S. bank open a foreign branch bank instead of a foreign chartered subsidiary? A This form of bank organization allows the bank to be able to extend a larger loan to a customer than . a locally chartered subsidiary bank of the parent. B. To slow down check clearing and maximize the bank's float. C. To avoid U.S. banking regulation. D. Both a and c Eun - Chapter 11 #38 Topic: Foreign Branches

39.

The most popular way for a U.S. bank to expand overseas is A. branch banks. B. representative offices. C. subsidiary banks. D. affiliate banks. Eun - Chapter 11 #39 Topic: Foreign Branches

40.

A foreign branch bank operates like a local bank, but legally A. it is a part of the parent bank. B. a branch bank is subject to both the banking regulations of its home country and the country in which it operates. C. a branch bank is subject to only the banking regulations of its home country and not the country in which it operates. D. both a and b Eun - Chapter 11 #40 Topic: Foreign Branches

41.

The major legislation controlling the operation of foreign banks in the U.S. A. specifies that foreign branch banks operating in the U.S. must comply with U.S. banking regulations just like U.S. banks. B specifies that foreign branch banks operating in the U.S. must comply with their country-of-origin . banking regulations just like U.S. banks operating abroad. C. specifies that the "shell" branches are illegal for U.S. and foreign banks. D. both a and c Eun - Chapter 11 #41 Topic: Foreign Branches

42.

A subsidiary bank is A. a locally incorporated bank that is wholly owned by a foreign parent. B. a locally incorporated bank that is majority owned by a foreign parent. C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent. D. both a and b Eun - Chapter 11 #42 Topic: Subsidiary and Affiliate Banks

43.

An affiliate bank is A. a locally incorporated bank that is wholly owned by a foreign parent. B. a locally incorporated bank that is majority owned by a foreign parent. C. a locally incorporated bank that is partially owned (but not controlled) by a foreign parent. D. both a and b Eun - Chapter 11 #43 Topic: Subsidiary and Affiliate Banks

44.

Both subsidiary and affiliate banks A. operate under the banking laws of the country in which they are incorporated. B. operate under the banking laws of the U.S. C. can underwrite securities, but not accept dollar-denominated deposits. D. both a and b Eun - Chapter 11 #44 Topic: Subsidiary and Affiliate Banks

45.

U.S. banks that establish subsidiary and affiliate banks A. are allowed to underwrite securities. B. must provide FDIC insurance on their foreign-currency denominated demand deposits. C. can underwrite securities, but not accept dollar-denominated deposits. D. both a and b Eun - Chapter 11 #45 Topic: Subsidiary and Affiliate Banks

46.

Foreign banks that establish subsidiary and affiliate banks in the U.S. A. tend to locate in states that are major centers of financial activity. B. tend to locate in the highly populous states of New York, California, Illinois, Florida, Georgia, and Texas. C. can underwrite securities, but not accept dollar-denominated deposits. D. both a and b Eun - Chapter 11 #46 Topic: Subsidiary and Affiliate Banks

47.

Edge Act banks are so-called because Athe are Federally chartered subsidiaries of U.S. banks that are physically located in the United States . and are allowed to engage in a full range of international banking activities. BSenator Walter E. Edge of New Jersey sponsored the 1919 amendment to Section 25 of the Federal . Reserve Act to allow U.S. banks to be competitive with the services foreign banks could supply their customers. C. they can only be chartered in states that are on the borders of the United States—on the "edge" of the map. D. none of the above Eun - Chapter 11 #47 Topic: Edge Act Banks

48.

Edge Act banks Acan accept foreign deposits, extend trade credit, finance foreign projects abroad, trade foreign . currencies, and engage in investment banking activities with U.S. citizens involving foreign securities. B are federally chartered subsidiaries of U.S. banks that are physically located in the United States and . are allowed to engage in a full range of international banking activities. C. can underwrite securities, but can only be located in states on the edge of the U.S. D. both a and b Eun - Chapter 11 #48 Topic: Edge Act Banks

49.

Edge Act banks A. are not prohibited from owning equity in business corporations. B. are prohibited from owning equity in business corporations. C. both a and b D. None of the above Eun - Chapter 11 #49 Topic: Edge Act Banks

50.

An Offshore banking center is A. a country whose banking system is organized to permit external accounts beyond the normal economic activity of the county. B. is external to any government, frequently located on old oil drilling platforms located in international waters. C. a country like North Korea. D. none of the above Eun - Chapter 11 #50 Topic: Offshore Banking Centers

51.

Offshore banks A. are frequently located on old oil drilling platforms located in international waters. B. are often located in "pariah" countries like North Korea and Iran. C. operate as branches or subsidiaries of the parent bank. D. none of the above Eun - Chapter 11 #51 Topic: Offshore Banking Centers

52.

The primary activities of offshore banks A. include money laundering where banking secrecy laws are strict. B. is to seek deposits and grant loans in currencies other than the currency of the host government. C. involve check clearing of large bags of checks. D. none of the above Eun - Chapter 11 #52 Topic: Offshore Banking Centers

53.

Which banks cannot accept foreign deposits? A. Domestic banks located in the U.S. B. Edge Act banks located in the U.S. C. Subsidiary banks located overseas D. Foreign branches located overseas Eun - Chapter 11 #53 Topic: International Banking Facilities

54.

In reference to capital requirements, A. bank capital adequacy refers to the amount of equity capital a bank holds as reserves against impaired loans. B bank capital adequacy refers to the amount of debt capital a bank holds as reserves against risky . assets to reduce the probability of bank failure. C. most bank regulators agree with the doctrine of "less is more". D. none of the above Eun - Chapter 11 #54 Topic: Capital Adequacy Standards

55.

In reference to capital requirements, value-at-risk analysis A. refers to traditional bank loans and deposits. B. refers to a "risk-focused" approach to determining adequate bank capital. C. provides a level of confidence measure of the probability of the maximum loss that can occur during a period of time. D. both b and c Eun - Chapter 11 #55 Topic: Capital Adequacy Standards

56.

The core of the international money market is A. the Eurocurrency market. B. the market for foreign exchange. C. the futures forwards and options markets on foreign exchange. D. none of the above Eun - Chapter 11 #56 Topic: International Money Market

57.

Eurocurrency A. is the euro, the common currency of Europe. B. is a time deposit of money in an international bank located in a county different from the country that issued the currency. C. is a demand deposit of money in an international bank located in a county different from the country that issued the currency. D. either b or c Eun - Chapter 11 #57 Topic: International Money Market

58.

The Eurocurrency market A. is only in Europe. B. is an external banking system that runs parallel to the domestic banking system of the country that issued the currency. C. has languished following monetary union in Europe. D. none of the above Eun - Chapter 11 #58 Topic: International Money Market

59.

LIBOR A. is a market rate, analogous to the U.S. Federal Funds rate. B. is a government set rate, like the discount rate. C. is the rate at which banks in London will accept interbank deposits. D. none of the above Eun - Chapter 11 #59 Topic: International Money Market

60.

LIBOR A. is the London Interbank Offered Rate. B. is the reference rate in London for Eurodollar deposits. C. one of several reference rates in London: there is a LIBOR for Eurodollars, Euroyen, Euro— Canadian dollars, and even euro. D. all of the above Eun - Chapter 11 #60 Topic: International Money Market

61.

The rate charged by banks with excess funds is referred to as the interbank offered rate; they will accept interbank deposits at the interbank bid rate. A. The spread is generally 1/8 of 1 percent for most major Eurocurrencies. B. The spread is generally referred to as "the TED spread". C. The spread is generally referred to as the bid-ask commission. D. None of the above Eun - Chapter 11 #61 Topic: International Money Market

62.

The LIBOR rate for euro A. is EURIBOR. B. is a government set rate. C. is the rate at which Interbank deposits of euro are offered by one prime bank to another in the euro zone. D. both a and c Eun - Chapter 11 #62 Topic: International Money Market

63.

In the wholesale money market, denominations A. are at least $10,000, but sizes of $100,000 or larger are more typical. B. are at least $100,000, but sizes of $500,000 or larger are more typical. C. are at least $500,000, but sizes of $1,000,000 or larger are more typical. D. none of the above Eun - Chapter 11 #63 Topic: Eurocurrency Market

64.

Approximately ___ of wholesale Eurobank external liabilities come from fixed time deposits, the remainder from Negotiable Certificates of Deposit. A. 50% B. 75% C. 90% D. None of the above Eun - Chapter 11 #64 Topic: Eurocurrency Market

65.

Eurodollars refers to dollar deposits when the depository bank is located in A. Europe. B. Europe, and the Caribbean. C. Outside the United States. D. United States. Eun - Chapter 11 #65 Topic: Eurocurrency Market

66.

Eurocredits A. are credit cards that work in the euro zone. B short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign . governments, nonprime banks, or international organizations. C short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign . governments, nonprime banks, or international organizations. D. none of the above Eun - Chapter 11 #66 Topic: Eurocredits

67.

Eurocredits A. are often so large that individual banks cannot handle them. B short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign . governments, nonprime banks, or international organizations. C. frequently require the use of a banking syndicate. D. all of the above Eun - Chapter 11 #67 Topic: Eurocredits

68.

Eurocredits feature rollover pricing. A Rollover pricing was created on Eurocredits so that Eurobanks do not end up paying more on . Eurocurrency time deposits than they earn from the loans. BBecause of the rollover pricing feature, a Eurocredit may be viewed as a series of shorter-term loans, . where at the end of each time period (generally three or six months), the loan is rolled over and the base lending rate is repriced to current LIBOR over the next time interval of the loan. CThe lending rate on these Eurocredits is stated as LIBOR + X percent, where X is the lending margin . charged depending upon the creditworthiness of the borrower. LIBOR is reset according to a set schedule. D. All of the above are true Eun - Chapter 11 #68 Topic: Eurocredits

69.

Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of .75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17 32 percent. Further suppose that over the second three-month interval LIBOR falls to 5 1 8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan? A. $79,921.875 B. $91,171.88 C. $96,174.39 D. $364,687.52 Eun - Chapter 11 #69 Topic: Eurocredits

70.

A bank agrees to buy from a customer a "three against six" FRA at the market rate for such instruments. How can the bank hedge this obligation? AGo long a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate financed . by going short a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate. B Go short a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate; go . long a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate. C. Borrow a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate. D. None of the above Eun - Chapter 11 #70 Topic: Forward Rate Agreements

71.

A forward rate agreement (FRA) is a contract between two banks A. that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits. Bin which the buyer agrees to pay the seller the increased interest cost on a notional amount if interest . rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest cost if interest rates increase above the agreed rate. C. that is structured to capture the maturity mismatch in standard-length Eurodeposits and credits. D. all of the above Eun - Chapter 11 #71 Topic: Forward Rate Agreements

72.

A bank bought a "three against six" FRA. Payment is made when? A. At the end of 3 months B. At the end of 6 months C. At the end of 9 months D. None of the above Eun - Chapter 11 #72 Topic: Forward Rate Agreements

73.

You are a bank and your customer asks you to quote an agreed-upon rate for a 3 × 9 FRA. You observe the following rates.

What rate should you quote? A. 5.96% B. 4.96% C. 1.94% D. None of the above Eun - Chapter 11 #73 Topic: Forward Rate Agreements

74.

You are a bank and your customer asks you to quote an agreed-upon rate for a 3 × 6 FRA. You observe the following rates:

What rate should you quote? A. 5.96% B. 4.96% C. 2.48% D. None of the above Eun - Chapter 11 #74 Topic: Forward Rate Agreements

75.

ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent, but ABC is worried about an increase in three-month LIBOR 3 months from now. What could they do to hedge? A. Buy a 3 × 6 FRA in the amount of $4 million. B. Sell a 3 × 6 FRA in the amount of $4 million. C. Buy a 3 × 3 FRA in the amount of $4 million. D. Buy a 3 × 9 FRA in the amount of $4 million. Eun - Chapter 11 #75 Topic: Forward Rate Agreements

76.

ABC International can borrow $4,000,000 at LIBOR plus a lending margin of .65 percent per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently 5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan? A. $50,000 B. $100,000 C. $118,000 D. $120,000 Eun - Chapter 11 #76 Topic: Forward Rate Agreements

77.

You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3%. Suppose at the maturity of the FRA, the correct interest rate is 3½%. Clearly you are better off since you have the ability to borrow $10,000,000 for 3 months at 3% instead of 3½%. What is the payoff at the maturity of the FRA? A. Net payment of $12,391.57 to you B. Net payment of $12,500 to you C. Net payment of $50,000 to you D. Net payment of $48,309.18 to you Eun - Chapter 11 #77 Topic: Forward Rate Agreements

78.

A bank bought a "three against six" $5,000,000 FRA for a three-month period beginning three months from today and ending six months from today. The reason that the bank bought the FRA was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate with the seller is 5.0%. Assume that three months from today the settlement rate is 5.25%. Who pays whom? How much? When? The actual number of days in the FRA is 90. A. The bank pays $3,0084.52 at the end of 3 months B. The bank pays $3,0084.52 at the end of 6 months C. The counterparty pays $3,0084.52 at the end of 3 months D. The counterparty pays $3,0084.52 at the end of 6 months Eun - Chapter 11 #78 Topic: Forward Rate Agreements

79.

A bank sold a 3 × 9 FRA. Payment is made when? A. At the end of 3 months B. At the end of 6 months C. At the end of 9 months D. None of the above Eun - Chapter 11 #79 Topic: Forward Rate Agreements

ABC Bank (seller) has made a "three against six" Forward Rate Agreement (FRA), with XYZ Bank (buyer).

Eun - Chapter 11

80.

Since SR < AR, then A. ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 91-day FRA period. B. XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 91-day FRA period. C. ABC Bank will pay XYZ Bank a cash settlement at the end of the 91-day FRA period. D. XYZ Bank will pay ABC Bank a cash settlement at the end of the 91-day FRA period. Eun - Chapter 11 #80 Topic: Forward Rate Agreements

81.

The payment amount under this FRA is A. $9,985. B. $10,111. C. $60,667. D. $120,000. Eun - Chapter 11 #81 Topic: Forward Rate Agreements

82.

A "three against nine" forward rate agreement A. could call for a buyer to sell a six-month Eurobond in three months at prices agreed upon today. Bcould call for a buyer to pay the seller the increased interest cost on a notational amount if six-month . interest rates fall below an agreed rate beginning three months from now and ending nine months from now. C. is a forward contract on a three-month Eurobond with a nine-month maturity. D. is a forward contract on a nine-month Eurobond with a three-month maturity. Eun - Chapter 11 #82 Topic: Forward Rate Agreements

83.

Forward rate agreements can be used for speculative purposes. If one believes rates will be less than the agreement rate, A. take a short position in a forward rate agreement. B. the purchase of a FRA is the suitable position. C. the sale of a FRA is the suitable position. D. take a long position in the spot market. Eun - Chapter 11 #83 Topic: Forward Rate Agreements

84.

The most widely used futures contract for hedging short-term U.S. dollar interest rate risk is A. the Eurodollar contract. B. the Euroyen contract. C. the EURIBOR contract. D. none of the above Eun - Chapter 11 #84 Topic: Eurodollar Interest Rate Futures Contracts

85.

Consider the position of a treasurer of a MNC, who has $20,000,000 that his firm will not need for the next 90 days. A. He could borrow the $20,000,000 in the money market. B. He could take a long position in the Eurodollar futures contract. C. He could take a short position in the Eurodollar futures contract. D. None of the above Eun - Chapter 11 #85 Topic: Eurodollar Interest Rate Futures Contracts

86.

A DECREASE in the implied three-month LIBOR yield causes Eurodollar futures price A. to increase. B. to decrease. C. there is no direct or indirect relationship. D. none of the above Eun - Chapter 11 #86 Topic: Eurodollar Interest Rate Futures Contracts

87.

Which of the following are principles of sound banking behavior? A. Avoid an undue concentration of loans to single activities B. Control mismatches between assets and liabilities C. Expand cautiously into unfamiliar activities D. All of the above Eun - Chapter 11 #87 Topic: International Debt Crisis

88.

Who benefits from debt-for-equity swaps? A. The creditor bank B. The LDC C. The market maker D. All of the above Eun - Chapter 11 #88 Topic: Debt-for-Equity Swaps

89.

On September 10, 1990 the published prices (cents on the dollar) on Latin American bank debt was quoted as follows:

Assume that the central banks of Mexico, Venezuela, and Chile redeemed their debts at 50 percent, 85 percent, and 76 percent, respectively, of face value in a debt-for-equity swap. If the three countries had equal political risk, based purely on financial considerations, the cost of a $40,000,000 assembly plant investment in local currency would be ranked (lowest to highest) in dollar cost as follows: A. Venezuela first, Mexico second, Chile third B. Venezuela first, Chile second, Mexico third C. Chile first, Venezuela second, Mexico third D. Mexico first, Chile second, Venezuela third Eun - Chapter 11 #89 Topic: The Solution: Brady Bonds

90.

The Asian crisis A. followed a period of economic recession in the region coupled with record private capital outflows. B. followed a period of economic expansion in the region financed by record private capital inflows. C. began in the fall of 2001 when Japan devalued the yen. D. none of the above Eun - Chapter 11 #90 Topic: The Asian Crisis

91.

Proceeding the Asian crisis, A. bankers from industrialized countries actively sought to finance the growth opportunities in the region. B the risk exposure of the lending banks in East Asia was primarily to local banks and commercial . firms, and not to sovereignties, as in the LDC debt crisis. C. bankers failed to correctly assess the political and economic risks. D. bankers were willing to lend huge amounts to borrowers with a limited potential to repay. E. all of the above Eun - Chapter 11 #91 Topic: The Asian Crisis

92.

Proceeding the Asian crisis, A domestic price bubbles in East Asia, particularly in real estate, were fostered by capital inflows . from bankers from the G-10 countries. B the liberalization of financial markets coupled with capital inflows from bankers from the G-10 . countries contributed to bubbles in financial asset prices. C.the close interrelationships common among commercial firms and financial institutions in Asia resulted in poor investment decision making. D. all of the above Eun - Chapter 11 #92 Topic: The Asian Crisis

93.

Proceeding the Asian crisis A it may have been implicitly assumed that the governments would come to the rescue of their private . banks should financial problems develop. B the history of managed growth in the East Asian region at least suggested that the economic and . financial system, as an integral unit, could be managed in an economic downturn. C. both a and b D. none of the above Eun - Chapter 11 #93 Topic: The Asian Crisis

94.

So-called subprime mortgages were typically A. mortgages granted to borrowers with less-than-perfect credit. B. backed by the full faith and credit of the U.S. government. C. held to maturity by the originating lender, thereby assuring that default risk was priced into the rate of return. D. none of the above Eun - Chapter 11 #94 Topic: Global Financial Crisis

95.

One lesson from the credit crunch is that Ain the aggregate, credit scores tend to understate the probability of default—thereby a pool of . subprime mortgages is actually quite a safe investment since not every borrower defaults. B moral hazard, while an issue in the market for used cars, does not seem to affect the U.S. financial . system due to the effective regulatory environment. Cbankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators . and then pass it on to MBS investors rather than hold the paper themselves. D. none of the above Eun - Chapter 11 #95 Topic: Global Financial Crisis

96.

The models that the credit rating firms (e.g. Moody's, S&P, and Fitch) used to evaluate the risk of the various tranches of MBS debt and thereby assign a credit rating (e.g. AAA, AA-BB, or unrated) were A. right on target, but only in the aggregate. B. poorly specified. C. superfluous, since the CDOs turned out to be backed by the full faith and credit of the U.S. Treasury. D supermodels, and while as a group they were not so good at evaluating credit risk, they made up for . it with their good looks and impeccable fashion sense. Eun - Chapter 11 #96 Topic: Global Financial Crisis

97.

Many lessons should be learned from the credit crunch. A.One lesson is that credit rating agencies need to refine their models for evaluating esoteric credit risk created in MBS and CDOs. B. One lesson is that borrowers must be more wary of putting complete faith in credit ratings. COne lesson is that bankers seem not to scrutinize credit risk as closely when they serve only as . mortgage originators and then pass it on to MBS investors rather than hold the paper themselves. D. All of the above Eun - Chapter 11 #97 Topic: Global Financial Crisis

98.

So-called subprime mortgages were typically A. not held by the originating bank, but instead were resold for packaging into mortgage-backed securities. B. aggregated and then sliced into tranches each representing a different risk class: AAA, AA-BB, or unrated. C. both a and b D. None of the above Eun - Chapter 11 #98 Topic: Global Financial Crisis

99.

One enduring truth of banking is that A. for some reason, bankers always seem willing to lend huge amounts to borrowers with a limited potential to repay. B. credit ratings work, but only in the aggregate. Cwhen liquidity dries up, bankers are typically able to ride out the storm by buying up other investors . debt at pennies on the dollar, holding it until the crisis is over, and then selling at a huge profit. D. none of the above Eun - Chapter 11 #99 Topic: Global Financial Crisis

100.

With regard to creating money, A. only central banks such as the Federal Reserve can create money. B. money is created when a bank customer invests in a time deposit. C.commercial banks can create money when a bank lends out funds borrowed from another customer who invested in a time deposit. D. none of the above Eun - Chapter 11 #100 Topic: Appendix 11A: Eurocurrency Creation