International Finance Final Exam (FIN 4300)

Euronotes

are short term notes underwritten by a group of international investment or commercial banks called a "facility".

Optimal International Portfolio (OIP)

Has the highest possible Sharpe ratio

Quality Spread Differential (QSD)

difference between the default-risk premium differential on the fixed-rate debt and the default-risk premium differential on the floating-rate debt

swap broker

the swap bank matches counterparties but does not assume any of the risks of the swap

Euro-Medium-Term Notes (Euro-MTNs)

(typically) fixed rate notes issued by a corporation with maturities ranging from less than a year to about 10 years

Secondary Market

- allows those share owners to reduce holdings of unwanted shares and purchasers to acquire.

Primary Market

-Investors who buy shares from the issuing firm buy them from the primary market

The Asian Crisis:

-began mid 1997, Thailand devalued the baht. other Asian countries devalued their currencies by letting them float. - Other countries had invested in Asian businesses, they were poor investment decisions.

Home Bias

The tendency of an investor to hold a larger portion of the home country securities than is optimum for diversification of risk.

Shelf registration

allows an issuer to preregister a securities issue, and then shelve the securities for later sale when financing is actually needed.

Forward Rate Agreement (FRA) Two Parties

an interbank contract that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits. - Buyer agrees to pay seller the increased interest cost on a notational amount if interest rates fall below an agreed rate. - Seller agrees to pay buyer the increased interest cost if interest rates increase above the agreed rate.

Edge Act banks:

are federally chartered subsidiaries of U.S. banks that are physically located in the U.S. and can engage in a full range of international banking activities.

Brady Bonds:

are loans converted into collateralized bonds with a reduced interest rate devised to resolve the international debt crisis in the late 1980s

Eurocredits

are short-to medium-term loans of Eurocurrency extended by Eurobanks

Floating-rate notes (FRNs)

are typically medium-term bonds with coupon payments indexed to some reference rate

Straight fixed-rate bonds

have a specified maturity date and fixed coupon payments

Single-currency interest rate swaps

involve swapping interest payments on debt obligations that are denominated in the same currency.

offshore banking center

is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.

Subsidiary bank:

is a locally incorporated bank that is wither wholly owned or owned in major part by a foreign parent

American Depository Receipt (ADR)

is a receipt representing a number of foreign shares that remain on deposit with the U.S. depository's custodian in the issuer's home market -first started in 1927

International banking facility (IBF):

is a separate set of asset and liability accounts that are segregated on the parent bank's books, though it is not a unique physical or legal entity.

Representative office:

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.

Dual currency bond

is a straight fixed-rate bond issued in one currency that pays coupon interest in that same currency

Eurocurrency:

is a time deposit in an international bank located in a country different from the country that issued the currency

Exchange-traded fund (ETF)

is an investment vehicle that seeks to track the performance of a specific index, typically an equity index - high liquid, easy to buy and sell fast - most are passive, some actives exist - iShares managed by BlackRock

Correspondent bank relationship:

is established when tow banks maintain a correspondent bank account with one another

Exposure netting

is hedging only the net exposure by firms that have both payable and receivables in foreign currencies

Foreign bond

is offered by a foreign borrower to investors in a national capital market and denominated in that nation's currency.

Affiliate bank:

is one that is only partially owned but not controlled by its foreign parent.

Translation exposure:

is the effect of an unanticipated change in the exchange rates on the consolidated financial reports of an MNC

Economic exposure:

is the possibility that cash flows and the value of the firm may be affected by unanticipated changes in the exchange rates

Transaction exposure:

is the potential change in the value of financial positions due to changes in the exchange rate between the inception of a contract and the settlement of the contract

EURIBOR

is the rate at which interbank time deposits of the euro are offered by one prime bank to another in the euro zone.

Contingent exposure:

is the risk due to uncertain situations in which a firm does not know if it will face exchange risk exposure in the future.

Debt-for-equity swap:

is the sale of sovereign debt for U.S. dollars to investors desiring to make equity investment in the indebted nation.

Global bond

issue is a very large bond issue that would be difficult to sell in any one country or region of the world

Eurobond:

issue is denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency.

Eurocommercial paper

like domestic commercial paper, is an unsecured short-term promissory note issued by a corporation or a bank and placed directly with the investment public through a dealer.

Yankee stock:

offerings are sold directly to U.S. investors by foreign companies

Cross currency interest rate swap

one counterparty exchanges the debt service obligations of a bond denominated in one currency for the debt service obligations of the other counterparty that are denominated in another country.

Foreign branch bank:

operates like a local bank, but is legally part of the parent bank

Shape performance measure (SHP)

provides a risk-adjusted performance measure

lead/lag strategy:

reduces transaction exposure by paying or collecting foreign financial obligations early (lead) or late (lag) depending on whether the currency is hard or soft.

Cross-listing:

refers to a firm having its equity shares listed on one or more foreign exchanges, in addition to the home country stock exchange

Bank capital adequacy: & 3 pillars

refers to the amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a bank failure. 1. Minimum capital requirements 2. Supervisory review process 3. Effective use of market discipline

Swap Dealer

the swap bank stands ready to accept either side of a currency swap, and then later lay it off, or match it with a counterparty.

Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = E1.00 and the dollar-pound exchange rate is quoted at $2.00 = e1.00. A. E1.25/e1.00 B. $1.25/ e1.00 C. e1.25/E1.00 D. E0.80/e1.00

A.

Suppose a bank customer with E1,000,000 wishes to trade out of euro and into Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = E1.00 and the dollar-yen exchange rate is quoted at $1.00=Y120. How many yen will the customer get? A. Y192,000,000 B. Y5,208,333 C. Y75,000,000 D. Y5,208.33

A.

Exercise of a currency futures option results in A. a long futures position for the call buyer or put writer B. a short futures position for the call buyer or put writer C. a long futures position for the put buyer or call writer D. a short futures position for the call buyer or put buyer

A.

Equity-related bonds what are the 2 types?

1. Convertible bond: issue allows the investor to exchange the bond for a predetermined straight fixed-rate bond value 2. Bonds with equity warrants: Can be viewed as straight fixed-rate bonds with the addition of a call option (or warrant) feature

Suppose that the pound is pegged to gold at E20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. A. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to E200 at E20 per ounce. Exchange the E200 for dollars at the current rate of $1.80 per pound to get $360. B. Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at E20 per ounce. Convert the gold to dollars at $35 per ounce. C. both of the options D. none of the options

A.

To hedge a foreign currency payable, A. buy call options on the foreign currency B. buy put options on the foreign currency. C. sell call options on the foreign currency D. see put options on the foreign currency.

A.

When a foreign currency trades at a discount in the forward market (Assume that exchange rates are quoted in American terms) A. the forward rate is less than the spot rate B. the forward rate is more than the spot rate C. the forward exchange rate is less than one dollar D. the exchange rate is less than it was yesterday

A.

XYZ Corporation, located in the United States, has an accounts payable obligation of Y750 million payable in one year to a bank in Tokyo. Which of the following is not part of a money market hedge? A. Buy the Y750 million at the forward exchange rate B. Find the present value of Y750 million at the Japanese interest rate C. By that much yen at the spot exchange rate D. Invest in risk-free Japanese securities with the same maturity as the accounts payable obligation

A.

Use the following to calculate the quality spread differential (QSD). Company X Fixed-Rate Borrowing Cost 10% Floating-Rate Borrowing Cost: LIBOR Company Y Fixed-Rate Borrowing Cost: 12% Floating-Rate Borrowing Cost: LIBOR + 1.5% A. 0.50 percent B. 1.00 percent C. 1.50% D. 2.00%

A. 0.50 percent

When Nestle', a Swiss firm, bought the American firm Carnation, it was engaged in foreign direct investment. If Nestle had only bought a non-controlling number of shares of the firm, A. Nestle would have been engaged in portfolio investment B. Nestle would have been engaged in a cross-border acquisition C. it would depend if they bought the shares from an American or a Canadian D. none of the options

A. Nestle would have been engaged in portfolio investment

Unlike a bond issue, in which the entire issue is brought to market at once, (blank) is partially sold on a continuous basis through an issuance facility that allows the borrower to obtain funds only as needed on a flexible basis. A. a Euro-medium term note issue B. a bearer bond C. a Euro-long term note issue D. a Euro-short term note issue

A. a Euro-medium term note issue

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 options

A. bank capital adequacy refers to the amount of equity capital a bank holds as reserves against impaired loans.

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 C. by 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 D. multinational 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.

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.

Investors will generally accept a lower yield on (blank) than on (blank) of comparable terms, making them a less costly source of funds for the issuer to service. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. Eurobonds; domestic bonds D. domestic bonds; Eurobonds

A. bearer bonds; registered bonds

Investors in corporate bonds would still be interested in sovereign credit ratings A. because the sovereign credit rating usually represents a ceiling on corporate credit ratings within that country. B. because they might play the TED spread C. because they are the rating assigned by the country's regulators. D. none of the options

A. because the sovereign credit rating usually represents a ceiling on corporate credit ratings within that country.

Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of E160,000. 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 E0.6250/$1.00. The importer accepts this price, so his bank will proceed to (blank) the importer's account in the amount of (blank). A. debit; $256,000 B. credit; E512,100 C. credit; $500,000 D. debit; E100,000

A. debit; $256,000

An exporter can shift exchange rate risk to their customers by A. invoicing in their home currency. B. invoicing in their customer's local currency C. splitting the difference, and invoicing half of sales in local currency and half of sales in home currency D. invoicing sales in a currency basket such as the SDR as the invoice currency

A. invoicing in their home currency

Which of the following statements regarding a quality spread differential are true? A. It is the difference between the default-risk premium differential on the fixed-rate debt and the default-risk premium differential on the floating rate debt B. It is the sum of the default-risk premium differential and the fixed-rate debt divided by the default-risk premium differential on the floating rate debt. C. it is not possible for all parties to have a positive quality spread differential. D. none of the options.

A. it is the difference between the default-risk premium differential on the fixed-rate debt and the default-risk premium differential on the floating rate debt.

Securities sold in the United States to public investors must be registered with the SEC, and a prospectus disclosing detailed financial information about the issuer must be provided and made available to prospective investors. This encourages foreign borrowers wishing to raise U.S. dollars to use. A. the Eurobond market. B. their domestic market C. bearer bonds D. none of the options

A. the Eurobond market

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. non of the options

A. the Eurodollar contract.

When a country's currency depreciates against the currencies of major trading partners, A. the country's exports tend to rise and imports fall B. the country's exports tend to fall and imports rise. C. the country's exports tend to rise and imports rise D. the country's exports tend to fall and imports fall

A. the country's exports tend to rise and imports fall

If you can make a good product at a low opportunity cost, A. you would be well served to produce that good and trade for other goods. B. you should make something else that has a higher value C. you should make something else that has a higher opportunity cost. D. none of the options.

A. you would be well served to produce that good and trade for other goods.

Suppose that you are a U.S. producer of a commodity good competing with foreign producers. Your inputs of production are priced in dollars and you sell your output in dollars. If the U.S. currency depreciates against the currencies of our trading partners, A. your competitive position is likely improved. B. your competitive position is likely worsened. C. your competitive position is unchanged. D. none of the options.

A. your competitive position is likely improved.

Exchange rates names and years:

Adler and Simon (1986) - Found changes in exchange rates generally explained a larger portion of the variability of foreign bond indexes than foreign equity indexes Eun & Resnick (1988) - Found that the cross-correlations among major stock markets and exchange markets are relatively low, but positive Gupta and Finnerty (1992) - Concluded that exchange risk is generally not priced.

A bank may establish a multinational operation for the reason of risk reduction. The underlying rationale being that A. by maintaining foreign branches and foreign currency valances, banks may reduce transaction costs and foreign exchange risk on currency conversion if government controls can be circumvented. B. greater 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 C. multinational 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.

B.

A conventional peg refers to A. involves the confirmation of the country authorities' de jure exchange rate arrangement. B. When a country formally pegs its currency at a fixed rate to another currency or basket of currencies where the basket reflects the geographic distribution of trade, services, or capital flows C. Where the exchange rate margins within a narrow margin of 2 percent relative to a statistically identified trend for six months or more, and the exchange rate arrangement cannot be considered as floating D. Where the exchange rate is largely market determined without an ascertainable or predictable path for the rate.

B.

Suppose you observe the following exchange rates: E1 = $1.45 and e1 = 1.90$. Calculate the euro-pound cross-rate A. e1.333 = E1.00 B. E1.3103 = e1.00 C. E2.00 = e1 D. E3 = e1

B.

The current exchange rate is E1.00 = $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 E100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. A. Bank B's dollar-denominated account at A will fall by $150,000. B. Bank A's dollar-denominated account at B will fall by $150,000 C. Bank A's euro-denominated account at B will fall by E100,000. D. Bank B's euro-denominated account at A will rise by E100,000.

B.

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: 1. (i) Bimetallism 2. (ii) Bretton Woods system 3. (iii) Classical gold standard 4. (iv) Flexible exchange rate regime 5. (v) Interwar period The chronological order that they actually occurred is: A. (iii), (i), (iv), (ii), and (v) B. (i), (iii), (v), (ii), and (iv) C. (vi), (i), (iii), (ii), and (v) D. (v), (ii), (i), (iii), and (iv)

B.

The law of one price (LOP) is referring to A. a legal condition imposed by the U.S. Commodity Futures Trading Commission B. The same or equivalent things trading at the same price across different locations or markets, precluding profitable arbitrage opportunities C. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain guaranteed profits. D. The composition of a standard commodity basket.

B.

The most direct and popular way of hedging transaction exposure is by A. exchange-traded futures options B. Currency forward contracts. C. Foreign currency warrants D. Borrowing and lending in the domestic and foreign money markets

B.

Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = E1. What would an ounce of gold be worth in U.S. dollars? A. $29.40 B. $30.00 C. $0.83 D. $1.20

B. $30.00

In the swap market, which position potentially carries greater risks, broker or dealer? A. Broker B. Dealer C. they are the same swaps, therefore the same risks. D. none of the options.

B. Dealer

A central bank can fix an exchange rate A. in perpetuity B. only for as long as the market believes that it ahs the political will to do so. C. only for as long as it has reserves of gold D. only for as long as it has independence of monetary policy

B. Only for as long as the market believes that it has the political will to do so.

Generally speaking, a firm with recurrent exposure can best hedge using which product? A. Options B. Swaps C. Futures D. all of the options

B. Swaps

Shelf registration A. accounts for outstanding shares repurchased and "shelved" by the company. B. allows an issuer to preregister a securities issue, and then "shelve" the securities for later sale. C. allows an investment bank to increase the fees they charge by charging for storage of the "shelved" securities. D. eliminates the information disclosure that many foreign firms found objectionable in the foreign bond market.

B. allows an issuer to preregister a securities issue, and then "shelve" the securities for later sale.

The Mexican Peso Crisis was touched off by A. an unsurprising announcement by the Mexican government to devalue the peso against the dollar by 14 percent. B. an unexpected announcement by the Mexican government to devalue the peso against the dollar by 14 percent C. An announcement by the Mexican government to enact a currency board arrangement with the U.S. dollar. D. contagion from other Latin American and Asian financial markets

B. an unexpected announcement by the Mexican government to devalue the peso against the dollar by 14 percent

To hedge a foreign currency receivable, A. buy call options on the foreign currency with a strike in the domestic currency B. buy put options on the foreign currency with a strike in the domestic currency C. sell call options on the foreign currency with a strike in the domestic currency D. sell put options on the foreign currency with a strike in the domestic currency

B. buy put options on the foreign currency with a strike in the domestic currency

Bonds with equity warrants A. are really the same as convertible bonds if the stated price of exercising the warrant is the par value of the bond. B. can be viewed as straight debt with a call option (technically a warrant) attached C. can only be exercised on coupon dates D. typically are convertible as well

B. can be viewed as straight debt with a call option (technically a warrant) attached.

A "global issue" bond A. is a very large international bond offering by several borrowers pooled together. B. is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets C. has higher yields for the purchasers. D. has a lower liquidity.

B. is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets.

In countries like France and Germany, A. managers have often made business decision with regard to maximizing market share to the exclusion of other goals. B. mangers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth. C. managers have often regarded the prosperity and growth of their combines, or families of related rims, as their most critical goal. D. managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal.

B. managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.

In an FRA, the seller agrees to pay the buyer A. the increased interest cost if interest rates fall below the agreement rate. B. the increased interest cost if interest rates increase above the agreement rate. C. the increased interest cost on a notional amount if interest rates fall below an agreement rate. D. none of the options.

B. the increased interest cost if interest rates increase above the agreement rate.

With regard to a swap bank acting as a dealer in swap transactions, interest rate risk refers to A. the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index B. the risk that interest rates changing unfavorably before the swap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty. C. the risk the swap bank faces from fluctuating exchange rates during the time it takes for the bank to lay off a swap it undertakes with one counterparty with an opposing transaction. D. the risk that a counterparty will default

B. the risk that interest rates changing unfavorably before the swap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty

"Samurai" bonds are A. dollar-denominated foreign bonds originally sold to U.S. investors. B. yen-denominated foreign bonds originally sold in Japan C. pound sterling-denominated foreign bonds originally sold in the U.K. D. none of the options.

B. yen-denominated foreign bonds originally sold in Japan.

If the $/E bid and ask prices are $1.50/E and $1.51/E, respectively, the corresponding E/$ bid and ask prices are A. E0.6667 and E0.6623 B. $1.51 and $1.50 C. E0.6623 and E0.6667 D. cannot be determined with the information given.

C.

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can a astute trader make? A. No arbitrage is possible B. $1,160,000 C. $41,667 D. $40,000

C.

Six-month U.S. dollar LIBOR is currently 4.25 percent; your firm issued floating-rate notes indexed to six-month U.S. dollar LIBOR plus 50 basis points. What is the amount of the next semi-annual coupon payment per U.S. $1,000 of face value? A. $43.75 B. $47.50 C. $23.75 D. $46.875

C. $23.75

In 2012, the United States had a current account deficit. The current account deficit implies that the United States. A. had a surplus on legal consulting and engineering services B. produced more output than it consumed C. consumed more output than is produced D. had a financial account surplus

C. Consumed more output than it produced

Floating-for-floating currency swaps A. have reference rates that are different for the different currencies (e.g., dollar LIBOR versus euro LIBOR). B. have reference rates that can be the same but have different frequencies. C. both A and B D. none of the options

C. both A and B

A swap bank A. can act as a broker, standing ready to buy and sell swaps. B. can act as a dealer, bringing together counterparties to a swap C. can act as a broker, bringing together counterparties to a swap, and/or as a dealer, standing ready to buy and sell weapons D. only sometimes acts as a broker, bringing together counterparties to a swap, but never ever acts as a dealer, standing ready to buy and sell swaps.

C. can act as a broker, bringing together counterparties to a swap, and/or s a dealer, standing ready to buy and sell swaps.

If the interest rate rises in the U.S. while other variables remain constant A. capital will flow out of the U.S. B. capital inflows into the U.S. may not materialize C. capital inflows into the U.S. will increase D. none of the options

C. capital inflows into the U.S. will increase.

The Theory of comparative advantage: A. Claims that economic well-being is enhanced if each country's citizens produce only a single product B. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries. C. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production. D. claims that no country has an absolute advantage over another country in the production of any good or service.

C. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries.

An exporter faced with exposure to a depreciation currency can reduce transaction exposure with a strategy of A. paying or collecting early B. paying or collecting late C. paying late, collecting early D. paying early, collecting late.

C. paying late, collecting early.

Under a purely flexible exchange rate system A. governments can set exchange rates with fiscal policy B. governments can set the exchange rate by buying or selling reserves C. supply and demand set the exchange rates D. governments can set the exchange rate by buying or selling reserves and with fiscal policy

C. supply and demand set the exchange rates.

A major risk face by a swap dealer is exchange rate risk. This is A. the probability that a foreign counterparty will default in a currency swap. B. the probability that either counterparty defaults in a currency swap. C. the probability exchange rates will move against the dealer. D. none of the options.

C. the probability exchange rates will move against the dealer.

The primary reasons for a counterparty to use a currency swap are A. to hedge and to speculate. B. to play in the futures and forward markets. C. to obtain debt financing in the swapped currency at an interest cost reductions brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposures D. to hedge and to speculate, as well as to play in the futures and forward markets

C. to obtain debt financing in the swapped currency at an interest cost reductions brought about through comparative advantages each counterparty has in its national capital market, and the benefit of hedging long-run exchange rate exposures.

A foreign branch bank operates like a local bank, but legally A. it is not a part of the parent bank B. a branch bank is subject to neither the banking regulations of its home country nor the country in which it operates C. a branch bank is subject to the only the banking regulations of its home country and not the country is which it operates D. it is a part of the parent bank, and a branch bank is subject to both the banking regulations of its home country and the country in which it operates

D it is a part of the parent bank, and a branch bank is subject to both the banking regulations of its home country and the country in which it operates.

Comparing "forward" and "futures" exchange contracts, we can say that A. delivery of the underlying asset is seldom made in futures and forward contracts. B. delivery of the underlying asset is usually made in futures and forward contracts. C. delivery of the underlying asset is never made in either contract-they are typically cash settled at maturity D. delivery of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is usually made is forward contracts.

D.

Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = Y120. A. E1.00/Y1.92 B. E1.92/Y100 C. E1.25/Y1.00 D. Y192/E1.00

D.

Purchasing Power Parity (PPP) theory states that A. the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. B. As the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies. C. The prices of standard commodity baskets in two countries are not related. D. Both A and B are correct

D.

With regard to expiration date, A. futures contracts do not have delivery dates B. forward contracts have standardized delivery dates C. futures contracts have tailor-made delivery dates that meet the needs of the investor. D. futures contracts have standardized delivery dates.

D.

Your U.S. firm has E100,000 payable with a 3-month maturity. Which of the following will hedge your liability? A. Buy the present value of E100,000 today at the spot exchange rate, invest in the U.K. at ie B. Buy a call option on e100,000 with a strike price in dollars. C. Take a long position in a forward contract on e100,000 with a 3-month maturity. D. all of the options

D.

If you owe a foreign currency denominated debt, you can hedge with A. a short position in a currency forward contract B. A short position in an exchange-traded futures option C. Buying the foreign currency today and investing it in the foreign county D. A long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign county.

D. A long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign county.

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, Euro yen, Euro-Canadian dollars, and even euro. D. All of the options

D. All of the options.

Edge Act banks A. can 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 are correct.

D. Both A and B are correct

Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has a AAA credit rating, but company Y's credit standing is considerably lower. A. Company X should demand most of the QSD in any swap with Y as compensation for default risk B. Since Y has a poor credit rating, it would not be a participant in the swap market. C. Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation. D. Company X should demand most of the QSD in any swap with Y as compensation for default risk, and Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.

D. Company X should demand most of the QSD in any swap with Y as compensation for default risk, and Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation

The Asian Currency Crisis A. happened just prior to the Mexican peso crisis B. Was almost over before anyone outside the Pacific Rim noticed C. Was limited to Asian currencies D. Turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion

D. Turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion

A "foreign bond" issue is A. one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. B. one offered by a foreign borrower to investors in a national market and denominated in another nation's currency. C. for example, a German MNC issuing euro-denominated bonds to U.S. investors. D. one offered by a foreign borrower to investors in a national market and denominated in that nation's currency (e.g., a German MNC issuing dollar-denominated bonds to U.S. investors).

D. one offered by a foreign borrower to investors in a national market and denominated in that nation's currency (e.g., a German MNC issuing dollar-denominated bonds to U.S. investors).

When a country must make a net payment to foreigners because of balance-of-payments deficit, the central bank of the country A. should do nothing B. should run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) only. C. should borrow anew from foreign central banks only D. should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

D. should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

With regard to a swap bank acting as a dealer in swap transactions, mismatch risk refers to: A. the risk that arises from the situation in which the floating-rates of the two counterparties are not pegged to the same index. B. the risk that interest rates changing unfavorably before the swap bank can lay off to an opposing counterparty on the other side of an interest rate swap entered into with the first counterparty. C. the risk the swap bank faces from fluctuating exchanger rates during the time it takes for the bank to lay off a swap it undertakes with one counterparty with an opposing transaction D. the risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed to take.

D. the risk that it may be difficult or impossible to find an exact opposite match for a swap the bank has agreed take.

The current exchange rate is E1.00 = $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 E45,000 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 E45,000 D. Bank B's pound-denominated account at A will fall by E45,000 E. All of the options

E. All of the options

Forward Market Hedge

Foreign currency contract sold or bought forward to protect against foreign currency movement

Systematic Risk

Refers to the risk that remains even after investors fully diversify their portfolio holdings.

Broker:

the agent used to conduct a trade on the secondary market

Agency market:

the broker takes the client's order through the agent, who matches it with another public order.

dealer market:

the broker takes the trade through the dealer, who participates in trades as a principal by buying and selling the security for his own account

International debt crisis:

was caused by lending to the sovereign governments of some less-developed countries (LDCs). - crisis began on August 20, 1982 - Mexico more than 100 U.S. and foreign banks to forgive its $68 billion in loans -Brazil, Argentina, and more than 20 other countries announced similar problems in the making. -source was oil, 3rd world countries owed $1.2 trillion